item 14 principal accountant fees services pursuant general instruction g3 information principal accountant fees services filed amendment annual report form 10k incorporated reference company’s definitive proxy statement 2007 annual meeting stockholders within 120 days end fiscal year ending december 31 2006 part iv item 15 item 14 exhibits financial statement schedules reports form 8k list documents filed index financial statements financial schedule included page 15 report financial statements schedules included report omitted applicable required information shown financial statements notes thereto b reports form 8k reports form 8k filed fourth quarter 1997 c exhibits 2 1 first amended disclosure statement pursuant section 1125 bankruptcy code includes first amended restated joint plan reorganization dated september 14 1988 incorporated reference companys report form 8k dated december 1 1988 31 amended restated certificate incorporation allischalmers corporation incorporated reference companys report form 8a dated august 12 1992 32 bylaws allischalmers corporation incorporated reference companys report form 8a dated august 12 1992 101 amended restated retiree health trust agreement allischalmers corporation wells fargo bank incorporated reference exhibit c1 first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 102 amended restated retiree health trust agreement allischalmers corporation firstar trust company incorporated reference exhibit c2 first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 103 reorganization trust agreement allis chalmers corporation john grigsby jr trustee incorporated reference exhibit first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 104 product liability trust agreement allis chalmers corporation bruce w strausberg trustee incorporated reference exhibit e first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 105 allischalmers corporation longterm stock incentive plan 1989 incorporated reference companys report form 10q three months ended september 30 1989 106 subscription shareholder agreement allischalmers corporation alch company lp dated may 18 1989 incorporated reference companys report form 8k dated may 24 1989 107 commercial installment loan agreement allischalmers corporation marine midland bank na dated december 20 1989 incorporated reference companys report form 8k dated december 20 1989 108 employment agreement allischalmers corporation john grigsby jr incorporated reference companys report form 10q three months ended september 30 1989 109 allischalmers savings plan incorporated reference companys report form 10k year ended december 31 1988 1010 allischalmers consolidated pension plan incorporated reference companys report form 10k year ended december 31 1988 211 subsidiaries allischalmers corporation 271financial data schedule management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized allischalmers corporation sjohn grigsby jr john grigsby jr vice chairman executive vice president chief financial officer date march 26 1998 pursuant requirements section 13 15d securities exchange act 1934 amended report signed march 26 1998 following persons behalf registrant capacities indicated sh sean mathis srobert e nederlander h sean mathis robert e nederlander director chairman board chief executive officer director john r collins sjohn e sundman john r collins director john e sundman director sjohn grigsby jr sallan r tessler john grigsby jr director allan r tessler director sclaude montgomery sleonard toboroff claude montgomery director leonard toboroff director item 14 principal accountant fees services information required item 14 incorporated reference section entitled “corporate governance” relevant portions proxy statement part iv item 15 item 14 exhibits financial statement schedules reports form 8k list documents filed index financial statements included page 25 report financial statements schedules included report omitted applicable required information shown financial statements notes thereto b reports form 8k december 27 2001 company filed current report form 8k event date december 12 2001 reporting events response item 2 item 7 8k relating disposition houston dynamic service inc connection therewith company filed following financial statements pro forma financial information unaudited pro forma consolidated condensed statement financial position september 30 2001 unaudited pro forma consolidated condensed statement operations nine months ended september 30 2001 notes unaudited pro forma consolidated condensed financial statements c exhibits see exhibit index page 66 annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized march 29 2002 munawar h hidayatallah munawar h hidayatallah president chief executive officer chairman pursuant requirements section 13 15d securities exchange act 1934 amended report signed march 29 2001 following persons behalf registrant capacities indicated munawar h hidayatallah v william archer iii munawar h hidayatallah v william archer iii president chief executive vice president chief officer chairman financial officer principal executive officer financial accounting officer sdr phillip david michael tapp dr phillip david director michael tapp director david groshoff david groshoff director allan r tessler director saeed sheikh robert e nederlander saeed sheikh director robert e nederlander leonard toboroff thomas whitener jr leonard toboroff director thomas whitener jr director james w spann james w spann director 21 first amended disclosure statement pursuant section 1125 bankruptcy code includes first amended restated joint plan reorganization dated september 14 1988 incorporated reference companys report form 8k dated december 1 1988 22 agreement plan merger among allischalmers corporation allischalmers acquisition corp oilquip rentals inc dated may 9 2001incorporated reference companys report form 8k filed may 15 2001 23 letter agreement allischalmers corporation pension benefit guaranty corporation others dated may 9 2001incorporated reference companys report form 8k filed may 15 2001 24 termination agreement among allischalmers corporation pension benefit guaranty corporation others dated may 9 2001 incorporated reference companys report form 8k filed may 15 2001 25 stock purchase agreement dated november 30 2001 clayton lau mountain incorporated reference companys report form 8k dated december 27 2001 26 hds promissory note executed clayton lau dated november 30 2001 incorporated reference companys report form 8k dated december 27 2001 27 hds security agreement dated november 30 2001 clayton lau mountain compressed air inc incorporated reference companys report form 8k dated december 27 2001 28 stock purchase agreement dated february 1 2002 allischalmers corporation delaware corporation buyer jens h mortensen jr incorporated reference companys report form 8k filed february 21 2002 29 shareholders agreement among jens oilfield services inc texas corporation jens h mortensen jr allischalmers corporation 210 stock purchase agreement dated february 1 2002 allischalmers corporation energy spectrum partners lp strata directional technology inc 211 registration rights agreement dated among allischalmers corporation energy spectrum partners lp 212 shareholders agreement among allischalmers corporation shareholders warrantholder signatories thereto dated february 1 2002 31 amended restated certificate incorporation allischalmers corporation 32 certificate designation preferences rights series 10 cumulative convertible preferred stock 01 par value allis chalmers corporation incorporated reference companys report form 8k filed february 21 2002 33 amended restated bylaws allischalmers corporation 101 amended restated retiree health trust agreement allischalmers corporation wells fargo bank incorporated reference exhibit c1 first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 102 amended restated retiree health trust agreement allischalmers corporation firstar trust company incorporated reference exhibit c2 first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 103 reorganization trust agreement allischalmers corporation john grigsby jr trustee incorporated reference exhibit first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 104 product liability trust agreement allischalmers corporation bruce w strausberg trustee incorporated reference exhibit e first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 105 allischalmers savings plan incorporated reference companys report form 10k year ended december 31 1988 106 allischalmers consolidated pension plan incorporated reference companys report form 10k year ended december 31 1988 107 agreement dated march 31 1999 allischalmers corporation pension benefit guaranty corporation incorporated reference companys report form 10q quarter ended june 30 1999 108 registration rights agreement dated march 31 1999 allischalmers corporation pension benefit guaranty corporation incorporated reference companys report form 10q quarter ended june 30 1999 109 letter agreement allischalmers corporation pension benefit guarantee corporation dated may 9 2001 incorporated reference companys report form 8k filed may 15 2002 1010 termination agreement allischalmers corporation pension benefit guarantee corporation others dated may 9 2001incorporated reference companys report form 8k filed may 15 2002 1011 employment agreement dated february 7 2001 oil quip rentals inc munawar h hidayatallah 1012 option agreement dated october 15 2001 allischalmers corporation leonard toboroff incorporated reference companys report form 10q quarter ended september 30 2001 1013 credit security agreement dated february 1 2002 jens oil field service inc wells fargo credit inc incorporated reference companys report form 8k filed february 21 2002 1014 amended restated credit security agreement dated february 1 2002 strata directional technology inc wells fargo credit inc incorporated reference companys report form 8k filed february 21 2002 1015 credit agreement dated february 1 2002 allischalmers corporation wells fargo energy capital inc incorporated reference companys report form 8k filed february 21 2002 1016 warrant purchase agreement dated february 1 2002 allischalmers corporation wells fargo energy capital inc incorporated reference companys report form 8k filed february 21 2002 1017 employment agreement dated february 1 2002 jens oil field service inc jens h mortensen jr incorporated reference companys report form 8k filed february 21 2002 211 subsidiaries allischalmers corporation compensation plan agreement item 14 exhibits financial statement schedules reports form 8k selected financial data managements discussion analysis companys financial statements together report thereon price waterhouse llp appearing pages 5 26 companys 1996 annual report shareholders incorporated reference annual report form 10k exception aforementioned information 1996 annual report shareholders deemed filed part report schedule financial statements listed read conjunction financial statements 1996 annual report shareholders financial statement schedules included form 10k annual report omitted applicable required information shown financial statements notes thereto allischalmers corporation consolidated subsidiaries schedule financial statements ii valuation qualifying accounts page 19 report independent accountants financial statement schedule b reports form 8k reports form 8k filed fourth quarter 1996 however company filed form 8k dated february 14 1997 report item 5 filed pbgc initiate termination consolidated plan c exhibits 2f1 first amended disclosure statement pursuant section 1125 bankruptcy code includes first amended restated joint plan reorganization dated september 14 1988 incorporated reference companys report form 8k dated december 1 1988 31 amended restated certificate incorporation allischalmers corporation incorporated reference companys report form 8a dated august 12 1992 32 bylaws allischalmers corporation incorporated reference companys report form 8a dated august 12 1992 101 amended restated retiree health trust agreement allischalmers corporation wells fargo bank incorporated reference exhibit c1 first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 102 amended restated retiree health trust agreement allischalmers corporation firstar trust company incorporated reference exhibit c2 first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 103 reorganization trust agreement allischalmers corporation john grigsby jr trustee incorporated reference exhibit first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 104 product liability trust agreement allischalmers corporation bruce w strausberg trustee incorporated reference exhibit e first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 105 allischalmers corporation longterm stock incentive plan 1989 incorporated reference companys report form 10q three months ended september 30 1989 106 subscription shareholder agreement allischalmers corporation alch company lp dated may 18 1989 incorporated reference companys report form 8k dated may 24 1989 107 commercial installment loan agreement allischalmers corporation marine midland bank na dated december 20 1989 incorporated reference companys report form 8k dated december 20 1989 108 employment agreement allischalmers corporation john grigsby jr incorporated reference companys report form 10q three months ended september 30 1989 109 asset purchase agreement allischalmers corporation brb industries inc jack ehrenhaus fredric allen dated november 7 1989 incorporated reference companys report form 8k dated december 20 1989 1010allischalmers savings plan incorporated reference companys report form 10k year ended december 31 1988 1011allischalmers consolidated pension plan incorporated reference companys report form 10k year ended december 31 1988 1012 asset purchase agreement allischalmers corporation brb industries corp dated august 4 1994 amended among allischalmers corporation brb industries corp power manufacturing inc september 22 1994 incorporated reference companys report form 8k dated september 22 1994 131 1996 annual report shareholders allischalmers corporation portions annual report incorporated reference report form 10k deemed filed herewith 211 subsidiaries allischalmers corporation 271 financial data schedule management contract compensatory plan arrangement report independent accountants financial statement schedule board directors allischalmers corporation audits consolidated financial statements referred report dated march 24 1997 appearing 1996 annual report shareholders allischalmers corporation report consolidated financial statements incorporated reference annual report form 10k also included audit financial statement schedule listed item 14a form 10k opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements price waterhouse llp milwaukee wisconsin march 24 1997 signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized allischalmers corporation sjohn grigsby jr john grigsby jr vice chairman executive vice president chief financial officer date march 15 1997 pursuant requirements section 13 15d securities exchange act 1934 amended report signed march 15 1997 following persons behalf registrant capacities indicated sh sean mathis srobert e nederlander h sean mathis robert e nederlander chairman board director chief executive officer director john r collins sjohn e sundman john r collins director john e sundman director sjohn grigsby jr sallan r tessler john grigsby jr director allan r tessler director sclaude montgomery sleonard toboroff claude montgomery director leonard toboroff director exhibit index 131 1996 annual report shareholders allischalmers corporation portions annual report incorporated reference report form 10k deemed filed herewith 211 subsidiaries allischalmers corporation 271 financial data schedule item 14 exhibits financial statement schedules reports form 8k list documents filed index financial statements financial schedule included page 15 report financial statements schedules included report omitted applicable required information shown financial statements notes thereto b reports form 8k reports form 8k filed fourth quarter 2000 c exhibits 2 1 first amended disclosure statement pursuant section 1125 bankruptcy code includes first amended restated joint plan reorganization dated september 14 1988 incorporated reference companys report form 8k dated december 1 1988 31 amended restated certificate incorporation allis chalmers corporation incorporated reference companys report form 8a dated august 12 1992 32 amended restated bylaws allischalmers corporation incorporated reference companys report form 10q quarter ended september 30 1999 101 amended restated retiree health trust agreement allischalmers corporation wells fargo bank incorporated reference exhibit c1 first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 102 amended restated retiree health trust agreement allischalmers corporation firstar trust company incorporated reference exhibit c2 first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 103 reorganization trust agreement allischalmers corporation john grigsby jr trustee incorporated reference exhibit first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 104 product liability trust agreement allischalmers corporation bruce w strausberg trustee incorporated reference exhibit e first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 105 allischalmers corporation longterm stock incentive plan 1989 incorporated reference companys report form 10q quarter ended september 30 1989 106 subscription shareholder agreement allischalmers corporation alch company lp dated may 18 1989 incorporated reference companys report form 8k dated may 24 1989 107 commercial installment loan agreement allischalmers corporation marine midland bank na dated december 20 1989 incorporated reference companys report form 8k dated december 20 1989 108 employment agreement allischalmers corporation john grigsby jr incorporated reference companys report form 10q quarter ended september 30 1989 109 allischalmers savings plan incorporated reference companys report form 10k year ended december 31 1988 1010 allischalmers consolidated pension plan incorporated reference companys report form 10k year ended december 31 1988 1011 agreement dated march 31 1999 allis chalmers corporation pension benefit guaranty corporation incorporated reference companys report form 10q quarter ended june 30 1999 1012 lockup agreement dated march 31 1999 among allischalmers corporation pension benefit guaranty corporation acting individual capacity trustee allischalmers consolidated pension plan alch company lp wells fargo bank trustee certain amended restated retiree health trust agreement uaw retired employees allischalmers corporation firstar trust company trustee certain amended restated retiree health trust agreement nonuaw retired employees allischalmers corporation incorporated reference companys report form 10q quarter ended june 30 1999 1013 registration rights agreement dated march 31 1999 allischalmers corporation pension benefit guaranty corporation incorporated reference companys report form 10q quarter ended june 30 1999 211 subsidiaries allischalmers corporation allischalmers corporation consolidated subsidiaries schedule ii valuation qualifying accounts years ended december 31 1998 1999 2000 thousands signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized allischalmers corporation sjohn grigsby jr john grigsby jr executive vice president chief financial officer date march 29 2001 pursuant requirements section 13 15d securities exchange act 1934 amended report signed march 29 2001 following persons behalf registrant capacities indicated sjames p shanahan jr salexander p sammarco james p shanahan jr director alexander p sammarco director david groshoff sallan r tessler david groshoff director allan r tessler director sdr richard lichtenstein sleonard toboroff dr richard lichtenstein director leonard toboroff director srobert e nederlander robert e nederlander director exhibit index exhibit description 211 subsidiaries allischalmers corporation item 14 principal accounting fees services pursuant general instruction g3 information principal accountant fees services filed amendment annual report form 10k incorporated reference definitive proxy statement 2010 annual meeting stockholders filed within 120 days end fiscal year ending december 31 2009 part iv item 15 item 14 principal accounting fees services information required item 14 incorporated reference section entitled corporate governance relevant portions information statement part iv item 15 item 14 principal accounting fees services information required item 14 incorporated reference section entitled corporate governance relevant portions proxy statement part iv item 15 item 14 exhibits financial statement schedules reports form 8k list documents filed index financial statements financial schedule included page 15 report financial statements schedules included report omitted applicable required information shown financial statements notes thereto b reports form 8k reports form 8k filed fourth quarter 1998 c exhibits 2 1 first amended disclosure statement pursuant section 1125 bankruptcy code includes first amended restated joint plan reorganization dated september 14 1988 incorporated reference companys report form 8k dated december 1 1988 31 amended restated certificate incorporation allis chalmers corporation incorporated reference companys report form 8a dated august 12 1992 32 amended restated bylaws allischalmers corporation incorporated reference companys report form 10q quarter ended september 30 1999 101 amended restated retiree health trust agreement allischalmers corporation wells fargo bank incorporated reference exhibit c1 first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 102 amended restated retiree health trust agreement allischalmers corporation firstar trust company incorporated reference exhibit c2 first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 management contract compensatory plan arrangement 103 reorganization trust agreement allischalmers corporation john grigsby jr trustee incorporated reference exhibit first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 104 product liability trust agreement allischalmers corporation bruce w strausberg trustee incorporated reference exhibit e first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 105 allischalmers corporation longterm stock incentive plan 1989 incorporated reference companys report form 10q quarter ended september 30 1989 106 subscription shareholder agreement allischalmers corporation alch company lp dated may 18 1989 incorporated reference companys report form 8k dated may 24 1989 107 commercial installment loan agreement allischalmers corporation marine midland bank na dated december 20 1989 incorporated reference companys report form 8k dated december 20 1989 108 employment agreement allischalmers corporation john grigsby jr incorporated reference companys report form 10q quarter ended september 30 1989 109 allischalmers savings plan incorporated reference companys report form 10k year ended december 31 1988 1010 allischalmers consolidated pension plan incorporated reference companys report form 10k year ended december 31 1988 1011 agreement dated march 31 1999 allis chalmers corporation pension benefit guaranty corporation incorporated reference companys report form 10q quarter ended june 30 1999 1012 lockup agreement dated march 31 1999 among allischalmers corporation pension benefit guaranty corporation acting individual capacity trustee allischalmers management contract compensatory plan arrangement consolidated pension plan alch company lp wells fargo bank trustee certain amended restated retiree health trust agreement uaw retired employees allischalmers corporation firstar trust company trustee certain amended restated retiree health trust agreement nonuaw retired employees allischalmers corporation incorporated reference companys report form 10q quarter ended june 30 1999 1013 registration rights agreement dated march 31 1999 allischalmers corporation pension benefit guaranty corporation incorporated reference companys report form 10q quarter ended june 30 1999 211 subsidiaries allischalmers corporation 271 financial data schedule management contract compensatory plan arrangement allischalmers corporation consolidated subsidiaries schedule ii valuation qualifying accounts years ended december 31 1997 1998 1999 thousands balance year ended beginning close december 31 1997 period additions deductions period doubtful receivables 30 6 0 36 balance year ended beginning close december 31 1998 period additions deductions period doubtful receivables 36 0 15 21 balance year ended beginning close december 31 1999 period additions deductions period doubtful receivables 21 102 1 122 signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized allischalmers corporation sjohn grigsby jr john grigsby jr executive vice president chief financial officer date march 29 2000 pursuant requirements section 13 15d securities exchange act 1934 amended report signed march 29 2000 following persons behalf registrant capacities indicated sthomas barnhart ii salexander p sammarco thomas barnhart ii director alexander p sammarco director david groshoff sallan r tessler david groshoff director allan r tessler director sdr richard lichtenstein sleonard toboroff dr richard lichtenstein director leonard toboroff director srobert e nederlander robert e nederlander director item 14 principal accountant fees services pursuant general instruction g3 information principal accountant fees services filed amendment annual report form 10k incorporated reference definitive proxy statement 2008 annual meeting stockholders within 120 days end fiscal year ending december 31 2007 part iv item 15 item 14 principal accounting fees services pursuant general instruction g3 information principal accountant fees services filed amendment annual report form 10k incorporated reference definitive proxy statement 2009 annual meeting stockholders filed within 120 days end fiscal year ending december 31 2008 part iv item 15 item 14 exhibits financial statement schedules reports form 8k list documents filed index financial statements financial schedule included page 15 report financial statements schedules included report omitted applicable required information shown financial statements notes thereto b reports form 8k reports form 8k filed fourth quarter 1998 c exhibits 2 1 first amended disclosure statement pursuant section 1125 bankruptcy code includes first amended restated joint plan reorganization dated september 14 1988 incorporated reference companys report form 8k dated december 1 1988 31 amended restated certificate incorporation allischalmers corporation incorporated reference companys report form 8 dated august 12 1992 32 bylaws allischalmers corporation incorporated reference companys report form 8a dated august 12 1992 101 amended restated retiree health trust agreement allischalmers corporation wells fargo bank incorporated reference exhibit c1 first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 102 amended restated retiree health trust agreement allischalmers corporation firstar trust company incorporated reference exhibit c2 first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 103 reorganization trust agreement allischalmers corporation john grigsby jr trustee incorporated reference exhibit first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 104 product liability trust agreement allischalmers corporation bruce w strausberg trustee incorporated reference exhibit e first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 105 allischalmers corporation longterm stock incentive plan 1989 incorporated reference companys report form 10q three months ended september 30 1989 106 subscription shareholder agreement allischalmers corporation alch company lp dated may 18 1989 incorporated reference companys report form 8k dated may 24 1989 107 commercial installment loan agreement allischalmers corporation marine midland bank na dated december 20 1989 incorporated reference companys report form 8k dated december 20 1989 108 employment agreement allischalmers corporation john grigsby jr incorporated reference companys report form 10q three months ended september 30 1989 109 allischalmers savings plan incorporated reference companys report form 10k year ended december 31 1988 1010 allischalmers consolidated pension plan incorporated reference companys report form 10k year ended december 31 1988 211 subsidiaries allischalmers corporation 271 financial data schedule management contract compensatory plan arrangement allischalmers corporation consolidated subsidiaries schedule ii valuation qualifying accounts years ended december 31 1996 1997 1998 thousands includes writeoff uncollectible receivables less recoveries signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized allischalmers corporation sjohn grigsby jr john grigsby jr vice chairman executive vice president chief financial officer date march 29 1999 pursuant requirements section 13 15d securities exchange act 1934 amended report signed march 26 1999 following persons behalf registrant capacities indicated sh sean mathis srobert e nederlander h sean mathis robert e nederlander director chairman board chief executive officer director john r collins sjohn e sundman john r collins director john e sundman director sjohn grigsby jr sallan r tessler john grigsby jr director allan r tessler director sclaude montgomery sleonard toboroff claude montgomery director leonard toboroff director item 14 exhibits financial statement schedules reports form 8k page selected financial data managements discussion analysis companys financial statements together report thereon price waterhouse llp appearing pages 5 28 companys 1995 annual report shareholders incorporated reference form 10k annual report exception aforementioned information 1995 annual report shareholders deemed filed part report schedule financial statements listed read conjunction financial statements 1995 annual report shareholders financial statement schedules included form 10k annual report omitted applicable required information shown financial statements notes thereto allischalmers corporation consolidated subsidiaries schedule financial statements viii valuation qualifying accounts 19 report independent accountants financial statement schedule 20 b reports form 8k reports form 8k filed company fourth quarter 1995 c exhibits 21 first amended disclosure statement pursuant section 1125 bankruptcy code includes first amended restated joint plan reorganization dated september 14 1988 incorporated reference companys report form 8k dated december 1 1988 31 amended restated certificate incorporation allischalmers corporation incorporated reference companys report form 8a dated august 12 1992 32 bylaws allischalmers corporation incorporated reference companys report form 8a dated august 12 1992 101 amended restated retiree health trust agreement allischalmers corporation wells fargo bank incorporated reference exhibit c1 first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 102 amended restated retiree health trust agreement allischalmers corporation firstar trust company incorporated reference exhibit c2 first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 103 reorganization trust agreement allis chalmers corporation john grigsby jr trustee incorporated reference exhibit first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 104 product liability trust agreement allis chalmers corporation bruce w strausberg trustee incorporated reference exhibit e first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 105 allischalmers corporation longterm stock incentive plan 1989 incorporated reference companys report form 10q three months ended september 30 1989 106 subscription shareholder agreement allischalmers corporation alch company lp dated may 18 1989 incorporated reference companys report form 8k dated may 24 1989 107 commercial installment loan agreement allischalmers corporation marine midland bank na dated december 20 1989 incorporated reference companys report form 8k dated december 20 1989 108 employment agreement allischalmers corporation john grigsby jr incorporated reference companys report form 10q three months ended september 30 1989 109 asset purchase agreement allischalmers corporation brb industries inc jack ehrenhaus fredric allen dated november 7 1989 incorporated reference companys report form 8k dated december 20 1989 1010 allischalmers savings plan incorporated reference companys report form 10k year ended december 31 1988 1011 allischalmers consolidated pension plan incorporated reference companys report form 10k year ended december 31 1988 1012 asset purchase agreement allis chalmers corporation brb industries corp dated august 4 1994 amended among allischalmers corporation brb industries corp power manufacturing inc september 22 1994 incorporated reference companys report form 8k dated september 22 1994 131 1995 annual report shareholders allis chalmers corporation portions annual report incorporated reference report form 10k deemed filed herewith 211 subsidiaries allischalmers corporation 271 financial data schedule management contract compensatory plan arrangement allischalmers corporation consolidated subsidiaries schedule viii valuation qualifying accounts years ended december 31 1993 1994 1995 thousands balance year ended beginning close december 31 1993 period additions deductions period doubtful receivables 367 130 248a 249 plant rearrangement 68 0 68 restructure costs 161 0 113 48 229 0 113 116 balance year ended beginning close december 31 1994 period additions deductions period doubtful receivables 249 73 3 319 plant rearrangement 68 0 68 restructure costs 48 0 48 0 116 0 48 68 balance year ended beginning close december 31 1995 period additions deductions period doubtful receivables 319 0 13 306 plant rearrangement 68 0 68 restructure costs 0 68 0 68 includes writeoff uncollectible receivables less recoveries report independent accountants financial statement schedule board directors allischalmers corporation audits consolidated financial statements referred report dated february 27 1996 appearing page 12 1995 annual report shareholders allischalmers corporation report consolidated financial statements incorporated reference annual report form 10k also included audit financial statement schedule listed item 14a form 10k opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements price waterhouse llp milwaukee wisconsin february 27 1996 signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized allischalmers corporation sjohn grigsby jr john grigsby jr vice chairman executive vice president chief financial officer date march 15 1996 pursuant requirements section 13 15d securities exchange act 1934 amended report signed march 15 1996 following persons behalf registrant capacities indicated sh sean mathis srobert e nederlander h sean mathis robert e nederlander director chairman board chief executive officer director john r collins sjohn e sundman john r collins director john e sundman director sjohn grigsby jr sallan r tessler john grigsby jr director allan r tessler director sclaude montgomery sleonard toboroff claude montgomery director leonard toboroff director exhibit index exhibit description 131 1995 annual report shareholders allischalmers corporation portions annual report incorporated reference report form 10k deemed filed herewith 211 subsidiaries allischalmers corporation 271 financial data schedule item 14 controls procedures evaluation disclosure controls procedures chief executive officer chief accounting officer evaluating effectiveness companys disclosure controls procedures defined exchange act rules 13a14c 15d14c date evaluation date within 90 days prior filing date annual report concluded evaluation date disclosure controls procedures adequate ensure material information relating registrant consolidated subsidiaries would made known others within entities b changes internal controls knowledge significant changes companys internal controls factors could significantly affect internal controls subsequent evaluation date part iv item 15 item 14 principal accounting fees services following table shows aggregate fees professional services rendered uhy llp years ended december 31 2010 2009 1 includes fees outofpocket charges paid audit annual financial statements reviews related quarterly financial statements 2 includes fees paid assurance related services reasonably related performance audit review financial statements reported “audit fees” services include accounting reporting consultations uhy llp leases personnel work control uhy llp partners whollyowned subsidiaries uhy advisors inc alternative practice structure preapproval policies procedures prior merger seawell policy audit committee must approve advance audit nonaudit services provided independent accountants audit auditrelated services fees therefor provided uhy llp 2010 2009 preapproved audit committee result merger seawell company longer audit committee 73 index financial statements part iv item 15 item 7 management’s discussion analysis financial condition results operations following discussion analysis read conjunction selected historical financial data accompanying financial statements notes financial statements included elsewhere document following discussion contains forwardlooking statements within meaning private securities litigation reform act 1995 reflect plans estimates beliefs actual results could differ materially anticipated forwardlooking statements result risks uncertainties including limited discussed “item 1a risk factors” overview business multifaceted oilfield services company provides services equipment oil natural gas exploration production companies domestically texas louisiana new mexico colorado oklahoma mississippi utah wyoming arkansas alabama west virginia offshore gulf mexico internationally primarily argentina mexico operate six sectors oil natural gas service industry rental tools international drilling directional drilling services casing tubing services compressed air drilling services production services derive operating revenues rates per job charge labor equipment required provide service rates per day equipment tools rent customers price charge services depends upon several factors including level oil natural gas drilling activity competitive environment particular geographic regions operate contracts awarded based price quality service equipment general reputation experience personnel demand drilling services historically volatile affected capital expenditures oil natural gas exploration development companies fluctuate based upon prices oil natural gas expectation prices oil natural gas number working drilling rigs typically referred “rig count” important indicator activity levels oil natural gas industry rig count united states increased 862 december 31 2002 1752 march 2 2007 according baker hughes rig count furthermore directional horizontal rig counts increased 283 december 31 2002 738 march 2 2007 accounted 33 42 total us rig count respectively cost revenues represents direct indirect costs associated operation maintenance equipment principal elements costs direct indirect labor benefits repairs maintenance equipment insurance equipment rentals fuel depreciation operating expenses fluctuate direct proportion changes revenues among factors fixed base inventory equipment facilities support operations periods low drilling activity may also seek preserve labor continuity market services maintain equipment cyclical nature equipment rental services industry oilfield services industry highly cyclical critical factor assessing outlook industry worldwide supply demand oil domestic supply demand natural gas peaks valleys demand apart many cyclical industries primarily result industry driven commodity demand corresponding price increases demand increases producers raise prices price escalation enables producers increase capital expenditures increased capital expenditures ultimately result greater revenues profits services equipment companies increased capital expenditures also ultimately result greater production historically resulted increased supplies reduced prices demand services strong throughout 2004 2005 2006 due high oil natural gas prices increased demand declining production costs natural gas compared energy sources management believes current market fundamentals indicative favorable longterm trend activity markets however factors could offset developments affecting worldwide supply demand oil natural gas products restatement understated diluted earnings per share due incorrect calculation weighted shares outstanding first three quarters 2004 year ended december 31 2004 quarter ended march 31 2005 addition understated basic earnings per share due incorrect calculation weighted average basic shares outstanding quarter ended september 30 2004 consequently restated financial statements periods incorrect calculation resulted mathematical error improper application statement financial accounting standards 128 “earnings per share” sfas 128 effect restatement reduce weighted average diluted shares outstanding relevant periods reduce weighted average basic shares outstanding quarter ended september 30 2004 therefore diluted earnings per share increased relevant periods basic earnings per share increased quarter ended september 30 2004 see note 2 consolidated financial statements three years ended december 31 2006 connection formation aircomp 2003 along mi contributed assets aircomp exchange 55 interest 45 interest respectively aircomp originally accounted formation aircomp joint venture february 2005 determined transaction accounted using purchase accounting pursuant sfas 141 “business combinations” sec staff accounting bulletin 51 “accounting sales stock subsidiary” consequently restated financial statements first three quarters 2004 see note 2 consolidated financial statements three years ended december 31 2006 results operations september 2004 acquired remaining 19 tubular acquired safco november 2004 aircomp acquired substantially assets diamond air december 2004 acquired downhole consolidated results acquisitions day acquired april 2005 acquired delta may 2005 acquired capcoil report operations downhole capcoil production services segment operations safco delta rental tools segment july 2005 acquired 45 interest mi compressed air drilling subsidiary aircomp making us 100 owner aircomp addition july 2005 acquired compressed air drilling assets w august 1 2005 acquired 100 outstanding capital stock target results target included directional drilling segment measurement drilling equipment utilized segment september 1 2005 acquired casing tubing service assets patterson services inc consolidated results acquisitions day acquired january 2006 acquired outstanding stock specialty december 2006 acquired substantially assets ogr report operations specialty ogr rental tool segment april 2006 acquired outstanding stock rogers report operations rogers casing tubing services segment august 2006 acquired outstanding stock dls december 2006 acquired outstanding stock tanus report operations dls tanus international drilling segment october 2006 acquired outstanding stock petro rentals report operations petro rentals production services segment consolidated results acquisitions day acquired foregoing acquisitions affect comparability period historical results historical results may indicative future results comparison years ended december 31 2006 december 31 revenues year ended december 31 2006 3073 million increase 1917 compared 1053 million year ended december 31 2005 revenues increased business segments due successful integration acquisitions completed third quarter 2005 2006 investment new equipment improved pricing services addition operations sales personnel opening new operations offices revenues increased significantly due acquisition dls august 14 2006 expanded operations sixth operating segment international drilling revenues also increased significantly rental tools segment due acquisition specialty effective january 1 2006 casing tubing services segment also substantial increase revenue primarily due acquisitions casing tubing assets patterson services inc september 1 2005 acquisition rogers april 1 2006 along investment additional equipment improved market conditions increased market penetration services south texas east texas louisiana us gulf mexico revenues increased compressed air drilling segment due purchase additional equipment improved pricing services directional drilling services segment revenues increased 2006 period compared 2005 period due improved pricing directional drilling services august 2005 acquisition target provides measurementwhiledrilling tools mwd purchase additional downhole motors mwds increased capacity market presence gross margin year ended december 31 2006 increased 2438 1051 million 342 revenues compared 306 million 290 revenues year ended december 31 2005 increase gross profit due increase revenues business segments increase gross profit percentage revenues primarily due acquisition specialty january 1 2006 high margin rental tool business improved pricing services generally investments new capital equipment also contributing improved gross profit margin acquisition target purchase additional mwd’s acquisition rogers increase gross profit partially offset increase depreciation expense 3157 203 million compared 49 million 2005 increase due additional depreciable assets resulting acquisitions capital expenditures cost revenues consists principally labor costs benefits equipment rentals maintenance repairs equipment depreciation insurance fuel many costs fixed gross profit percentage revenues generally affected level revenues general administrative expense 355 million year ended december 31 2006 compared 156 million year ended december 31 2005 general administrative expense increased due additional expenses associated acquisitions hiring additional sales operations administrative personnel general administrative expense also increased accounting consulting fees expenses connection initiatives strengthen internal control processes costs related sarbanes oxley compliance efforts increased corporate accounting administrative staff percentage revenues general administrative expenses 116 2006 compared 148 2005 adopted sfas 123r sharebased payment effective january 1 2006 statement requires sharebased payments employees including grants employee stock options recognized financial statements based grantdate fair values adopted sfas 123r using modified prospective transition method utilizing blackscholes option pricing model calculation fair value employee stock options modified prospective method record compensation cost related unvested stock awards december 31 2005 recognizing unamortized grant date fair value awards remaining vesting periods awards change historical reported earnings therefore recorded expense 34 million related stock awards year ended december 31 2006 30 million recorded general administrative expense balance recorded direct cost prior january 1 2006 accounted stockbased compensation using accounting principle board opinion 25 apb 25 apb 25 compensation expense recognized stock options exercise price less market price grant date option accordingly compensation cost recognized apb 25 amortization expense 29 million year ended december 31 2006 compared 18 million year ended december 31 2005 increase amortization expense due amortization intangible assets connection acquisitions amortization deferred financing costs included approximately 11 million income operations year ended december 31 2006 totaled 667 million 4043 increase 132 million income operations year ended december 31 2005 reflecting increase revenues gross profit offset part increased general administrative expenses income operations percentage revenues increased 217 2006 125 2005 due increase gross margin offset increases amortization expense general administrative expenses net interest expense 193 million year ended december 31 2006 compared 44 million year ended december 31 2005 interest expense increased 2006 due increased debt january 2006 issued 1600 million senior notes bearing interest 90 fund acquisition specialty pay outstanding debt working capital august 2006 issued additional 950 million senior notes bearing interest 90 fund portion acquisition dls december 18 2006 borrowed 3000 million senior unsecured bridge loan fund acquisition ogr average interest rate bridge loan approximately 106 interest expense 2006 includes writeoff 453000 related financing fees bridge loan bridge loan repaid january 29 2007 remaining 12 million financing fees written 2007 third quarter 2005 incurred debt retirement expense 11 million related refinancing debt amount includes prepayment penalties writeoff deferred financing fees previous financing minority interest income subsidiaries year ended december 31 2006 0 compared 488000 corresponding period 2005 due acquisition minority interest aircomp july 11 2005 provision income taxes year ended december 31 2006 114 million 243 net income taxes compared 13 million 158 net income taxes 2005 increase provision income taxes attributable significant increase operating income resulted utilization deferred tax assets including net operating losses increase percentage income taxes net income taxes attributable operations argentina taxed 350 net income attributed common stockholders 356 million year ended december 31 2006 increase 3965 compared net income attributed common stockholders 72 million year ended december 31 2005 following table compares revenues income operations business segments years ended december 31 2006 december 31 2005 income operations consists revenues less cost revenues general administrative expenses depreciation amortization rental tools segment rental tools revenues 515 million year ended december 31 2006 increase 51 million revenues year ended december 31 2005 income operations increased 263 million 2006 compared 13 million 2005 increase revenue operating income primarily attributable acquisition specialty effective january 1 2006 improved pricing improved utilization inventory rental equipment lesser extent acquisition ogr assets december 2006 international drilling segment international drilling revenues 695 million year ended december 31 2006 income operations 122 million segment operations created acquisition dls august 2006 november 2006 dls employees involved tenday labor strike argentina affected entire oil industry argentina negative impact results directional drilling services segment revenues year ended december 31 2006 directional drilling services segment 728 million increase 659 439 million revenues year ended december 31 2005 income operations increased 1391 177 million 2006 74 million 2005 improved results segment due increase drilling activity texas gulf coast areas improved pricing acquisition target august 1 2005 purchase additional six mwds increased operating expenses result addition operations personnel offset growth revenues improved pricing services casing tubing services segment revenues year ended december 31 2006 casing tubing services segment 509 million increase 1431 209 million revenues year ended december 31 2005 revenues domestic operations increased 444 million 2006 145 million 2005 result acquisition rogers acquisition casing tubing assets patterson services inc september 1 2005 investment new equipment resulted increased market penetration services south texas east texas louisiana us gulf mexico year ended december 2005 also adversely impacted hurricane activity september 2005 revenues mexican operations increased 65 million 2006 64 million 2005 income operations increased 1512 125 million 2006 50 million 2005 increase segment’s operating income due increased revenues domestically mexico operations compressed air drilling services segment compressed air drilling revenues 430 million year ended december 31 2006 increase 677 compared 257 million revenues year ended december 31 2005 income operations increased 926 108 million 2006 compared income operations 56 million 2005 compressed air drilling revenues operating income 2006 period increased compared 2005 period due part acquisition air drilling assets w investment additional equipment improved pricing west texas production services segment production services revenues 196 million year ended december 31 2006 compared 98 million revenues year ended december 31 2005 income operations 21 million 2006 compared loss operations 99000 2005 increase revenue attributable acquisition petrorentals completed october 2006 acquisition capcoil may 1 2005 improved utilization pricing services increase operating income primarily related operations petrorentals addition two coil tubing units fourth quarter 2006 comparison years ended december 31 2005 december 31 revenue year ended december 31 2005 1053 million increase 1207 compared 477 million year ended december 31 2004 increase revenues principally due acquisitions completed fourth quarter 2004 second third quarters 2005 addition operations sales personnel opening new operations offices purchase additional equipment acquisitions completed period enabled us establish rental tool production services segments resulted increased offering products services expansion customer base directional drilling services segment revenues increased 2005 period compared 2004 period due addition operations sales personnel opening new operations offices purchase additional downhole motors increased capacity market presence revenues increased compressed air drilling segment due acquisition air drilling assets w july 11 2005 acquisitions diamond air november 1 2004 improved pricing services west texas revenues increased casing tubing services segment due acquisition casing tubing assets patterson services inc september 1 2005 increased revenues mexico improved market conditions improved market penetration services south texas addition operating personnel equipment broadened capabilities also contributing increased revenues acquisitions safco september 1 2004 downhole december 1 2004 delta april 1 2005 capcoil may 1 2005 downhole capcoil comprised production services segment safco delta comprised rental tool segment gross margin year ended december 31 2005 increased 1461 306 million 290 revenues compared 124 million 260 revenues year ended december 31 2004 increase due increased revenues improved pricing directional drilling services segment increased revenues compressed air drilling services segment including revenues resulting acquisition diamond air compressed air drilling assets wt increased revenues mexico improved market conditions domestic casing tubing segment growth rental tools segment acquisition delta april 1 2005 depreciation expense increased 804 49 million 2005 compared 27 million 2004 increase due additional depreciable assets resulting capital expenditures acquisitions 2004 2005 cost revenues consists principally labor costs benefits equipment rentals maintenance repairs equipment depreciation insurance fuel many costs fixed gross profit percentage revenues generally affected level revenues general administrative expense 156 million year ended december 31 2005 compared 73 million year ended december 31 2004 general administrative expense increased due additional expenses associated acquisitions completed second half 2004 2005 hiring additional sales administrative personnel general administrative expense also increased legal accounting fees expenses related financing acquisition activities increased consulting fees connection internal controls corporate governance process increased corporate accounting administrative staff percentage revenues general administrative expenses 148 2005 153 2004 amortization expense 18 million year ended december 31 2005 compared 09 million year ended december 31 2004 increase amortization expense due amortization intangible assets connection acquisitions amortization deferred financing costs income operations year ended december 31 2005 totaled 132 million 2127 increase 42 million income operations year ended december 31 2004 reflecting increase revenues gross profit offset part increased general administrative expenses interest expense 44 million year ended december 31 2005 compared 28 million year ended december 31 2004 interest expense increased 2005 due increased borrowings associated acquisitions completed second third quarters 2005 equipment purchases higher average interest rates offset part prepayment december 2004 12 24 million subordinated note additionally 2005 incurred debt retirement expense 11 million related refinancing debt amount includes prepayment penalties writeoff deferred financing fees previous financing minority interest income subsidiaries year ended december 31 2005 488000 compared 321000 corresponding period 2004 due increase profitability aircomp due part acquisition diamond air november 1 2004 minority interest aircomp acquired july 11 2005 minority interest tubular 19owned director jens mortensen acquired september 30 2004 net income attributed common stockholders 72 million year ended december 31 2005 increase 8391 compared net income attributed common stockholders 08 million year ended december 31 2004 net income attributed common stockholders 2004 period 124000 preferred stock dividends following table compares revenues income operations business segments years ended december 31 2005 december 31 2004 income operations consists revenues less cost revenues general administrative expenses depreciation amortization rental tools segment rental tools revenues 51 million year ended december 31 2005 increase 7280 compared 06 million revenues year ended december 31 2004 income operations increased 13 million 2005 compared loss operations 71000 2004 operations segment include safco acquired september 2004 delta acquired april 2005 directional drilling services segment revenues year ended december 31 2005 directional drilling services segment 439 million increase 771 248 million revenues year ended december 31 2004 income operations increased 1414 74 million 2005 31 million 2004 improved results segment due increase drilling activity texas gulf coast areas establishment new operations west texas oklahoma addition operations sales personnel purchase additional downhole motors increased capacity market presence acquisition target provider measurement drilling equipment effective august 2005 operating income increased due higher revenue explained cost savings achieved result purchases downhole motors used directional drilling previously rented casing tubing services segment revenues year ended december 31 2005 casing tubing services segment 209 million increase 1014 104 million revenues year ended december 31 2004 revenues domestic operations increased 145 million 2005 52 million 2004 result acquisition casing tubing assets patterson services inc september 1 2005 improved market conditions services south texas addition personnel added capabilities offering services revenues mexican operations increased 64 million 2005 52 million 2004 result increased drilling activity mexico addition equipment increased capacity income operations increased 552 50 million 2005 32 million 2004 increase segment’s operating income due increased revenues domestically mexico operations compressed air drilling services segment compressed air drilling revenues 257 million year ended december 31 2005 increase 1220 compared 116 million revenues year ended december 31 2004 income operations increased 3801 56 million 2005 compared income operations 12 million 2004 compressed air drilling revenues operating income 2005 period increased compared 2004 period due part acquisition air drilling assets w acquisitions diamond air november 1 2004 improved pricing west texas production services segment production services revenues 98 million year ended december 31 2005 compared 376000 revenues year ended december 31 2004 loss operations 99000 2005 compared operating income 4000 2004 operations segment consist downhole acquired december 1 2004 capcoil acquired may 1 2005 results year ended december 31 2005 segment negatively affected costs incurred expand international presence production services downtime experienced one larger coil tubing units liquidity capital resources ongoing capital requirements arise primarily need service debt acquire maintain equipment fund working capital requirements complete acquisitions primary sources liquidity proceeds issuance debt equity securities cash flows operations cash equivalents 397 million december 31 2006 compared 19 million december 31 2005 operating activities year ended december 31 2006 generated 537 million cash operating activities net income year ended december 31 2006 356 million noncash additions net income totaled 297 million 2006 period consisting primarily 232 million depreciation amortization 34 million related expensing stock options required sfas 123r 22 million deferred income tax 781000 provision bad debts 453000 amortization bridge loan fees partially offset 24 million gain disposition equipment year ended december 31 2006 changes working capital used 99 million cash principally due increase 232 million accounts receivable decrease 23 million accounts payable offset part increase 114 million accrued interest increase 34 million accrued employee benefits payroll taxes increase 872000 accrued expenses accounts receivables increased december 31 2006 primarily due increase revenues 2006 accrued interest increased december 31 2006 due principally interest accrued 90 senior notes payable semiannually accrued employee benefits payroll taxes accrued expenses increased primarily due increase costs due growth revenues acquisition completed 2006 year ended december 31 2005 generated 36 million cash operating activities net income year ended december 31 2005 72 million noncash additions net income totaled 74 million 2005 period consisting primarily 67 million depreciation amortization 488000 minority interest income subsidiary 653000 writeoff financing fees conjunction refinancing 219000 provision bad debts 669000 gain disposition equipment year ended december 31 2005 changes working capital used 110 million cash principally due increase 107 million accounts receivable increase 21 million current assets increase assets 936000 decrease liabilities 266000 decrease 97000 accrued expenses offset part increase 24 million accounts payable increase 324000 accrued interest increase 443000 accrued employee benefits payroll taxes accounts receivables increased december 31 2005 due primarily increase revenues 2005 current assets increased 21 million due primarily increase inventory accounts payable increased 24 million december 31 2005 due increase cost sales associated increase revenues acquisitions completed 2005 2004 year ended december 31 2004 generated 33 million cash operating activities net income preferred stock dividend year ended december 31 2004 888000 noncash additions net income totaled 44 million 2004 period consisting 36 million depreciation amortization 321000 minority interest income subsidiary 350000 amortization discount debt 104000 provision bad debts year ended december 31 2004 changes working capital used 20 million cash principally due increase 24 million accounts receivable increase 638000 assets decrease 398000 accrued expenses liabilities offset part increase 11 million accounts payable increase 299000 accrued interest accounts receivables increased december 31 2004 due primarily increase revenues 2004 current assets increased 638000 due primarily increase prepaid insurance premiums accounts payable increased 11 million december 31 2004 due increase cost sales associated increase revenues acquisitions completed fourth quarter 2004 investing activities year ended december 31 2006 used 5594 million investing activities consisting six acquisitions capital expenditures year ended december 31 2006 completed following acquisitions total net cash outlay 5266 million consisting purchase price acquisition costs less cash acquired • effective january 1 2006 acquired specialty purchase price 960 million cash • effective april 1 2006 acquired rogers purchase price 113 million cash 125285 shares common stock promissory note 750000 • august 14 2006 acquired dls purchase price 937 million cash 25 million shares common stock assumption 91 million indebtedness • october 16 2006 acquired petro rentals purchase price 202 million cash 246761 shares common stock payment approximately 96 million debt • effective december 1 2006 acquired tanus purchase price 25 million cash • december 18 2006 acquired substantially assets ogr purchase price approximately 2910 million cash 32 million shares common stock addition made capital expenditures approximately 397 million year ended december 31 2006 including 45 million replace “lostinhole” equipment increase inventory equipment rental tools segment 58 million purchase improve replace equipment international drilling segment 51 million purchase equipment directional drilling services segment 77 million purchase improve equipment compressed air drilling service segment 110 million purchase improve casing equipment approximately 53 million expand production services segment also received 69 million sale assets year ended december 31 2006 comprised mostly equipment “lostinhole” rental tools segment 38 million directional drilling segment 18 million year ended december 31 2005 used 531 million investing activities year ended december 31 2005 completed following acquisitions total net cash outlay 369 million consisting purchase price acquisition costs less cash acquired • april 1 2005 acquired delta purchase price 46 million cash 223114 shares common stock two promissory notes totaling 350000 • may 1 2005 acquired capcoil purchase price 27 million cash 168161 shares common stock payment assumption approximately 13 million debt • july 11 2005 acquired compressed air drilling assets wt purchase price 60 million cash • july 11 2005 acquired mi it’s 45 interest aircomp subordinated note principal amount 48 million issued aircomp paid mi 71 million cash reissued 40 million subordinated note • effective august 1 2005 acquired target purchase price 13 million cash forgiveness lease receivable 592000 • september 1 2005 acquired casing tubing service assets patterson services inc purchase price approximately 156 million addition made capital expenditures approximately 178 million year ended december 31 2005 including 29 million purchase equipment directional drilling services segment 70 million purchase improve equipment compressed air drilling service segment 52 million purchase improve casing equipment approximately 15 million expand production services segment also received 16 million sale assets year ended december 31 2005 comprised mostly equipment lost hole directional drilling segment 10 million rental tool segment 408000 year ended december 31 2004 used 91 million investing activities consisting principally capital expenditures approximately 46 million including 16 million purchase equipment directional drilling services segment 13 million purchase casing equipment 14 million make capital repairs existing equipment compressed air drilling services segment year ended december 31 2004 completed following acquisitions net cash outlay 46 million • september 1 2004 completed 10 million acquisition 100 outstanding stock safco • november 1 2004 aircomp acquired substantially assets diamond air 46 million cash assumption approximately 450000 debt contributed share purchase price 25 million aircomp order fund purchase • effective december 1 2004 acquired downhole approximately 11 million cash 568466 shares common stock payment assumption 950000 debt financing activities year ended december 31 2006 financing activities provided net 5436 million cash received 5578 million borrowings longterm debt facilities consisting primarily issuance 2550 million 90 senior notes due 2014 3000 million senior unsecured bridge loan bridge loan repaid january 29 2007 used fund acquisition ogr also received 463 million net proceeds issuance 3450000 shares common stock 64 million tax benefit options 63 million proceeds warrant option exercises 1851377 shares common stock proceeds used repay longterm debt totaling 540 million repay 64 million net borrowings revolving lines credit repay related party debt 30 million pay 99 million debt issuance costs year ended december 31 2005 financing activities provided net 441 million cash received 563 million borrowings longterm debt facilities 155 million net proceeds issuance 1761034 shares common stock 25 million net borrowings revolving lines credit 14 million proceeds warrant option exercises 1076154 shares common stock proceeds used repay longterm debt totaling 282 million repay related party debt 15 million pay 18 million debt issuance costs year ended december 31 2004 financing activities provided net 118 million cash received 169 million net proceeds issuance 6081301 shares common stock 82 million borrowings longterm debt facilities 689000 increase net borrowings revolving lines credit proceeds used repay longterm debt totaling 135 million pay 391000 debt issuance costs january 18 2006 august 14 2006 closed private offerings qualified institutional buyers pursuant rule 144a securities act 1600 million 950 million aggregate principal amount senior notes respectively senior notes due january 15 2014 bear interest 90 proceeds used fund acquisitions specialty dls repay existing debt general corporate purposes debt repaid included outstanding balances credit agreement including 421 million term loan 64 million working capital advances 40 million subordinated note issued connection acquisition aircomp approximately 30 million subordinated note issued connection acquisition tubular approximately 548000 real estate loan approximately 350000 outstanding equipment financing january 18 2006 also executed amended restated credit agreement provides 250 million revolving line credit maturity january 2010 agreement contains customary events default financial covenants limits ability incur additional indebtedness make capital expenditures pay dividends make distributions create liens sell assets obligations agreement secured substantially assets excluding dls assets including 23 shares dls december 31 2006 amounts borrowed facility availability reduced outstanding letters credit 97 million part acquisition dls assumed various bank loans floating interest rates based libor plus margin terms ranging 2 5 years weighted average margin 70 december 31 2006 bank loans denominated us dollars outstanding amount due december 31 2006 73 million december 18 2006 closed ogr acquisition proceeds 3000 million unsecured bridge financing bridge loan term 18 months tranche bridge 2250 million bore interest libor plus 375 tranche b 750 million bore interest libor plus 575 bridge repaid january 29 2007 proceeds private offering 2500 million aggregate principal amount 85 senior notes due 2017 proceeds offering 60 million shares common stock connection acquisition rogers issued seller note amount 750000 note bears interest 50 due april 3 2009 part acquisition mountain air 2001 issued note sellers mountain air original amount 22 million accruing interest rate 575 per annum note reduced 15 million result settlement legal action sellers 2003 march 2005 reached agreement sellers holders note result action brought us sellers terms agreement paid holders note 10 million cash agreed pay additional 350000 june 1 2006 additional 150000 june 1 2007 settlement claims december 31 2006 outstanding amounts due 150000 connection purchase safco agreed pay total 150000 sellers exchange noncompete agreement required make annual payments 50000 september 30 2007 connection purchase capcoil agreed pay total 500000 two management employees exchange noncompete agreements required make annual payments 110000 may 2008 total amounts due theses noncompete agreements december 31 2006 270000 2000 compensated directors including current directors nederlander toboroff served board directors 1989 march 31 1999 without compensation issuing promissory notes totaling 325000 notes bore interest rate 50 december 31 2006 principal accrued interest notes totaled approximately 32000 various equipment financing loans interest rates ranging 50 87 terms ranging 2 5 years december 31 2006 outstanding balances equipment financing loans 35 million also various capital leases terms expire 2008 december 31 2006 amounts outstanding capital leases approximately 414000 april 2006 august 2006 obtained insurance premium financings amount 19 million 896000 fixed interest rates 56 60 respectively terms agreements amounts outstanding paid 10 month 11 month repayment schedules outstanding balances notes approximately 10 million december 31 2006 following table summarizes obligations commitments make future payments notes payable operating leases employment contracts consulting agreements periods specified december 31 2006 includes obligations 255 million 85 senior notes closed january 2007 proceeds 85 senior notes january 2007 common stock offering used repay 300 million bridge loan facility outstanding december 31 2006 b amounts represent minimum capital lease payments net interest payments totaling 15000 identified capital expenditure projects require approximately 800 million 2007 exclusive acquisitions believe cash generated operations cash hand cash available credit facilities provide sufficient funds identified projects intend implement growth strategy increasing scope services internal growth acquisitions regularly involved discussions number potential acquisition candidates expect make capital expenditures acquire maintain existing equipment performance cash flow operations determined demand services turn affected customers’ expenditures oil natural gas exploration development industry perceptions expectations future oil natural gas prices areas operate need refinance existing debt facilities become due provide funds capital expenditures acquisitions effect expansion plans require additional equity debt financing excess current working capital amounts available credit facilities assurance successful raising additional debt equity capital terms acceptable us recent developments january 2007 closed private offering qualified institutional buyers pursuant rule 144a securities act 2550 million principal amount 85 senior notes due 2017 proceeds senior notes offering together portion proceeds concurrent common stock offering used repay debt outstanding 300 million bridge loan facility incurred finance acquisition substantially assets ogr january 2007 closed public offering 60 million shares common stock 1765 per share proceeds common stock offering together proceeds concurrent senior notes offering used repay debt outstanding 300 million bridge loan facility incurred finance acquisition substantially assets ogr general corporate purposes february 7 2007 zane tankel elected member board directors critical accounting policies identified policies critical business operations understanding results operations impact associated risks related policies business operations discussed throughout management’s discussion analysis financial condition results operations policies affect reported expected financial results detailed discussion application accounting policies see note 1 notes consolidated financial statements included elsewhere document preparation report requires us make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period assurance actual results differ estimates allowance doubtful accounts determination collectibility amounts due customers requires us use estimates make judgments regarding future events trends including monitoring customer payment history current credit worthiness determine collectibility reasonably assured well consideration overall business climate customers operate uncertainties require us make frequent judgments estimates regarding customers’ ability pay amounts due us order determine appropriate amount valuation allowances required doubtful accounts provisions doubtful accounts recorded becomes evident customers able make required payments either contractual due dates future revenue recognition provide rental equipment drilling services customers per day per job contractual rates recognize drilling related revenue work progresses collectibility reasonably assured securities exchange commission’s staff accounting bulletin 104 revenue recognition financial statements provides guidance sec staff’s views application generally accepted accounting principles selected revenue recognition issues revenue recognition policy accordance generally accepted accounting principles sab 104 impairment longlived assets longlived assets include property plant equipment goodwill intangibles comprise significant amount total assets make judgments estimates conjunction carrying value assets including amounts capitalized depreciation amortization methods useful lives additionally carrying values assets reviewed impairment whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires us make longterm forecasts future revenues costs related assets subject review forecasts require assumptions demand products services future market conditions technological developments significant unanticipated changes assumptions could require provision impairment future period goodwill intangibles december 31 2006 recorded approximately 1258 million goodwill 328 million identifiable intangible assets perform purchase price allocations intangible assets make business combination business combinations purchase price allocations consummated acquisitions reportable segments excess purchase price allocation fair values tangible assets allocated identifiable intangibles thereafter goodwill subsequently perform initial impairment tests annual impairment tests accordance financial accounting standards board 141 business combinations financial accounting standards board 142 goodwill intangible assets initial valuations used two approaches determine carrying amount individual reporting units first approach discounted cash flow method focuses expected cash flow applying approach cash flow available distribution projected finite period years cash flow available distribution defined amount cash could distributed dividend without impairing future profitability operations cash flow available distribution terminal value end estimation period discounted present value derive indication value business enterprise valuation method dependent upon assumptions made regarding future cash flow cash requirements second approach guideline company method focuses comparing us selected reasonably similar publicly traded companies method valuation multiples derived operating data selected similar companies ii evaluated adjusted based strengths weaknesses relative selected guideline companies iii applied operating data arrive indication value valuation method dependent upon assumption value evaluated analysis earnings strengths weaknesses relative selected similar companies significant unanticipated changes assumptions could require provision impairment future period income taxes determination evaluation annual income tax provision involves interpretation tax laws various jurisdictions operate requires significant judgment use estimates assumptions regarding significant future events amount timing character income deductions tax credits changes tax laws regulations level operations profitability jurisdiction may impact tax liability given year annual tax provision based information available us time number years may elapse ultimate tax liabilities certain tax jurisdictions determined current income tax expense reflects estimate income tax liability current year withholding taxes changes tax rates changes prior year tax estimates returns filed deferred tax assets liabilities recognized anticipated future tax effects temporary differences financial statement basis tax basis assets liabilities using enacted tax rates effect year end valuation allowance deferred tax assets recorded morelikelythannot benefit deferred tax asset realized intention permanently reinvest undistributed earnings nonus subsidiaries accordingly provided us deferred taxes undistributed earnings nonus subsidiaries distribution made us undistributed earnings subsidiaries could required record additional taxes cannot predict make distribution undistributed earnings unable make determination amount unrecognized deferred tax liability recently issued accounting standards february 2006 fasb issued sfas 155 accounting certain hybrid financial instruments sfas 155 provides entities relief separately determine fair value embedded derivative would otherwise required bifurcated host contract accordance sfas 133 accounting derivative instruments hedging activities sfas 155 allows entity make irrevocable election measure hybrid financial instrument fair value entirely changes fair value recognized earning sfas 155 effective financial instruments acquired issued subject remeasurement event occurring beginning entity’s first fiscal year begins september 15 2006 believe adoption sfas 155 material impact financial position results operations cash flows march 2006 fasb issued sfas 156 accounting servicing financial assets amendment fasb statement 140 sfas 156 requires entities recognize servicing asset liability time undertake obligation service financial asset entering servicing contract certain situations statement also requires separately recognized servicing assets servicing liabilities initially measured fair value permits choice either amortization fair value measurement method subsequent measurement effective date statement annual periods beginning september 15 2006 earlier adoption permitted beginning entity’s fiscal year provided entity issued financial statements year plan adopt sfas 156 early currently assessing impact consolidated financial statements july 2006 fasb issued fasb interpretation fin 48 accounting uncertainty income taxes interpretation fasb statement 109 fin 48 clarifies accounting uncertainty income taxes recognized enterprise’s financial statements accordance sfas 109 accounting income taxes prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return new standard also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition provisions fin 48 applied tax positions upon initial adoption standard tax positions meet likelythannot recognition threshold effective date may recognized continue recognized upon adoption fin 48 cumulative effect applying provisions fin 48 reported adjustment opening balance retaining earnings appropriate components equity net assets statement financial position fiscal year provisions fin 48 effective fiscal years beginning december 15 2006 currently evaluating impact applying provisions fin 48 september 2006 fasb issued sfas 157 fair value measurements sfas 157 clarifies principle fair value based assumptions market participants would use pricing asset liability establishes fair value hierarchy prioritizes information used develop assumptions standard fair value measurements would separately disclosed level within fair value hierarchy sfas 157 effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years early adoption permitted believe adoption sfas 157 material impact financial position results operations cash flows september 2006 fasb issued fsp aug air1 accounting planned major maintenance activities fsp aug air1 prohibits use accruedinadvance method accounting major maintenance activities confirms acceptable methods accounting planned major maintenance activities fsp aug air1 effective first fiscal year beginning december 15 2006 believe adoption fsp aug air1 material impact financial position results operations cash flows september 2006 securities exchange commission issued staff accounting bulletin 108 considering effects prior year misstatements quantifying misstatements current year financial statements “sab 108” sab 108 requires public companies utilize “dualapproach” assessing quantitative effects financial misstatements dual approach includes income statement focused assessment balance sheet focused assessment sab 108 effective fiscal years ending november 15 2006 adopted sab 108 december 31 2006 impact consolidated financial statements offbalance sheet arrangements balance sheet arrangements normal operating leases employee contracts likely current future material effect financial condition changes financial condition revenues expenses results operations liquidity capital expenditures capital resources 250 million revolving line credit maturity january 2010 december 31 2006 amounts borrowed facility availability reduced outstanding letters credit 97 million guarantee obligations unconsolidated entities item 7a item 7 managements discussion analysis financial condition results operations discussion read conjunction report shareholders consolidated financial statements including notes consolidated financial statements overview allischalmers emerging chapter 11 companys plan reorganization consummated december 2 1988 entered agreement alch company lp investor pursuant investor agreed purchase 61 million shares common stock 40 outstanding common stock 3750000 cash investor limited partnership controlled messrs robert e nederlander leonard toboroff acquisition environment unfavorable since investors cash contribution company remained difficult company 1997 problems continued include companys lack cash investment limited availability debt financing acquisitions financial exposure associated allischalmers consolidated pension plan consolidated plan allischalmers moved forward 1997 resolve major impediment future september 30 1997 pension benefit guaranty corporation pbgc announced assumed assets liabilities consolidated plan addition company reached agreement principle pbgc settlement liabilities pbgc arising termination consolidated plan subject reaching acceptable settlement internal revenue service irs regarding certain excise taxes assessed unpaid delinquent consolidated plan underfunding installments therefore company continues proceed cautiously efforts identify evaluate potential candidates acquisition company continues efforts conserve cash resources however expenses associated ongoing securities exchange commission governmental reporting well legal accounting audit tax insurance costs associated corporate requirements publicly held company continue make difficult company present size achieve positive cash flow 1994 companys independent pension actuaries changed assumptions mortality administrative expenses used determine liabilities consolidated plan primarily result changes mortality assumptions reflect decreased mortality rates companys retirees consolidated plan underfunded present value basis first quarter 1996 company made cash contribution amount 205000 company however financial resources make required payments 1996 1997 given inability company fund obligations current financial resources february 1997 allischalmers applied pbgc distress termination consolidated plan section 4041c employee retirement income security act 1974 amended erisa pbgc approved distress termination application september 1997 agreed plan termination date april 14 1997 pbgc became trustee terminated consolidated plan september 30 1997 upon termination consolidated plan allischalmers subsidiaries incurred liability pbgc amount equal consolidated plans unfunded benefit liabilities allischalmers subsidiaries also liability pbgc trustee terminated consolidated plan outstanding balance consolidated plans accumulated funding deficiencies pbgc estimated unfunded benefit liabilities accumulated funding deficiencies together pbgc liability total approximately 679 million september 1997 allischalmers pbgc entered agreement principle settlement pbgc liability pbgc agreement pbgc agreement calls pbgc release allis chalmers subsidiaries pbgc liability return number shares allischalmers common stock represents 35 total number shares issued outstanding fullydiluted basis pbgc agreement subject negotiation definitive documentation satisfactory resolution allischalmers tax obligations respect consolidated plan section 4971 internal revenue code 1986 amended code section 4971a code imposes taxable year firsttier tax 10 percent amount accumulated funding deficiency plan like consolidated plan section 4971b code imposes additional secondtier tax equal 100 percent accumulated funding deficiency corrected within specified period liability taxes imposed section 4971 extends jointly severally allischalmers commonlycontrolled subsidiary corporations prior termination consolidated plan accumulated funding deficiency taxable years 1995 1996 1997 deficiencies resulted result firsttier taxes code section 4971a approximately 900000 march 2 1998 allischalmers sent irs formal offer compromise companys tax liability code section 4971 accepted irs offer compromise require allischalmers pay irs 25000 plus interest march 2 1998 ii extinguish companys tax liability code section 4971 subject standard conditions attendant offer compromise although irs yet responded offer compromise allis chalmers management hopeful mutually acceptable settlement achieved satisfactory settlement cannot reached irs definitive documentation pbgc agreement achieved reason allischalmers evaluate alternatives including bankruptcy filing results operations results operations 1997 1996 1995 reflect sole operation business allischalmers machine repair business hds sales totaled 41 million 1997 compared 41 million 32 million 1996 1995 respectively increase sales 1996 1997 1995 primarily result strong market conditions coupled focused marketing strategy product offering gross margins percentage sales 250 261 257 1997 1996 1995 respectively market activity inconsistent 1997 higher number orders booked average dollar order significantly lower 1996 due competitive pressures product mix changes resulted lower gross margins experienced 1996 marketing administrative expense 17 million 14 million 13 million 1997 1996 1995 respectively marketing administrative expense 419 sales 1997 compared 348 1996 411 1995 increase 1997 primarily result additional legal fees incurred connection termination consolidated plan related negotiations pbgc irs along increased marketing expenses hds marketing administrative expense significantly reduced since 1994 result cost reduction activity hds companys corporate offices significant portion companys administrative expense relates expenses securities exchange commission governmental reporting well legal accounting audit tax insurance requirements publicly held company loss operations 646000 1997 compared 1996 loss 353000 loss 491000 1995 change 1996 resulted primarily aforementioned legal fees hds marketing expenses interest income years resulted mainly earnings shortterm investments however complete year 1995 interest income also derived note receivable sale brb industries division molded fabric business september 1994 interest expense primarily relates term loan proceeds used purchase shop office building hds operates pension expense relates recognition pension liability associated consolidated plan accordance statement financial accounting standards 87 employers accounting pensions 1397000 1422000 1067000 1997 1996 1995 respectively 1997 expense nine month period transfer consolidated plan pbgc took place september 30 1997 termination consolidated plan resulted additional 645 million pension expense 1997 including 9 million irs excise taxes company incurred net loss 66545000 including recognition pension expense 65926000 6634 per common share 1997 compared net loss 1728000 including recognition pension expense 1422000 172 per common share 1996 pension expense accounted 6573 per common share net loss 1997 liquidity capital resources december 31 1997 company cash shortterm investments totaling 699000 decrease 1568000 december 31 1996 decrease result expenses associated ongoing corporate reporting well legal accounting pension audit tax insurance addition hds expenditures 304000 capital items trade receivables december 31 1997 683000 compared 652000 december 31 1996 increase primarily result certain major projects completed billed hds near end year inventory december 31 1997 101000 slight increase 93000 year end 1996 net property plant equipment december 31 1997 1107000 increase 937000 december 31 1996 company spent 304000 capital expenditures fiscal 1997 approximately 185000 invested machinery equipment acquisitions approximately 120000 spent improve operations facilities including much needed revamping companys electric service shop area building enclosure help increase operations capacity effectiveness expenditures additional upgrades machinery tooling necessary reduce production costs decreasing downtime increasing production efficiency output positioning company growth increased capacity service capabilities offers marketplace current maturities longterm debt december 31 1997 38000 compared 54000 yearend 1996 decrease included payments real estate loan refinanced hds august 1996 proceeds original loan used 1990 purchase land building hds operates business houston texas amount refinanced required repaid monthly installments 3278 august 20 2001 remaining unpaid balance due december 31 1997 interest rate note 105 rate subject adjustments term note accordance increases decreases prime rate note secured hds facility net book value 456000 december 31 1997 companys guaranty companys principal sources cash include earnings operations interest income shortterm investments cash requirements needed administrative expenses associated publicly held company significant management believes company continue use substantial portion cash balances 1998 ac reorganization trust pursuant plan reorganization funds costs incurred allischalmers relate implementation plan reorganization costs include allocated share certain expenses company employees professional fees certain administrative expenses epa certain state environmental protection agencies requested information connection eleven potential hazardous waste disposal sites products manufactured allischalmers consummation plan reorganization disposed epa claimed allischalmers liable cleanup costs associated several additional sites epas claims respect one site withdrawn 1994 based upon settlements reached epa bankruptcy proceeding addition certain third parties asserted allischalmers liable cleanup costs associated epa fines connection additional sites one instances former site operator joined allischalmers 47 potentially responsible parties thirdparty defendant lawsuit involving cleanup one sites instance environmental claims asserted company involve prebankruptcy operations accordingly allischalmers taken position cleanup costs liabilities related sites discharged bankruptcy one particular site epas region iii concurred companys position claims environmental cleanup discharged pursuant bankruptcy site unique different circumstances company notified regional offices epa determination associated region iii site company received responses regional offices environmental claims asserted company involving postbankruptcy operations financial condition shareholders deficit december 31 1997 680 million three year comparison shareholders deficit follows millions 1997 1996 1995 january 1 136 99 69 net loss 665 17 14 pension liability adjustment 121 20 16 december 31 680 136 99 item 7a item 7 management’s discussion analysis financial condition results operations following discussion analysis read conjunction selected historical financial data accompanying financial statements notes financial statements included elsewhere document following discussion contains forwardlooking statements within meaning private securities litigation reform act 1995 reflect plans estimates beliefs actual results could differ materially anticipated forwardlooking statements result risks uncertainties including limited discussed “risk factors” overview business multifaceted oilfield services company provides services equipment oil natural gas exploration production companies domestically texas louisiana new mexico colorado oklahoma offshore gulf mexico internationally mexico operate five sectors oil natural gas service industry directional drilling services casing tubing services compressed air drilling services rental tools production services derive operating revenues rates per day rates per job charge labor equipment required provide service price charge services depends upon several factors including level oil natural gas drilling activity competitive environment particular geographic regions operate contracts awarded based price quality service equipment general reputation experience personnel demand drilling services historically volatile affected capital expenditures oil natural gas exploration development companies fluctuate based upon prices oil natural gas expectation prices oil natural gas number working drilling rigs typically referred “rig count” important indicator activity levels oil natural gas industry rig count united states increased 862 december 31 2002 1532 march 10 2006 according baker hughes rig count furthermore directional horizontal rig counts increased 283 december 31 2002 605 march 10 2006 accounted 328 395 total us rig count respectively currently believe number available drilling rigs insufficient meet demand drilling rigs consequently unless significant number additional drilling rigs brought online rig count may increase substantially despite strong demand cost revenues represents direct indirect costs associated operation maintenance equipment principal elements costs direct indirect labor benefits repairs maintenance equipment insurance equipment rentals fuel depreciation operating expenses fluctuate direct proportion changes revenues among factors fixed base inventory equipment facilities support operations periods low drilling activity may also seek preserve labor continuity market services maintain equipment cyclical nature equipment rental services industry oilfield services industry highly cyclical critical factor assessing outlook industry worldwide supply demand oil domestic supply demand natural gas peaks valleys demand apart many cyclical industries primarily result industry driven commodity demand corresponding price increases demand increases producers raise prices price escalation enables producers increase capital expenditures increased capital expenditures ultimately result greater revenues profits services equipment companies increased capital expenditures also ultimately result greater production historically resulted increased supplies reduced prices demand services strong throughout 2003 2004 2005 due high oil natural gas prices increased demand declining production costs natural gas compared energy sources management believes current market fundamentals indicative favorable longterm trend activity markets however factors could offset developments affecting worldwide supply demand oil natural gas products restatement understated diluted earnings per share due incorrect calculation weighted shares outstanding third quarter 2003 first three quarters 2004 years ended december 31 2003 2004 quarter ended march 31 2005 addition understated basic earnings per share due incorrect calculation weighted average basic shares outstanding quarter ended september 30 2004 consequently restated financial statements periods incorrect calculation resulted mathematical error improper application statement financial accounting standards 128 “earnings per share” sfas 128 effect restatement reduce weighted average diluted shares outstanding relevant periods reduce weighted average basic shares outstanding quarter ended september 30 2004 therefore diluted earnings per share increased relevant periods basic earnings per share increased quarter ended september 30 2004 based correction mathematical error three nine months ended september 30 2004 weighted average basic shares outstanding 8298000 6168000 respectively compared previously reported weighted average basic shares outstanding 11599000 7285000 three nine months ended september 30 2004 effect increase basic earnings per share 006 021 three nine months ended september 30 2004 compared 004 018 previously reported periods based proper allocation sfas 128 weighted average diluted shares outstanding 9828000 7890000 three nine months ended september 30 2004 respectively compared previously reported weighted average diluted shares outstanding 14407000 9980000 three nine months ended september 30 2004 respectively effect increase diluted earnings per share 005 018 three nine months ended september 30 2004 respectively compared 004 013 previously restated respectively see note 2 consolidated financial statements three years ended december 31 2005 connection formation aircomp 2003 along mi contributed assets aircomp exchange 55 interest 45 interest respectively aircomp originally accounted formation aircomp joint venture february 2005 determined transaction accounted using purchase accounting pursuant sfas 141 “business combinations” sec staff accounting bulletin 51 “accounting sales stock subsidiary” consequently restated financial statements year ended december 31 2003 first three quarters 2004 see note 2 consolidated financial statements three years ended december 31 2005 management concluded need restate financial statements resulted part lack sufficient experienced accounting personnel turn resulted lack effective control financial reporting process implemented number actions believe address deficiencies financial reporting process including following • addition experienced accounting personnel appropriate experience qualifications perform quality review procedures satisfy financial reporting obligations august 2004 hired new chief financial officer october 2004 hired fulltime inhouse general counsel march 2005 hired certified public accountant financial reporting manager july 2005 hired chief accounting officer certified public accountant significant prior experience chief accounting officer publicly traded company 2006 added three additional certified public accountants connection growth business implement monitor compliance internal control processes • fourth quarter 2004 engaged independent internal controls consulting firm process documenting analyzing identifying correcting deficiencies testing internal controls procedures including controls internal financial reporting • final stages completing implementation new accounting software facilitate timely accurate reporting although implemented number actions described yet sufficient time test newly implemented actions results operations february 2002 acquired 81 outstanding stock tubular february 2002 also purchased substantially outstanding common stock preferred stock strata results casing tubing services directional drilling services included operating results february 1 2002 july 2003 subsidiary mountain compressed air inc entered limited liability company agreement mi company owned smith international schlumberger nv form aircomp owned 55 mi owned 45 aircomp purchased mi’s interest july 2005 consolidated aircomp financial statements beginning quarter ending september 30 2003 september 2004 acquired remaining 19 tubular acquired safco november 2004 aircomp acquired substantially assets diamond air december 2004 acquired downhole consolidated results acquisitions day acquired april 2005 acquired delta may 2005 acquired capcoil report operations downhole capcoil production services segment operations safco delta rental tools segment july 2005 acquired 45 interest mi compressed air drilling subsidiary aircomp making us 100 owner aircomp addition july 2005 acquired compressed air drilling assets w august 1 2005 acquired 100 outstanding capital stock target results target included directional horizontal drilling segment measure drilling equipment utilized segment september 1 2005 acquired casing tubing service assets patterson services inc consolidated results acquisitions day acquired foregoing acquisitions affect comparability period historical results historical results may indicative future results comparison years ended december 31 2005 december 31 revenue year ended december 31 2005 1053 million increase 1208 compared 477 million year ended december 31 2004 increase revenues principally due acquisitions completed fourth quarter 2004 second third quarters 2005 addition operations sales personnel opening new operations offices purchase additional equipment acquisitions completed period enabled us establish rental tool production services segments resulted increased offering products services expansion customer base directional drilling services segment revenues increased 2005 period compared 2004 period due addition operations sales personnel opening new operations offices purchase additional downhole motors increased capacity market presence revenues increased compressed air drilling segment due acquisition air drilling assets w july 11 2005 acquisitions diamond air november 1 2004 improved pricing services west texas revenues increased casing tubing services segment due acquisition casing tubing assets patterson services inc september 1 2005 increased revenues mexico improved market conditions improved market penetration services south texas addition operating personnel equipment broadened capabilities also contributing increased revenues acquisitions safco september 1 2004 downhole december 1 2004 delta april 1 2005 capcoil may 1 2005 downhole capcoil comprise production services segment merged february 2006 form allischalmers production services inc safco delta comprise rental tool segment merged february 2006 specialty form allischalmers rental tools inc gross margin year ended december 31 2005 increased 1461 306 million 290 revenues compared 124 million 260 revenues year ended december 31 2004 increase due increased revenues improved pricing directional drilling services segment increased revenues compressed air drilling services segment including revenues resulting acquisition diamond air compressed air drilling assets wt increased revenues mexico improved market conditions domestic casing tubing segment growth rental tools segment acquisition delta april 1 2005 depreciation expense increased 804 49 million 2005 compared 27 million 2004 increase due additional depreciable assets resulting capital expenditures acquisitions 2004 2005 cost revenues consists principally labor costs benefits equipment rentals maintenance repairs equipment depreciation insurance fuel many costs fixed gross profit percentage revenues generally affected level revenues general administrative expense 159 million year ended december 31 2005 compared 71 million year ended december 31 2004 general administrative expense increased due additional expenses associated acquisitions completed second half 2004 2005 hiring additional sales administrative personnel general administrative expense also increased legal accounting fees expenses related financing acquisition activities increased consulting fees connection internal controls corporate governance process increased corporate accounting administrative staff percentage revenues general administrative expenses 151 2005 149 2004 amortization expense 18 million year ended december 31 2005 compared 09 million year ended december 31 2004 increase amortization expense due amortization intangible assets connection acquisitions amortization deferred financing costs income operations year ended december 31 2005 totaled 132 million 2127 increase 42 million income operations year ended december 31 2004 reflecting increase revenues gross profit offset part increased general administrative expenses interest expense 44 million year ended december 31 2005 compared 28 million year ended december 31 2004 interest expense increased 2005 due increased borrowings associated acquisitions completed second third quarters 2005 equipment purchases higher average interest rates offset part prepayment december 2004 12 24 million subordinated note additionally 2005 incurred debt retirement expense 11 million related refinancing debt amount includes prepayment penalties writeoff deferred financing fees previous financing minority interest income subsidiaries year ended december 31 2005 488000 compared 321000 corresponding period 2004 due increase profitability aircomp due part acquisition diamond air november 1 2004 minority interest aircomp acquired july 11 2005 minority interest tubular 19owned director jens mortensen acquired september 30 2004 net income attributed common stockholders 72 million year ended december 31 2005 increase 8391 compared net income attributed common stockholders 08 million year ended december 31 2004 net income attributed common stockholders 2004 period 124000 preferred stock dividends following table compares revenues income operations business segments years ended december 31 2005 december 31 2004 income operations consists revenues less cost revenues general administrative expenses depreciation amortization directional drilling services segment revenues year ended december 31 2005 directional drilling services segment 439 million increase 771 248 million revenues year ended december 31 2004 income operations increased 1414 74 million 2005 31 million 2004 improved results segment due increase drilling activity texas gulf coast areas establishment new operations west texas oklahoma addition operations sales personnel purchase additional downhole motors increased capacity market presence acquisition target provider measurement drilling equipment effective august 2005 operating income increased due higher revenue explained cost savings achieved result purchases downhole motors used directional drilling previously rented compressed air drilling services segment compressed air drilling revenues 257 million year ended december 31 2005 increase 1220 compared 116 million revenues year ended december 31 2004 income operations increased 3801 56 million 2005 compared income operations 12 million 2004 compressed air drilling revenues operating income 2005 period increased compared 2004 period due part acquisition air drilling assets w acquisitions diamond air november 1 2004 improved pricing west texas casing tubing services segment revenues year ended december 31 2005 casing tubing services segment 209 million increase 1014 104 million revenues year ended december 31 2004 revenues domestic operations increased 145 million 2005 52 million 2004 result acquisition casing tubing assets patterson services inc september 1 2005 improved market conditions services south texas addition personnel added capabilities offering services revenues mexican operations increased 64 million 2005 52 million 2004 result increased drilling activity mexico addition equipment increased capacity income operations increased 552 50 million 2005 32 million 2004 increase segment’s operating income due increased revenues domestically mexico operations rental tools segment rental tools revenues 51 million year ended december 31 2005 increase 7280 compared 06 million revenues year ended december 31 2004 income operations increased 13 million 2005 compared loss operations 71000 2004 operations segment include safco acquired september 2004 delta acquired april 2005 production services segment production services revenues 98 million year ended december 31 2005 compared 376000 revenues year ended december 31 2004 loss operations 99000 2005 compared operating income 4000 2004 operations segment consist downhole acquired december 1 2004 capcoil acquired may 1 2005 plan grow segment improve profitability increasing market presence critical mass including adding additional capillary coil tubing units results year ended december 31 2005 segment negatively affected costs incurred expand international presence production services downtime experienced one larger coil tubing units comparison years ended december 31 2004 december 31 revenue year ended december 31 2004 477 million increase 458 compared 327 million year ended december 31 2003 revenues increased due increased demand services due general increase oil gas drilling activity revenues increased significantly directional drilling services segment due addition operations sales personnel increased capacity market presence additionally compressed air drilling services revenues 2004 increased compared 2003 year due inclusion full year 2004 business contributed mi connection formation aircomp july 2003 acquisition diamond air november 1 2004 consolidated aircomp financial statements beginning quarter ended september 30 2003 also contributing increase revenues increase mexico revenues casing tubing services segment offset part decrease domestic revenues segment due increased competition casing tubing services south texas finally second half 2004 acquired safco rental tools subsidiary september 1 december 1 2004 acquired downhole production services subsidiary gross margin year ended december 31 2004 increased 429 124 million 260 revenues compared 87 million 266 revenues year ended december 31 2003 due increase revenues directional drilling services segment compressed air drilling services segment mexico offset lower revenues higher costs domestic casing tubing segment cost revenues consists principally labor costs benefits equipment rentals maintenance repairs equipment depreciation insurance fuel many costs fixed gross profit percentage revenues generally affected level revenues general administrative expense 71 million 2004 period compared 53 million 2003 general administrative expense increased 2004 due additional expenses associated inclusion aircomp full year acquisitions completed second half 2004 hiring additional sales administrative personnel subsidiaries general administrative expense also increased professional fees expenses related financing acquisition activities including listing common stock american stock exchange increased corporate accounting administrative staff percentage revenues general administrative expenses 149 2004 162 2003 depreciation amortization 36 million year ended december 31 2004 compared 29 million year ended december 31 2003 increase due inclusion aircomp full year increase assets resulting capital expenditures acquisitions completed 2004 income operations year ended december 31 2004 totaled 42 million 610 increase 26 million income operations prior year reflecting increase revenues gross profit offset part increase general administrative expense income operations year ended december 31 2004 includes 188000 additional accrued expense postretirement medical benefits pursuant plan reorganization increase accrued expense based present value expected retiree benefit obligations determined third party actuary income operations 2003 year includes income 99000 resulted reduction projected postretirement benefits based third party actuary end 2003 interest expense increased 28 million 2004 compared 25 million prior year spite decrease total debt interest expense 2004 includes 359000 warrant put amortization including retirement warrants connection prepayment december 2004 24 million 120 subordinated note interest expense 2003 includes 216000 connection acceleration 2003 amortization put obligation related subordinated debt mountain compressed air subordinated debt including accrued interest paid connection formation aircomp 2003 minority interest income subsidiaries 2004 year 321000 compared 343000 2003 year increase net income aircomp offset part elimination minority interest tubular 19owned director jens mortensen september 30 2004 net income attributed common stockholders 764000 year ended december 31 2004 compared net income attributed common stockholders 23 million year ended december 31 2003 recognized nonoperating gain sale interest subsidiary amount 24 million connection formation aircomp recognized onetime gain 10 million third quarter 2003 result settling lawsuit former owners mountain air drilling following table compares revenues income operations business segments years ended december 31 2004 december 31 2003 income operations consists revenues less cost revenues general administrative expenses depreciation amortization directional drilling services segment revenues year ended december 31 2004 directional drilling services segment 248 million increase 548 160 million revenues year ended december 31 2003 income operations increased 1775 31 million year ended december 31 2004 11 million 2003 improved results segment due increase drilling activity texas gulf coast areas addition operations sales personnel increased capacity market presence increased operating expenses result addition personnel offset growth revenues cost savings result purchases late 2003 2004 downhole motors used directional drilling previously leased motors compressed air drilling services segment compressed air drilling revenues 116 million year ended december 31 2004 increase 731 compared 67 million revenues year ended december 31 2003 income operations increased 12 million 2004 compared income operations 17000 2003 compressed air drilling revenues operating income 2004 year increased compared prior year due inclusion full year 2004 business contributed mi connection formation aircomp july 2003 acquisition diamond air november 1 2004 casing tubing services segment revenues year ended december 31 2004 casing tubing services segment 104 million increase 35 100 million revenues year ended december 31 2003 revenues domestic operations decreased 63 million 2003 51 million 2004 year result increased competition south texas resulting fewer contracts awarded us lower pricing services revenues mexican operations however increased 37 million 2003 53 million 2004 period result increased drilling activity mexico addition equipment increased capacity income operations decreased 113 32 million 2004 36 million 2003 decrease segment’s revenues operating income due decrease revenues domestic operations increases wages benefits domestically partially offset increased revenues mexico services segment revenues segment consist safco’s rental tool business beginning september 1 2004 downhole’s production services beginning december 1 2004 effective date respective acquisitions revenues segment 987000 loss operations 67000 plan grow businesses thereby improving profitability increase market presence critical mass liquidity capital resources ongoing capital requirements arise primarily need service debt acquire maintain equipment fund working capital requirements complete acquisitions primary sources liquidity borrowings revolving lines credit financings proceeds issuance equity securities cash flows operations cash equivalents 19 million december 31 2005 compared 73 million december 31 2004 compared 13 million december 31 2003 operating activities year ended december 31 2005 generated 36 million cash operating activities compared 33 million cash operating activities period 2004 net income preferred stock dividend year ended december 31 2005 increased 72 million compared 888000 2004 period revenues income operations increased 2005 due increased demand services due general increase oil gas drilling activity results acquisitions completed period noncash additions net income totaled 68 million 2005 period consisting 66 million depreciation amortization 488000 minority interest income subsidiary 653000 writeoff financing fees conjunction refinancing offset decrease 352000 pension benefit obligation 669000 gain disposition equipment noncash additions net income totaled 43 million 2004 period consisting 36 million depreciation amortization 321000 minority interest income subsidiary 350000 amortization discount debt year ended december 31 2005 changes working capital used 104 million cash compared use 19 million cash 2004 period principally due 2005 period increase 104 million accounts receivable increase 21 million current assets decrease 97000 accrued expenses offset part increase 24 million accounts payable increase 324000 accrued interest increase 443000 accrued employee benefits payroll taxes accounts receivables increased 104 million december 31 2005 due increase revenues 2005 current assets increased 21 million due primarily increase inventory accounts payable increased 24 million december 31 2005 due increase cost sales associated increase revenues acquisitions completed 2005 2004 year ended december 31 2004 generated 33 million cash operating activities compared 19 million cash operating activities period 2003 net income preferred stock dividend year ended december 31 2004 decreased 888000 compared 29 million 2003 period revenues income operations increased 2004 due increased demand services due general increase oil gas drilling activity net income 2003 includes 10 million gain settlement lawsuit 24 million nonoperating gain sale interest aircomp noncash additions net income totaled 43 million 2004 period consisting 36 million depreciation amortization 321000 minority interest income subsidiary 350000 amortization discount debt net noncash additions net income 2003 totaled 305000 consisting depreciation amortization expense 29 million minority interest income subsidiary 343000 amortization discount debt 516000 offset 34 million noncash gains year ended december 31 2004 changes working capital used 19 million cash compared use 13 million cash 2003 period principally due 2004 period increase 23 million accounts receivable increase 638000 assets decrease 398000 accrued expenses liabilities offset part increase 11 million accounts payable increase 299000 accrued interest accounts receivables increased 23 million december 31 2004 due increase revenues 2004 current assets increased 638000 due primarily increase prepaid insurance premiums accounts payable increased 11 million december 31 2004 due increase cost sales associated increase revenues acquisitions completed fourth quarter 2004 investing activities year ended december 31 2005 used 531 million investing activities year ended december 31 2005 completed following acquisitions total net cash outlay 369 million • april 1 2005 acquired delta 46 million cash 223114 shares common stock two promissory notes totaling 350000 • may 1 2005 acquired capcoil 27 million cash 168161 shares common stock payment assumption approximately 13 million debt • july 11 2005 acquired compressed air drilling assets wt 60 million cash • july 11 2005 acquired mi it’s 45 interest aircomp subordinated note principal amount 48 million issued aircomp paid mi 71 million cash reissued 40 million subordinated note • effective august 1 2005 acquired target 13 million cash forgiveness lease receivable 592000 • september 1 2005 acquired casing tubing service assets patterson services inc approximately 156 million addition made capital expenditures approximately 178 million including 29 million purchase equipment directional drilling services segment 70 million purchase improve equipment compressed air drilling service segment 52 million purchase improve casing equipment approximately 15 million expand production services segment also received 16 million sale assets year ended december 31 2005 comprised mostly equipment lost hole directional drilling segment 10 million rental tool segment 408000 year ended december 31 2004 used 91 million investing activities consisting principally capital expenditures approximately 46 million including 16 million purchase equipment directional drilling services segment 13 million purchase casing equipment 14 million make capital repairs existing equipment compressed air drilling services segment year ended december 31 2004 completed following acquisitions net cash outlay 46 million • september 1 2004 completed 10 million acquisition 100 outstanding stock safco • november 1 2004 aircomp acquired substantially assets diamond air 46 million cash assumption approximately 450000 debt contributed share purchase price 25 million aircomp order fund purchase • effective december 1 2004 acquired downhole approximately 11 million cash 568466 shares common stock payment assumption 950000 debt 12 month period ended december 31 2003 used 45 million investing activities consisting purchases equipment 54 million partially offset proceeds sale equipment 843000 financing activities year ended december 31 2005 financing activities provided net 441 million cash received 563 million borrowings longterm debt facilities 155 million net proceeds issuance 1761034 shares common stock 25 million net borrowings revolving lines credit 14 million proceeds warrant option exercises 1076154 shares common stock proceeds used repay longterm debt totaling 282 million repay related party debt 15 million pay 18 million debt issuance costs year ended december 31 2004 financing activities provided net 118 million cash received 169 million net proceeds issuance 6081301 shares common stock 82 million borrowings longterm debt facilities 689000 increase net borrowings revolving lines credit proceeds used repay longterm debt totaling 135 million pay 391000 debt issuance costs year ended december 31 2003 financing activities provided net 38 million cash 2003 received 141 million issuance longterm debt 305 million borrowings lines credit proceeds used pay longterm debt amount 108 million make principal payments outstanding borrowings lines credit amount 294 million also used 408000 cash debt issuance costs 2003 july 11 2005 replaced previous credit agreement new agreement provided following senior secured credit facilities • 130 million revolving line credit borrowings limited 85 eligible accounts receivable plus 50 eligible inventory maximum 20 million borrowings based inventory line credit used finance working capital requirements general corporate purposes including issuance standby letters credit outstanding borrowings line credit 64 million margin prime libor rates plus margin averaging approximately 81 december 31 2005 • two term loans totaling 420 million outstanding borrowings term loans 420 million december 31 2005 loans libor rates plus margin averages approximately 78 december 31 2005 borrowed july 2005 facilities refinance prior credit facility aircomp credit facility fund acquisition mi’s interest aircomp air drilling assets wt pay transaction costs related refinancing acquisitions incurred debt retirement expense 11 million related refinancing amount includes prepayment penalties writeoff deferred financing fees previous financing borrowings july 2005 facilities mature july 2007 amounts outstanding term loans july 2006 repaid monthly principal payments based 48 month repayment schedule remaining balance due maturity additionally second year required prepay remaining balance term loans 75 excess cash flow debt service capital expenditures interest rate payable borrowings based margin london interbank offered rate referred libor prime rate 05 fee undrawn portion revolving line credit margin libor increase 10 second year july 2005 credit facilities secured substantially assets contained customary events default financial covenants including limitations ability incur additional indebtedness make capital expenditures pay dividends make distributions create liens sell assets amounts outstanding july 2005 credit agreement paid proceeds senior notes offering january 2006 executed amended restated credit agreement provides 250 million revolving line credit detailed description new credit agreement please see “ recent developments” prior july 11 2005 credit agreement dated december 7 2004 provided following credit facilities • 100 million revolving line credit borrowings limited 85 eligible accounts receivables defined outstanding borrowings line credit 24 million december 31 2004 • term loan amount 63 million repaid monthly payments principal 105583 per month also required prepay term loan amount equal 20 receipts largest customer mexico proceeds term loan used prepay term loan owed tubular prepay 12 24 million subordinated note retire related warrants outstanding balance 63 million december 31 2004 • 60 million capital expenditure acquisition line credit borrowings facility payable monthly four years beginning january 2006 availability capital expenditure term loan facility subject security acceptable lender form equipment acquired collateral outstanding borrowings december 31 2004 credit facilities mature december 31 2007 secured liens substantially assets agreement governing credit facilities contained customary events default financial covenants also limited ability incur additional indebtedness make capital expenditures pay dividends make distributions create liens sell assets interest accrued adjustable rate based prime rate 625 december 31 2004 paid 05 per annum fee undrawn portion revolving line credit capital expenditure line connection acquisition tubular strata 2002 issued 12 secured subordinated note original amount 30 million connection subordinated note issued redeemable warrants valued 15 million recorded discount subordinated debt liability discount amortized life subordinated note beginning february 6 2002 additional interest expense 350000 300000 recognized years ended december 31 2004 december 31 2003 respectively debt recorded 27 million december 31 2003 net unamortized portion put obligation december 7 2004 prepaid 24 million balance 12 subordinated note retired 15 million warrants portion proceeds 63 million bank term loan prior july 11 2005 aircomp subsidiary credit facilities described credit facilities repaid connection acquisition minority interest aircomp refinancing bank credit facilities described • 35 million bank line credit interest accrued adjustable rate based prime rate paid 05 per annum fee undrawn portion borrowings line credit subject borrowing base consisting 80 eligible accounts receivable balance december 31 2004 15 million • 71 million term loan accrued interest adjustable rate based either libor prime rate principal payments 286000 plus interest due quarterly final maturity date june 27 2007 balance december 31 2004 68 million • “delayed draw” term loan facility amount 15 million used capital expenditures interest accrued adjustable rate based either libor prime rate quarterly principal payments commence march 31 2006 amount equal 50 outstanding balance december 31 2005 final maturity june 27 2007 borrowings outstanding facility december 31 2004 aircomp credit facilities secured liens substantially aircomp’s assets agreement governing credit facilities contained customary events default required aircomp satisfy various financial covenants also limited aircomp’s ability incur additional indebtedness make capital expenditures pay dividends make distributions create liens sell assets guaranteed 55 obligations aircomp facilities tubular two bank term loans remaining balance totaling 90000 263000 december 31 2005 2004 interest accruing floating interest rate based prime plus 20 interest rate 925 725 december 31 2005 2004 monthly principal payments 13000 plus interest maturity date one loans balance 60000 september 17 2006 second loan balance 30000 final maturity january 12 2007 balances two loans repaid full january 2006 proceeds senior notes offering aircomp subordinated note payable mi amount 48 million bearing interest annual rate 50 2007 party right cause aircomp sell assets party may buy party’s interest event note including accrued interest due payable note also due payable mi sells interest aircomp upon termination aircomp december 31 2004 376000 interest included accrued interest july 11 2005 acquired mi 45 equity interest aircomp subordinated note principal amount 48 million issued aircomp paid mi 71 million cash issued new 40 million subordinated note bearing interest 5 per annum subordinated note issued mi requires quarterly interest payments principal amount due october 9 2007 contingent upon future equity offering subordinated note convertible 700000 shares common stock conversion price equal market value common stock time conversion tubular subordinated note payable jens mortensen seller tubular one directors amount 40 million fixed interest rate 75 interest payable quarterly final maturity note january 31 2006 subordinated note subordinated rights bank lenders balance outstanding note december 31 2005 2004 30 40 million respectively balance subordinated note repaid full january 2006 proceeds senior notes offering part acquisition mountain air 2001 issued note sellers mountain air original amount 22 million accruing interest rate 575 per annum note reduced 15 million result settlement legal action sellers 2003 march 2005 reached agreement sellers holders note result action brought us sellers terms agreement paid holders note 10 million cash agreed pay additional 350000 june 1 2006 additional 150000 june 1 2007 settlement claims see “item 3 legal proceedings” december 31 2005 2004 outstanding amounts due 500000 16 million connection purchase delta issued sellers note amount 350000 note bears interest 2 principal accrued interest due april 1 2006 connection purchase tubular agreed pay total 12 million mr mortensen exchange noncompete agreement monthly payments 20576 due agreement january 31 2007 connection purchase safco also agreed pay total 150000 sellers exchange noncompete agreement required make annual payments 50000 september 30 2007 connection purchase capcoil agreed pay total 500000 two management employees exchange noncompete agreements required make annual payments 110000 may 2008 total amounts due noncompete agreements december 31 2005 2004 698000 664000 respectively 2000 compensated directors including current directors nederlander toboroff served board directors 1989 march 31 1999 without compensation issuing promissory notes totaling 325000 notes bear interest rate 50 december 31 2005 2004 principal accrued interest notes totaled approximately 96000 402000 respectively subsidiary downhole notes payable two former shareholders totaling 49000 required make monthly payments 8878 june 30 2005 december 31 2005 2004 amounts outstanding 0 49000 also real estate loan payable equal monthly installments 4344 remaining outstanding balance due january 1 2010 loan floating interest rate based prime plus 20 outstanding principal balance 548000 december 31 2005 balance loan prepaid full january 2006 proceeds senior notes offering december 2003 strata directional drilling subsidiary entered financing agreement major supplier downhole motors repayment motor lease repair cost totaling 17 million agreement provided repayment amounts later december 30 2005 payment interest due monthly principal payments 582000 due april 2005 december 2005 interest rate fixed 80 december 31 2005 2004 outstanding balance 0 12 million various equipment financing loans interest rates ranging 5 115 terms ranging 2 5 years december 31 2005 2004 outstanding balances equipment financing loans 19 million 530000 respectively also various capital leases terms expire 2008 december 31 2005 2004 amounts outstanding capital leases 917000 0 respectively 2006 prepaid 350000 outstanding equipment loans proceeds senior notes offering december 2004 chief executive officer chairman munawar h hidayatallah wife personal guarantors substantially financing december 2004 refinanced outstanding bank debt obtained release certain guarantees refinancing mr hidayatallah continued guarantee tubular subordinated seller note july 2005 paid mr hidayatallah annual guarantee fee equal onequarter one percent total amount debt guaranteed mr hidayatallah fees aggregated 7250 2005 following table summarizes obligations commitments make future payments notes payable operating leases employment contracts consulting agreements periods specified december 31 2005 amounts represent minimum capital lease payments net interest payments totaling 69000 balance sheet arrangements normal operating leases employee contracts shown likely current future material effect financial condition changes financial condition revenues expenses results operations liquidity capital expenditures capital resources guarantee obligations unconsolidated entities identified capital expenditure projects require approximately 150 million 2006 exclusive acquisitions believe current cash generated operations cash available credit facilities cash hand provide sufficient funds identified projects intend implement growth strategy increasing scope services internal growth acquisitions regularly involved discussions number potential acquisition candidates expect make capital expenditures acquire maintain existing equipment performance cash flow operations determined demand services turn affected customers’ expenditures oil gas exploration development industry perceptions expectations future oil gas prices areas operate need refinance existing debt facilities become due provide funds capital expenditures acquisitions effect expansion plans require additional equity debt financing excess current working capital amounts available credit facilities assurance successful raising additional debt equity capital terms acceptable us recent developments january 2006 acquired 100 outstanding stock specialty rental tools inc 960 million cash specialty located lafayette louisiana engaged rental high quality drill pipe heavy weight spiral drill pipe tubing work strings blowout preventors choke manifolds various valves handling tools oil natural gas drilling nine months ended september 30 2005 specialty generated aggregate revenues 218 million january 2006 closed private offering qualified institutional buyers pursuant rule 144a securities act 1933 1600 million principal amount 90 senior notes due 2014 refer senior notes proceeds offering used fund acquisition specialty repay existing debt general corporate purposes january 2006 amended restated july 2005 credit agreement increase borrowing capacity exchanging existing two year 550 million facility new four year 250 million facility refer july 2005 credit agreement amended restated new credit agreement amounts outstanding previous 550 million credit facility repaid proceeds issuance senior notes new credit agreement’s interest rate based margin libor prime rate 05 fee undrawn portion credit facility secured first priority lien substantially assets march 15 2006 borrowings facility january 2006 proceeds sale senior notes also prepaid 30 million subordinated seller note due jens mortensen 548000 real estate loan 430000 various outstanding term equipment loans february 2006 david groshoff resigned board directors audit committee mr groshoff served board since 1999 initially agreement behalf pension benefit guaranty corporation client mr groshoff’s employer agreement permitted pbgc appoint member board long pbgc held minimum number shares allischalmers stock pbgc sold stock allischalmers august 2005 investment management employee jpmorgan asset management mr groshoff subject employer’s policies generally prohibit employees serving public company boards directors without meaningful client interest companies light pbgc’s sale allischalmers stock policies required mr groshoff’s resignation board march 2006 robert nederlander appointed audit committee replace mr groshoff march 13 2006 received proceeds approximately 784000 exercise 313000 warrants critical accounting policies identified policies critical business operations understanding results operations impact associated risks related policies business operations discussed throughout management’s discussion analysis financial condition results operations policies affect reported expected financial results detailed discussion application accounting policies see note 1 notes consolidated financial statements included elsewhere document preparation report requires us make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period assurance actual results differ estimates allowance doubtful accounts determination collectibility amounts due customers requires us use estimates make judgments regarding future events trends including monitoring customer payment history current credit worthiness determine collectibility reasonably assured well consideration overall business climate customers operate uncertainties require us make frequent judgments estimates regarding customers’ ability pay amounts due us order determine appropriate amount valuation allowances required doubtful accounts provisions doubtful accounts recorded becomes evident customers able make required payments either contractual due dates future revenue recognition provide rental equipment drilling services customers per day per job contractual rates recognize drilling related revenue work progresses collectibility reasonably assured securities exchange commission’s staff accounting bulletin 104 revenue recognition financial statements provides guidance sec staff’s views application generally accepted accounting principles selected revenue recognition issues revenue recognition policy accordance generally accepted accounting principles sab 104 impairment longlived assets longlived assets include property plant equipment goodwill intangibles comprise significant amount total assets make judgments estimates conjunction carrying value assets including amounts capitalized depreciation amortization methods useful lives additionally carrying values assets reviewed impairment whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires us make longterm forecasts future revenues costs related assets subject review forecasts require assumptions demand products services future market conditions technological developments significant unanticipated changes assumptions could require provision impairment future period goodwill intangibles december 31 2005 recorded approximately 124 million goodwill 68 million identifiable intangible assets perform purchase price allocations intangible assets make business combination business combinations purchase price allocations consummated acquisitions reportable segments excess purchase price allocation fair values tangible assets allocated identifiable intangibles thereafter goodwill subsequently perform initial impairment tests annual impairment tests accordance financial accounting standards board 141 business combinations financial accounting standards board 142 goodwill intangible assets initial valuations used two approaches determine carrying amount individual reporting units first approach discounted cash flow method focuses expected cash flow applying approach cash flow available distribution projected finite period years cash flow available distribution defined amount cash could distributed dividend without impairing future profitability operations cash flow available distribution terminal value end estimation period discounted present value derive indication value business enterprise valuation method dependent upon assumptions made regarding future cash flow cash requirements second approach guideline company method focuses comparing us selected reasonably similar publicly traded companies method valuation multiples derived operating data selected similar companies ii evaluated adjusted based strengths weaknesses relative selected guideline companies iii applied operating data arrive indication value valuation method dependent upon assumption value evaluated analysis earnings strengths weaknesses relative selected similar companies significant unanticipated changes assumptions could require provision impairment future period recently issued accounting standards may 2005 fasb issued sfas 154 accounting changes error corrections sfas 154 requires retroactive application voluntary change accounting principle prior period financial statements unless impracticable sfas 154 also requires change method depreciation amortization depletion longlived nonfinancial assets accounted change accounting estimate affected change accounting principle sfas 154 replaces apb opinion 20 “accounting changes” sfas 3 “reporting accounting changes interim financial statements” sfas 154 effective fiscal years beginning december 15 2005 adopt provisions sfas 154 january 1 2006 expect adoption material impact results operations financial condition december 2004 fasb issued sfas 123r sharebased payment sfas 123r revises sfas 123 accounting stockbased compensation focuses accounting sharebased payments services employer employee statement requires sharebased payments employees including grants employee stock options recognized financial statements based fair values adopted sfas 123r january 1 2006 use modified prospective transition method utilizing blackscholes option pricing model calculation fair value employee stock options modified prospective method stock option awards granted modified settled january 1 2006 measured accounted accordance sfas 123r compensation cost awards granted prior vested january 1 2006 would based grant date attributes originally used value awards pro forma purposes sfas 123 believe adoption standard result expense approximately 32 million reduction diluted earnings per share approximately 018 per share full calendar year 2006 estimate assumes additional grants stock options beyond outstanding december 31 2005 retained services compensation consulting firm advise us alternatives longterm incentive programs including future use stock options forms incentive compensation estimate based many assumptions including level stock option grants expected 2006 stock price significant assumptions option valuation model including volatility expected life options actual expenses could differ estimate november 2004 fasb issued sfas 151 inventory costs amendment arb 43 chapter 4 amends guidance arb 43 clarify accounting abnormal amounts idle facility expense freight handling costs wasted material sfas 151 requires items recognized current period charges addition sfas 151 requires allocation fixed production overheads inventory based normal capacity production facilities required adopt provisions sfas 151 prospective basis january 1 2006 believe adoption sfas 151 material impact future results operations risk factors annual report form 10k including without limitation following risk factors contains forwardlooking statements within meaning section 27a securities act 1933 section 21e securities exchange act 1934 regarding business financial condition results operations prospects words expects anticipates intends plans believes seeks estimates similar expressions variations words intended identify forwardlooking statements exclusive means identifying forwardlooking statements annual report form 10k although forwardlooking statements annual report form 10k reflect good faith judgment management statements based facts factors currently know consequently forwardlooking statements inherently subject risks uncertainties actual results outcomes may differ materially results outcomes discussed forwardlooking statements factors could cause contribute differences results outcomes include limited discussed elsewhere annual report form 10k sec filings publicly available documents readers urged place undue reliance forwardlooking statements speak date annual report form 10k undertake obligation revise update forwardlooking statements order reflect event circumstance may arise date annual report form 10k risks associated investment common stock price may decrease response various factors could adversely affect business cause stockholders suffer significant losses factors include • decreases prices oil natural gas resulting decreased demand services • variations operating results failure meet expectations investors analysts • increases interest rates • loss customers • failure customers pay services • competition • illiquidity market common stock • sales common stock existing stockholders • developments affecting us financial markets reduced stock price result loss investors adversely affect ability issue stock fund activities existing stockholders’ interest us may diluted additional issuances equity securities expect issue additional equity securities fund acquisition additional businesses pursuant employee benefit plans may also issue additional equity purposes securities may parity common stock may dividend liquidation preferences common stock issuance additional equity securities dilute holdings existing stockholders may reduce share price common stock expect pay dividends common stock investors able receive cash respect shares common stock upon sale shares within last ten years paid cash dividends common stock intention foreseeable future pay cash dividends common stock new credit agreement indenture governing senior notes restrict ability pay dividends common stock therefore investor common stock likelihood obtain economic benefit common stock selling common stock risks associated indebtedness substantial amount debt could adversely affect financial health prevent us making principal interest payments senior notes debt december 31 2005 giving effect sale senior notes january 2006 application proceeds therefrom closing new credit agreement transaction occurred date approximately 1682 million consolidated total indebtedness outstanding approximately 244 million additional secured borrowing capacity available new credit agreement substantial debt could • make difficult us satisfy obligations respect senior notes debt • increase vulnerability general adverse economic industry conditions including declines oil natural gas prices declines drilling activities • limit ability obtain additional financing future working capital expenditures mergers general corporate purposes • require us dedicate substantial portion cash flow operations payments debt thereby reducing availability cash flow operations purposes • limit flexibility planning reacting changes business industry operate • make us vulnerable increases interest rates • place us competitive disadvantage compared competitors less debt • material adverse effect us fail comply covenants indenture relating senior notes instruments governing debt addition may incur substantial additional debt future indenture governing senior notes permits us incur additional debt new credit agreement permits additional borrowings new debt added current debt levels related risks could increase may maintain sufficient revenues sustain profitability meet capital expenditure requirements financial obligations also may able generate sufficient amount cash flow meet debt service obligations ability make scheduled payments refinance obligations respect debt depend financial operating performance turn subject prevailing economic conditions certain financial business factors beyond control cash flow capital resources insufficient fund debt service obligations may forced reduce delay scheduled expansion capital expenditures sell material assets operations obtain additional capital restructure debt cannot assure operating performance cash flow capital resources sufficient payment debt future event required dispose material assets operations restructure debt meet debt service obligations cannot assure terms transaction would satisfactory us soon transaction could completed fail obtain additional financing may unable refinance existing debt expand current operations acquire new businesses could result failure grow result defaults obligations new credit agreement senior notes order refinance indebtedness expand existing operations acquire additional businesses require substantial amounts capital assurance financing whether equity debt financings sources available terms satisfactory us unable obtain financing unable acquire additional businesses may unable meet obligations new credit agreement senior notes indenture governing senior notes new credit agreement impose restrictions us may limit discretion management operating business turn could impair ability meet obligations senior notes indenture governing senior notes new credit agreement contain various restrictive covenants limit management’s discretion operating business particular covenants limit ability among things • incur additional debt • make certain investments pay dividends distributions capital stock purchase redeem retire capital stock • sell assets including capital stock restricted subsidiaries • restrict dividends payments restricted subsidiaries • create liens • enter transactions affiliates • merge consolidate another company new credit agreement also requires us maintain specified financial ratios satisfy certain financial tests ability maintain meet financial ratios tests may affected events beyond control including changes general economic business conditions cannot assure maintain meet ratios tests lenders new credit agreement waive failure meet ratios tests covenants could materially adversely affect ability finance future operations capital needs furthermore may restrict ability expand pursue business strategies otherwise conduct business ability comply covenants may affected circumstances events beyond control prevailing economic conditions changes regulations cannot assure able comply breach covenants could result default indenture governing senior notes andor new credit agreement event default indenture governing senior notes andor new credit agreement affected creditors could cause amounts borrowed instruments due payable immediately additionally fail repay indebtedness new credit agreement becomes due lenders new credit agreement could proceed assets pledged security assets cash flow might sufficient repay outstanding debt event default risks associated company may fail acquire additional businesses restrict growth may result decrease stock price business strategy acquire companies operating oil natural gas equipment rental services industry however assurance successful acquiring additional companies successful acquisition new companies depend various factors including limited • ability obtain financing • competitive environment acquisitions • integration synergy issues described next risk factor assurance able acquire successfully operate particular business able expand areas targeted price common stock may fall fail acquire additional businesses difficulties integrating acquired businesses may result reduced revenues income may able successfully integrate businesses operating subsidiaries business may acquire future integration businesses complex time consuming place significant strain management may disrupt businesses may adversely impacted unknown liabilities acquired businesses may encounter substantial difficulties costs delays involved integrating common accounting information communication systems operating procedures internal controls human resources practices including incompatibility business cultures loss key employees customers difficulties may reduce ability gain customers retain existing customers may increase operating expenses resulting reduced revenues income failure realize anticipated benefits acquisitions particular recent acquisition specialty largest acquisition date may pose greater integration risks previous acquisitions furthermore acquiring specialty cash proceeds recent senior notes offering depend specialty’s continued performance source cash flow service debt obligations made numerous acquisitions past five years result transactions past performance indicative future performance investors base expectations future performance historical results failure maintain effective disclosure controls procedures andor internal controls financial reporting could material adverse effect operations disclosed notes consolidated financial statements included elsewhere report caption “management’s discussion analysis financial condition results operations restatement” understated diluted earnings per share due incorrect calculation weighted shares outstanding third quarter 2003 first three quarters 2004 years ended december 31 2003 2004 quarter ended march 31 2005 addition understated basic earnings per share due incorrect calculation weighted average basic shares outstanding quarter ended september 30 2004 consequently restated financial statements periods incorrect calculation resulted mathematical error improper application statement financial accounting standards sfas 128 earnings per share management concluded need restate financial statements resulted part lack sufficient experienced accounting personnel turn resulted lack effective control financial reporting process addition part growth strategy recently completed several acquisitions privatelyheld businesses including closelyheld entities future may make additional strategic acquisitions privatelyheld businesses prior becoming part consolidated company acquired businesses required implement maintain disclosure controls procedures internal controls financial reporting federal law requires publiclyheld companies similarly likely future acquired businesses required maintain disclosure controls procedures internal controls prior acquisition process creating implementing appropriate disclosure controls procedures internal controls financial reporting recently acquired businesses however yet completed process cannot assure process complete likewise upon completion future acquisition required integrate acquired business consolidated company’s system disclosure controls procedures internal controls financial reporting cannot assure long integration process may take business may acquire furthermore integration process may able fully implement consolidated disclosure controls internal controls financial reporting also fourth quarter 2005 failed timely file current report form 8k relating issuance shares common stock connection recent stock option warrant exercises current report due filed november 2005 filed february 2006 result issues described management concluded end periods covered restatements december 31 2005 disclosure controls procedures effective enable us record process summarize report information required included sec filings within required time periods ensure information accumulated reported management including chief executive officer chief financial accounting officer allow timely decisions regarding required disclosure fully described caption “management’s discussion analysis financial condition results operations restatement” implemented number actions believe address deficiencies financial reporting process improve disclosure controls procedures internal controls financial reporting however cannot yet assert remediation effective yet sufficient time test newly implemented actions process documenting testing internal control procedures order satisfy requirements section 404 sarbanesoxley act requires annual management assessments effectiveness internal controls financial reporting report independent auditors addressing assessments also retained services independent consultant assist us documenting testing process course testing may identify deficiencies andor one material weaknesses internal controls financial reporting may able remediate time meet deadline imposed sec rules sarbanesoxley act compliance requirements section 404 addition fail achieve maintain adequacy disclosure controls procedures andor internal controls standards modified supplemented amended time may able conclude effective disclosure controls procedures andor effective internal controls financial reporting accordance section 404 sarbanesoxley act successful improving financial reporting process disclosure controls procedures andor internal controls financial reporting identify deficiencies andor one material weaknesses internal controls financial reporting independent registered public accounting firm may unable attest management’s assessment internal controls financial reporting fairly stated may unable express opinion management’s evaluation effectiveness internal controls determined disclosure controls procedures andor internal controls financial reporting effective may able provide reliable financial reports prevent fraud turn could harm business operating results cause investors lose confidence accuracy completeness financial reports andor adversely affect ability timely file periodic reports sec failure timely file periodic reports sec may give rise default indenture governing senior notes ultimately acceleration amounts due senior notes addition default indenture generally also give rise default new credit agreement could cause acceleration amounts due new credit agreement acceleration senior notes debt occur cannot assure would sufficient funds repay obligations loss key executives would adversely affect ability effectively finance manage business acquire new businesses obtain retain customers dependent upon efforts skills executives finance manage business identify consummate additional acquisitions obtain retain customers executives include • chief executive officer chairman munawar h hidayatallah • president chief operating officer david wilde addition development expansion require additional experienced management operations personnel assurance given able identify retain employees loss services one key executives could increase exposure risks described “risk factors” section maintain key man insurance personnel historically dependent customers operating single industry loss one could adversely affect financial condition results operations customers engaged oil natural gas drilling business united states mexico elsewhere historically dependent upon customers significant portion revenue 2004 matyep burlington resources represented 108 101 respectively revenues 2003 matyep burlington resources el paso corporation represented 102 111 141 respectively revenues concentration customers may increase overall exposure credit risk customers likely similarly affected changes economic industry conditions financial condition results operations materially adversely affected one significant customers fails pay us ceases contract us services terms favorable us international operations may expose us political uncertainties including risks • terrorist acts war civil disturbances • changes laws policies regarding award contracts • inability collect repatriate income capital part strategy prudently opportunistically acquire businesses assets complement existing products services expand geographic footprint make acquisitions countries may increase exposure risks discussed environmental liabilities could result substantial losses since reorganization us federal bankruptcy laws 1988 number parties including environmental protection agency asserted responsible cleanup hazardous waste sites respect prebankruptcy activities believe claims barred applicable bankruptcy law experienced material expense relation claims however prevail respect claims future additional environmental claims asserted us relating current future activities oil natural gas industry could become subject material environmental liabilities could material adverse effect financial condition results operation products liability claims relating discontinued operations could result substantial losses since reorganization us federal bankruptcy laws 1988 regularly named products liability lawsuits primarily resulting manufacture products containing asbestos connection bankruptcy special products liability trust established address products liability claims believe claims us barred applicable bankruptcy law products liability trust continue responsible products liability claims since 1988 court ruled responsible products liability claims however held responsible product liability claims could suffer substantial losses could material adverse effect financial condition results operation manufactured products containing asbestos since reorganization 1988 may subject claims personal injury property damage could materially adversely affect financial condition results operations products services used exploration production oil natural gas operations subject inherent hazards cause personal injury loss life damage destruction property equipment environment marine life suspension operations litigation arising accident location products services used provided may cause us named defendant lawsuits asserting potentially large claims maintain customary insurance protect business potential losses insurance deductibles selfinsured retentions contains certain coverage exclusions however could become subject material uninsured liabilities could material adverse effect financial condition results operation risks associated industry cyclical declines oil natural gas prices may result reduced use services affecting business financial condition results operation ability meet capital expenditure obligations financial commitments oil natural gas exploration drilling business highly cyclical generally oil natural gas prices decrease exploration drilling activity declines marginally profitable projects become uneconomic either delayed eliminated declines number operating drilling rigs result reduced use prices services accordingly oil natural gas prices relatively low revenues income suffer oil natural gas prices depend many factors beyond control including following • economic conditions united states elsewhere • changes global supply demand oil natural gas • level production organization petroleum exporting countries commonly called opec • level production nonopec countries • price quantity imports foreign oil natural gas • political conditions including embargoes affecting oil natural gas producing activities • level global oil natural gas inventories • advances exploration development production technologies depending market prices oil natural gas companies exploring oil natural gas may cancel curtail drilling programs thereby reducing demand drilling services contracts generally shortterm oil natural gas companies tend respond quickly upward downward changes prices reduction demand drilling services may materially erode pricing utilization rates services adversely affect financial results result may suffer losses unable make necessary capital expenditures unable meet financial obligations industry highly competitive intense price competition markets operate highly competitive contracts traditionally awarded competitive bid basis pricing often primary factor determining qualified contractor awarded job competitive environment intensified recent mergers among oil natural gas companies reduced number available customers many oilfield services companies larger us greater resources competitors better able withstand industry downturns compete basis price acquire new equipment technologies could affect revenues profitability competitors compete us customers acquisitions businesses competition may cause business suffer believe competition contracts continue intense foreseeable future may experience increased labor costs unavailability skilled workers failure retain key personnel could hurt operations companies industry including us dependent upon available labor pool skilled employees compete oilfield services businesses employers attract retain qualified personnel technical skills experience required provide customers highest quality service also subject fair labor standards act governs matters minimum wage overtime working conditions shortage labor pool skilled workers general inflationary pressures changes applicable laws regulations could make difficult us attract retain personnel could require us enhance wage benefits packages assurance labor costs increase operating costs could cause business suffer severe weather could material adverse impact business could materially adversely affected severe weather repercussions severe weather conditions may include • curtailment services • weatherrelated damage facilities equipment resulting suspension operations • inability deliver materials job sites accordance contract schedules • loss productivity addition oil natural gas operations customers located offshore onshore gulf mexico may adversely affected hurricanes tropical storms resulting reduced demand services customers’ operations midcontinent rocky mountain regions united states also adversely affected seasonal weather conditions limits access job sites ability service wells areas constraints decrease drilling activity resulting shortages high costs could delay operations materially increase operating capital costs business may affected terrorist activity security measures taken response terrorism may experience loss business delays defaults payments payers affected actual potential terrorist activities oil natural gas drilling companies implemented security measures response potential terrorist activities including access restrictions could adversely affect ability market services new existing customers could increase costs terrorist activities potential terrorist activities resulting economic downturn could adversely impact results operations impair ability raise capital otherwise adversely affect ability grow business subject government regulations subject various federal state local laws regulations relating energy industry general environment particular environmental laws recent years become stringent generally sought impose greater liability larger number potentially responsible parties although aware proposed material changes federal state local statutes rules regulations changes could materially affect financial condition results operations item 7a item 7 managements discussion analysis financial condition results operations background prior 2001 operated primarily hds may 2001 part strategy acquire develop businesses natural gas oil services industry consummated merger oilquip merger acquired 100 capital stock oilquip rentals inc oilquip owned 100 capital stock mca december 2001 disposed hds february 2002 acquired substantially capital stock strata approximately 81 capital stock jens see recent developments acquisition jens oilfield service inc strata directional drilling inc disposition hds business conducted 2001 include operations jens strata material continuing business operations accounting purposes oilquip merger treated reverse acquisition allischalmers financial statements presented herein periods prior may 2001 present results operations financial condition oilquip result oilquip merger fixed assets goodwill intangibles allischalmers existence immediately prior merger prior ac assets increased 2691000 goodwill intangibles included prior ac assets amortized 10 20 years fixed assets included prior ac assets depreciated 10 years critical accounting policies identified policies critical business operations understanding results operations impact associated risks related policies business operations discussed throughout managements discussion analysis financial condition results operations policies affect reported expected financial results detailed discussion application accounting policies see note 1 notes consolidated financial statements annual report form 10k note preparation annual report form 10k requires us make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period assurance actual results differ estimates revenue recognition revenue recognition policy significant revenue key component results operations addition revenue recognition determines timing certain expenses commissions royalties follow specific detailed guidelines measuring revenue however certain judgments affect application revenue policy revenue results difficult predict shortfall revenue delay recognizing revenue could cause operating results vary significantly quarter could result future operating losses impairment longlived assets longlived assets include property plant equipment goodwill intangibles assets comprise significant amount companys total assets company makes judgments estimates conjunction carrying value assets including amounts capitalized depreciation amortization methods useful lives additionally carrying values assets periodically reviewed impairment whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires company make longterm forecasts future revenues costs related assets subject review forecasts require assumptions demand companys products services future market conditions technological developments significant unanticipated changes assumptions could require provision impairment future period results operations results operations 2001 2000 reflect business operations oilquip inception february 4 2000 february 6 2001 oilquip developmental stage oilquips activities period prior february 6 2001 consisted developing business plan raising capital negotiating potential acquisition targets therefore results operations prior february 6 2001 sales cost sales marketing administrative expenses would reflective ongoing company february 6 2001 oilquip acquired assets mountain air conducted natural gas exploration equipment rental services operations may 9 2001 oilquip acquired prior ac assets including operations hds results operation hds sold december 2001 included discontinued operations may 9 2001 year ended december 31 2001 compared period february 4 2000 inception december 31 2000 sales year 2001 totaled 4796000 reflecting revenue mca following acquisition assets mcas predecessor mountain air drilling inc mountain air acquisition period february 4 2000 inception december 31 2000 oilquip revenues gross margin percentage sales 305 2001 general administrative expense 2898000 2001 compared 627000 period february 4 2000 inception december 31 2000 increasing result mountain air acquisition issuance stock options 2001 ebitda earnings interest income taxes depreciation amortization loss continuing operation 330000 year ended december 31 2001 incurred net loss continuing operations 2273000 057 per common share year 2001 compared loss oilquip 627000 157 per common share period february 4 2000 inception december 31 2000 company incurred net loss 4577000 115 per common share year 2001 compared loss oilquip 627000 157 per common share period february 4 2000 inception december 31 2000 loss discontinued operations 2001 2304000 includes loss sale hds pro forma results pro forma results operation set forth includes results operations oilquip mca mcas predecessor 2001 excludes operations hds financial statements read conjunction pro forma financial statements included herein pro forma sales year 2001 totaled 5289000 represents sales mca predecessor pro forma gross profit totaled 2222000 gross profit margin 420 sales 2001 company pro forma ebitda loss operating loss 6000 1188000 respectively year ended december 31 2001 company incurred pro forma net loss continuing operations 2039000 018 per common share year ended december 31 2001 financial condition liquidity cash equivalents totaled 152000 december 31 2001 increase 4000 oilquip december 31 2000 mainly due oilquip merger mountain air acquisition net trade receivables december 31 2001 973000 increased significantly december 31 2000 balance oilquip due mountain air acquisition net property plant equipment 4246000 december 31 2001 result mountain air acquisition oilquip merger capital expenditures year 2001 402000 capital expenditures 2002 projected approximately 350000 trade accounts payable december 31 2001 298000 increased significantly december 31 2000 balance due mountain air acquisition oilquip merger current liabilities excluding current portion long term debt 1637000 consisting interest amount 176000 accrued salary benefits amount 851000 legal professional expenses amount 610000 included salary benefits payable deferred compensation amount 318000 due ceo company balance sheet accounts increased significantly december 31 2000 balances oilquip due mountain air acquisition long term debt 7856000 december 31 2001 including current maturities longterm debt primarily result cost mountain air acquisition february 2001 term loan amount 3550000 floating interest rate quarterly principal payments 147917 maturity date loan february 7 2004 sellers note amount 2200000 575 simple interest principal interest due february 6 2004 subordinated debt amount 1400000 12 interest principal due january 31 2004 connection incurring debt company issued redeemable warrants recorded liability 600000 amount amortizable three years additional interest expense 183000 amortized 2001 delayed draw term loan amount 282291 libor plus 05 interest payable quarterly commencing november 30 2001 interest rate 525 december 31 2001 principal due february 7 2004 described recent developments acquisition jens oilfield service inc strata directional drilling inc disposition hds company incurred additional 132 million longterm debt connection acquisition jens strata february 2002 september 30 2001 company default certain covenants set forth term loan subordinated debt agreements financing institutions relating maintenance certain financial ratios first quarter 2002 financing institutions granted forbearance default september 30 2001 company compliance debt covenants company continues make payments financing institution compliance debt agreements addition debt discussed company available lines credit totaling 775000 december 31 2001 400000 available unused connection acquisition jens strata february 2002 lines credit increased 4275000 858000 available unused february 28 2002 long term capital needs provide funds existing operations retirement existing debt redemption series preferred stock secure funds acquisitions oil gas equipment rental services industry continue growth additional acquisitions require additional financing may include issuance new equity debt securities well secured unsecured loans substantially assets pledged secure existing financing discussions regarding issuance additional equity securities however assurance able consummate transaction recent developments acquisition jens oilfield service inc strata directional drilling inc disposition hds disposition hds part corporate strategy focus providing services oil gas industry december 12 2001 sold stock hds general manager hds clayton lau terms sale received promissory note lau amount 790500 due november 30 2007 secured certain hds equipment hds assigned us hds accounts receivable assumed obligation pay hds accounts payable outstanding balance revolving line credit amount 375000 loss sale approximately 20 million resulting sale recorded year ended december 31 2001 note received lau collaterally assigned wells fargo bank texas national association jens oil field transaction purchased 81 outstanding stock jens 10250000 cash ii 4000000 note payable 75 interest rate principal due four years iii 1000000 noncompete agreement payable monthly five years iv additional payment estimated 1000000 1250000 based upon jens working capital december 31 2001 v 1397849 shares common stock vi amount equal net income jens period january 1 2002 january 31 2002 entered three year employment agreement mr mortensen pay mr mortensen base salary 150000 per year also entered shareholders agreement jens mr mortensen providing restrictions transfer stock jens us mr mortensen providing mr mortensen option february 1 2003 exchange shares stock jens shares common stock value equal 46 times trailing ebitda jens determined accordance gaap less intercompany loans third party investments jens times nineteen percent 19 common stock valued based average closing bid price stock preceding 30 days mr mortensen demand registration right pursuant shareholder agreement requires company register shares company securities act 1933 amended effected august 1 2002 within 3 years thereafter mr mortensens cost along piggyback registration rights strata acquisition acquired 100 preferred stock 95 common stock strata consideration issuance energy spectrum partners lp energy spectrum 6559863 shares common stock warrants purchase additional 437500 shares company common stock exercise price 015 per share 3500000 shares newly created series 10 cumulative convertible preferred stock company series preferred stock addition event series preferred stock converted redeemed prior february 4 2004 additional warrant issued energy spectrum entitle acquire 875000 shares exercise price 015 per share energy spectrum largest shareholder private equity fund headquartered dallas series preferred stock issued energy spectrum connection strata transaction cumulative dividends 10 per share payable cash additional series preferred stock additionally series preferred stock convertible 075 per share company common stock february 1 2003 conversion price lowered lesser 060 per share ii 75 market price calculated accordance certificate designations series preferred stock series preferred stock also subject antidilution event issuances conversion price series preferred stock subject mandatory redemption second anniversary date issuance earlier net proceeds new equity sales subject optional redemption us time redemption price series preferred stock 100 per share plus amount equal accrued unpaid dividends date addition holder series preferred stock entitled appoint three directors board directors three persons designated energy spectrum thomas whitener jr james w spann michael tapp appointed directors upon consummation acquisition strata also granted energy spectrum registration rights includes two demand registrations expense piggyback registration rights bank financing connection acquisition jens wells fargo bank affiliates banks provided 5574396 financing consisting revolving credit facility amount 1000000 term equipment facility amount 4042396 real estate term facility amount 532000 facilities floating interest rate maturity date february 1 2005 connection acquisition strata banks provided financing 4154000 consisting revolving credit facility amount 2500000 term facility amount 1654000 facilities floating interest rate maturity date february 1 2005 connection jens strata acquisitions banks also made subordinated loan us amount 3000000 loan 120 interest rate maturity date february 1 2005 energy capital issued warrants 1165000 shares common stock 015 exercise price 335000 warrants purchase common stock 100 per share exercise price connection subordinated debt financing right redeem 465000 warrant 600000 two years 700000 warrants 900000 three years addition previously issued warrants purchase common stock mca cancelled substantially companys tangible assets pledged collateral loans banks result transactions described outstanding approximately 195 million shares common stock well preferred stock options warrants convertible exercisable additional 96 million shares new accounting pronouncements june 2001 financial accounting standards board finalized fasb statements 141 business combinations sfas 141 142 goodwill intangible assets sfas 142 sfas 141 requires use purchase method accounting prohibits use poolingofinterests method accounting business combinations initiated june 30 2001 sfas 141 also requires company recognize acquired intangible assets apart goodwill acquired intangible assets meet certain criteria sfas 141 applies business combinations initiated june 30 2001 purchase business combinations completed july 1 2001 also requires upon adoption sfas 142 company reclassify carrying amounts intangible assets goodwill based criteria sfas 141 sfas 142 requires among things companies longer amortize goodwill instead test goodwill impairment least annually addition sfas 142 requires company identify reporting units purposes assessing potential future impairments goodwill reassess useful lives existing recognized intangible assets cease amortization intangible assets indefinite useful life intangible asset indefinite useful life tested impairment accordance guidance sfas 142 sfas 142 required applied fiscal years beginning december 15 2001 goodwill intangible assets recognized date regardless assets initially recognized sfas 142 requires company complete transitional goodwill impairment test six months date adoption company also required reassess useful lives intangible assets within first interim quarter adoption sfas 142 companys previous business combinations accounted using purchase method currently company assessing yet determined adoption sfas 141 sfas 142 impact financial position results operations june 2001 fasb issued sfas 143 accounting asset retirement obligations sfas 143 addresses financial accounting reporting obligations associated retirement longlived assets associated asset retirement costs sfas 143 requires fair value liability associated asset retirement recognized period incurred reasonable estimate fair value made associated retirement costs capitalized part carrying amount longlived asset subsequently depreciated life asset company completed analysis impact adoption sfas 143 consolidated financial statements company adopt sfas 143 fiscal year beginning january 1 2003 august 2001 fasb issued sfas 144 accounting impairment disposal longlived assets sfas 144 addresses financial accounting reporting impairment disposal longlived assets sfas 144 replaces sfas 121 accounting impairment longlived assets longlived assets disposed sfas 144 provides updated guidance concerning recognition measurement impairment loss certain types longlived assets modifies accounting reporting discontinued operations sfas 144 expected materially change methods used company measure impairment losses longlived assets may result future dispositions reported discontinued operations greater extent currently permitted company adopt sfas 144 fiscal year beginning january 1 2002 risk factors annual report form 10k including without limitation following risk factors contains forwardlooking statements within meaning section 27a securities act 1933 securities act section 21e securities exchange act 1934 regarding business financial condition results operations prospects words expects anticipates intends plans believes seeks estimates similar expressions variations words intended identify forwardlooking statements exclusive means identifying forwardlooking statements annual report form 10k although forwardlooking statements annual report form 10k reflect good faith judgment management statements based facts factors currently know consequently forwardlooking statements inherently subject risks uncertainties actual results outcomes may differ materially results outcomes discussed forwardlooking statements factors could cause contribute differences results outcomes include limited discussed elsewhere annual report form 10k sec filings publicly available documents readers urged place undue reliance forwardlooking statements speak date annual report form 10k undertake obligation revise update forwardlooking statements order reflect event circumstance may arise date annual report form 10k low prices oil natural gas adversely affect demand services products natural gas exploration drilling business highly cyclical exploration drilling activity declines marginally profitable projects become uneconomic either delayed eliminated decline number operating oil rigs would adversely affect business accordingly oil natural gas prices relatively low revenues income suffer oil gas industry extremely volatile subject change based political economic factors outside control highly leveraged result acquisition financing highly leveraged february 28 2002 approximately 21 million debt outstanding level debt impair ability obtain additional financing makes us vulnerable economic downturns declines oil natural gas prices makes us vulnerable increases interest rates may maintain sufficient revenues meet debt obligations fund operations lack funds may limit flexibility planning reacting changes business industry place us competitive disadvantage compared competitors greater access funds limit ability borrow additional funds result event default fail comply financial restrictive covenants debt obligations service indebtedness require significant amount cash ability generate cash depends many factors beyond control ability fund operations make payments refinance indebtedness fund planned acquisitions capital expenditures depend ability generate cash future ability certain extent subject general economic financial competitive legislative regulatory factors beyond control historical results indicator future operations business conducted three subsidiaries one acquired february 2001 two acquired february 2002 result past performance indicative future results likelihood success must considered light volatility industry leveraged condition competition factors set forth herein failure obtain additional financing may adversely affect us expansion operations acquisition additional companies require substantial amounts capital availability financing may affect ability expand assurance funds expansion whether equity debt financings sources available terms satisfactory us may also enter strategic partnerships purpose developing new businesses future growth may limited unable complete acquisitions strategic partnerships may difficulties integrating acquired businesses may able successfully integrate business mca strata jens integration businesses complex time consuming may disrupt future business may encounter substantial difficulties costs delays involved integrating common information communication systems operating procedures financial controls human resources practices including incompatibility business cultures loss key employees customers various risks associated acquisition businesses uncertainties regarding profitability operations could material adverse effect us success dependent upon ability acquire integrate additional businesses business strategy acquire companies operating oil natural gas equipment rental services industry however assurance successful acquiring additional companies successful acquisition new companies depend various factors including ability obtain financing competitive environment acquisitions well integration issues described preceding paragraph assurance able acquire successfully operate particular business able expand areas targeted may experience expected synergies may able achieve synergies expect combination businesses including plans reduce overhead shared facilities systems cross market businesses customers access larger pool customers due combined businesses ability provide larger range services trading market common stock common stock registered exchange nasdaq traded sporadically counter bulletin board assurance active market common stock develop future existing shareholders may diluted connection additional financings expect issue additional equity securities connection acquisition additional businesses well connection employee benefit plans issuances dilute holdings existing stockholders securities may prior parity common stock competition could cause business suffer natural gas equipment rental services industry highly competitive despite recent consolidation activities industry remains highly fragmented competitors significantly larger greater financial technological operating resources addition number individual regional operators compete us throughout existing targeted markets competitors compete us customers acquisitions businesses competition may cause business suffer products services may become obsolete business success dependent upon providing customers efficient costeffective oil gas drilling equipment aware new types equipment technology would compete equipment services assurance new technologies developed may render equipment technologies obsolute material adverse effect us controlled stockholders small number stockholders effectively control us energy spectrum mr hidayatallah colebrook investements inc approximately 336 224 173 respectively currently outstanding common stock energy spectrum owns series preferred stock warrants entitle acquire shares would give energy spectrum ownership approximately 47 outstanding common stock addition holder series preferred stock energy spectrum right elect three 3 directors board directors energy spectrum either mr hidayatallah colebrook investments inc voting together power control outcome matters requiring stockholder approval including election directors proposed change control company natural person controls colebrooke none officers directors financial interest colebrooke owner colebrookes shares jupiter trust guernsey trust corporate trustee jupiter trust ansbacher trust company ansbacher guernsey trust action taken upon majority vote trusts three directors messrs robert bannister phillip retz ms rachel whatley directors absolute discretion take action make investment decisions behalf ansbacher deemed control ansbacher sole voting dispository power shares colebrooke individuals directors colebrooke corporate director colebrooke plaiderie corporate directors one limited guernsey company plaiderie whollyowned ansbacher guernsey limited ansbacher limited controlled registered bank guernsey ultimate parent ansbacher limited first rand limited first rand publiclyowned company listed johannesburg stock exchange first rand deemed control plaiderie dependence upon key personnel dependent upon efforts skilled executives including president chief executive officer chairman munawar h hidayatallah manage business well identify consummate additional acquisitions addition business strategy acquire businesses dependent upon skilled management personnel retain personnel operate business loss services mr hidayatallah one key personnel operating subsidiaries could material adverse effect us maintain key man insurance personnel addition development expansion require additional experienced management operations personnel assurance given able identify retain employees customers credit risks could cause business suffer majority customers engaged energy industry concentration customers may impact overall exposure credit risk customers may similarly affected changes economic industry conditions vulnerable personal injury property damage services used exploration production natural gas operations subject inherent hazards cause personal injury loss life damage destruction property equipment environment marine life suspension operations litigation arising accident location products services used provided may result named defendant lawsuits asserting potentially large claims maintain customary insurance protect business potential losses however could become subject material uninsured liabilities government regulations could cause business suffer subject various federal state local laws regulations relating energy industry general environment particular environmental laws recent years become stringent generally sought impose greater liability larger number potentially responsible parties although aware proposed material changes statutes rules regulations changes could cause business suffer labor costs unavailability skilled workers could cause business suffer dependent upon available labor pool skilled employees also subject fair labor standards act governs matters minimum wage overtime working conditions shortage labor pool general inflationary pressures changes applicable laws regulations could require us enhance wage benefits packages assurance labor costs increase operating costs could cause business suffer may subject certain environmental liabilities relating discontinued operations reorganized bankruptcy laws 1988 since time number parties including environmental protection agency epa asserted responsible cleanup hazardous waste sites assertions made respect prebankruptcy activities believe claims barred applicable bankruptcy law however prevail respect claims could become subject material environmental liabilities item 7a item 7 managements discussion analysis financial condition results operations pages 6 10 1996 annual report shareholders item 8 item 7 managements discussion analysis financial condition results operations discussion read conjunction consolidated financial statements including notes consolidated financial statements overview allischalmers emerging chapter 11 plan reorganization entered agreement alch company lp investor pursuant investor agreed purchase 61 million shares prereverse stock split basis common stock 40 outstanding common stock 3750000 cash investor limited partnership controlled messrs robert e nederlander leonard toboroff two companys directors company continues efforts conserve cash resources however expenses associated ongoing securities exchange commission governmental reporting well legal accounting audit insurance costs associated corporate requirements publicly held company continue make difficult company present size achieve positive cash flow date chapter 11 filings june 1987 company sponsored 19 defined benefit plans providing pensions substantially us employees pension plan us salaried employees capped frozen effective march 31 1987 benefit accruals date result divestitures chapter 11 proceedings eight active plans transferred buyers businesses leaving company sponsor 11 plans none permitted additional benefit accruals effective january 1 1989 11 remaining plans consolidated single plan allischalmers consolidated pension plan consolidated plan 1994 companys independent pension actuaries changed assumptions mortality administrative expenses used determine liabilities consolidated plan primarily result changes mortality assumptions reflect decreased mortality rates companys retirees consolidated plan underfunded present value basis first quarter 1996 company made required cash contribution consolidated plan amount 205000 company however financial resources make required payments 1996 1997 given inability company fund obligations current financial resources february 1997 allischalmers applied pension benefit guaranty corporation pbgc distress termination consolidated plan section 4041c employee retirement income security act 1974 amended erisa pbgc approved distress termination application september 1997 agreed plan termination date april 14 1997 pbgc became trustee terminated consolidated plan september 30 1997 upon termination consolidated plan allischalmers subsidiaries incurred liability pbgc amount equal consolidated plans unfunded benefit liabilities allischalmers subsidiaries also liability pbgc trustee terminated consolidated plan outstanding balance consolidated plans accumulated funding deficiencies pbgc estimated unfunded benefit liabilities accumulated funding deficiencies together pbgc liability total approximately 679 million effective march 31 1999 company issued 585100 shares pbgc reducing pension liability estimated fair market value shares 669 million september 1997 allischalmers pbgc entered agreement principle settlement pbgc liability required among things satisfactory resolution companys tax obligations respect consolidated plan section 4971 internal revenue code 1986 amended code section 4971a code imposes taxable year firsttier tax 10 amount accumulated funding deficiency plan like consolidated plan section 4971b code imposes additional secondtier tax equal 100 accumulated funding deficiency corrected within specified period liability taxes imposed section 4971 extends jointly severally company commonlycontrolled subsidiary corporations prior termination consolidated plan accumulated funding deficiency taxable years 1995 1996 1997 deficiencies resulted estimated firsttier taxes code section 4971a approximately 900000 july 16 1998 company internal revenue service irs reached agreement principal settle companys tax liability code section 4971 75000 following final irs approval payment amount made august 11 1998 june 1999 effective march 31 1999 company pbgc entered agreement settlement pbgc liability pbgc agreement pursuant terms pbgc agreement company issued 585100 shares common stock pbgc 35 total number shares issued outstanding fullydiluted basis company right first refusal respect sale shares common stock owned pbgc conjunction share issuance company reduced pension liability pbgc based estimated fair market value shares issued effective date march 31 1999 accordance terms pbgc agreement company required decreased size board directors company board seven members ii caused sufficient number current directors company resign board committees thereof iii caused three designees pbgc elected board pbgc caused company amend bylaws conform terms pbgc agreement furthermore company agreed pay pbgcs reasonable professional fees 90th day release event hereinafter defined term pbgc agreement company agreed issue agree issue common stock company common stock equivalent less fair value determined majority board company also agreed merge consolidate entity sell transfer convey 50 property assets without majority board approval agreed amend amended restated certificate incorporation certificate bylaws order satisfy discharge pbgc liability pbgc agreement provides company must either receive single transaction series related transactions debt financing makes available company least 10 million borrowings ii consummate acquisition single transaction series related transactions assets andor business purchase price including funded debt assumed least 10 million release event 585100 shares disposed pbgc prior release event final satisfaction discharge pbgc liability accreted estimated fair market value 1024000 shares issued pbgc connection pbgc agreement additional consideration settling pbgc liability following agreements dated march 31 1999 also entered registration rights agreement company pbgc registration rights agreement ii lockup agreement among company pbgc alch company lp delaware limited partnership alch wells fargo bank trustee certain amended restated retiree health trust agreement uaw retired employees allischalmers corporation uaw trust firstar trust company trustee certain amended restated retiree health trust agreement nonuaw retired employees allischalmers corporation nonuaw trust lockup agreement registration rights agreement grants holder registrable shares defined registration rights agreement basically mean shares common stock issued pbgc agreement right shares registered pursuant securities act 1933 amended demand incidental registration statement filed company order demand registration registrable shares request registration holders less 20 registrable shares necessary company may deny request registration shares company contemplates filing registration statement within 90 days receipt notice holders registration rights agreement also contains provisions allow company postpone filing registration statement 180 days registration rights agreement contains indemnification language similar usually contained agreements kind lockup agreement governs transfer disposition shares companys common stock voting shares well grants pbgc right sale shares prior alch uaw trust nonuaw trust pursuant lockup agreement unless board terminated common stock transfer restrictions set forth article xiii companys certificate alch uaw trust nonuaw trust agreed period commencing march 31 1999 ending third anniversary release event directly indirectly sell transfer assign dispose shares company stock beneficially owns commencing third anniversary release event continuing fifth anniversary release event alch uaw trust nonuaw trust agreed sell transfer dispose shares company stock without first giving pbgc opportunity sell portion shares company stock pbgc owns foregoing right pbgc applies sale company stock public offering otherwise lockup agreement also contains voting component term lockup agreement party agreement agreed vote meeting company stockholders written consent shares company stock owned favor election directors company persons nominated nominating committee board refrain taking action contrary inconsistent obligation term lockup agreement party agreement agreed vote shares company stock take action amend companys certificate bylaws manner inconsistent breach pbgc agreement party agreed vote shares favor certain specified amendments companys certificate ii election persons designated pbgc director serve board iii favor election company directors committed cause one pbgc director appointed nominating committee board one pbgc director appointed chairman compensation committee board acquisition environment unfavorable since investors 1989 cash contribution company remained difficult company 2000 problems continued include companys lack cash investment limited availability debt financing acquisitions financial exposure associated consolidated plan therefore company continues proceed cautiously efforts identify evaluate potential candidates acquisition business combinations results operations results operations 2000 1999 1998 reflect sole operation business allischalmers machine repair business hds sales totaled 46 million 2000 compared 44 million 1999 50 million 1998 increase sales 2000 1999 due slightly better pricing better mix products serviced gross margins percentage sales 272 242 297 2000 1999 1998 respectively increase 2000 due better pricing continued cost reduction efforts marketing administrative expense 14 million 15 million 17 million 2000 1999 1998 respectively marketing administrative expense 310 sales 2000 compared 354 1999 336 1998 decrease marketing administrative expense due reduced corporate overhead acquisition costs additional costs incurred 1999 1998 pursuit corporate acquisitions certain engineering costs hds significant portion companys administrative expense continues relate expenses securities exchange commission governmental reporting well legal accounting audit insurance requirements publicly held company interest income years resulted mainly earnings shortterm investments interest expense primarily relates real estate loan proceeds used purchase shop office building hds operates additional financing capital improvements hds company net loss 189000 12 per common share 2000 compared net loss 113000 08 per common share 1999 net income 618000 62 per common share 1998 liquidity capital resources december 31 2000 company cash shortterm investments totaling 358000 decrease 501000 december 31 1999 trade receivables december 31 2000 549000 compared 570000 december 31 1999 inventory december 31 2000 122000 decrease 157000 year end 1999 inventory unusually high one job totaling approximately 81000 completed january 2000 net property plant equipment december 31 2000 1055000 decrease 1170000 december 31 1999 company purchased 35000 capital equipment 2000 purchased significant capital items since 1998 approximately 234000 invested machinery equipment acquisitions approximately 119000 spent improve hdss facilities including air conditioning upgrading telephone system expenditures additional upgrades machinery tooling necessary reduce production costs decreasing downtime increasing production efficiency output helping position company growth increased capacity service capabilities offers marketplace current maturities longterm debt december 31 2000 212000 majority current maturities represent payments real estate loan refinanced hds august 1996 proceeds original loan used 1990 purchase land building hds operates business houston texas amount refinanced required repaid monthly installments 3278 august 20 2001 remaining unpaid balance due december 31 2000 interest rate note 115 rate subject adjustments term note accordance increases decreases prime rate note collateralized hds facility net book value 421000 december 31 2000 companys guaranty trade accounts payable december 31 2000 208000 decrease 461000 december 31 1999 december 1999 payables higher normal due timing fluctuations payment vendor invoices current liabilities 106000 december 31 2000 decrease 281000 december 31 1999 due 128000 decrease legal reserve well reduction accruals franchise tax legal expense companys principal sources cash include earnings operations cash requirements needed administrative expenses associated publicly held company significant management believes company continue use substantial portion cash balances generated hds purposes 2001 ac reorganization trust pursuant plan reorganization funds costs incurred allischalmers relate implementation plan reorganization costs include allocated share certain expenses company employees professional fees certain administrative expenses epa certain state environmental protection agencies requested information connection several potential hazardous waste disposal sites products manufactured allischalmers consummation plan reorganization disposed epa claimed allischalmers liable cleanup costs associated several additional sites addition certain third parties asserted allischalmers liable cleanup costs associated epa fines connection additional sites instance environmental claims asserted company involve prebankruptcy operations accordingly allischalmers taken position cleanup costs liabilities related sites discharged bankruptcy environmental claims asserted company involving postbankruptcy operations financial condition shareholders deficit december 31 2000 667 million threeyear comparison shareholders deficit follows millions 2000 1999 1998 january 1 665 674 680 net income loss 02 01 06 issuance common stock 00 10 00 december 31 667 665 674 future accounting changes june 1999 financial accounting standards board issued statement financial accounting standard sfas 137 accounting derivative instruments hedging activities deferral effective date fasb statement 133 issuance delayed effective date sfas 133 company first quarter 2001 sfas 133 requires derivative instruments defined statement recorded balance sheet assets liabilities measured fair value change fair value recorded within net income comprehensive income adoption statement material effect net earnings financial position item 7a item 7 management’s discussion analysis financial condition results operations following discussion analysis read conjunction selected historical financial data accompanying financial statements notes financial statements included elsewhere document following discussion contains forwardlooking statements within meaning private securities litigation reform act 1995 reflect plans estimates beliefs actual results could differ materially anticipated forwardlooking statements result risks uncertainties including limited discussed “item 1a risk factors” overview business multifaceted oilfield services company provides services equipment oil natural gas exploration production companies throughout us including texas louisiana arkansas pennsylvania oklahoma new mexico offshore gulf mexico internationally primarily argentina brazil bolivia mexico operate three sectors oil natural gas service industry oilfield services drilling completion rental services derive operating revenues rates per job charge labor equipment required provide service rates per day equipment tools rent customers price charge services depends upon several factors including level oil natural gas drilling activity competitive environment particular geographic regions operate contracts awarded based price quality service equipment general reputation experience personnel demand drilling services historically volatile affected capital expenditures oil natural gas exploration development companies fluctuate based upon prices oil natural gas expectation prices oil natural gas rig count important indicator activity levels oil natural gas industry according baker hughes rig count rig count us increased 862 december 27 2002 peak 2031 august 2008 however rig count began decline fourth quarter 2008 continued decline 2009 reaching low 876 rigs june 2009 rapid decline us rig count experienced 2009 due economic slowdown us decrease natural gas oil prices impacted capital expenditures customers turmoil financial markets impact availability capital customers also affected drilling activity us rig count since increased 1373 february 26 2010 due recovery oil prices stabilization natural gas prices directional horizontal rig count us according baker hughes 914 february 26 2010 compared 692 one year earlier according baker hughes offshore gulf mexico rig count 44 rigs february 26 2010 51 february 27 2009 revenue correlated rig count operating costs fluctuate direct proportion changes revenues operating expenses consist principally labor costs benefits equipment rentals maintenance repairs equipment depreciation insurance fuel many costs fixed operating income percentage revenues generally affected level revenues company outlook believe revenue operating income operating segments improve 2010 oilfield service segment heavily based oil natural gas activity us good indicator activity us rig count baker hughes rig count us first eight weeks 2010 decreased average 1308 compared average 1428 first eight weeks 2009 increased compared average rig count fourth quarter 2009 1115 average rig count 1079 2009 favorable trend rig count result improved demand pricing oilfield services segment rental services segment historically dependent drilling activity gulf mexico baker hughes average rig count gulf mexico first eight weeks 2010 decreased 42 rigs compared average 60 rigs first eight weeks 2009 increased compared 34 rigs last quarter 2009 believe favorable trend since fourth quarter strategy moving rental assets new markets result increased utilization pricing rental services segment anticipate drilling completion segment exceed 2009 results revenue operating income drilling activity argentina improving relocated underutilized rigs brazil also signed two new contracts bolivia commence drilling operations february april 2010 drilling completion segment currently operates argentina brazil bolivia two rigs scheduled delivered us 2010 currently firm commitments work two us rigs impact revenue operating income rigs may negative impact drilling completion segment’s operating results expect general administrative expenses 2010 relatively flat realize full year benefit reductions administrative staffs made 2009 reflect decline activity offset additional administrative positions created handled growing international activities costs related investigation new operational financial reporting tools improve operating performance also anticipate increase compensation existing administrative positions response market conditions net interest expense dependent upon level debt cash hand principally dependent acquisitions complete capital expenditures cash flows operations due shortage liquidity credit us financial markets may see increase effective interest rate 2010 anticipate ability record gain debt extinguishment 2010 senior notes trading close face value anticipate effective tax rate increase 2010 due projected domestic tax loss lower tax rate tax rate applied international operations expected generate taxable income operating income principally dependent level revenues pricing environment services addition demand services dependent upon customers’ capital spending plans largely driven current commodity prices expectations future commodity prices believe 2010 challenging year operations although increased oil natural gas prices resulting increased rig count increase utilization pricing equipment services believe cost cuts strategy international growth offering new equipment technology customers focus us land shale plays improve operating results 2010 results operations june 2007 acquired outstanding stock coker july 2007 acquired outstanding stock diggar november 2007 acquired substantially assets diamondback october 2007 acquired outstanding stock rebel june 2007 sold capillary assets report operations four acquisitions one disposition oilfield services segment december 2008 acquired outstanding stock bch reported part drilling completion segment august 2008 sold drill pipe tong manufacturing assets reported oilfield services segment consolidated results acquisitions day acquired foregoing acquisitions dispositions affect comparability period historical results historical results may indicative future results comparison years ended december 31 2009 december 31 revenues year ended december 31 2009 5063 million decrease 251 compared 6759 million year ended december 31 2008 decrease revenues due decrease revenues oilfield services rental services segments offset part slight increase revenues drilling completion segment oilfield services rental services segments strong concentration us domestic oil natural gas market due decline oil natural gas prices drilling activity us compared 2008 experienced significant deterioration equipment utilization pricing resulted decline revenues oilfield services segment 1436 million year ended december 31 2009 compared revenues 2808 million year ended december 31 2008 rental services segment decline revenues 587 million year ended december 31 2009 compared revenues 1038 million year ended december 31 2008 increase revenues drilling completion segment due acquisition bch brazil offset lower rig utilization pricing argentina operations drilling completion segment generated 3040 million revenues year ended december 31 2009 compared revenues 2913 million year ended december 31 2008 bch acquired december 31 2008 generated 436 million revenues year ended december 31 2009 direct costs year ended december 31 2009 decreased 144 3794 million 750 revenues compared 4434 million 656 revenues year ended december 31 2008 increase percentage direct costs revenue periods primarily due change revenue mix fact direct costs variable therefore fluctuate revenues year ended december 31 2009 higher margin rental services segment comprised 116 total revenues compared 154 total revenues year ended december 31 2008 direct costs oilfield services rental services segments decreased absolute dollars year ended december 31 2009 compared year ended december 31 2008 revenues oilfield services rental services segments decreased period reduction direct costs oilfield services segment direct costs year ended december 31 2009 decreased 394 direct costs year ended december 31 2008 revenues decreased 489 period addition oilfield services segment 12 million expenses recorded year ended december 31 2009 related severance payments closing unprofitable locations downsizing locations oilfield services segment also impacted pricing pressure decreases revenues impact direct costs rental services segment direct costs year ended december 31 2009 decreased 364 direct costs year ended december 31 2008 revenues decreased 434 period direct costs rental services segment largely fixed primarily relate yard expenses maintain rental inventory addition pricing pressure reduced rental services revenues impact direct costs direct costs drilling completion segment increased 206 million year ended december 31 2009 compared year ended december 31 2008 direct costs related december 2008 acquisition bch 296 million year ended december 31 2009 drilling completion segment direct costs year ended december 31 2009 increased 91 direct costs year ended december 31 2008 revenues increased 43 period unfavorable variance primarily attributed lower utilization drilling service rigs year ended december 31 2009 compared period prior year labor cost increases due inflationary environment argentina additionally workforce reductions response market conditions difficult costly implement labor environment argentina incurred 17 million severance costs argentina year ended december 31 2009 depreciation expense increased 233 783 million year ended december 31 2009 635 million year ended december 31 2008 primary increase depreciation expense due acquisitions completed second half 2008 acquisition bch december 2008 depreciation expense bch 33 million year ended december 31 2009 general administrative expense 508 million year ended december 31 2009 compared 628 million year ended december 31 2008 general administrative expense decreased primarily due amortization sharebased compensation arrangements reduced management accounting administrative staffs reductions provided benefits general administrative expense includes sharebased compensation expense 48 million 2009 79 million 2008 percentage revenues general administrative expenses 100 2009 compared 93 2008 year ended december 31 2009 recorded 16 million loss asset disposition total loss rig blowout drilling completion segment insurance proceeds loss sufficient cover book value rig related assets effective august 1 2008 sold drill pipe tong manufacturing assets part oilfield services segment total consideration approximately 75 million recognized gain 166000 related transaction recorded impairment goodwill 1158 million december 31 2008 light adverse market conditions affecting stock price market conditions time determined impairment necessary goodwill associated rental services segment well tubular services production services reporting units included oilfield services segment performed annual impairment test december 31 2009 recorded impairment amortization expense 47 million year ended december 31 2009 compared 42 million year ended december 31 2008 increase primarily attributable intangible assets associated acquisition bch december 2008 loss operations year ended december 31 2009 totaled 85 million compared 135 million loss year ended december 31 2008 improvement 50 million improvement primarily related 1158 million goodwill impairment year ended december 31 2008 compared impairment year ended december 31 2009 offset decreased revenues increased depreciation amortization expense 153 million year ended december 31 2009 compared year ended december 31 2008 interest expense 481 million year ended december 31 2009 compared 484 million year ended december 31 2008 june 29 2009 purchased 748 million senior notes proceeds 1256 million equity issuances date also prepaid 350 million outstanding loan balance revolving credit facility june 29 2009 equity proceeds compared outstanding balance 365 million december 31 2008 revolving credit facility 2008 dls entered new 250 million import finance facility bank fund portion purchase price new drilling service rigs interest expense increased due acquisition bch end 2008 bch 221 million term loan facility december 31 2008 reduced 162 million december 31 2009 interest expense includes amortization expense debt issuance costs 22 million 21 million years ended december 31 2009 2008 respectively interest income 72000 year ended december 31 2009 compared 56 million year ended december 31 2008 january 2008 invested 400 million 15 convertible subordinated secured debenture bch earned interest note december 28 2008 acquired outstanding stock bch year ended december 31 2009 recorded gain 264 million result tender offer completed june 29 2009 purchased 306 million aggregate principal 90 senior notes 442 million aggregate principal 85 senior notes approximately 464 million included computation gain writeoff 15 million debt issuance costs related retired notes incurred approximately 466000 expenses related transactions benefit income taxes year ended december 31 2009 99 million 318 net loss income taxes compared income tax benefit 174 million 306 net income taxes 2008 effective tax rate us 355 2009 compared 311 2008 effective tax rate international activities increased 444 2009 compared 317 2008 increase us tax rate primarily attributable higher nondeductible items 2008 year including intangible disposals meals entertainment increase international tax rate primarily due bch operations generate loss brazil valuation allowance 21 million benefit year ended december 31 2009 us operations generated 439 million book loss income taxes international activities generated 129 million income taxes resulting us operations higher influence consolidated effective tax rate 2009 net loss 212 million year ended december 31 2009 compared net loss 395 million year ended december 31 2008 net loss attributed common stockholders 225 million 13 million preferred stock dividends preferred stock dividend relates 36393 shares 1000 par value preferred shares 70 following table compares revenues income loss operations business segments years ended december 31 2009 december 31 2008 income loss operations consists revenues gain loss asset dispositions less direct costs general administrative expenses goodwill impairment depreciation amortization oilfield services revenues year ended december 31 2009 oilfield services segment 1436 million decrease 489 2808 million revenues year ended december 31 2008 income operations oilfield services segment decreased 533 million resulted loss operations 147 million year ended december 31 2009 compared income operations 386 million year ended december 31 2008 operating income year ended december 31 2008 included 94 million noncash charge impairment goodwill oilfield services segment revenues operating income year ended december 31 2009 decreased compared year ended december 31 2008 due weak market conditions resulted reduced demand pricing services year ended december 31 2009 incurred 12 million costs related severance payments closing unprofitable locations downsizing locations oilfield services segment depreciation amortization expense oilfield services segment increased 59 million 237 year ended december 31 2009 compared prior year due capital expenditures completed 2008 including six coiled tubing units delivered last half 2008 realized benefits capital expenditures due decreased utilization pricing equipment result decline us drilling activity drilling completion drilling completion revenues 3040 million year ended december 31 2009 increase 43 2913 million revenues year ended december 31 2008 drilling completion revenues increased 2009 primarily due 436 million revenues generated bch acquired december 2008 offset decrease revenues argentina income operations decreased 192 million 2009 compared 402 million year ended december 31 2008 income operations percentage revenue decreased 63 2009 compared 138 2008 reduction due 1 reduced rig utilization rig rates argentina year ended december 31 2009 2 increased labor costs argentina year ended december 31 2009 3 increase 80 million 559 depreciation amortization year ended december 31 2009 4 16 million noncash loss recorded year ended december 31 2009 rig destroyed blowout 5 17 million severance costs year ended december 31 2009 related workforce reductions argentina result lower activity 6 329000 costs incurred consolidate operating locations brazil year ended december 31 2009 increase depreciation amortization expense result addition new rigs argentina acquisition bch rental services rental services revenues 587 million year ended december 31 2009 decrease 434 1038 million revenues year ended december 31 2008 income operations rental services segment increased 140000 year ended december 31 2009 compared loss 744 million year ended december 31 2008 operating income year ended december 31 2008 included 1064 million noncash charge impairment goodwill without charge operating income year ended december 31 2008 would 320 million rental services segment revenues operating income adjusted goodwill impairment year ended december 31 2009 decreased compared prior year due primarily decrease utilization rental equipment competitive pricing environment due decrease drilling activity united states decrease income operations year ended december 31 2009 also due 306000 increase bad debt expense rental services segment customers facing financial difficulties 237000 costs related closing rental yard reducing workforce bad debt expense recorded rental services segment year ended december 31 2009 15 million compared 12 million year ended december 31 2008 addition depreciation amortization expense rental services segment increased 17 million 59 year ending december 31 2009 compared prior year due capital expenditures made 2008 general corporate general corporate expenses decreased 48 million 132 million year ended december 31 2009 compared 180 million year ended december 31 2008 decrease primarily due decrease sharebased compensation expense decrease payroll costs benefits due reduced management accounting administrative staff sharebased compensation expense included general corporate 37 million year ended december 31 2009 compared 67 million year ended december 31 2008 comparison years ended december 31 2008 december 31 revenues year ended december 31 2008 6759 million increase 184 compared 5710 million year ended december 31 2007 increase revenues due increase revenues drilling completion oilfield services segments offset part decrease revenues rental services segment significant increase revenues drilling completion segment due additional drilling service rigs placed service 2008 price increases drilling completion segment generated 2913 million revenues year ended december 31 2008 compared 2158 million year ended december 31 2007 oilfield services segment revenues increased 2808 million 2008 compared 2340 million 2007 due acquisitions completed third fourth quarters 2007 added downhole motors measurementwhiledrilling mwd tools directional drilling personnel resulting increased capacity increased market penetration revenues also increased oilfield services segment due purchase additional equipment principally new compressor packages underbalanced operations coiled tubing equipment expansion operations new geographic regions impact additional mwd tools downhole motors acquisitions diggar coker completed last half 2007 easily identifiable quickly integrated preexisting operations acquisition diamondback assets provided 303 million revenues year ended december 31 2008 compared 31 million revenues date acquisition december 31 2007 additional coiled tubing equipment provided additional 118 million revenues year ended december 31 2008 compared 2007 increases revenue partially offset significant decrease revenues rental services segment due reduction drilling activity us gulf mexico beginning last half 2007 rigs departed us gulf favor international markets impact hurricanes 2008 factors also caused pricing rental services segment become competitive also impacting revenues 55 million decrease revenues capillary tubing assets compared 2007 assets sold june 29 2007 direct costs year ended december 31 2008 increased 309 4434 million 656 revenues compared 3388 million 593 revenues year ended december 31 2007 percentage basis direct costs oilfield services segment outpaced growth revenue segment oilfield services revenue year ended december 31 2008 increased 200 revenue oilfield services segment year ended december 31 2007 direct costs increased 247 period unfavorable variance primarily associated costs incurred deployment new coiled tubing rigs percentage basis direct costs drilling completion segment outpaced growth revenue segment drilling completion revenue year ended december 31 2008 increased 350 revenue drilling completion segment year ended december 31 2007 direct costs increased 451 period unfavorable variance primarily attributed higher labor costs drilling completion segment relating labor concessions argentina granted oil industry last half 2007 significant increase labor force laborrelated expenses connection delivery new rigs prior activation direct costs rental services segment decrease percentage drop revenue segment rental services revenue year ended december 31 2008 decreased 144 revenue rental services segment year ended december 31 2007 direct costs decreased 59 period direct costs rental services segment largely fixed primarily relate yard expenses maintain rental inventory addition change service mix longerterm gulf mexico rentals benefited 2007 shorter term landdrilling rental work 2008 requires handling part increases costs depreciation expense increased 246 635 million year ended december 31 2008 509 million year ended december 31 2007 primary increase depreciation expense due acquisitions completed second half 2007 capital expenditures principally addition new service rigs one drilling rig argentina general administrative expense 628 million year ended december 31 2008 compared 612 million year ended december 31 2007 general administrative expense increased primarily due amortization sharebased compensation arrangements general administrative expense includes sharebased compensation expense 79 million 2008 47 million 2007 percentage revenues general administrative expenses 93 2008 compared 107 2007 effective august 1 2008 sold drill pipe tong manufacturing assets part oilfield services segment total consideration approximately 75 million recognized gain 166000 related transaction june 29 2007 sold capillary tubing assets part oilfield services segment total consideration approximately 163 million cash recognized gain 89 million related sale assets recorded impairment goodwill 1158 million december 31 2008 light adverse market conditions affecting stock price market conditions determined impairment necessary goodwill associated rental services segment well tubular services production services reporting units included oilfield services segment performed annual impairment test december 31 2007 recorded impairment amortization expense 42 million year ended december 31 2008 compared 41 million year ended december 31 2007 loss operations year ended december 31 2008 totaled 135 million compared 1248 million income operations year ended december 31 2007 total decrease 1383 million decrease primarily related 1158 million goodwill impairment increased depreciation amortization expense 127 million year ended december 31 2008 compared year ended december 31 2007 89 million gain related sale capillary tubing assets 2007 interest expense 484 million year ended december 31 2008 compared 495 million year ended december 31 2007 2008 borrowed revolving credit facility december 31 2008 outstanding balance 365 million 2008 dls subsidiary argentina also entered new 250 million import finance facility bank fund portion purchase price new drilling service rigs january 2007 issued 2500 million senior notes bearing interest 85 pay part 3000 million bridge loan utilized complete acquisition substantially assets oil gas rental services inc ogr working capital bridge loan repaid january 29 2007 average interest rate bridge loan approximately 106 interest expense 2007 includes writeoff deferred financing fees 12 million related repayment bridge loan interest expense also includes amortization expense deferred financing costs 21 million 19 million 2008 2007 respectively interest income 56 million year ended december 31 2008 compared 33 million year ended december 31 2007 january 2008 invested 400 million 15 convertible subordinated secured debenture bch earned interest note december 28 2008 acquired outstanding stock bch 2007 excess cash result senior note financing equity offering able generate interest income period benefit income taxes year ended december 31 2008 174 million 306 net loss income taxes compared income tax expense 288 million 364 net income taxes 2007 income tax benefit recorded 2008 result net loss income taxes compared net income taxes previous year lower effective tax rate lower effective tax rate 2008 attributable impact foreign currency losses foreign income tax well lower benefit loss generated us operations due nondeductible expenses state income taxes net loss 395 million year ended december 31 2008 compared net income 504 million year ended december 31 2007 following table compares revenues income loss operations business segments years ended december 31 2008 december 31 2007 income loss operations consists revenues gain asset dispositions less direct costs general administrative expenses goodwill impairment depreciation amortization oilfield services revenues year ended december 31 2008 oilfield services segment 2808 million increase 200 2340 million revenues year ended december 31 2007 increase revenues due purchase additional mwd tools new compressors new “foam” units underbalanced drilling operations new coiled tubing units benefit acquisitions completed last half 2007 added downhole motors mwds directional drillers additional equipment personnel enabled us strengthen presence new geographic markets increase market penetration impact acquisitions diggar coker completed last half 2007 additional mwd tools easily identifiable quickly integrated preexisting operations acquisition diamondback provided 303 million 2008 compared 31 million revenues date acquisition december 31 2007 income operations decreased 274 386 million 2008 532 million 2007 income operations year ended december 31 2008 includes goodwill impairment charge 94 million year ended december 31 2007 included 89 million gain sale capillary tubing assets depreciation amortization expense increased 468 247 million year ended december 31 2008 compared 168 million 2007 increase depreciation expense due capital expenditures principally new coiled tubing units delivered second half 2008 drilling completion drilling completion revenues 2913 million year ended december 31 2008 increase 350 2158 million revenues year ended december 31 2007 drilling completion revenues increased 2008 primarily due 16 new service rigs one drilling rig placed service various dates 2008 increased prices services income operations increased 402 million 2008 compared 388 million year ended december 31 2007 income operations percentage revenue decreased 138 2008 compared 180 2007 due primarily higher wages included payroll expenses increase administrative costs relating labor concessions argentina granted oil industry last half 2007 significant increase labor force laborrelated expenses connection delivery new rigs prior activation depreciation expense increased 30 million year ended december 31 2008 compared prior year due capital expenditures drilling completion segment 2008 2007 rental services rental services revenues 1038 million year ended december 31 2008 decrease 144 1212 million revenues year ended december 31 2007 decrease revenue primarily attributable competitive market environment due decreased us gulf mexico drilling activity beginning last half 2007 stemming departure drilling rigs favor international markets impact hurricanes us gulf mexico 2008 income operations decreased 1235 million loss 744 million 2008 compared income 491 million 2007 decrease operating income primarily attributable 1064 million noncash charge impairment goodwill recorded year ending december 31 2008 due decrease revenue general corporate general corporate expenses increased 16 million 180 million year ended december 31 2008 compared 164 million year ended december 31 2007 increase primarily due increase sharebased compensation expense liquidity capital resources june 2009 strengthened balance sheet raising approximately 1256 million gross proceeds sale common stock newly issued series preferred stock transactions effected common stock rights offering existing stockholders sale common stock lime rock backstop commitment rights offering sale convertible perpetual preferred stock lime rock approximately 464 million proceeds used purchase aggregate 748 million principal amount existing senior notes approximately 350 million used repay borrowings revolving bank credit facility due 2012 except outstanding letters credit remainder general corporate purposes ongoing capital requirements arise primarily need service debt acquire maintain equipment fund working capital requirements complete acquisitions primary sources liquidity proceeds issuance debt equity securities cash flows operations amended restated revolving credit facility permits borrowings 900 million principal amount december 31 2009 858 million available borrowing amended restated revolving credit facility cash flows operations expected primary source liquidity fiscal 2010 cash equivalents 411 million december 31 2009 compared 69 million december 31 2008 revolving credit agreement requires us maintain specified financial ratios fail comply financial ratio covenants could limit eliminate availability revolving credit agreement ability maintain financial ratios may affected events beyond control including changes general economic business conditions cannot assure maintain meet ratios tests lenders credit agreement waive failure meet ratios tests decrease us rig count experienced late 2008 2009 resulting decrease demand services adversely impacts ability maintain meet financial ratios believe 1256 million gross equity proceeds received june 2009 significantly improved liquidity decreased reliance revolving credit facility utilized portion equity proceeds prepay borrowings revolving credit agreement exclusive acquisitions currently expect capital spending 600 million 850 million 2010 depending upon market demand experience operating performance year expenditures may associated potential new contracts amounts net equipment deposits paid 2009 december 31 2009 capital expenditure commitments 192 million net equipment deposits majority commitments due 121 million remaining paid two new 1600 horsepower drilling rigs expected completed second fourth quarters 2010 believe cash generated operations cash hand cash available credit facilities provide sufficient funds identified projects ability obtain capital opportunistic acquisitions additional projects implement growth strategy longer term depend upon future operating performance financial condition dependent upon prevailing conditions industry global market including availability equity debt financing operating activities year ended december 31 2009 generated 555 million cash operating activities net loss year ended december 31 2009 212 million noncash additions net loss totaled 493 million 2009 period consisting primarily 830 million depreciation amortization 48 million related expensing stock options 28 million bad debts 22 million amortization writeoff deferred financing fees 16 million related loss rig destroyed fire partially offset 264 million gain debt extinguishment 179 million deferred income taxes 09 million gains dispositions equipment year ended december 31 2009 changes working capital provided 274 million cash principally due decrease 500 million accounts receivable decrease 46 million inventories decrease current assets 46 million increase 27 million accrued employee benefits payroll taxes offset decrease 276 million accounts payable decrease 46 million accrued expenses decrease accrued interest 28 million accounts receivables decreased december 31 2009 primarily due decrease revenues 2009 inventories decreased december 31 2009 primarily due slow activity current assets decreased primarily due tax refunds received 2009 accounts payable accrued expenses decreased primarily due decrease costs due decrease activity year ended december 31 2008 generated 1137 million cash operating activities net loss year ended december 31 2008 395 million noncash additions net loss totaled 1648 million 2008 period consisting primarily 1158 million impairment goodwill 677 million depreciation amortization 79 million related expensing stock options 33 million bad debts 21 million amortization writeoff deferred financing fees partially offset 299 million deferred income taxes 19 million gains dispositions equipment year ended december 31 2008 changes working capital used 117 million cash principally due increase 275 million accounts receivable increase 97 million inventories increase current assets 16 million offset increase 219 million accounts payable increase 35 million accrued employee benefits payroll taxes increase 12 million accrued expenses increase accrued interest 567000 accounts receivables increased december 31 2008 primarily due increase revenues 2008 inventories increased december 31 2008 primarily due larger rig fleet drilling completion segment current assets increased primarily due estimated tax payments exceeding estimated tax liability december 31 2008 accounts payable accrued employee benefits payroll taxes accrued expenses increased primarily due increase costs due growth revenues year ended december 31 2007 generated 1035 million cash operating activities net income year ended december 31 2007 504 million noncash additions net income totaled 612 million 2007 period consisting primarily 550 million depreciation amortization 49 million related expensing stock options 80 million deferred income tax 13 million bad debts 32 million amortization writeoff deferred financing fees partially offset 23 million gain disposition equipment 89 million gain sale capillary assets year ended december 31 2007 changes working capital used 81 million cash principally due increase 314 million accounts receivable increase 45 million assets increase inventories 54 million offset decrease 82 million current assets increase 107 million accounts payable increase 60 million accrued interest increase 40 million accrued employee benefits payroll taxes increase 15 million accrued expenses increase longterm liabilities 27 million accounts receivables increased december 31 2007 primarily due increase revenues 2007 assets increase primarily due contract costs related deployment new rigs drilling completion segment decrease current assets principally due collection working capital adjustment ogr acquisition approximately 71 million first quarter 2007 accrued interest increased december 31 2007 due principally interest accrued 85 senior notes issued january 2007 90 senior notes issued august 2006 payable semiannually accounts payable accrued employee benefits payroll taxes accrued expenses increased primarily due increase costs due growth revenues acquisition completed 2007 longterm liabilities increased primarily due deferral contract revenue related new rigs constructed drilling completion segment investing activities year ended december 31 2009 used 640 million investing activities consisting 781 million capital expenditures 11 million additional investments offset decrease 27 million deposits asset commitments 86 million proceeds equipment sales 39 million insurance proceeds drilling rig destroyed blowout included 781 million capital expenditures 114 million oilfield services segment 385 million two domestic drilling rigs 199 million additional equipment drilling completion segment 82 million drill pipe equipment used rental services segment invested 24 million cash expenditures equipment investment saudi arabia joint venture received 13 million insurance proceeds related preacquisition contingency bch decrease assets due conversion deposits equipment purchases capital expenditures drilling rigs assets used directional drilling services also received 86 million sale assets year ended december 31 2009 comprised mostly equipment “lostinhole” rental services segment 35 million oilfield services segment 08 million along 39 million sale plane rental services segment also transferred 16 million rental assets part investment saudi arabia joint venture noncash transaction 2009 reduced carrying value goodwill bch acquisition 13 million due utilization preacquisition tax asset year ended december 31 2008 used 2022 million investing activities year ended december 31 2008 acquired bch total net cash outlay 537 million consisting purchase price acquisition costs less cash acquired addition made capital expenditures approximately 1545 million year ended december 31 2008 including 734 million expand drilling fleet purchase improve replace equipment drilling completion segment 584 million purchase upgrade equipment oilfield services segment 226 million increase inventory equipment replace “lostinhole” equipment rental services segment received proceeds 30 million sale drill pipe tong manufacturing assets also received 115 million sale assets year ended december 31 2008 comprised mostly equipment “lostinhole” rental services segment 83 million oilfield services segment 23 million also made net advance payments 88 million purchase new drilling service rigs delivered 2009 drilling completion segment advance payments 11 million purchase new directional drilling tools oilfield services segment year ended december 31 2007 used 1371 million investing activities consisting four acquisitions capital expenditures year ended december 31 2007 completed following acquisitions total net cash outlay 410 million consisting purchase price acquisition costs less cash acquired • june 2007 acquired coker purchase price approximately 36 million cash promissory note 350000 • july 2007 acquired diggar purchase price approximately 67 million cash payment approximately 28 million debt promissory note 750000 • october 2007 acquired rebel purchase price approximately 50 million cash payment approximately 18 million debt escrow promissory notes aggregate 500000 • november 2007 acquired substantially assets diamondback purchase price approximately 231 million cash addition made capital expenditures approximately 1132 million year ended december 31 2007 including 486 million purchase upgrade equipment oilfield services segment 349 million increase inventory equipment replace “lostinhole” equipment rental services segment 289 million purchase improve replace equipment drilling completion segment received proceeds 163 million sale capillary assets also received 128 million sale assets year ended december 31 2007 comprised mostly equipment “lostinhole” rental services segment 110 million oilfield services segment 14 million also made advance payments 115 million purchase new drilling service rigs delivered 2008 drilling completion segment financing activities year ended december 31 2009 financing activities provided 427 million cash raised 1202 million net expenses issuance common preferred stock borrowed 250 million loan facility acquire two drilling rigs offset part repayments 648 million longterm debt net repayment revolving credit facility 365 million 665000 preferred dividend payments repayments longterm debt consisted 464 million senior notes result tender offer 184 million scheduled debt repayment including prepayment bch loan facility also incurred 658000 debt issuance costs consisting 528000 revolving credit facility primarily modify loan covenants 131000 rig financing agreement addition financed renewal 32 million insurance policy premiums noncash transactions year ended december 31 2008 financing activities provided net 517 million cash received 250 million proceeds longterm debt used finance expansion drilling completion segment’s rig fleet year ended december 31 2008 net draw revolving credit facility 365 million necessary due investment bch capital expenditures also received 633000 proceeds option exercises 558707 shares common stock issued equity compensation plans financing uses year ended december 31 2008 repayment 99 million longterm debt 525000 debt issuance costs year ended december 31 2007 financing activities provided net 376 million cash received 2500 million borrowings issuance 85 senior notes due 2017 also received 1001 million net proceeds issuance 6000000 shares common stock 17 million tax benefit stock compensation plans 33 million proceeds warrant option exercises 882624 shares common stock issued equity compensation plans proceeds used repay longterm debt totaling 3097 million pay 78 million debt issuance costs repayment longterm debt consisted primarily repayment 3000 million bridge loan used fund acquisition substantially assets ogr january 18 2006 august 14 2006 closed private offerings qualified institutional buyers pursuant rule 144a securities act 1933 1600 950 million aggregate principal amount senior notes respectively senior notes due january 15 2014 bear interest 90 proceeds used fund acquisitions specialty rental tools inc dls repay existing debt general corporate purposes june 29 2009 closed tender offer purchased 306 million aggregate principal 90 senior notes total consideration 650 per 1000 principal amount january 2007 closed private offering qualified institutional buyers pursuant rule 144a securities act 2500 million principal amount 85 senior notes due 2017 proceeds senior notes offering together portion proceeds concurrent common stock offering used repay debt outstanding 3000 million bridge loan facility incurred finance acquisition substantially assets oil gas rental services inc june 29 2009 closed tender offer purchased 442 million aggregate principal 85 senior notes total consideration 600 per 1000 principal amount january 18 2006 also executed amended restated credit agreement provided 250 million revolving line credit maturity january 2010 april 26 2007 entered second amended restated credit agreement increased revolving line credit 620 million final maturity date april 26 2012 december 3 2007 entered first amendment second amended restated credit agreement increased revolving line credit 900 million amended restated credit agreement contains customary events default financial covenants limits ability incur additional indebtedness make capital expenditures pay dividends make distributions create liens sell assets april 9 2009 entered third amendment existing second amended restated credit agreement dated april 26 2007 modified leverage interest coverage ratio covenants credit agreement addition permitted maximum capital expenditures reduced 850 million 2009 compared previous limit 1200 million effective december 31 2009 amended leverage interest coverage ratio covenants credit agreement amendment relaxed required financial ratios quarter ended december 31 2009 quarters 2010 obligations amended restated credit agreement secured substantially assets located us compliance debt covenants december 31 2009 2008 december 31 2009 borrowings facility except 42 million outstanding letters credit december 31 2008 365 million borrowings outstanding 58 million outstanding letters credit agreement loan rates based prime libor plus margin weighted average interest rate 46 december 31 2008 part acquisition dls assumed various bank loans floating interest rates based libor plus margin terms ranging 2 5 years weighted average interest rates loans 21 51 december 31 2009 2008 respectively bank loans denominated us dollars outstanding amount due december 31 2009 2008 11 million 25 million respectively february 15 2008 dls subsidiary argentina entered 250 million import finance facility bank borrowings facility used fund portion purchase price new drilling service rigs ordered drilling completion segment loan repayable four years equal semiannual installments beginning one year disbursement final principal payment due later march 15 2013 import finance facility unsecured contains customary events default financial covenants limits dls’ ability incur additional indebtedness make capital expenditures create liens sell assets compliance debt covenants december 31 2009 2008 bank loan rates based libor plus margin weighted average interest rate 44 69 december 31 2009 2008 respectively bank loans denominated us dollars outstanding amount december 31 2009 2008 201 million 250 million respectively part acquisition bch assumed 236 million term loan credit facility bank credit agreement dated june 2007 contains customary events default financial covenants obligations facility secured substantially bch assets facility repayable quarterly principal installments plus interest final payment due later august 2012 compliance debt covenants december 31 2009 2008 credit facility loan denominated us dollars interest rates based libor plus margin december 31 2009 2008 outstanding amount loan 162 million 221 million interest rate 35 60 respectively may 22 2009 drew 250 million new term loan credit facility lending institution facility utilized fund portion purchase price two new drilling rigs loan secured equipment facility repayable quarterly installments approximately 14 million principal interest matures may 2015 loan bears interest fixed rate 90 december 31 2009 outstanding amount loan 234 million connection acquisition rogers oil tools inc issued seller note amount 750000 note bore interest 50 paid full april 2009 accordance terms 2000 compensated directors served board directors 1989 march 31 1999 without compensation issuing promissory notes totaling 325000 notes bear interest rate 50 december 31 2009 2008 principal accrued interest notes totaled approximately 0 32000 respectively april 2008 august 2008 obtained insurance premium financings aggregate amount 30 million fixed average weighted interest rate 49 terms agreements amounts outstanding paid 10 11 month repayment schedules outstanding balance notes approximately 0 991000 december 31 2009 2008 respectively 2009 obtained insurance premium financings aggregate amount 32 million fixed average weighted interest rate 48 terms agreements amount outstanding paid 10 11 month repayment schedules outstanding balance notes approximately 997000 december 31 2009 part acquisition bch assumed various capital leases terms two three years outstanding balance capital leases 254000 779000 december 31 2009 2008 respectively following table summarizes obligations commitments make future payments notes payable operating leases employment contracts consulting agreements periods specified december 31 2008 amounts represent minimum capital lease obligations net interest payments totaling 18000 critical accounting policies identified policies critical business operations understanding results operations impact associated risks related policies business operations discussed throughout management’s discussion analysis financial condition results operations policies affect reported expected financial results detailed discussion application accounting policies see note 1 notes consolidated financial statements included elsewhere document preparation report requires us make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period assurance actual results differ estimates allowance doubtful accounts determination collectibility amounts due customers requires us use estimates make judgments regarding future events trends including monitoring customer payment history current credit worthiness determine collectibility reasonably assured well consideration overall business climate customers operate uncertainties require us make frequent judgments estimates regarding customers’ ability pay amounts due us order determine appropriate amount valuation allowances required doubtful accounts provisions doubtful accounts recorded becomes evident customers able make required payments either contractual due dates future revenue recognition provide rental equipment oilfield services drilling services customers per day daywork per job contractual rates recognize drilling related revenue work progresses collectibility reasonably assured revenue daywork contracts recognized realized realizable earned daywork contracts revenue recognized based number days completed fixed rates stipulated contract certain contracts receive lumpsum fees equipment mobilization costs mobilization fees related costs deferred amortized contract terms material impairment longlived assets longlived assets principally property plant equipment comprise significant amount total assets make judgments estimates conjunction carrying value assets including amounts capitalized depreciation amortization methods useful lives additionally carrying values assets reviewed impairment whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires us make longterm forecasts future revenues costs related assets subject review forecasts require assumptions demand products services future market conditions technological developments significant unanticipated changes assumptions could require provision impairment future period goodwill intangibles december 31 2009 recorded approximately 406 million goodwill 326 million identifiable intangible assets perform purchase price allocations intangible assets make business combination business combinations purchase price allocations consummated acquisitions reportable segments excess purchase price allocation fair values tangible assets allocated identifiable intangibles thereafter goodwill make judgments estimates conjunction carrying value assets including amounts capitalized whether asset finite life amortization purposes annual impairment tests involve use different valuation techniques including income approach andor market approach determine fair value reporting units determining fair value reporting unit matter judgment often involves use significant estimates assumptions fair value reporting unit less carrying value impairment loss recorded extent implied fair value reporting unit’s goodwill less carrying value recorded impairment charge 1158 million 2008 result test december 31 2009 2007 impairment deeded necessary significant unanticipated changes assumptions could require additional provision impairment future period purchase price allocation acquired businesses allocate purchase price acquired businesses identifiable assets liabilities businesses post acquisition based estimated fair values excess purchase price amount allocated assets liabilities recorded goodwill engage thirdparty appraisal firms valuation experts assist determination identifiable assets liabilities judgments estimates allocation purchase price based information available measurement period judgments estimates materially impact financial position well results operations income taxes determination evaluation annual income tax provision involves interpretation tax laws various jurisdictions operate requires significant judgment use estimates assumptions regarding significant future events amount timing character income deductions tax credits changes tax laws regulations level operations profitability jurisdiction may impact tax liability given year annual tax provision based information available us time number years may elapse ultimate tax liabilities certain tax jurisdictions determined current income tax expense benefit reflects estimate income tax liability current year withholding taxes changes tax rates changes prior year tax estimates returns filed deferred tax assets liabilities recognized anticipated future tax effects temporary differences financial statement basis tax basis assets liabilities using enacted tax rates effect year end valuation allowance deferred tax assets recorded morelikelythannot benefit deferred tax asset realized intention permanently reinvest undistributed earnings nonus subsidiaries accordingly provided us deferred taxes undistributed earnings nonus subsidiaries distribution made us undistributed earnings subsidiaries could required record additional taxes cannot predict make distribution undistributed earnings unable make determination amount unrecognized deferred tax liability recently issued accounting standards discussion new accounting standards see applicable section note 1 consolidated financial statements included “item 8 financial statements supplementary data” offbalance sheet arrangements balance sheet arrangements normal operating leases employee contracts likely current future material effect financial condition changes financial condition revenues expenses results operations liquidity capital expenditures capital resources 900 million revolving credit facility maturity april 2012 december 31 2009 borrowings facility availability reduced outstanding letters credit 42 million guarantee obligations unconsolidated entities item 7a item 7 managements discussion analysis financial condition results operations information item 7 contains forwardlooking statements within meaning private securities litigation reform act 1995 actual results could differ materially anticipated forwardlooking statements result risks uncertainties including limited discussed risk factors discussed reports filed securities exchange commission rely forwardlooking statements reflect position date report obligation revise update forwardlooking statements background prior may 2001 operated primarily houston dynamic services inc hds may 2001 part strategy acquire develop businesses natural gas oil services industry consummated merger oilquip merger acquired 100 capital stock oilquip rentals inc oilquip owned 100 capital stock mountain air december 2001 disposed hds february 2002 acquired substantially capital stock strata approximately 81 capital stock jens business conducted 2001 include operations jens strata july 2003 subsidiary mountain air entered limited liability company operating agreement division mi llc mi joint venture smith international schlumberger nv schlumberger limited form texas limited liability company named aircomp llc aircomp mountain air contributed assets net book value approximately 63 million mi contributed assets net book value approximately 68 million aircomp llc company owns 55 mi owns 45 aircomp consolidated aircomp financial statements beginning quarter ending september 30 2003 accounting purposes oilquip merger treated reverse acquisition allischalmers financial statements presented herein periods prior may 2001 present results operations financial condition oilquip result oilquip merger fixed assets goodwill intangibles allischalmers existence immediately prior merger prior ac assets increased 2691000 critical accounting policies identified policies critical business operations understanding results operations impact associated risks related policies business operations discussed throughout managements discussion analysis financial condition results operations policies affect reported expected financial results detailed discussion application accounting policies see note 1 notes consolidated financial statements item 8 financial statements note preparation annual report form 10k requires us make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period assurance actual results differ estimates allowance doubtful accounts determination collectibility amounts due customers requires us use estimates make judgments regarding future events trends including monitoring customer payment history current credit worthiness determine collectibilty reasonably assured well consideration overall business climate customers operate inherently uncertainties require us make frequent judgments estimates regarding customers ability pay amounts due us order determine appropriate amount valuation allowances required doubtful accounts provisions doubtful accounts recorded becomes evident customers able make required payments either contractual due dates future past two years reserves doubtful accounts percentage total accounts receivable reserves ranged 1 2 december 31 2003 2002 reserves doubtful accounts totaled 168000 2 32000 1 total accounts receivable reserves respectively believe reserve doubtful accounts adequate cover anticipated losses current conditions however uncertainties regarding changes financial condition customers either adverse positive could impact amount timing additional provisions doubtful accounts may required revenue recognition revenue recognition policy significant revenue key component results operations addition revenue recognition policy determines timing certain expenses commissions follow specific detailed guidelines measuring revenue results difficult predict shortfall revenue delay recognizing revenue could cause operating results vary significantly quarter could result future operating losses revenues recognized company subsidiaries services rendered pricing fixed determinable collection reasonably assured securities exchange commissions sec staff accounting bulletin sab 104 revenue recognition financial statements provides guidance sec staffs views application generally accepted accounting principles selected revenue recognition issues revenue recognition policy accordance generally accepted accounting principles sab 104 impairment longlived assets longlived assets include property plant equipment goodwill intangibles comprise significant amount companys total assets company makes judgments estimates conjunction carrying value assets including amounts capitalized depreciation amortization methods useful lives additionally carrying values assets reviewed impairment whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires company make longterm forecasts future revenues costs related assets subject review forecasts require assumptions demand companys products services future market conditions technological developments significant unanticipated changes assumptions could require provision impairment future period goodwill intangibles company recorded approximately 7661000 goodwill 2290000 identifiable intangible assets company performs purchase price allocations intangible assets makes business combination business combinations purchase price allocations consummated purchase mountain air strata jens operating segments excess purchase price allocation fair values tangible assets allocated identifiable intangibles thereafter goodwill subsequently company performed initial impairment tests annual impairment tests accordance financial accounting standards board 141 business combinations financial accounting standards board 142 goodwill intangible assets initial valuations required use thirdparty valuation experts turn developed assumptions value carrying amount individual reporting units significant unanticipated changes assumptions could require provision impairment future periods stock based compensation company accounts stockbased compensation using accounting principles boards opinion 25 apb 25 apb 25 compensation expense recognized stock options exercise price less market price grant date option stock options exercise prices market value stock grant date company adopted disclosureonly provisions statement financial accounting standards 123 accounting stockbased compensation sfas 123 company adopted disclosureonly provisions sfas 123 stock options granted employees directors company accordingly compensation cost recognized options many equity instrument transactions valued based pricing models blackscholes require judgments management values transactions vary widely often material financial statements new accounting pronouncements september 2003 fasb approved sfas 150 accounting certain financial instruments characteristics liabilities equity sfas 150 sfas 150 establishes standards issuer classifies measures certain financial instruments characteristics liabilities equity sfas 150 effective financial instruments entered modified may 31 2003 otherwise effective beginning first interim period beginning september 15 2003 effect companys financial position includes fact beginning july 1 2003 redeemable warrants classified liabilities shown mezzanine equity section balance sheet adoption sfas 150 could also affect companys debt covenant calculations purposes bank loans results operations results operations 2001 reflect business operations oilquip inception february 4 2000 february 6 2001 oilquip developmental stage oilquips activities period prior february 6 2001 consisted developing business plan raising capital negotiating potential acquisition targets therefore results operations period prior february 6 2001 reflect sales cost sales marketing administrative expenses would reflective operating company february 6 2001 oilquip acquired assets mountain air provides air drilling services natural gas exploration operations compressed air drilling services may 9 2001 oilquip acquired prior ac assets including operations hds results operation hds sold december 2001 included discontinued operations may 9 2001 february 6 2002 allischalmers acquired 81 outstanding stock jens oilfield service inc supplies highly specialized equipment operations install casing production tubing required drill complete oil gas wells casing services february 6 2002 company also purchased substantially outstanding common stock preferred stock strata directional technology inc provides highend directional horizontal drilling services specific targeted reservoirs cannot reached vertically directional drilling services results jens stratas operations included february 1 2002 july 2003 subsidiary mountain air entered limited liability company operating agreement division mi llc mi joint venture smith international schlumberger nv schlumberger limited form texas limited liability company named aircomp llc aircomp companies contributed assets net book value approximately 13 million aircomp llc aircomp company owns 55 mi owns 45 aircomp consolidated aircomp financial statements beginning quarter ending september 30 2003 year ended december 31 2003 compared december 31 2002 sales year 2003 totaled 32724000 reflecting revenue aircomp joint venture company mi consummated july 2003 mountain air january 1 2003 june 30 2003 entire year jens strata comparable period 2002 revenues 17990000 reflecting revenue jens strata acquired february 2002 entire year mountain air revenues year ended december 31 2003 casing services directional drilling services compressed air drilling services segments 10036000 16008000 6680000 respectively revenues year ended december 31 2002 casing services directional drilling services compressed air drilling services segments 7796000 6529000 3665000 respectively revenues compressed air drilling services segment increased 3665000 year ended december 31 2002 primarily due joint venture company mi company aircomp able expand geographical areas operates include geothermal drilling california natural gas drilling west texas along drilling work operations mountain air operating san juan basin revenues also increased result overall upturn petroleum industry rig counts united states provide measure oil natural gas drilling activities rig counts increased 862 december 31 2002 1126 december 31 2003 according baker hughes gulf coast region rig count according baker hughes drilling type survey directional horizontal rigs counts increased 283 december 31 2002 381 december 31 2003 accounted 328 338 total us rig count respectively april 2004 trend continued directional horizontal rigs climbing 399 351 1138 total us rig counts date gross margin ratio percentage sales 259 year ended december 31 2003 compared 186 year ended december 31 2002 gross margin ratio increased result increased utilization equipment personnel increased pricing casing services directional drilling services compressed air drilling services segments made significant investments equipment constant number personnel many costs fixed result gross profit margins impacted either increases decreases revenues general administrative expense 6169000 2003 compared 3792000 2002 general administrative expenses increased 2003 compared 2002 due costs associated aircomp hiring additional sales force operations personnel due upturn market operating income year 2003 totaled 262400 reflecting inclusion operating income aircomp limited liability company formed july 2003 comparable period 2002 operating loss 1170000 operating income loss year ended december 31 2003 casing services directional drilling services compressed air drilling services general corporate segments 3628000 1103000 115000 2222000 respectively operating income loss year ended december 31 2002 casing services directional drilling services compressed air drilling services general corporate segments 2495000 576000 945000 2144000 respectively operating income segments increased aggregate loss 1170000 year ended december 31 2002 primarily due higher revenues resulting overall upturn petroleum industry third quarter 2002 company reorganized order contain costs recorded charges related reorganization amount 495000 charges consisted related payroll costs terminated employees 307000 consulting fees 113000 costs associated terminated rent obligation 75000 company also recorded onetime charges costs related abandoned acquisitions abandoned private placement amount 233000 net loss attributed common shareholders 108000 001per common share year ended december 31 2003 compared loss 4290000 023 per common share year end december 31 2002 net income 2003 included onetime gain reduction note payable 1034000 third quarter result settling lawsuit former owners mountain air drilling service co inc gain calculated part discounting note payable 1469152 using present value calculation accreting note payable 1863195 amount due september 2007 record interest expense totaling 394043 life note payable beginning july 2003 net loss 2002 included discount given holder hds note amount 191000 incentive payoff note september 2002 companys outstanding preferred stock converted common stock april 2004 conversion occurred prior january 1 2003 net income per common share would 548000 002 per share pro forma results following unaudited pro forma consolidated summary financial information illustrates effects formation aircomp companys results operations based historical statements operations transaction occurred beginning periods presented pro forma results operations set forth includes results operations 2003 2002 financial statements read conjunction pro forma financial statements included herein pro forma sales year 2003 totaled 33605000 reflecting revenue aircomp comparable period 2002 pro forma sales 20443000 increase 2003 compared 2002 primarily due higher revenues resulting overall upturn petroleum industry pro forma gross margin percentage sales 269 year ended december 31 2003 compared pro forma gross margin 194 year ended december 31 2002 gross margin ratio increased result increased market share increased pricing casing services directional drilling services compressed air drilling services segments made significant investments equipment constant number personnel many costs fixed result gross profit margins impacted either increases decreases revenues pro forma general administrative expense 5958000 2003 compared 4841000 2002 pro forma general administrative expense increased 2003 due costs associated formation aircomp hiring additional sales force operations personnel due upturn market company pro forma operating income year 2003 3098000 compared pro forma operating loss 867000 2002 increase pro forma operating income 2003 primarily due higher revenues resulting overall upturn petroleum industry company incurred pro forma net income 577000 003 per common share year ended december 31 2003 compared pro forma net loss 3821000 019 per common share year ended december 31 2002 pro forma net income 2003 included onetime gain reduction note payable 1034000 third quarter result settling lawsuit former owners mountain air drilling service company gain calculated discounting note payable 1469152 using present value calculation accreting note payable 1863195 amount due september 2007 pro forma net loss 2002 included factoring discount given holder hds note amount 191000 incentive payoff note september 30 2002 third quarter 2002 company reorganized order contain costs recorded charges related reorganization amount 495000 charges consisted related payroll costs terminated employees 307000 consulting fees 113000 costs associated terminated rent obligation 75000 company also recorded onetime charges costs related abandoned acquisitions abandoned private placement amount 233000 year ended december 31 2002 compared december 31 2001 sales year 2002 totaled 17990000 reflecting revenue jens strata acquired february 2002 comparable period 2001 revenues 4796000 revenues year ended december 31 2002 casing services directional drilling services compressed air drilling services segments 7796000 6529000 3665000 respectively revenues compressed air drilling services segment decreased 4796000 year ended december 31 2001 primarily due lower revenues resulting decline revenues burlington resources 3310788 1827681 burlington resources represented 499 626 compressed air drilling services revenues 2002 2001 respectively revenues also declined result overall downturn petroleum industry rig counts united states decreased average 1156 2001 average 830 2002 according baker hughes rig count gross margin ratio percentage sales 186 year ended december 31 2002 compared 305 year ended december 31 2001 gross margin ratio declined result jens strata acquisitions 2002 lower gross margin ratios mountain air resulting lower revenues made significant investments equipment constant number personnel many costs fixed result gross profit margins severely impacted decreases revenues general administrative expense 3792000 2002 compared 2898000 2001 general administrative expenses increased 2002 compared 2001 due acquisition jens strata third quarter 2002 company restructured order contain costs recorded charges related reorganization amount 495000 charges consisted related payroll costs terminated employees 307000 consulting fees 113000 costs associated terminated rent obligation 75000 company also recorded onetime charges costs related abandoned acquisitions abandoned private placement amount 233000 operating income loss year 2002 totaled 1170000 reflecting operating income loss jens strata acquired february 2002 comparable period 2001 operating income loss 1433000 operating income loss year ended december 31 2002 casing services directional drilling services compressed air drilling services general corporate segments 2495000 576000 945000 2144000 respectively operating income compressed air drilling services segment decreased income 433000 year ended december 31 2001 primarily due lower revenues resulting overall downturn petroleum industry operating loss general corporate segment increased 1866000 year ended december 31 2001 third quarter 2002 company reorganized order contain costs recorded charges related reorganization amount 495000 charges consisted related payroll costs terminated employees 307000 consulting fees 113000 costs associated terminated rent obligation 75000 company also recorded onetime charges costs related abandoned acquisitions abandoned private placement amount 233000 incurred net loss attributed common shareholders 4290000 023 per common share year ended december 31 2002 compared loss 4577000 115 per common share year end december 31 2001 net loss 2002 included discount given holder hds note amount 191000 incentive payoff note september 2002 third quarter 2002 company reorganized order contain costs recorded charges related reorganization amount 495000 charges consisted related payroll costs terminated employees 307000 consulting fees 113000 costs associated terminated rent obligation 75000 company also recorded onetime charges costs related abandoned acquisitions abandoned private placement amount 233000 pro forma results following unaudited pro forma consolidated summary financial information illustrates effects acquisitions jens strata mountain air merger oilquip companys results operations based historical statements operations transactions occurred beginning periods presented discontinued hds operations included pro forma information pro forma results operations set forth includes results operations 2002 2001 financial statements read conjunction pro forma financial statements included herein pro forma sales year 2002 totaled 19142000 reflecting revenue mountain air jens strata comparable period 2001 pro forma sales 28244000 pro forma revenues year ended december 31 2002 casing services directional drilling services compressed air drilling services segments 8500000 6977000 3665000 respectively pro forma revenues year ended december 31 2001 casing services directional drilling services compressed air drilling services segments 9949000 12986000 5289000 respectively decrease 2002 compared 2001 primarily due lower revenues resulting overall downturn petroleum industry revenues casing services directional drilling services compressed air drilling services declined 15 47 31 2002 compared 2001 pro forma gross margin percentage sales 184 year ended december 31 2002 compared pro forma gross margin 338 year ended december 31 2001 gross margin ratio declined result jens strata acquisitions 2002 lower gross margin ratios mountain air resulting lower revenues pro forma general administrative expense 3040000 2002 compared 4719000 2001 pro forma general administrative expense decreased 2002 due cost reductions strata corporate company pro forma operating loss year 2002 401000 compared pro forma operating income 4089000 2001 pro forma operating income loss year ended december 31 2002 casing services directional drilling services compressed air drilling services general corporate segments 2756000 584000 795000 1778000 respectively pro forma operating income year ended december 31 2001 casing services directional drilling services compressed air drilling services general corporate segments 3954000 1420000 581000 1866000 respectively decrease pro forma operating income 2002 primarily due lower revenues resulting overall downturn petroleum industry company incurred pro forma net loss 4431000 024 per common share year ended december 31 2002 compared pro forma net loss 71000 002 per common share year ended december 31 2001 pro forma net loss 2002 included factoring discount given holder hds note amount 191000 incentive payoff note september 30 2002 third quarter 2002 company reorganized order contain costs recorded charges related reorganization amount 495000 charges consisted related payroll costs terminated employees 307000 consulting fees 113000 costs associated terminated rent obligation 75000 company also recorded onetime charges costs related abandoned acquisitions abandoned private placement amount 233000 schedule contractual obligations following table summarizes companys obligations commitments make future payments notes payable operating leases employment contracts consulting agreements periods specified december 31 2003 financial condition liquidity cash equivalents totaled 1299000 december 31 2003 compared 146000 december 31 2002 net trade receivables december 31 2003 8852000 compared 4409000 december 31 2002 due increased revenues formation aircomp net property plant equipment 26339000 december 31 2003 compared 17124000 december 31 2002 result formation aircomp capital expenditures year 2003 5354000 capital expenditures year 2002 518000 capital expenditures 2004 projected approximately 2000000 trade accounts payable december 31 2003 3133000 compared 2106000 december 31 2002 primarily due formation aircomp december 31 2003 current liabilities excluding current portion longterm debt trade accounts payable 3291000 consisting interest amount 152000 accrued salary benefits amount 591000 income taxes payable 45000 accrued restructuring costs 296000 related party payables 787000 accrued operating expenses 1358000 legal professional expenses payable amount 62000 included accrued restructuring costs compensation amount 166000 due former employees company december 31 2002 current liabilities excluding current portion longterm debt trade accounts payable 2597000 consisting interest amount 811000 accrued salary benefits amount 280000 income taxes payable 45000 accrued restructuring costs 606000 advance officers company 99000 accrued operating expenses 543000 legal professional expenses payable amount 213000 included accrued restructuring costs compensation amount 244000 due former employees company longterm debt including current maturities 32233000 december 31 2003 compared 21221000 december 31 2002 increase longterm debt primarily result debt recorded structuring aircomp july 2003 increase amount term loan jens october 2003 approximately 2100000 longterm debt follows mountain air december 31 2003 mountain air following debt outstanding note sellers mountain air drilling service co inc assets original amount 2200000 575 simple interest reduced 1469151 result settlement legal action sellers december 31 2003 outstanding amount due including accrued interest 1511000 principal accrued interest due september 30 2007 amount 1863195 connection incurring subordinated debt subsequently extinguished connection formation aircomp mountain air issued redeemable warrants recorded liability 600000 redeemable warrants remain outstanding term loan original amount 267000 interest rate 5 principal interest payments 5039 due last day month december 31 2003 outstanding amount due 247000 maturity date loan june 30 2008 conjunction purchase assets mountain compressed air inc february 2001 issued common stock warrant 620000 shares thirdparty investment firm assisted company initial identification purchase assets warrant entitles holder acquire 620000 shares common stock mountain air exercise price 01 per share nineyear period commencing february 7 2001 jens december 31 2003 jens following debt outstanding term loan payable wells fargo credit inc original amount 4042396 increased october 2003 5100000 floating interest rate monthly principal payments 85000 plus 25 jens receipt payment maytep interest rate 60 december 31 2003 december 31 2003 outstanding amount due 4654000 maturity date loan january 31 2005 april 2004 extended january 31 2006 sellers note payable jens mortensen original amount 4000000 75 simple interest quarterly interest payments december 31 2003 533000 interest accrued included accrued interest principal interest due january 31 2006 real estate loan payable wells fargo credit inc amount 532000 floating interest rate monthly principal payments 14778 plus interest rate 60 december 31 2003 december 31 2003 outstanding amount due 207000 principal due february 1 2005 1000000 line credit wells fargo credit inc 26000 outstanding december 31 2003 committed line credit due january 31 2005 april 2004 maturity date extended january 31 2006 interest accrues floating rate plus 3 70 december 31 2003 committed portion additionally jens pays 005 fee uncommitted portion conjunction purchase jens company agreed cause jens pay total 1234560 seller jens exchange noncompete agreement jens make monthly payments 20576 period ended january 31 2007 december 31 2003 balance due approximately 761000 including 247000 classified shortterm term loan payable texas state bank original amount 397080 floating interest rate 60 december 31 2003 monthly principal payments 11000 plus interest balance december 31 2003 354000 maturity date loan september 17 2006 strata december 31 2003 strata following debt outstanding 2500000 line credit wells fargo credit inc 2413000 outstanding december 31 2003 amounts borrowed line credit due january 31 2005 april 2004 maturity date extended january 31 2006 amount credit line increased 4 million interest accrues floating rate plus 3 70 december 31 2003 committed portion additionally strata pays 005 annual fee uncommitted portion december 2003 strata entered shortterm vendor financing agreement original amount 1746000 major supplier drilling motors drilling motor rentals motor lease costs motor repair costs agreement provides repayment amounts due later december 30 2005 payment interest note due monthly three principal payments due october 2004 april 2005 december 2005 vendor financing incurs interest rate 80 december 31 2003 outstanding balance approximately 1746000 october 2003 strata entered shortterm vendor financing agreement original amount 779000 major supplier drilling motors purchase fifty 50 drilling motors agreement provides repayment amounts due later october 31 2004 payment due monthly amount 71000 plus interest vendor financing incurs interest rate 80 december 31 2003 outstanding balance approximately 637000 allischalmers december 31 2003 allischalmers following debt obligations outstanding subordinated debt payable wells fargo energy capital inc original amount 3000000 12 interest 2675000 outstanding december 31 2003 principal amount due january 31 2005 april 2004 extended january 31 2006 connection incurring debt company issued redeemable warrants recorded liability 900000 discount face amount debt amount amortizable three years beginning february 6 2002 additional interest expense 300000 amortized 2003 275000 amortized 2002 debt recorded 2675000 net unamortized portion put obligation connection acquisition strata issued 3500000 shares series 10 cumulative convertible preferred stock shares along accrued unpaid dividend rights redeemable option holder february 1 2004 4293000 preferred stock including accrued dividend rights converted 8590449 shares common stock april 2 2004 see recent developments 1999 company compensated former continuing directors served board directors 1989 march 31 1999 without compensation issuing promissory notes totaling 325000 notes bear interest rate 5 due march 28 2005 december 31 2003 principal accrued interest notes totaled approximately 386000 company issued redeemable warrants exercisable 1165000 shares companys common stock exercise price 015 per share warrants b nonredeemable warrants exercisable maximum 335000 shares companys common stock 100 per share warrant c warrants issued connection issuance subordinated debt instrument mountain air 2001 subsequently repaid connection formation aircomp july 2003 related issuance 3 million subordinated debt discussed collectively subordinated debt warrants b subject cash redemption provisions puts amount 600000 900000 respectively discretion warrant holders beginning earlier final maturity date subordinated debt three years closing subordinated debt january 31 2005 warrant c contain puts provisions april 2004 maturity date debt extended february 1 2006 company recorded liability 600000 mountain air 900000 allischalmers total 1500000 amortizing effects puts interest expense life subordinated debt aircomp llc december 31 2003 aircomp llc following debt outstanding 1000000 line credit wells fargo bank 369000 outstanding december 31 2003 committed line credit due january 31 2005 interest accrues floating rate plus 225 625 december 31 2003 committed portion additionally aircomp pays 005 fee uncommitted portion term loan original amount 8000000 variable interest rates related prime libor rates 409 december 31 2003 interest payable quarterly principal payments 286000 due last day quarter beginning july 2003 maturity date loan june 27 2007 balance december 31 2003 7429000 mca mi guaranteed 55 45 respectively debt delayed draw term loan amount 1000000 interest rate equal libor rate plus 20 275 quarterly payments interest currently quarterly payments principal equal 5 outstanding balance commencing first quarter 2005 maturity date loan june 27 2007 aircomp yet drawn note outstanding balance december 31 2003 subordinated debt payable mi llc amount 4818000 bearing annual interest rate 5 conjunction joint venture 2007 party right cause aircomp sell assets party may buy partys interest debt due event note due payable mi sells interest termination aircomp occurs december 31 2003 120000 interest accrued included accrued interest capital requirements longterm capital needs repay andor refinance existing debt provide funds existing operations secure funds acquisitions oil gas equipment rental services industry order pay debts become due including amounts due bank lenders described require additional financing may include issuance new warrants equity debt securities well secured unsecured loans see recent developments discussion capital transactions completed subsequent yearend march 2004 company entered agreement morgan joseph co inc assist company restructuring outstanding debt effect public offering common stock however assurance company successful efforts new issuance equity securities may dilute existing shareholders formation aircomp llc joint venture company subsidiary mountain compressed air inc mi llc contributed assets fair market value excess 27 million aircomp llc aircomp company believes worlds second largest provider air compressor products services oil natural gas geothermal drilling work completion industries allischalmers 55 mi llc 45 aircomp llc connection transaction aircomp obtained financing 8 million 73 million distributed company used funds retire debt mountain compressed air inc general working capital purposes aircomp recent developments april 2 2004 company entered following transactions exchange investment 2 million company issued 3100000 shares common stock purchase price equal 050 per share warrants purchase 4000000 shares common stock exercise price 050 per share expiring april 1 2006 investor group investor group consisting entities affiliated donald christopher engel directors robert nederlander leonard toboroff aggregate purchase price common stock 1550000 aggregate purchase price warrants 450000 energy spectrum converted 3500000 shares series 10 cumulative convertible preferred stock including accrued dividend rights 8590449 shares common stock company investor group energy spectrum director saeed sheikh officers directors munawar h hidayatallah jens h mortensen entered stockholders agreement pursuant parties agreed vote election board directors company three persons nominated energy spectrum two persons nominated investor group one person nominated messrs hidayatallah mortensen sheikh addition parties company agreed event company effected public offering shares prior september 30 2005 request energy spectrum company retain investment banking firm identify candidates transaction involving sale company assets wells fargo credit inc wells fargo energy capital inc extended maturity dates certain obligations december 31 2003 aggregated approximately 9768000 january february 2005 january february 2006 condition extension company make 400000 initial payment 24 monthly principal payments amount 25000 wells fargo energy capital inc part extension lenders waived certain defaults including defaults relating failure jens strata comply certain covenants relating amount capital expenditures amended certain covenants set forth loan agreements ongoing basis addition wells fargo credit inc increased stratas line credit 25 million 40 million result foregoing transactions parties stockholders agreement 864 outstanding common stock company calculated accordance rule 13d3 securities exchange commission proceeds sale common stock warrants used company reduce debt fund potential acquisitions general corporate purposes risk factors annual report form 10k including without limitation following risk factors contains forwardlooking statements within meaning section 27a securities act 1933 securities act section 21e securities exchange act 1934 regarding business financial condition results operations prospects words expects anticipates intends plans believes seeks estimates similar expressions variations words intended identify forwardlooking statements exclusive means identifying forwardlooking statements annual report form 10k although forwardlooking statements annual report form 10k reflect good faith judgment management statements based facts factors currently know consequently forwardlooking statements inherently subject risks uncertainties actual results outcomes may differ materially results outcomes discussed forwardlooking statements factors could cause contribute differences results outcomes include limited discussed elsewhere annual report form 10k sec filings publicly available documents readers urged place undue reliance forwardlooking statements speak date annual report form 10k undertake obligation revise update forwardlooking statements order reflect event circumstance may arise date annual report form 10k low prices oil natural gas adversely affect demand services products oil natural gas exploration drilling business highly cyclical market prices decrease exploration drilling activity declines marginally profitable projects become uneconomic either delayed eliminated decline number operating oil natural gas rigs would adversely affect business accordingly oil natural gas prices relatively low revenues income suffer oil gas industry extremely volatile subject change based political economic factors outside control highly leveraged result acquisition financing highly leveraged december 31 2003 april 1 2004 approximately 32233000 30903000 respectively debt outstanding high level debt impair ability obtain additional financing makes us vulnerable economic downturns declines oil natural gas prices makes us vulnerable increases interest rates may maintain sufficient revenues meet debt obligations even achieve profitability may sustain increase profitability quarterly annual basis future service indebtedness require significant amount cash ability generate cash depends many factors beyond control ability fund operations make payments refinance indebtedness fund planned acquisitions capital expenditures depend ability generate cash future ability certain extent subject general economic financial competitive legislative regulatory factors beyond control failure obtain additional financing may adversely affect us expansion operations acquisition additional companies require substantial amounts capital addition required refinance existing debt upon maturity availability financing may affect ability refinance debt expand assurance funds whether equity debt financings sources available terms satisfactory us may also enter strategic partnerships purpose developing new businesses future growth may limited unable complete acquisitions strategic partnerships may difficulties integrating acquired businesses may able successfully integrate business operating subsidiaries business acquire future integration businesses complex time consuming may disrupt future business may encounter substantial difficulties costs delays involved integrating common information communication systems operating procedures financial controls human resources practices including incompatibility business cultures loss key employees customers various risks associated acquisition businesses uncertainties regarding profitability operations could material adverse effect us success dependent upon ability acquire integrate additional businesses business strategy acquire companies operating oil natural gas equipment rental services industry however assurance successful acquiring additional companies successful acquisition new companies depend various factors including ability obtain financing competitive environment acquisitions well integration issues described preceding paragraph assurance able acquire successfully operate particular business able expand areas targeted may experience expected synergies may able achieve synergies expect combination businesses including plans reduce overhead shared facilities systems crossmarket business customers access larger pool customers due combined businesses ability provide larger range services trading market common stock common stock registered exchange nasdaq traded sporadically counter bulletin board march 15 2004 filed application list common stock american stock exchange however approval listing common stock subject numerous conditions including effect reverse stock split resulting increase per share price least 300 per share meet certain quantitative qualitative standards stockholders board directors approved future reverse stock split see item 4 submission matters vote security holders assurance meet listing requirements american stock exchange assurance active market common stock develop future expect pay dividends common stock within last ten years paid intentions foreseeable future pay cash dividends common stock therefore investor common stock likelihood realize profit investment market price common stock increases value existing stockholders may diluted connection additional financings expect issue additional equity securities repay debt connection acquisition additional businesses well connection employee benefit plans issuances dilute holdings existing stockholders securities may dividend liquidation preferences may parity common stock competition could cause business suffer natural gas equipment rental services industry highly competitive number individual regional operators compete us throughout existing targeted markets competitors significantly larger greater financial technological operating resources competitors compete us customers acquisitions businesses competition may cause business suffer products services may become obsolete business success dependent upon providing customers efficient costeffective oil gas drilling equipment technology possible competing technologies may render equipment technologies obsolete material adverse effect us historical results indicator future operations business conducted three subsidiaries one acquired february 2001 two acquired february 2002 result past performance indicative future results likelihood success must considered light volatility industry leveraged condition competition factors set forth herein controlled stockholders small number stockholders effectively control us discussed managements discussion analysis results operation financial condition recent developments energy spectrum investor group chief executive officer chairman munawar h hidayatallah president director jens h mortensen director saeed sheikh parties stockholders agreement includes provision election six directors board directors group stockholders beneficially owns approximately 864 common stock group thus power elect majority board directors company control affairs dependence upon key personnel dependent upon efforts skills executives including chief executive officer chairman munawar h hidayatallah president chief operating officer jens h mortensen president chief executive officer strata david wilde manage business well identify consummate additional acquisitions addition business strategy acquire businesses dependent upon skilled management personnel retain personnel operate business loss services mr hidayatallah one key personnel operating subsidiaries could material adverse effect us maintain key man insurance personnel addition development expansion require additional experienced management operations personnel assurance given able identify retain employees customers credit risks could cause business suffer customers engaged oil natural gas drilling business southwestern united states mexico concentration customers may impact overall exposure credit risk customers may similarly affected changes economic industry conditions vulnerable personal injury property damage services used exploration production oil natural gas operations subject inherent hazards cause personal injury loss life damage destruction property equipment environment marine life suspension operations litigation arising accident location products services used provided may result named defendant lawsuits asserting potentially large claims maintain customary insurance protect business potential losses however could become subject material uninsured liabilities government regulations could cause business suffer subject various federal state local laws regulations relating energy industry general environment particular environmental laws recent years become stringent generally sought impose greater liability larger number potentially responsible parties although aware proposed material changes statutes rules regulations changes could cause business suffer labor costs unavailability skilled workers could cause business suffer dependent upon available labor pool skilled employees also subject fair labor standards act governs matters minimum wage overtime working conditions shortage labor pool general inflationary pressures changes applicable laws regulations could require us enhance wage benefits packages assurance labor costs increase operating costs could cause business suffer may subject certain environmental liabilities relating discontinued operations reorganized bankruptcy laws 1988 since time number parties including environmental protection agency epa asserted responsible cleanup hazardous waste sites assertions made respect prebankruptcy activities believe claims barred applicable bankruptcy law however prevail respect claims could become subject material environmental liabilities may subject certain products liability claims reorganized bankruptcy laws 1988 since time regularly named products liability lawsuits primarily resulting manufacture products containing asbestos connection bankruptcy special products liability trust established responsible claims believe claims allischalmers corporation banned applicable bankruptcy law products liability trust continue responsible claims since 1988 court ruled responsible claims however products liability trust terminated funds disbursed otherwise subject product liability claims prevail claim bankruptcy bars claims us could become subject material products liabilities related prebankruptcy activities manufactured products containing asbestos since bankruptcy item 7a item 7 managements discussion analysis financial condition results operation following discussion analysis read conjunction selected historical financial data accompanying financial statements notes financial statements included elsewhere document following discussion contains forwardlooking statements within meaning private securities litigation reform act 1995 reflect plans estimates beliefs actual results could differ materially anticipated forwardlooking statements result risks uncertainties including limited discussed risk factors overview business provide services equipment oil gas drilling industry customers principally small independent major oil gas producers engaged exploration development oil gas wells operations conducted principally texas gulf coast offshore united states gulf mexico west texas rocky mountain regions new mexico colorado oklahoma also operate mexico mexican partner provide casing tubing handling services drilling services includes directional drilling services segment compressed air drilling services segment casing tubing services segment supplies specialized equipment trained operators install casing tubing change drill pipe retrieve production tubing onshore offshore drilling workover operations directional drilling operations provide directional horizontal measure drilling services oil gas companies operating onshore offshore texas louisiana compressed air drilling segment provides compressed air related products services air drilling workover completion transmission segments oil gas geothermal industries result two acquisitions completed september december 2004 also engaged providing oilfield rental tools principally renting spiral drill pipe oil gas operators providing downhole production services production services business provides techniques chemical processes related services increase production existing wells operations rental tools production services aggregated services segment december 31 2004 plan broaden geographic regions operate expand types services equipment provide oil gas drilling industry derive operating revenues rates per day rates per job charge labor equipment required provide service rates vary widely project depending upon scope services asked provide price charge services depends upon several factors including level oil gas drilling activity particular geographic regions operate competitive environment contracts awarded based price quality service equipment general reputation depth operations management personnel demand drilling services historically volatile affected capital expenditures oil gas exploration development companies turn impacted prices oil natural gas expectation prices oil natural gas number working drilling rigs important indicator activity levels oil gas industry typically referred rig count rig count us increased 862 december 31 2002 1126 december 31 2003 according baker hughes rig count according baker hughes rig count directional horizontal rig counts increased 283 december 31 2002 381 december 31 2003 accounted 328 338 total us rig count respectively december 31 2004 trend continued directional horizontal rigs climbing 440 354 1243 total us rig count date operating expenses represent direct indirect costs associated operation maintenance equipment principal elements costs direct indirect labor benefits repairs maintenance equipment insurance equipment rentals fuel operating expenses necessarily fluctuate proportion changes revenues fixed base inventory equipment facilities support operations may also seek preserve labor continuity market services maintain equipment prior may 2001 operated primarily houston dynamic services inc conducted machine repair business may 2001 part strategy acquire develop businesses natural gas oil services industry consummated merger acquired 100 capital stock oilquip rentals inc owned mountain compressed air inc provided compressed air drilling services december 2001 disposed houston dynamic service inc february 2002 acquired substantially capital stock strata directional technology inc approximately 81 capital stock jens oilfield service inc july 2003 mountain compressed air entered limited liability company operating agreement mi llc joint venture smith international schlumberger nv form texas limited liability company named aircomp llc 55 mi owns 45 aircomp consolidated aircomp financial statements beginning quarter ending september 30 2003 september 2004 acquired remaining 19 jens oilfield service inc september 2004 acquired safco oil field products inc november 2004 aircomp acquired substantially assets diamond air drilling services inc marquis bit co llc december 2004 acquired downhole injection services llc effected reverse stock split june 10 2004 result reverse stock split every five shares common stock combined one share common stock reverse stock split reduced number shares outstanding common stock 31393789 approximately 6276015 reduced number stockholders 6070 2140 prior september 13 2004 common stock traded otc bulletin board september 13 2004 common stock began trading american stock exchange restatement connection formation aircomp 2003 company mi contributed assets aircomp exchange 55 interest 45 interest respectively aircomp originally accounted formation aircomp joint venture february 2005 determined transaction accounted using purchase accounting pursuant statement financial accounting standard sfas 141 business combinations sec staff accounting bulletin sab 51 accounting sales stock subsidiary consequently restated financial statements year ended december 31 2003 described note 2 consolidated financial statements year ended december 31 2004 financial statements 2003 first three quarters 2004 presented form 10k restated results operations february 6 2002 allischalmers acquired 81 outstanding stock jens oilfield service inc supplies specialized equipment operations install casing production tubing required drill complete oil gas wells february 6 2002 also purchased substantially outstanding common stock preferred stock strata directional technology inc provides directional horizontal drilling services specific targeted reservoirs cannot reached vertically results casing tubing services directional drilling services included operating results february 1 2002 july 2003 subsidiary mountain air entered limited liability company operating agreement division mi llc joint venture smith international schlumberger nv form aircomp 55 mi owns 45 aircomp consolidated aircomp financial statements beginning quarter ending september 30 2003 september 2004 acquired remaining 19 jens oilfield service inc acquired safco oil field products inc november 2004 aircomp acquired substantially assets diamond air drilling services inc marquis bit co llc december 2004 acquired downhole injection services llc consolidated results acquisitions day acquired comparison years ended december 31 2004 december 31 2003 revenues year ended december 31 2004 477 million increase 459 compared 327 million year ended december 31 2003 revenues increased due increased demand services due general increase oil gas drilling activity revenues increased significantly directional drilling services segment due addition operations sales personnel increased capacity market presence additionally compressed air drilling services revenues 2004 increased compared 2003 year due inclusion full year 2004 business contributed mi connection formation aircomp july 2003 acquisition diamond air marquis bit collectively diamond air november 1 2004 consolidated aircomp financial statements beginning quarter ended september 30 2003 also contributing increase revenues increase mexico revenues casing tubing services segment offset part decrease domestic revenues segment due increased competition casing tubing services south texas finally second half 2004 acquired safco rental tools subsidiary september 1 december 1 2004 acquired downhole production services subsidiary gross profit year ended december 31 2004 increased 425 124 million 260 revenues compared 87 million 266 revenues year ended december 31 2003 due increase revenues directional drilling services segment compressed air drilling services segment mexico offset lower revenues higher costs domestic casing tubing segment cost revenues consists principally labor costs benefits equipment rentals maintenance repairs equipment depreciation insurance fuel many costs fixed gross profit percentage revenues generally affected level revenues general administrative expense 80 million 2004 period compared 62 million 2003 general administrative expense increased 2004 due additional expenses associated inclusion aircomp full year acquisitions completed second half 2004 hiring additional sales administrative personnel subsidiaries general administrative expense also increased professional fees expenses related financing acquisition activities including listing common stock american stock exchange increased corporate accounting administrative staff percentage revenues general administrative expenses 167 2004 188 2003 depreciation amortization 36 million year ended december 31 2004 compared 29 million year ended december 31 2003 due inclusion aircomp full year increase assets resulting capital expenditures acquisitions completed 2004 income operations year ended december 31 2004 totaled 42 million 615 increase 26 million income operations prior year reflecting increase revenues gross profit offset part increase general administrative expense amortization income operations year ended december 31 2004 includes 188000 additional accrued expense postretirement medical benefits pursuant plan reorganization increase accrued expense based present value expected retiree benefit obligations determined third party actuary income operations 2003 year includes income 99000 resulted reduction projected postretirement benefits based third party actuary end 2003 please refer note 3 pension post retirement benefit obligations interest expense increased 28 million 2004 compared 25 million prior year spite decrease total debt interest expense 2004 includes 359000 warrant put amortization including retirement warrants connection prepayment december 2004 24 million 120 subordinated note interest expense 2003 includes 216000 connection acceleration 2003 amortization put obligation related subordinated debt mountain compressed air subordinated debt including accrued interest paid connection formation aircomp 2003 minority interest income subsidiaries 2004 year 321000 compared 343000 2003 year increase net income aircomp offset part elimination minority interest jens 19owned director jens mortensen september 30 2004 net income attributed common stockholders 764000 year ended december 31 2004 compared net income attributed common stockholders 23 million year ended december 31 2003 recognized nonoperating gain sale interest subsidiary amount 24 million connection formation aircomp recognized onetime gain 10 million third quarter 2003 result settling lawsuit former owners mountain air drilling following table compares revenues income operations business segments years ended december 31 2004 december 31 2003 income operations consists revenues less cost revenues general administrative expenses depreciation amortization casing tubing services segment revenues year ended december 31 2004 casing tubing services segment 104 million increase 40 100 million revenues year ended december 31 2003 revenues domestic operations decreased 67 million 2003 52 million 2004 year result increased competition south texas resulting fewer contracts awarded us lower pricing services revenues mexican operations however increased 37 million 2003 51 million 2004 period result increased drilling activity mexico addition equipment increased capacity income operations decreased 111 32 million 2004 36 million 2003 decrease segments revenues operating income due decrease revenues domestic operations increases wages benefits domestically partially offset increased revenues mexico directional drilling services segment revenues year ended december 31 2004 directional drilling services segment 248 million increase 550 160 million revenues year ended december 31 2003 income operations increased 1818 31 million year ended december 31 2004 11 million 2003 improved results segment due increase drilling activity texas gulf coast areas addition operations sales personnel increased capacity market presence increased operating expenses result addition personnel offset growth revenues cost savings result purchases late 2003 2004 downhole motors used directional drilling previously leased motors compressed air drilling services segment compressed air drilling revenues 116 million year ended december 31 2004 increase 731 compared 67 million revenues year ended december 31 2003 income operations increased 12 million 2004 compared income operations 17000 2003 compressed air drilling revenues operating income 2004 year increased compared prior year due inclusion full year 2004 business contributed mi connection formation aircomp july 2003 acquisition diamond air november 1 2004 services segment revenues segment consist safcos rental tool business beginning september 1 2004 downholes production services beginning december 1 2004 effective date respective acquisitions revenues segment 987000 loss operations 67000 plan grow businesses thereby improving profitability increase market presence critical mass comparison years ended december 31 2003 2002 revenues year ended december 31 2003 totaled 327 million increase 817 180 million revenues year ended december 31 2002 increase revenues due general increase oil gas drilling activity inclusion aircomp compressed air drilling venture beginning july 2003 increase revenues also due 2003 first full year revenue contribution casing tubing services segment directional drilling segment acquired february 2002 gross profit year ended december 31 2003 87 million 266 revenues compared 34 million 189 revenues year ended december 31 2002 due increased utilization equipment personnel increased pricing business segments due increase industry activity cost revenues consists principally labor costs benefits equipment rentals maintenance repairs equipment insurance fuel many costs fixed gross profit percentage revenues generally affected level revenues gross profit percentage revenues increased result higher revenues better pricing services general administrative expenses 62 million 189 revenues 2003 compared 38 million 211 revenues 2002 increase general administrative expenses absolute terms due inclusion general administrative expenses aircomp created larger operation compared previous mountain air subsidiary hiring additional sales force operations personnel due improvement oil gas drilling market inclusion operations casing tubing services directional drilling services segments full year 2003 depreciation amortization expenses increased 29 million 2003 compared 26 million 2002 due formation aircomp july 2003 acquisition casing tubing services directional drilling services segments february 2002 income operations year 2003 totaled 26 million reflecting general increase oil gas drilling activity inclusion revenues operating income contributed mi formation aircomp july 2003 comparable period 2002 incurred operating loss 10 million third quarter 2002 reorganized order contain costs recorded charges related reorganization amount 495000 charges consisted related payroll costs terminated employees 307000 consulting fees 113000 costs associated terminated rent obligation 75000 also recorded onetime charges costs related abandoned acquisitions abandoned private placement amount 233000 interest expense increased 25 million 2003 compared 23 million prior year due increased debt associated acquisitions completed 2002 debt associated formation aircomp july 2003 minority interest income subsidiaries 2003 343000 compared 189000 2002 due increase net income casing tubing services subsidiary september 30 2004 owned 19 jens mortensen formation july 2003 aircomp owned 45 mi year ended december 31 2003 recorded onetime gain reduction note payable 10 million third quarter result settling lawsuit former owners mountain air drilling service co inc gain calculated part discounting note payable 15 million using present value calculation accreting note payable 19 million amount due september 2007 record interest expense totaling 394043 life note payable beginning july 2003 addition also recorded onetime nonoperating gain sale interest subsidiary 24 million connection formation aircomp company adopted policy gain loss future incurred sale stock subsidiary would recognized income statement net loss 2002 included discount given holder houston dynamic services note amount 191000 incentive payoff note september 2002 net income attributed common stockholders 23 million 058 per common share year ended december 31 2003 compared net loss 43 million 114 per common share year ended december 31 2002 following table compares revenues income operations business segments years ended december 31 2003 2002 income operations consists revenues less cost revenues general administrative expenses depreciation amortization casing tubing services segment revenues year ended december 31 2003 casing tubing services segment 100 million increase 282 78 million revenues year ended december 31 2002 revenues domestic operations increased 63 million 2003 51 million 2002 result general improvement oil gas drilling activity south texas inclusion segment acquired february 2002 full year 2003 revenues mexican operations increased 37 million 2003 27 million 2002 result increased drilling activity mexico income operations increased 454 36 million 2003 25 million 2002 due increase revenues directional drilling services segment revenues 2003 directional drilling services 160 million increase 1462 65 million revenues 2002 due increased drilling activity texas gulf coast areas 2003 operating income increased 11 million 2003 compared loss operations 576000 period 2002 due increase revenues offset increase operating expenses due addition operations sales personnel compressed air drilling services segment compressed air drilling revenues 67 million 2003 increase 811 compared 37 million revenues 2002 revenues increased 2003 due inclusion revenues contributed mi formation aircomp july 2003 operating income increased 17000 2003 945000 loss operations 2002 due inclusion six months 2003 period business contributed mi connection formation aircomp july 2003 venture able expand geographical areas operate include gas drilling west texas along drilling workover operations mountain air san juan basin new mexico liquidity capital resources ongoing capital requirements arise primarily need service debt retire redeemable securities acquire maintain equipment working capital acquisitions primary sources liquidity borrowings revolving lines credit proceeds issuance equity securities cash flows operations cash equivalents 73 million december 31 2004 compared 13 million december 31 2003 compared 146000 december 31 2002 operating activities year ended december 31 2004 generated 33 million cash operating activities compared 19 million cash operating activities period 2003 net income preferred stock dividend year ended december 31 2004 decreased 888000 compared 29 million 2003 period revenues income operations increased 2004 due increased demand services due general increase oil gas drilling activity net income 2003 includes 10 million gain settlement lawsuit 24 million nonoperating gain sale interest aircomp noncash additions net income totaled 43 million 2004 period consisting 36 million depreciation amortization 334000 minority interest income subsidiary 350000 amortization discount debt noncash additions net income 2003 totaled 305000 consisting depreciation amortization expense 29 million minority interest income subsidiary 343000 amortization discount debt 516000 offset 34 million noncash gains year ended december 31 2004 changes working capital used 19 million cash compared use 13 million cash 2003 period principally due 2004 period increase 23 million accounts receivable increase 638000 current assets decrease 398000 accrued expenses liabilities offset part increase 11 million accounts payable increase 299000 accrued interest decrease 229000 lease receivable accounts receivable increased 23 million december 31 2004 due increase revenues 2004 current assets increased 638000 due primarily increase prepaid insurance premiums accounts payable increased 13 million december 31 2004 due increase cost sales associated increase revenues acquisitions completed fourth quarter 2004 year ended december 31 2003 generated 19 million cash operating activities compared 22 million cash operating activities period 2002 net income preferred stock dividend 2003 period improved 29 million compared net loss 40 million comparable 2002 period due increase revenues income operations 2003 due general increase oil gas drilling activity inclusion aircomp compressed air drilling subsidiary july 2003 net income 2003 includes 10 million gain settlement lawsuit 24 million nonoperating gain sale interest aircomp noncash additions net income totaled 305000 2003 net 10 million noncash gain settlement lawsuit 24 million nonoperating gain sale interest subsidiary compared 34 million noncash additions 2002 consisting principally depreciation amortization expense including amortization discount debt minority interest income subsidiary year ended december 31 2003 changes working capital used 13 million cash compared changes working capital provided 28 million cash 2002 period principally due 2003 increase accrued expenses 17 million increase accounts receivable current assets 56 million increase accounts payable 22 million increase accrued expenses due decrease accrued interest 126000 due retirement subordinated debt carrying interest rate 12 lower interest rates debt variable interest rates increase accrued expenses 397000 due accrued motor costs related expenses increase accrued employee benefits payroll taxes 13 million due payroll cycle ending december 31 2003 accounts receivable increased 44 million due increase revenues directional drilling services segment compressed air drilling services segment due inclusion business contributed mi aircomp july 2003 casing tubing services segment current assets decreased primarily recovery lease deposit related equipment lease paid june 2003 accounts payable increased 23 million 2003 period due increased costs related increased revenues inclusion accounts payable aircomp july 2003 investing activities year ended december 31 2004 used 91 million investing activities consisting principally capital expenditures approximately 46 million including 16 million purchase equipment directional drilling services segment approximately 12 million purchase casing equipment approximately 14 million make capital repairs existing equipment compressed air drilling services segment 12 month period ended december 31 2003 used 45 million investing activities consisting purchases equipment 54 million partially offset proceeds sale equipment 843000 september 1 2004 completed 10 million acquisition 100 outstanding stock safco november 1 2004 aircomp acquired substantially assets diamond air 46 million cash assumption approximately 450000 debt contributed share purchase price 25 million aircomp order fund purchase finally effective december 1 2004 acquired downhole approximately 11 million cash 568466 shares common stock payment assumption 950000 debt cash used investing activities 2002 85 million due acquisitions jens strata subsidiaries total 83 million purchases equipment 518000 proceeds sales equipment 367000 financing activities year ended december 31 2004 financing activities provided net 118 million cash received 169 million net proceeds issuance common stock 82 million borrowings longterm debt facilities 689000 increase net borrowings revolving lines credit proceeds used repay longterm debt totaling 135 million pay 391000 debt issuance costs year ended december 31 2003 financing activities provided net 38 million cash 2003 received 141 million issuance longterm debt 305 million borrowings lines credit proceeds used pay longterm debt amount 108 million make principal payments outstanding borrowings lines credit amount 294 million also used 408000 cash debt issuance costs 2003 year ended december 31 2002 financing activities provided net 63 million cash 2002 received 97 million issuance longterm debt 71 million borrowings lines credit proceeds used pay longterm debt amount 41 million make principal payments outstanding borrowings lines credit amount 58 million also used 588000 cash debt issuance costs 2002 april 2004 energy spectrum holder preferred stock converted 3500000 shares series 10 cumulative convertible preferred stock including accrued dividend rights 1718090 shares common stock august 10 2004 completed private placement 3504667 shares common stock price 300 per share net proceeds us selling commissions expenses approximately 96 million september 30 2004 completed private placement 1956634 shares common stock price 300 per share net proceeds us selling commissions expenses approximately 54 million use net proceeds private placement offerings reduce debt acquisitions general corporate purposes september 30 2004 issued 13 million shares common stock jens mortensen director exchange 19 interest jens result transaction 100 jens total value consideration paid 64 million equal number shares common stock issued mr mortensen 13 million multiplied last sale price 495 common stock reported american stock exchange date issuance amount treated contribution stockholders equity balance sheet eliminated amount recorded value jens minority interest 20 million balance contribution 45 million allocated follows june 2004 obtained appraisal fixed assets jens valued fixed assets 201 million book value fixed assets 158 million excess appraised value book value 43 million increased value jens fixed assets 19 amount 813511 remaining balance 37 million allocated goodwill several bank credit facilities debt instruments allischalmers three principal operating subsidiaries consolidated financial statements december 31 2004 305 million outstanding indebtedness 249 million longterm debt 55 million current portion longterm debt december 7 2004 entered amended restated credit agreement combined increased various credit facilities previously maintained us subsidiaries jens strata credit agreement governing facilities entered allischalmers jens strata safco guaranteed mca oilquip subsidiaries amended credit facilities include 100 million revolving line credit borrowings subject borrowing base based 85 eligible accounts receivables defined outstanding borrowings line credit 24 million december 31 2004 term loan amount 63 million repaid monthly payments principal 105583 per month also required prepay term loan amount equal 20 accounts receivables collections mexico proceeds term loan used prepay term loan owed jens subsidiary prepay 12 24 million subordinated note payable retire related warrants outstanding balance 63 million december 31 2004 60 million capital expenditure acquisition line credit borrowings facility repaid monthly four years beginning january 2006 availability capital expenditure term loan facility subject security acceptable lender form equipment acquired collateral outstanding borrowings december 31 2004 credit facilities mature december 31 2007 secured liens substantially assets agreement governing credit facilities contains customary events default financial covenants also limits ability incur additional indebtedness make capital expenditures pay dividends make distributions create liens sell assets interest rate payable borrowings floats based prime rate average interest rate 625 december 31 2004 pay 05 per annum fee undrawn portion revolving line credit capital expenditure line jens subsidiary subordinated note amount 40 million payable jens mortensen sold jens us one directors note accrues interest 75 per annum provides quarterly interest payments principal interest due january 31 2006 connection purchase jens also agreed pay total 12 million mr mortensen exchange noncompete agreement required make monthly payments 20576 january 31 2007 december 31 2004 balance due approximately 514000 including 247000 classified shortterm jens also two bank term loans aggregating 263000 december 31 2004 accrue interest floating rate 725 december 31 2004 require monthly payments 13000 plus accrued interest maturity date one loans balance 210000 september 17 2006 second loan balance 53000 matures january 12 2007 additionally october 2004 jens borrowed 326000 fiveyear equipment financing term loan proceeds used purchase five trucks loan repaid 60 installments principal interest equal 6449 per month beginning december 2004 december 2009 december 2003 strata directional drilling subsidiary entered shortterm vendor financing agreement major supplier drilling motor rentals motor lease costs motor repair costs agreement provides repayment amounts later december 30 2005 payment interest due monthly principal payments 582000 due october 2004 april 2005 december 2005 interest rate fixed 80 december 31 2004 outstanding balance 12 million connection purchase safco also agreed pay total 150000 sellers exchange noncompete agreement required make yearly payments 50000 september 30 2007 december 31 2004 balance due 150000 downhole notes payable two former shareholders totaling 49000 downhole required make monthly payments 8878 june 30 2005 downhole also vehicle installment note repaid 10 months 1137 per month without interest december 31 2004 balance due 11371 november 10 2004 aircomp completed acquisition diamond air drilling services inc affiliated company marquis bit co llc 46 million cash diamond air marquis bit provide air drilling technology products oil gas industry west texas new mexico oklahoma diamond air leading provider air hammers hammer bit products marquis bit manufactures hammer bit products exclusively diamond air acquisition funded capital contributions allischalmers mi amount 25 million 21 million respectively connection diamond air acquisition described november 15 2004 amended increased aircomps credit facilities provide following 35 million bank line credit 15 million outstanding december 31 2004 interest accrues floating rate based prime rate average interest rate 750 december 31 2004 pay 05 per annum fee undrawn portion borrowings line credit subject borrowing base consisting 80 eligible accounts receivable term loan amount 71 million floating adjustable rate based either london interbank offered rate libor prime rate average interest rate 625 december 31 2004 principal payments 286000 due quarterly plus interest final maturity date june 27 2007 remaining balance december 31 2004 68 million delayed draw term loan facility amount 15 million used capital expenditures interest accrues floating adjustable rate based either libor prime rate quarterly principal payments commence march 31 2006 amount equal 50 outstanding balance december 31 2005 final maturity june 27 2007 borrowings outstanding facility december 31 2004 aircomp credit facilities secured liens substantially aircomps assets agreement governing credit facilities contains customary events default requires aircomp satisfy various financial covenants also limits aircomps ability incur additional indebtedness make capital expenditures pay dividends make distributions create liens sell assets allischalmers mountain compressed air guarantee 55 obligations aircomp facilities aircomp also subordinated note payable mi amount 48 million bearing interest annual rate 50 2007 party right cause aircomp sell assets party may buy partys interest event note including accrued interest due payable note also due payable mi sells interest aircomp upon termination aircomp december 31 2004 376000 interest included accrued interest liable obligations aircomp note 2000 compensated directors served board directors 1989 march 31 1999 without compensation issuing promissory notes totaling 325000 maturity march 28 2005 notes accrue interest rate 50 december 31 2004 principal accrued interest notes totaled approximately 402000 march 31 2005 three notes totaling 96300 including accrued interest remain outstanding part acquisition mountain air 2001 issued note sellers mountain air original amount 22 million accrued interest 575 per annum note reduced 15 million 2003 result settlement legal action sellers december 31 2004 outstanding amount due including accrued interest 16 million note due september 30 2007 discussed business legal proceedings holder note brought legal action seeking accelerate payment march 2005 reached agreement plaintiff settle action agreed pay plaintiff 10 million cash agreed pay additional 350000 june 1 2006 additional 150000 june 1 2007 extinguishment amounts due promissory note claims made 10 million cash payment april 1 2005 mountain air term loan amount 198000 december 31 2004 interest rate 50 principal interest payments 5039 due last day month final maturity date june 30 2008 following table summarizes obligations commitments make future payments notes payable operating leases employment contracts consulting agreements periods specified december 31 2004 balance sheet arrangements normal operating leases employee contracts shown likely current future material effect financial condition changes financial condition revenues expenses results operations liquidity capital expenditures capital resources guarantee obligations unconsolidated entities identified capital expenditure projects require approximately 85 million 2005 exclusive acquisitions believe current cash generated operations cash available credit facilities cash hand provide sufficient funds identified projects intend implement growth strategy increasing scope services internal growth acquisitions regularly involved discussions number potential acquisition candidates expect make capital expenditures acquire maintain existing equipment performance cash flow operations determined demand services turn affected customers expenditures oil gas exploration development industry perceptions expectations future oil gas prices areas operate need refinance existing debt facilities become due provide funds capital expenditures acquisitions effect expansion plans require additional equity debt financing excess current working capital amounts available credit facilities assurance successful raising additional debt equity capital terms acceptable us recent developments january 2005 jens obtained real estate term loan amount 556000 loan repaid 59 equal monthly installments 4344 remaining outstanding balance due january 1 2010 interest rate floats based prime rate 725 time funding proceeds used pay accrued interest jens 40 million subordinated seller note january 1 2005 executed business development agreement cttv investments llc cttv affiliate chevrontexaco inc whereby issued 20000 shares common stock cttv agreed issue additional 60000 shares cttv contingent upon subsidiaries receiving certain levels revenues 2005 chevrontexaco affiliates cttv minority owner downhole mountain compressed air inc defendant action brought april 2004 district court mesa county colorado former owner mountain air drilling service company inc mountain compressed air inc acquired assets 2001 see legal proceedings march 2005 company reached agreement plaintiff settle action terms agreement april 1 2005 paid plaintiff 10 million cash agreed pay additional 350000 june 1 2006 additional 150000 june 1 2007 settlement claims april 1 2005 acquired 100 outstanding stock delta rental service inc delta 46 million cash 223114 shares common stock two promissory notes totaling 350000 delta located lafayette louisiana rental tool company providing specialty rental items oilfield spiral heavy wate drill pipe test plugs used test blowout preventors well head retrieval tools spacer spools assorted handling tools year ended december 31 2004 delta revenues 33 million april 4 2005 amended december 7 2004 credit agreement extend final maturity credit facilities one year december 31 2008 include delta downhole subsidiaries parties credit agreement provide increased availability 100 million revolving line credit 60 million acquisition line credit based receivables assets delta downhole additionally amendment documented lenders consent 15 million settlement former owners mountain air drilling service mentioned prepayment 40 million jens subordinated seller note amount exceed 397000 critical accounting policies identified policies critical business operations understanding results operations impact associated risks related policies business operations discussed throughout managements discussion analysis financial condition results operations policies affect reported expected financial results detailed discussion application accounting policies see note 1 notes consolidated financial statements included elsewhere document preparation report requires us make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period assurance actual results differ estimates allowance doubtful accounts determination collectibility amounts due customers requires us use estimates make judgments regarding future events trends including monitoring customer payment history current credit worthiness determine collectibility reasonably assured well consideration overall business climate customers operate uncertainties require us make frequent judgments estimates regarding customers ability pay amounts due us order determine appropriate amount valuation allowances required doubtful accounts provisions doubtful accounts recorded becomes evident customers able make required payments either contractual due dates future revenue recognition provide rental equipment drilling services customers per day per job contractual rates recognize drilling related revenue work progresses collectibility reasonably assured securities exchange commissions sec staff accounting bulletin sab 104 revenue recognition financial statements sab 104 provides guidance sec staffs views application generally accepted accounting principles selected revenue recognition issues revenue recognition policy accordance generally accepted accounting principles sab 104 impairment longlived assets longlived assets include property plant equipment goodwill intangibles comprise significant amount companys total assets company makes judgments estimates conjunction carrying value assets including amounts capitalized depreciation amortization methods useful lives additionally carrying values assets reviewed impairment whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires company make longterm forecasts future revenues costs related assets subject review forecasts require assumptions demand companys products services future market conditions technological developments significant unanticipated changes assumptions could require provision impairment future period goodwill intangibles company recorded approximately 118 million goodwill 50 million identifiable intangible assets company performs purchase price allocations intangible assets makes business combination business combinations purchase price allocations consummated purchase mountain air strata jens operating segments excess purchase price allocation fair values tangible assets allocated identifiable intangibles thereafter goodwill subsequently company performed initial impairment tests annual impairment tests accordance financial accounting standards board 141 business combinations financial accounting standards board 142 goodwill intangible assets initial valuations used two approaches determine carrying amount individual reporting units first approach discounted cash flow method focuses expected cash flow company applying approach cash flow available distribution projected finite period years cash flow available distribution defined amount cash could distributed dividend without impairing future profitability operation company cash flow available distribution terminal value company end estimation period discounted present value derive indication value business enterprise valuation method dependent upon assumptions made regarding future cash flow cash requirements second approach guideline company method focuses comparing company selected reasonably similar publicly traded companies method valuation multiples derived operating data selected similar companies ii evaluated adjusted based strengths weaknesses company relative selected guideline companies iii applied operating data company arrive indication value valuation method dependent upon assumption value company evaluated analysis earnings strengths weaknesses relative selected similar companies significant unanticipated changes assumptions could require provision impairment future period aircomp sale interest subsidiary company adopted sec staff accounting bulletin sab 51 accounting sales stock subsidiary account investment aircomp accounted consolidated subsidiary sfas 141 business combinations pursuant sab 51 company recorded contribution assets liabilities historical cost basis since liabilities exceeded assets companys basis aircomp negative amount company accounted assets contributed mi fair market value determined outside appraiser company gave mi 45 interest aircomp exchange assets contributed result formation venture retention 55 interest venture company realized immediate gain extent negative basis 55 interest combined assets liabilities venture accordance sab 51 company recorded negative basis investment aircomp addition equity share combined assets liabilities realized mi assets nonoperating income stock based compensation company accounts stockbased compensation using accounting principles boards opinion 25 apb 25 apb 25 compensation expense recognized stock options exercise price less market price grant date option stock options exercise prices market value stock grant date company adopted disclosureonly provisions statement financial accounting standards 123 accounting stockbased compensation sfas 123 company adopted disclosureonly provisions sfas 123 stock options granted employees directors company accordingly compensation cost recognized options many equity instrument transactions valued based pricing models blackscholes require judgments management values transactions vary widely often material financial statements recently issued accounting standards november 2004 fasb issued sfas 151 inventory costs amendment arb 43 chapter 4 amends guidance arb 43 clarify accounting abnormal amounts idle facility expense freight handling costs wasted material sfas 151 requires items recognized current period charges addition sfas 151 requires allocation fixed production overheads inventory based normal capacity production facilities sfas 151 effective inventory costs incurred fiscal years beginning june 15 2005 currently evaluating provisions sfas 151 adopt sfas 151 january 1 2006 december 2004 fasb issued sfas 123r sharebased payment sfas 123r sfas 123r revises sfas 123 accounting stockbased compensation focuses accounting sharebased payments services employer employee statement requires companies expense fair value employee stock options equitybased compensation grant date statement require certain type valuation model either binomial blackscholes model may used provisions sfas 123r effective financial statements annual interim periods beginning june 15 2005 currently evaluating method adoption impact operating results future cash flows impacted adoption standard december 2004 fasb issued fasb staff position 1091 fsp 1091 application fasb statement 109 accounting income taxes sfas 109 tax deduction qualified production activities provided american jobs creation act 2004 provides guidance recently enacted american jobs creation act 2004 act provides tax deduction income qualified domestic production activities fsp 1091 provides treatment deduction special deduction described sfas 109 deduction effect existing deferred tax assets liabilities impact deduction reported period deduction claimed us tax return expect deduction material impact effective tax rate future years fsp 1091 effective prospectively january 1 2005 risk factors annual report form 10k including without limitation following risk factors contains forwardlooking statements within meaning section 27a securities act 1933 securities act section 21e securities exchange act 1934 regarding business financial condition results operations prospects words expects anticipates intends plans believes seeks estimates similar expressions variations words intended identify forwardlooking statements exclusive means identifying forwardlooking statements annual report form 10k although forwardlooking statements annual report form 10k reflect good faith judgment management statements based facts factors currently know consequently forwardlooking statements inherently subject risks uncertainties actual results outcomes may differ materially results outcomes discussed forwardlooking statements factors could cause contribute differences results outcomes include limited discussed elsewhere annual report form 10k sec filings publicly available documents readers urged place undue reliance forwardlooking statements speak date annual report form 10k undertake obligation revise update forwardlooking statements order reflect event circumstance may arise date annual report form 10k risks associated investment common stock price may decrease response various factors could adversely affect business cause stockholders suffer significant losses factors include decreases prices oil natural gas resulting decreased demand services variations operating results failure meet expectations investors analysts increases interest rates loss customers failure customers pay services competition illiquidity market common stock sales common stock existing stockholders developments affecting us financial markets reduced stock price result loss investors adversely affect ability issue stock fund activities existing stockholders interest us may diluted additional issuances equity securities expect issue additional equity securities fund acquisition additional businesses pursuant employee benefit plans may also issue additional equity purposes securities may parity common stock may dividend liquidation preferences common stock issuance additional equity securities dilute holdings existing stockholders may reduce share price common stock controlled stockholders limit stockholders ability influence outcome key transactions small number stockholders effectively control us six stockholders beneficially approximately 49 outstanding common stock parties stockholders agreement providing election six ten members board directors group stockholders effectively power elect majority board directors control affairs also able control outcome matters submitted vote stockholders requiring majority vote result stockholders ability elect majority board directors influence outcome key transactions addition voting power stockholders may discourage others seeking acquire control us purchase common stock might depress price common stock parties stockholders agreement power control subject fiduciary duty owed stockholders delaware law matters affecting us including composition board directors determination respect business direction policies including appointment removal officers determination incentive compensation may affect ability retain key employees determinations respect mergers business combinations acquisition disposition assets financing decisions capital raising activities payment dividends common stock amendments amended restated certificate incorporation bylaws expect pay dividends common stock investors able receive cash respect shares common stock upon sale shares within last ten years paid cash dividends common stock intention foreseeable future pay cash dividends common stock credit agreements restrict payment dividends common stock therefore investor common stock likelihood obtain economic benefit common stock selling common stock risks associated company highly leveraged may difficulty obtaining additional financing could experience losses fail meet capital expenditure requirements financial obligations revenues income decrease interest rates increase result acquisition financing expect continue highly leveraged december 31 2004 approximately 305 million debt outstanding high level debt impair ability obtain additional financing make us vulnerable economic downturns declines oil natural gas prices declines drilling activities make us vulnerable increases interest rates may maintain sufficient revenues sustain profitability meet capital expenditure requirements financial obligations fail obtain additional financing may unable refinance existing debt expand current operations acquire new businesses could result failure grow defaults credit agreements order refinance indebtedness expand existing operations acquire additional businesses require substantial amounts capital assurance financing whether equity debt financings sources available terms satisfactory us unable obtain financing unable acquire additional businesses may unable meet obligations existing credit agreements may fail acquire additional businesses restrict growth may result decrease stock price business strategy acquire companies operating oil natural gas equipment rental services industry however assurance successful acquiring additional companies successful acquisition new companies depend various factors including limited ability obtain financing competitive environment acquisitions integration synergy issues described next two risk factors assurance able acquire successfully operate particular business able expand areas targeted price common stock may fall fail acquire additional businesses difficulties integrating acquired businesses may result reduced revenues income may able successfully integrate business operating subsidiaries business may acquire future integration businesses complex time consuming place significant strain management may disrupt businesses may encounter substantial difficulties costs delays involved integrating common information communication systems operating procedures internal controls human resources practices including incompatibility business cultures loss key employees customers difficulties may reduce ability gain customers retain existing customers may increase operating expenses resulting reduced revenues income experience expected synergies may achieve increases revenues reductions expenses hope obtain acquiring businesses may able achieve synergies expect combination businesses including plans reduce overhead shared facilities systems crossmarket businesses customers access larger pool customers due combined businesses ability provide larger range services failure maintain effective internal controls could material adverse effect operations process documenting testing internal control procedures order satisfy requirements section 404 sarbanesoxley act requires annual management assessments effectiveness internal controls financial reporting report independent auditors addressing assessments course testing may identify deficiencies may able remediate time meet deadline imposed sarbanesoxley act compliance requirements section 404 addition fail achieve maintain adequacy internal controls standards modified supplemented amended time may able ensure conclude ongoing basis effective internal controls financial reporting accordance section 404 sarbanesoxley act moreover effective internal controls necessary us produce reliable financial reports important helping prevent financial fraud cannot provide reliable financial reports prevent fraud business operating results could harmed investors could lose confidence reported financial information trading price stock could drop significantly products services may become obsolete resulting loss customers revenues business success dependent upon providing customers efficient costeffective oil gas drilling equipment services technology possible competing technologies may render equipment technologies obsolete causing us lose customers revenues historical results indicator future operations made numerous acquisitions past four years result transactions past performance indicative future performance investors common stock base expectations future performance historical results loss key personnel would adversely affect ability effectively finance manage business acquire new businesses obtain retain customers dependent upon efforts skills executives finance manage business identify consummate additional acquisitions obtain retain customers executives include chief executive officer chairman munawar h hidayatallah president chief operating officer david wilde addition development expansion require additional experienced management operations personnel assurance given able identify retain employees loss services one key personnel could increase exposure risks described risk factors section maintain key man insurance personnel failure retain key personnel could hurt operations require highly skilled personnel operate equipment provide technical services extent demand drilling services increases shortages qualified personnel could arise creating upward pressure wages difficulty obtaining skilled personnel dependent customers cash flow would seriously affected one significant customers fail pay us customers engaged oil natural gas drilling business southwestern united states mexico dependent upon customers significant portion revenues concentration customers may impact overall exposure credit risk customers may similarly affected changes economic industry conditions failure one significant customers pay us could materially reduce cash flow result losses operations mexico may expose us political uncertainties including risks terrorist acts war civil disturbances changes laws policies regarding award contracts inability collect repatriate income capital environmental liabilities relating discontinued operations could result substantial losses reorganized bankruptcy laws 1988 since time number parties including environmental protection agency asserted responsible cleanup hazardous waste sites assertions made respect prebankruptcy activities believe claims barred applicable bankruptcy law experienced material expense relation claims however prevail respect claims future could become subject material environmental liabilities could materially impact net worth products liability claims relating discontinued operations could result substantial losses reorganized bankruptcy laws 1988 since time regularly named products liability lawsuits primarily resulting manufacture products containing asbestos connection bankruptcy special products liability trust established responsible products liability claims believe claims us banned applicable bankruptcy law products liability trust continue responsible products liability claims since 1988 court ruled responsible products liability claims however held responsible product liability claims could suffer substantial losses manufactured products containing asbestos since bankruptcy 1988 risks associated industry cyclical declines oil natural gas prices may result reduced use services affecting business financial condition results operation ability meet capital expenditure obligations financial commitments oil natural gas exploration drilling business highly cyclical generally oil gas prices decrease exploration drilling activity declines marginally profitable projects become uneconomic either delayed eliminated declines number operating drilling rigs result reduced use prices services accordingly oil natural gas prices relatively low revenues income suffer oil gas prices depend many factors beyond control including following economic conditions united states elsewhere changes global supply demand oil natural gas level production organization petroleum exporting countries commonly called opec level production nonopec countries price quantity imports foreign oil natural gas political conditions including embargoes affecting oil natural gas producing activities level global oil natural gas inventories advances exploration development production technologies depending market prices oil gas companies exploring oil gas may cancel curtail drilling programs thereby reducing demand drilling services contracts generally shortterm oil gas companies tend respond quickly upward downward changes prices reduction demand drilling services may materially erode pricing utilization rates services adversely affect financial results result may suffer losses unable make necessary capital expenditures unable meet financial obligations industry highly cyclical results operations may volatile industry highly cyclical periods high demand high pricing followed periods low demand low pricing periods low demand intensify competition industry often result equipment idle long periods time may required enter lower rate contracts response market conditions future due shortterm nature contracts changes market conditions quickly affect business result cyclicality industry results operations volatile expect volatility continue industry highly competitive intense price competition regions operate highly competitive contracts traditionally awarded competitive bid basis pricing often primary factor determining qualified contractor awarded job competitive environment intensified recent mergers among oil gas companies reduced number available customers many oil gas service companies larger greater resources competitors better able withstand industry downturns compete basis price acquire new equipment technologies could affect revenues profitability competitors compete us customers acquisitions businesses competition may cause business suffer believe competition contracts continue intense foreseeable future may subject claims personal injury property damage reducing net worth services used exploration production oil natural gas operations subject inherent hazards cause personal injury loss life damage destruction property equipment environment marine life suspension operations litigation arising accident location products services used provided may cause us named defendant lawsuits asserting potentially large claims maintain customary insurance protect business potential losses however could become subject material uninsured liabilities materially reduce net worth subject government regulations subject various federal state local laws regulations relating energy industry general environment particular environmental laws recent years become stringent generally sought impose greater liability larger number potentially responsible parties although aware proposed material changes federal state local statutes rules regulations changes could materially affect financial condition results operations may experience increased labor costs unavailability skilled workers dependent upon available labor pool skilled employees also subject fair labor standards act governs matters minimum wage overtime working conditions shortage labor pool general inflationary pressures changes applicable laws regulations could require us enhance wage benefits packages assurance labor costs increase operating costs could cause business suffer business may affected terrorist activity security measures taken response terrorism may experience loss business delays defaults payments payers affected terrorist activities potential activities oil gas drilling companies implemented security measures response potential terrorist activities including access restrictions could adversely affect ability market services new existing customers could increase costs terrorist activities potential terrorist activities resulting economic downturn could adversely impact results operations impair ability raise capital otherwise adversely affect ability grow business item 7a item 7 managements discussion analysis financial condition results operations discussion read conjunction consolidated financial statements including notes consolidated financial statements overview allischalmers emerging chapter 11 plan reorganization entered agreement alch company lp investor pursuant investor agreed purchase 61 million shares prereverse stock split basis common stock 40 outstanding common stock 3750000 cash investor limited partnership controlled messrs robert e nederlander leonard toboroff two companys directors company continues efforts conserve cash resources however expenses associated ongoing securities exchange commission governmental reporting well legal accounting audit insurance costs associated corporate requirements publicly held company continue make difficult company present size achieve positive cash flow date chapter 11 filings june 1987 company sponsored 19 defined benefit plans providing pensions substantially us employees pension plan us salaried employees capped frozen effective march 31 1987 benefit accruals date result divestitures chapter 11 proceedings eight active plans transferred buyers businesses leaving company sponsor 11 plans none permitted additional benefit accruals effective january 1 1989 11 remaining plans consolidated single plan allischalmers consolidated pension plan consolidated plan 1994 companys independent pension actuaries changed assumptions mortality administrative expenses used determine liabilities consolidated plan primarily result changes mortality assumptions reflect decreased mortality rates companys retirees consolidated plan underfunded present value basis first quarter 1996 company made required cash contribution consolidated plan amount 205000 company however financial resources make required payments 1996 1997 given inability company fund obligations current financial resources february 1997 allischalmers applied pension benefit guaranty corporation pbgc distress termination consolidated plan section 4041c employee retirement income security act 1974 amended erisa pbgc approved distress termination application september 1997 agreed plan termination date april 14 1997 pbgc became trustee terminated consolidated plan september 30 1997 upon termination consolidated plan allischalmers subsidiaries incurred liability pbgc amount equal consolidated plans unfunded benefit liabilities allischalmers subsidiaries also liability pbgc trustee terminated consolidated plan outstanding balance consolidated plans accumulated funding deficiencies pbgc estimated unfunded benefit liabilities accumulated funding deficiencies together pbgc liability total approximately 679 million effective march 31 1999 company issued 585100 shares pbgc reducing pension liability estimated fair market value shares 669 million september 1997 allischalmers pbgc entered agreement principle settlement pbgc liability required among things satisfactory resolution companys tax obligations respect consolidated plan section 4971 internal revenue code 1986 amended code section 4971a code imposes taxable year firsttier tax 10 amount accumulated funding deficiency plan like consolidated plan section 4971b code imposes additional secondtier tax equal 100 accumulated funding deficiency corrected within specified period liability taxes imposed section 4971 extends jointly severally company commonlycontrolled subsidiary corporations prior termination consolidated plan accumulated funding deficiency taxable years 1995 1996 1997 deficiencies resulted estimated firsttier taxes code section 4971a approximately 900000 july 16 1998 company internal revenue service irs reached agreement principal settle companys tax liability code section 4971 75000 following final irs approval payment amount made august 11 1998 june 1999 effective march 31 1999 company pbgc entered agreement settlement pbgc liability pbgc agreement pursuant terms pbgc agreement company issued 585100 shares common stock pbgc 35 total number shares issued outstanding fullydiluted basis company right first refusal respect sale shares common stock owned pbgc conjunction share issuance company reduced pension liability pbgc based estimated fair market value shares issued effective date march 31 1999 accordance terms pbgc agreement company required decreased size board directors company board seven members ii caused sufficient number current directors company resign board committees thereof iii caused thomas barnhart ii alexander p sammarco david groshoff designees pbgc elected board pbgc caused company amend bylaws conform terms pbgc agreement furthermore company agreed pay pbgcs reasonable professional fees 90th day release event hereinafter defined currently evidenced company promissory note favor pbgc amount 75000 term pbgc agreement company agreed issue agree issue common stock company common stock equivalent less fair value determined majority board company also agreed merge consolidate entity sell transfer convey 50 property assets without majority board approval agreed amend amended restated certificate incorporation certificate bylaws order satisfy discharge pbgc liability pbgc agreement provides company must either receive single transaction series related transactions debt financing makes available company least 10 million borrowings ii consummate acquisition single transaction series related transactions assets andor business purchase price including funded debt assumed least 10 million release event 585100 shares disposed pbgc prior release event final satisfaction discharge pbgc liability accreted estimated fair market value 1024000 shares issued pbgc connection pbgc agreement additional consideration settling pbgc liability following agreements dated march 31 1999 also entered registration rights agreement company pbgc registration rights agreement ii lockup agreement among company pbgc alch company lp delaware limited partnership alch wells fargo bank trustee certain amended restated retiree health trust agreement uaw retired employees allischalmers corporation uaw trust firstar trust company trustee certain amended restated retiree health trust agreement nonuaw retired employees allischalmers corporation nonuaw trust lockup agreement registration rights agreement grants holder registrable shares defined registration rights agreement basically mean shares common stock issued pbgc agreement right shares registered pursuant securities act 1933 amended demand incidental registration statement filed company order demand registration registrable shares request registration holders less 20 registrable shares necessary company may deny request registration shares company contemplates filing registration statement within 90 days receipt notice holders registration rights agreement also contains provisions allow company postpone filing registration statement 180 days registration rights agreement contains indemnification language similar usually contained agreements kind lockup agreement governs transfer disposition shares companys common stock voting shares well grants pbgc right sale shares prior alch uaw trust nonuaw trust pursuant lockup agreement unless board terminated common stock transfer restrictions set forth article xiii companys certificate alch uaw trust nonuaw trust agreed period commencing march 31 1999 ending third anniversary release event directly indirectly sell transfer assign dispose shares company stock beneficially owns commencing third anniversary release event continuing fifth anniversary release event alch uaw trust nonuaw trust agreed sell transfer dispose shares company stock without first giving pbgc opportunity sell portion shares company stock pbgc owns foregoing right pbgc applies sale company stock public offering otherwise lockup agreement also contains voting component term lockup agreement party agreement agreed vote meeting company stockholders written consent shares company stock owned favor election directors company persons nominated nominating committee board refrain taking action contrary inconsistent obligation term lockup agreement party agreement agreed vote shares company stock take action amend companys certificate bylaws manner inconsistent breach pbgc agreement party agreed vote shares favor certain specified amendments companys certificate ii election persons designated pbgc director serve board iii favor election company directors committed cause one pbgc director appointed nominating committee board one pbgc director appointed chairman compensation committee board acquisition environment unfavorable since investors 1989 cash contribution company remained difficult company 1999 problems continued include companys lack cash investment limited availability debt financing acquisitions financial exposure associated consolidated plan therefore company continues proceed cautiously efforts identify evaluate potential candidates acquisition results operations results operations 1999 1998 1997 reflect sole operation business allischalmers machine repair business hds sales totaled 44 million 1999 compared 50 million 1998 41 million 1997 decrease sales 1999 1998 due continued soft conditions backlash low oil prices second half 1998 resulted lower shipments 1999 compared period 1998 even current higher oil prices hds continues affected volatile market conditions prevail oil related fields refining processing chemicals petrochemical operations throughout gulf coast gross margins percentage sales 242 297 250 1999 1998 1997 respectively marketing administrative expense 15 million 17 million 17 million 1999 1998 1997 respectively marketing administrative expense 354 sales 1999 compared 336 1998 409 1997 decrease marketing administrative expense due reduced acquisition costs well corporate overhead additional costs incurred 1998 pursuit corporate acquisitions certain engineering costs hds costs offset reduction 1998 legal expenses compared 1997 company experienced nonrecurring legal expenses associated termination consolidated plan related negotiations pbgc irs significant portion companys administrative expense continues relate expenses securities exchange commission governmental reporting well legal accounting audit insurance requirements publicly held company interest income years resulted mainly earnings shortterm investments interest expense primarily relates term loan proceeds used purchase shop office building hds operates additional financing capital improvements hds pension expense relates recognition pension liability associated consolidated plan accordance statement financial accounting standards 87 employers accounting pensions 1397000 1997 1999 1998 expense result termination consolidated plan 1997 expense nine month period transfer consolidated plan pbgc took place september 30 1997 termination consolidated plan resulted additional 645 million pension expense 1997 including 9 million irs excise taxes company net loss 113000 08 per common share 1999 compared net income 618000 62 per common share 1998 net loss 66545000 1997 net income 1998 included income 825000 result 900000 irs liability settled 75000 recognition pension expense 65926000 accounted significant portion net loss 1997 liquidity capital resources december 31 1999 company cash shortterm investments totaling 501000 increase 223000 december 31 1998 principally result plan reorganization implementation reimbursement trade receivables december 31 1999 570000 compared 796000 december 31 1998 decrease result addition reserve 102000 relating warranty dispute decreased sales 1999 certain major projects completed billed hds near end 1998 inventory december 31 1999 157000 increase 127000 year end 1998 due one job consisting approximately 81000 inventory completed january 2000 net property plant equipment december 31 1999 1170000 decrease 1308000 december 31 1998 company incurred 21000 capital expenditures 1999 1998 approximately 234000 invested machinery equipment acquisitions approximately 119000 spent improve hdss facilities including air conditioning upgrading telephone system expenditures additional upgrades machinery tooling necessary reduce production costs decreasing downtime increasing production efficiency output helping position company growth increased capacity service capabilities offers marketplace current maturities longterm debt december 31 1999 1998 60000 consistent prior year majority current maturities represent payments real estate loan refinanced hds august 1996 proceeds original loan used 1990 purchase land building hds operates business houston texas amount refinanced required repaid monthly installments 3278 august 20 2001 remaining unpaid balance due december 31 1999 interest rate note 105 rate subject adjustments term note accordance increases decreases prime rate note collateralized hds facility net book value 432000 december 31 1999 companys guaranty companys principal sources cash include earnings operations cash requirements needed administrative expenses associated publicly held company significant management believes company continue use substantial portion cash balances generated hds purposes 2000 ac reorganization trust pursuant plan reorganization funds costs incurred allischalmers relate implementation plan reorganization costs include allocated share certain expenses company employees professional fees certain administrative expenses epa certain state environmental protection agencies requested information connection eleven potential hazardous waste disposal sites products manufactured allischalmers consummation plan reorganization disposed epa claimed allischalmers liable cleanup costs associated several additional sites epas claims respect one site withdrawn 1994 based upon settlements reached epa bankruptcy proceeding addition certain third parties asserted allischalmers liable cleanup costs associated epa fines connection additional sites one instances former site operator joined allischalmers 47 potentially responsible parties thirdparty defendant lawsuit involving cleanup one sites instance environmental claims asserted company involve prebankruptcy operations accordingly allischalmers taken position cleanup costs liabilities related sites discharged bankruptcy one particular site epas region iii concurred companys position claims environmental cleanup discharged pursuant bankruptcy site unique different circumstances company notified regional offices epa determination associated region iii site company received responses regional offices environmental claims asserted company involving postbankruptcy operations management considered companys significant application year 2000 sensitive accounting system accounting system experienced year 2000 problems management anticipate additional year 2000 problems financial condition shareholders deficit december 31 1999 665 million threeyear comparison shareholders deficit follows millions 1999 1998 1997 january 1 674 680 136 net income loss 01 06 665 pension liability adjustment 00 121 issuance common stock 10 december 31 665 674 680 item 7a item 7 management’s discussion analysis financial condition results operations following discussion analysis read conjunction selected historical financial data accompanying financial statements notes financial statements included elsewhere document following discussion contains forwardlooking statements within meaning private securities litigation reform act 1995 reflect plans estimates beliefs actual results could differ materially anticipated forwardlooking statements result risks uncertainties including limited discussed “item 1a risk factors” overview business multifaceted oilfield services company provides services equipment oil natural gas exploration production companies throughout united states including texas louisiana new mexico colorado oklahoma mississippi wyoming arkansas west virginia offshore gulf mexico internationally primarily argentina mexico operate six sectors oil natural gas service industry rental services international drilling directional drilling tubular services underbalanced drilling production services derive operating revenues rates per job charge labor equipment required provide service rates per day equipment tools rent customers price charge services depends upon several factors including level oil natural gas drilling activity competitive environment particular geographic regions operate contracts awarded based price quality service equipment general reputation experience personnel demand drilling services historically volatile affected capital expenditures oil natural gas exploration development companies fluctuate based upon prices oil natural gas expectation prices oil natural gas number working drilling rigs typically referred “rig count” important indicator activity levels oil natural gas industry rig count united states increased 862 december 31 2002 1763 february 29 2008 according baker hughes rig count furthermore directional horizontal rig counts increased 283 december 31 2002 817 february 29 2008 accounted 33 46 total us rig count respectively offshore gulf mexico rig count however decreased 58 rigs february 29 2008 90 rigs one year earlier believe due relocation rigs international markets result high oil prices cost revenues represents direct indirect costs associated operation maintenance equipment principal elements costs direct indirect labor benefits repairs maintenance equipment insurance equipment rentals fuel depreciation operating expenses fluctuate direct proportion changes revenues among factors fixed base inventory equipment facilities support operations periods low drilling activity may also seek preserve labor continuity market services maintain equipment results operations april 2005 acquired outstanding stock delta may 2005 acquired outstanding stock capcoil report operations downhole capcoil production services segment operations safco delta rental services segment july 2005 acquired 45 interest mi underbalanced drilling subsidiary aircomp making us 100 owner aircomp addition july 2005 acquired underbalanced drilling assets w august 1 2005 acquired outstanding capital stock target included target results directional drilling segment target’s measurement drilling equipment utilized segment september 1 2005 acquired casing tubing service assets patterson services inc consolidated results acquisitions day acquired january 2006 acquired outstanding stock specialty december 2006 acquired substantially assets ogr report operations specialty ogr rental services segment april 2006 acquired outstanding stock rogers report operations rogers tubular services segment august 2006 acquired outstanding stock dls december 2006 acquired outstanding stock tanus report operations dls tanus international drilling segment october 2006 acquired outstanding stock petro rentals report operations petro rentals production services segment consolidated results acquisitions day acquired june 2007 acquired outstanding stock coker july 2007 acquired outstanding stock diggar november 2007 acquired substantially assets diamondback report operations coker diggar diamondback directional drilling segment october 2007 acquired outstanding stock rebel report operations rebel tubular services segment consolidated results acquisitions day acquired foregoing acquisitions affect comparability period historical results historical results may indicative future results comparison years ended december 31 2007 december 31 revenues year ended december 31 2007 5710 million increase 836 compared 3110 million year ended december 31 2006 revenues increased business segments due principally acquisitions completed two year period ended december 31 2007 investment new equipment opening new operating locations significant increase revenues due acquisition dls august 14 2006 established international drilling segment revenues also increased significantly rental services segment due acquisition ogr assets december 18 2006 directional drilling segment revenues increased 2007 period compared 2006 period due acquisitions completed third fourth quarters 2007 added downhole motors measurementwhiledrilling mwd tools directional drilling personnel resulting increased capacity increased market penetration revenues increased underbalanced drilling segment due purchase additional equipment principally new compressor packages expansion operations new geographic regions gross margin year ended december 31 2007 increased 699 1786 million 313 revenues compared 1051 million 338 revenues year ended december 31 2006 increase gross profit due increase revenues business segments decrease gross profit percentage revenues primarily due 1513 increase depreciation expense 509 million 2007 203 million 2006 increase depreciation expense due acquisition ogr assets acquisition dls capital expenditures cost revenues consists principally labor costs benefits equipment rentals maintenance repairs equipment depreciation insurance fuel many costs fixed gross profit percentage revenues generally affected level revenues general administrative expense 586 million year ended december 31 2007 compared 355 million year ended december 31 2006 general administrative expense increased due acquisitions hiring additional sales operations accounting administrative personnel percentage revenues general administrative expenses 103 2007 compared 114 2006 general administrative expense includes sharebased compensation expense 47 million 2007 30 million 2006 june 29 2007 sold capillary tubing assets part production services segment total consideration approximately 163 million cash recognized gain 89 million related sale assets amortization expense 41 million year ended december 31 2007 compared 19 million year ended december 31 2006 increase amortization expense due amortization intangible assets connection acquisitions income operations year ended december 31 2007 totaled 1248 million 842 increase 677 million income operations year ended december 31 2006 reflecting increase revenues gross profit offset part increased general administrative expense amortization expense income operations percentage revenues increased slightly 219 2007 218 2006 income operations 2007 period includes 89 million gain sale capillary tubing assets second quarter 2007 net interest expense 463 million year ended december 31 2007 compared 203 million year ended december 31 2006 interest expense increased 2007 due increased debt august 2006 issued 950 million senior notes bearing interest 90 fund portion acquisition dls january 2007 issued 2500 million senior notes bearing interest 85 pay part 3000 million bridge loan utilized complete ogr acquisition working capital bridge loan repaid january 29 2007 average interest rate bridge loan approximately 106 interest expense 2007 includes writeoff deferred financing fees 12 million related repayment bridge loan interest expense includes amortization expense deferred financing costs 19 million 15 million 2007 2006 respectively provision income taxes year ended december 31 2007 288 million 364 net income taxes compared 114 million 243 net income taxes 2006 increase provision income taxes attributable increase operating income higher effective tax rate effective tax rate 2006 favorably impacted reversal valuation allowance deferred tax assets valuation allowance reversed due operating results allowed realization deferred tax assets net income attributed common stockholders 504 million year ended december 31 2007 increase 416 compared net income attributed common stockholders 356 million year ended december 31 2006 following table compares revenues income operations business segments years ended december 31 2007 december 31 2006 income operations consists revenues less cost revenues general administrative expenses depreciation amortization rental services rental services revenues 1212 million year ended december 31 2007 increase 1352 515 million revenues year ended december 31 2006 income operations increased 869 491 million 2007 compared 263 million 2006 increase revenue operating income primarily attributable acquisition ogr assets december 2006 income operations percentage revenues decreased 405 2007 compared 510 prior year result higher depreciation expense associated ogr acquisition capital expenditures rental services revenues operating income impacted competitive market environment due decreased us gulf mexico drilling activity last half 2007 due hurricane season departure drilling rigs favor international markets international drilling august 14 2006 acquired dls established international drilling segment international drilling revenues 2158 million year ended december 31 2007 increase 695 million revenues year ended december 31 2006 income operations increased 388 million 2007 compared 122 million 2006 income operations percentage revenue increased 180 2007 compared 176 2006 2007 placed orders 16 service rigs workover rigs pulling rigs four drilling rigs four service rigs delivered fourth quarter 2007 expect rigs placed service first three quarters 2008 directional drilling revenues year ended december 31 2007 directional drilling segment 961 million increase 256 765 million revenues year ended december 31 2006 increase revenues due purchase additional mwd tools benefit acquisitions completed last half 2007 added downhole motors mwds directional drillers additional equipment personnel enabled us strengthen presence new geographic markets increase market penetration income operations increased 67 188 million 2007 177 million 2006 income operations percentage revenues decreased 196 2007 compared 231 prior year decrease operating margin percentage revenues due increased expenses downhole motor rentals repairs experienced primarily first three quarters 2007 prior recent additions downhole motor fleet increased personnel costs increased depreciation expense tubular services revenues year ended december 31 2007 tubular services segment 535 million increase 52 509 million revenues year ended december 31 2006 revenues domestic operations increased 456 million 2007 444 million 2006 result investment new equipment acquisition rogers april 2006 revenues mexican operations increased 79 million 2007 65 million 2006 income operations decreased 143 107 million 2007 125 million 2006 income operations percentage revenues decreased 201 2007 compared 247 prior year results tubular services segment impacted increasingly competitive environment domestically casing tubing services exacerbated decline drilling activity us gulf mexico last half 2007 decreased sales power tongs 2007 compared 2006 revenues mexican operations increased 215 2007 compared 2006 impacted fourth quarter 2007 severe weather flooding mexico underbalanced drilling underbalanced drilling revenues 510 million year ended december 31 2007 increase 184 compared 430 million revenues year ended december 31 2006 income operations increased 211 131 million 2007 compared income operations 108 million 2006 income operations percentage revenues increased slightly 257 2007 251 2006 underbalanced drilling revenues operating income 2007 period increased compared 2006 period due part investment additional equipment principally new compressors new “foam” units 2007 underbalanced drilling affected decrease drilling activity certain geographic areas customers offset increased market presence growth drilling activity attractive geographic areas production services segment production services revenues 334 million year ended december 31 2007 compared 196 million revenues year ended december 31 2006 income operations 105 million 2007 compared income operations 21 million 2006 revenues 2007 increased compared 2006 due primarily acquisition petro rentals october 17 2006 addition two coil tubing units fourth quarter 2006 one unit first quarter 2007 one additional unit delivered end second quarter 2007 offset part sale capillary tubing assets june 2007 increase income operations attributed 89 million gain sale capillary tubing assets 2007 production services segment experienced delays delivery activation new coil tubing units result experienced low utilization coil tubing units increases personnel expenses including increased lodging relocation training expenses crews without benefit corresponding increases revenues comparison years ended december 31 2006 december 31 revenues year ended december 31 2006 3110 million increase 1879 compared 1080 million year ended december 31 2005 revenues increased business segments due successful integration acquisitions completed third quarter 2005 2006 investment new equipment improved pricing services addition operations sales personnel opening new operations offices revenues increased significantly due acquisition dls august 14 2006 expanded operations sixth operating segment international drilling revenues also increased significantly rental services segment due acquisition specialty effective january 1 2006 tubular services segment also substantial increase revenue primarily due acquisitions casing tubing assets patterson services inc september 1 2005 acquisition rogers april 1 2006 along investment additional equipment improved market conditions increased market penetration services south texas east texas louisiana us gulf mexico revenues increased underbalanced drilling segment due purchase additional equipment improved pricing services directional drilling segment revenues increased 2006 period compared 2005 period due improved pricing directional drilling services august 2005 acquisition target provides mwd tools purchase additional downhole motors mwds increased capacity market presence gross margin year ended december 31 2006 increased 2438 1051 million 338 revenues compared 306 million 283 revenues year ended december 31 2005 increase gross profit due increase revenues business segments increase gross profit percentage revenues primarily due acquisition specialty january 1 2006 high margin rental tool business improved pricing services generally investments new capital equipment also contributing improved gross profit margin acquisition target purchase additional mwd’s acquisition rogers increase gross profit partially offset increase depreciation expense 3157 203 million compared 49 million 2005 increase due additional depreciable assets resulting acquisitions capital expenditures cost revenues consists principally labor costs benefits equipment rentals maintenance repairs equipment depreciation insurance fuel many costs fixed gross profit percentage revenues generally affected level revenues general administrative expense 355 million year ended december 31 2006 compared 156 million year ended december 31 2005 general administrative expense increased due additional expenses associated acquisitions hiring additional sales operations administrative personnel general administrative expense also increased accounting consulting fees expenses connection initiatives strengthen internal control processes costs related sarbanes oxley compliance efforts increased corporate accounting administrative staff percentage revenues general administrative expenses 114 2006 compared 144 2005 adopted sfas 123r sharebased payment effective january 1 2006 statement requires sharebased payments employees including grants employee stock options recognized financial statements based grantdate fair values adopted sfas 123r using modified prospective transition method utilizing blackscholes option pricing model calculation fair value employee stock options modified prospective method record compensation cost related unvested stock awards december 31 2005 recognizing unamortized grant date fair value awards remaining vesting periods awards change historical reported earnings therefore recorded expense 34 million related stock awards year ended december 31 2006 30 million recorded general administrative expense balance recorded direct cost prior january 1 2006 accounted stockbased compensation using accounting principle board opinion 25 apb 25 apb 25 compensation expense recognized stock options exercise price less market price grant date option accordingly compensation cost recognized apb 25 amortization expense 19 million year ended december 31 2006 compared 15 million year ended december 31 2005 increase amortization expense due amortization intangible assets connection acquisitions income operations year ended december 31 2006 totaled 677 million 4010 increase 135 million income operations year ended december 31 2005 reflecting increase revenues gross profit offset part increased general administrative expenses income operations percentage revenues increased 218 2006 125 2005 due increase gross margin offset increases amortization expense general administrative expenses net interest expense 203 million year ended december 31 2006 compared 47 million year ended december 31 2005 interest expense increased 2006 due increased debt january 2006 issued 1600 million senior notes bearing interest 90 fund acquisition specialty pay outstanding debt working capital august 2006 issued additional 950 million senior notes bearing interest 90 fund portion acquisition dls december 18 2006 borrowed 3000 million senior unsecured bridge loan fund acquisition ogr average interest rate bridge loan approximately 106 interest expense 2006 includes writeoff 453000 related financing fees bridge loan bridge loan repaid january 29 2007 remaining 12 million financing fees written 2007 third quarter 2005 incurred debt retirement expense 11 million related refinancing debt amount includes prepayment penalties writeoff deferred financing fees previous financing minority interest income subsidiaries year ended december 31 2006 0 compared 488000 corresponding period 2005 due acquisition minority interest aircomp july 11 2005 provision income taxes year ended december 31 2006 114 million 243 net income taxes compared 13 million 158 net income taxes 2005 increase provision income taxes attributable significant increase operating income resulted utilization deferred tax assets including net operating losses increase percentage income taxes net income taxes attributable operations argentina taxed 350 net income attributed common stockholders 356 million year ended december 31 2006 increase 3965 compared net income attributed common stockholders 72 million year ended december 31 2005 following table compares revenues income operations business segments years ended december 31 2006 december 31 2005 income operations consists revenues less cost revenues general administrative expenses depreciation amortization rental services segment rental services revenues 515 million year ended december 31 2006 increase 51 million revenues year ended december 31 2005 income operations increased 263 million 2006 compared 13 million 2005 increase revenue operating income primarily attributable acquisition specialty effective january 1 2006 improved pricing improved utilization inventory rental equipment lesser extent acquisition ogr assets december 2006 international drilling segment international drilling revenues 695 million year ended december 31 2006 income operations 122 million segment operations created acquisition dls august 2006 directional drilling segment revenues year ended december 31 2006 directional drilling segment 765 million increase 642 466 million revenues year ended december 31 2005 income operations increased 1391 177 million 2006 74 million 2005 improved results segment due increase drilling activity texas gulf coast areas improved pricing acquisition target august 1 2005 purchase additional six mwds increased operating expenses result addition operations personnel offset growth revenues improved pricing services tubular services segment revenues year ended december 31 2006 tubular services segment 509 million increase 1431 209 million revenues year ended december 31 2005 revenues domestic operations increased 444 million 2006 145 million 2005 result acquisition rogers acquisition casing tubing assets patterson services inc september 1 2005 investment new equipment resulted increased market penetration services south texas east texas louisiana us gulf mexico year ended december 2005 also adversely impacted hurricane activity september 2005 revenues mexican operations increased 65 million 2006 64 million 2005 income operations increased 1512 125 million 2006 50 million 2005 increase segment’s operating income due increased revenues domestically mexico operations underbalanced drilling segment underbalanced drilling revenues 430 million year ended december 31 2006 increase 677 compared 257 million revenues year ended december 31 2005 income operations increased 926 108 million 2006 compared income operations 56 million 2005 underbalanced drilling revenues operating income 2006 period increased compared 2005 period due part acquisition air drilling assets w investment additional equipment improved pricing west texas production services segment production services revenues 196 million year ended december 31 2006 compared 98 million revenues year ended december 31 2005 income operations 21 million 2006 compared loss operations 99000 2005 increase revenue attributable acquisition petrorentals completed october 2006 acquisition capcoil may 1 2005 improved utilization pricing services increase operating income primarily related operations petrorental addition two coil tubing units fourth quarter 2006 liquidity capital resources ongoing capital requirements arise primarily need service debt acquire maintain equipment fund working capital requirements complete acquisitions primary sources liquidity proceeds issuance debt equity securities cash flows operations cash equivalents 437 million december 31 2007 compared 397 million december 31 2006 operating activities year ended december 31 2007 generated 1035 million cash operating activities net income year ended december 31 2007 504 million noncash additions net income totaled 606 million 2007 period consisting primarily 550 million depreciation amortization 49 million related expensing stock options required sfas 123r 80 million deferred income tax 730000 provision bad debts 32 million amortization writeoff deferred financing fees partially offset 23 million gain disposition equipment 89 million gain sale capillary assets year ended december 31 2007 changes working capital used 76 million cash principally due increase 308 million accounts receivable increase 45 million assets increase inventories 54 million offset decrease 82 million current assets increase 107 million accounts payable increase 60 million accrued interest increase 40 million accrued employee benefits payroll taxes increase 15 million accrued expenses increase longterm liabilities 27 million accounts receivables increased december 31 2007 primarily due increase revenues 2007 assets increase primarily due contract costs related deployment new rigs international drilling segment decrease current assets principally due collection working capital adjustment ogr acquisition approximately 71 million first quarter 2007 accrued interest increased december 31 2007 due principally interest accrued 85 senior notes issued january 2007 90 senior notes issued august 2006 payable semiannually accounts payable accrued employee benefits payroll taxes accrued expenses increased primarily due increase costs due growth revenues acquisition completed 2007 longterm liabilities increased primarily due deferral contract revenue related new rigs constructed international drilling segment year ended december 31 2006 generated 537 million cash operating activities net income year ended december 31 2006 356 million noncash additions net income totaled 276 million 2006 period consisting primarily 221 million depreciation amortization 34 million related expensing stock options required sfas 123r 22 million deferred income tax 781000 provision bad debts 15 million amortization finance fees including bridge loan fees partially offset 24 million gain disposition equipment year ended december 31 2006 changes working capital used 99 million cash principally due increase 232 million accounts receivable increase 26 million inventories decrease 23 million accounts payable offset part decrease current assets 25 million increase 114 million accrued interest increase 34 million accrued employee benefits payroll taxes increase 872000 accrued expenses accounts receivables increased december 31 2006 primarily due increase revenues 2006 accrued interest increased december 31 2006 due principally interest accrued 90 senior notes payable semiannually accrued employee benefits payroll taxes accrued expenses increased primarily due increase costs due growth revenues acquisition completed 2006 year ended december 31 2005 generated 36 million cash operating activities net income year ended december 31 2005 72 million noncash additions net income totaled 74 million 2005 period consisting primarily 64 million depreciation amortization 488000 minority interest income subsidiary 962000 amortization writeoff financing fees conjunction refinancing 219000 provision bad debts partially offset 669000 gain disposition equipment year ended december 31 2005 changes working capital used 110 million cash principally due increase 107 million accounts receivable increase 31 million inventories increase assets 936000 decrease liabilities 266000 decrease 97000 accrued expenses offset part decrease current assets 929000 increase 24 million accounts payable increase 324000 accrued interest increase 443000 accrued employee benefits payroll taxes accounts receivables increased december 31 2005 due primarily increase revenues 2005 accounts payable increased 24 million december 31 2005 due increase cost sales associated increase revenues acquisitions completed 2005 2004 investing activities year ended december 31 2007 used 1371 million investing activities consisting four acquisitions capital expenditures year ended december 31 2007 completed following acquisitions total net cash outlay 410 million consisting purchase price acquisition costs less cash acquired • june 2007 acquired coker purchase price approximately 36 million cash promissory note 350000 • july 2007 acquired diggar purchase price approximately 67 million cash payment approximately 28 million debt promissory note 750000 • october 2007 acquired rebel purchase price approximately 50 million cash payment approximately 18 million debt escrow promissory notes aggregate 500000 • november 2007 acquired substantially assets diamondback purchase price approximately 231 million cash addition made capital expenditures approximately 1132 million year ended december 31 2007 including 349 million increase inventory equipment replace “lostinhole” equipment rental services segment 289 million purchase improve replace equipment international drilling segment 112 million purchase equipment directional drilling segment 174 million purchase improve equipment underbalanced drilling segment 93 million purchase improve tubular services equipment approximately 107 million expand production services segment received proceeds 163 million sale capillary assets also received 128 million sale assets year ended december 31 2007 comprised mostly equipment “lostinhole” rental services segment 110 million directional drilling segment 14 million also made advance payments 115 million purchase new drilling service rigs delivered 2008 international drilling segment year ended december 31 2006 used 5594 million investing activities consisting six acquisitions capital expenditures year ended december 31 2006 completed following acquisitions total net cash outlay 5266 million consisting purchase price acquisition costs less cash acquired • effective january 1 2006 acquired specialty purchase price approximately 953 million cash • effective april 1 2006 acquired rogers purchase price approximately 113 million cash 125285 shares common stock promissory note 750000 • august 14 2006 acquired dls purchase price approximately 937 million cash 25 million shares common stock assumption 91 million indebtedness • october 16 2006 acquired petro rentals purchase price approximately 202 million cash 246761 shares common stock payment approximately 96 million debt • effective december 1 2006 acquired tanus purchase price 25 million cash • december 18 2006 acquired substantially assets ogr purchase price approximately 2910 million cash 32 million shares common stock addition made capital expenditures approximately 397 million year ended december 31 2006 including 45 million replace “lostinhole” equipment increase inventory equipment rental services segment 58 million purchase improve replace equipment international drilling segment 51 million purchase equipment directional drilling segment 77 million purchase improve equipment underbalanced drilling segment 110 million purchase improve tubular services equipment approximately 53 million expand production services segment also received 69 million sale assets year ended december 31 2006 comprised mostly equipment “lostinhole” rental services segment 38 million directional drilling segment 18 million year ended december 31 2005 used 531 million investing activities year ended december 31 2005 completed following acquisitions total net cash outlay 369 million consisting purchase price acquisition costs less cash acquired • april 1 2005 acquired delta purchase price approximately 46 million cash 223114 shares common stock two promissory notes totaling 350000 • may 1 2005 acquired capcoil purchase price approximately 27 million cash 168161 shares common stock payment assumption approximately 13 million debt • july 11 2005 acquired compressed air drilling assets wt purchase price 60 million cash • july 11 2005 acquired mi it’s 45 interest aircomp subordinated note principal amount 48 million issued aircomp paid mi 71 million cash reissued 40 million subordinated note • effective august 1 2005 acquired target purchase price approximately 13 million cash forgiveness lease receivable 592000 • september 1 2005 acquired casing tubing service assets patterson services inc purchase price approximately 156 million addition made capital expenditures approximately 178 million year ended december 31 2005 including 29 million purchase equipment directional drilling segment 70 million purchase improve equipment underbalanced drilling segment 52 million purchase improve tubular services equipment approximately 15 million expand production services segment also received 16 million sale assets year ended december 31 2005 comprised mostly equipment lost hole directional drilling segment 10 million rental services segment 408000 financing activities year ended december 31 2007 financing activities provided net 376 million cash received 2500 million borrowings issuance 85 senior notes due 2017 also received 1001 million net proceeds issuance 6000000 shares common stock 17 million tax benefit stock compensation plans 33 million proceeds warrant option exercises 882624 shares common stock proceeds used repay longterm debt totaling 3097 million pay 78 million debt issuance costs repayment longterm debt consisted primarily repayment 3000 million bridge loan used fund acquisition ogr assets year ended december 31 2006 financing activities provided net 5436 million cash received 5578 million borrowings longterm debt facilities consisting primarily issuance 2550 million 90 senior notes due 2014 3000 million senior unsecured bridge loan bridge loan repaid january 29 2007 used fund acquisition ogr assets also received 463 million net proceeds issuance 3450000 shares common stock 64 million tax benefit options 63 million proceeds warrant option exercises 1851377 shares common stock proceeds used repay longterm debt totaling 540 million repay 64 million net borrowings revolving lines credit repay related party debt 30 million pay 99 million debt issuance costs year ended december 31 2005 financing activities provided net 441 million cash received 563 million borrowings longterm debt facilities 155 million net proceeds issuance 1761034 shares common stock 25 million net borrowings revolving lines credit 14 million proceeds warrant option exercises 1076154 shares common stock proceeds used repay longterm debt totaling 282 million repay related party debt 15 million pay 18 million debt issuance costs january 18 2006 august 14 2006 closed private offerings qualified institutional buyers pursuant rule 144a securities act 1600 million 950 million aggregate principal amount senior notes respectively senior notes due january 15 2014 bear interest 90 proceeds used fund acquisitions specialty dls repay existing debt general corporate purposes debt repaid included outstanding balances credit agreement including 421 million term loan 64 million working capital advances 40 million subordinated note issued connection acquisition aircomp approximately 30 million subordinated note issued connection acquisition tubular approximately 548000 real estate loan approximately 350000 outstanding equipment financing december 18 2006 closed 3000 million senior unsecured bridge loan bridge loan due 18 months closing weighted average interest rate 106 bridge loan repaid january 29 2007 used fund acquisition ogr january 2007 closed private offering qualified institutional buyers pursuant rule 144a securities act 2500 million principal amount 85 senior notes due 2017 proceeds senior notes offering together portion proceeds concurrent common stock offering used repay debt outstanding 3000 million bridge loan facility incurred finance acquisition substantially assets ogr january 18 2006 also executed amended restated credit agreement provides 250 million revolving line credit maturity january 2010 agreement contains customary events default financial covenants limits ability incur additional indebtedness make capital expenditures pay dividends make distributions create liens sell assets obligations agreement secured substantially assets excluding dls assets including 23 shares dls april 26 2007 entered second amended restated credit agreement increased revolving line credit 620 million final maturity date april 26 2012 december 3 2007 entered first amendment second amended restated credit agreement increased revolving line credit 900 million amended restated credit agreement contains customary events default financial covenants limits ability incur additional indebtedness make capital expenditures pay dividends make distributions create liens sell assets obligations amended restated credit agreement secured substantially assets located united states december 31 2007 2006 amounts borrowed facility availability reduced outstanding letters credit 84 million 97 million respectively part acquisition dls assumed various bank loans floating interest rates based libor plus margin terms ranging 2 5 years weighted average interest rates loans 67 70 december 31 2007 2006 respectively bank loans denominated us dollars outstanding amount due december 31 2007 2006 49 million 73 million respectively part acquisition mca 2001 issued note sellers mca original amount 22 million accruing interest rate 575 per annum note reduced 15 million result settlement legal action sellers 2003 march 2005 reached agreement sellers holders note result action brought us sellers terms agreement paid holders note 10 million cash agreed pay additional 350000 june 1 2006 additional 150000 june 1 2007 settlement claims december 31 2007 2006 outstanding amounts due 0 150000 respectively connection purchase delta issued sellers note amount 350000 note bore interest 2 principal accrued interest repaid maturity april 1 2006 connection acquisition rogers issued seller note amount 750000 note bears interest 50 due april 3 2009 connection purchase coker issued seller note amount 350000 note bears interest 825 due june 29 2008 connection purchase diggar issued seller note amount 750000 note bears interest 60 due july 26 2008 connection purchase rebel issued sellers notes amount 500000 notes bear interest 50 due october 23 2008 connection purchase tubular agreed pay total 12 million seller exchange noncompete agreement monthly payments 20576 due agreement january 31 2007 connection purchase safcooil field products inc safco also agreed pay total 150000 sellers exchange noncompete agreement required make annual payments 50000 september 30 2007 connection purchase capcoil agreed pay total 500000 two management employees exchange noncompete agreements required make annual payments 110000 may 2008 total amounts due noncompete agreements december 31 2007 2006 110000 270000 respectively 2000 compensated directors including current directors nederlander toboroff served board directors 1989 march 31 1999 without compensation issuing promissory notes totaling 325000 notes bear interest rate 50 december 31 2007 2006 principal accrued interest notes totaled approximately 32000 various rig equipment financing loans interest rates ranging 78 87 terms 2 5 years december 31 2007 2006 outstanding balances rig equipment financing loans 595000 35 million respectively january 2006 prepaid 350000 outstanding equipment loans proceeds senior notes offering april 2006 august 2006 obtained insurance premium financings amount 19 million 896000 fixed interest rates 56 60 respectively terms agreements amounts outstanding paid 10 month 11 month repayment schedules outstanding balance notes approximately 10 million december 31 2006 april 2007 august 2007 obtained insurance premium financings amount 32 million 13 fixed interest rates 59 57 respectively terms agreements amounts outstanding paid 11 month repayment schedules outstanding balance notes approximately 17 million december 31 2007 also various capital leases terms expire 2008 december 31 2007 2006 amounts outstanding capital leases 14000 414000 respectively following table summarizes obligations commitments make future payments notes payable operating leases employment contracts consulting agreements periods specified december 31 2007 identified capital expenditure projects require approximately 1400 million 2008 exclusive acquisitions 827 million committed december 31 2007 believe cash generated operations cash hand cash available credit facilities provide sufficient funds identified projects intend implement growth strategy increasing scope services internal growth acquisitions regularly involved discussions number potential acquisition candidates expect make capital expenditures acquire maintain existing equipment performance cash flow operations determined demand services turn affected customers’ expenditures oil natural gas exploration development industry perceptions expectations future oil natural gas prices areas operate need refinance existing debt facilities become due provide funds capital expenditures acquisitions effect expansion plans require additional equity debt financing excess current working capital amounts available credit facilities assurance successful raising additional debt equity capital terms acceptable us recent developments january 23 2008 entered agreement plan merger bronco drilling company inc bronco whereby bronco become whollyowned subsidiary allischalmers merger agreement approved board directors board directors bronco provides bronco stockholders receive aggregate merger consideration value approximately 4378 million consisting 2800 million cash b shares common stock par value 001 per share aggregate value approximately 1578 million number shares common stock issued based average closing price common stock tentrading day period ending two days prior closing completion merger conditioned upon among things adoption merger agreement bronco’s stockholders approval stockholders issuance shares common stock used merger consideration order finance cash component merger consideration repayment outstanding bronco debt transaction expenses expect incur debt 3500 million intend obtain 3500 million either 1 permanent debt financing 3500 million 2 permanent debt financing cannot consummated prior closing date merger draw senior unsecured bridge loan facility aggregate principal amount 3500 million arranged rbc capital markets corporation goldman sachs credit partners lp acting joint lead arrangers joint bookrunners executed commitment letter dated january 28 2008 royal bank canada goldman sachs subject certain conditions severally committed provide 50 loans senior unsecured bridge facility us commitment bridge loan facility terminate july 31 2008 drawn bridge facility date merger consummated date commitment may also terminate prior july 31 2008 merger abandoned material condition merger satisfied breach obligations commitment letter may use proceeds bridge facility finance cash component merger consideration repay outstanding bronco debt pay transaction expenses january 29 2008 burt adams resigned president chief operating officer effective february 28 2008 mr adams remain member board directors january 29 2008 mark c patterson elected senior vicepresident rental services january 29 2008 terrence p keane elected senior vicepresident oilfield services january 31 2008 entered agreement bch ltd bch invest 400 million cash bch form 15 convertible subordinated secured debenture convertible time option 49 common equity bch end two years option acquire remaining 51 bch parent brazalta resources corp brazalta based independent valuation mutually acceptable investment bank bch canadianbased oilfield services company engaged contract drilling operations exclusively brazil february 15 2008 dls subsidiary argentina entered 250 million import finance facility bank borrowings facility used fund portion purchase price new drilling service rigs ordered international drilling operation facility available borrowings december 31 2008 drawdown shall repaid four years equal semiannual instalments beginning one year disbursement final principal payment due later march 15 2013 interest payable every six months import finance facility unsecured contains customary events default financial covenants limits dls’ ability incur additional indebtedness make capital expenditures create liens sell assets critical accounting policies identified policies critical business operations understanding results operations impact associated risks related policies business operations discussed throughout management’s discussion analysis financial condition results operations policies affect reported expected financial results detailed discussion application accounting policies see note 1 notes consolidated financial statements included elsewhere document preparation report requires us make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period assurance actual results differ estimates allowance doubtful accounts determination collectibility amounts due customers requires us use estimates make judgments regarding future events trends including monitoring customer payment history current credit worthiness determine collectibility reasonably assured well consideration overall business climate customers operate uncertainties require us make frequent judgments estimates regarding customers’ ability pay amounts due us order determine appropriate amount valuation allowances required doubtful accounts provisions doubtful accounts recorded becomes evident customers able make required payments either contractual due dates future revenue recognition provide rental equipment drilling services customers per day daywork per job contractual rates recognize drilling related revenue work progresses collectibility reasonably assured revenue daywork contracts recognized realized realizable earned daywork contracts revenue recognized based number days completed fixed rates stipulated contract certain contracts receive lumpsum fees equipment mobilization costs mobilization fees related costs deferred amortized contract terms material securities exchange commission’s staff accounting bulletin 104 revenue recognition financial statements provides guidance sec staff’s views application generally accepted accounting principles selected revenue recognition issues revenue recognition policy accordance generally accepted accounting principles sab 104 impairment longlived assets longlived assets include property plant equipment goodwill intangibles comprise significant amount total assets make judgments estimates conjunction carrying value assets including amounts capitalized depreciation amortization methods useful lives additionally carrying values assets reviewed impairment whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires us make longterm forecasts future revenues costs related assets subject review forecasts require assumptions demand products services future market conditions technological developments significant unanticipated changes assumptions could require provision impairment future period goodwill intangibles december 31 2007 recorded approximately 1384 million goodwill 352 million identifiable intangible assets perform purchase price allocations intangible assets make business combination business combinations purchase price allocations consummated acquisitions reportable segments excess purchase price allocation fair values tangible assets allocated identifiable intangibles thereafter goodwill subsequently perform initial impairment tests annual impairment tests accordance financial accounting standards board 141 business combinations financial accounting standards board 142 goodwill intangible assets initial valuations used two approaches determine carrying amount individual reporting units first approach discounted cash flow method focuses expected cash flow applying approach cash flow available distribution projected finite period years cash flow available distribution defined amount cash could distributed dividend without impairing future profitability operations cash flow available distribution terminal value end estimation period discounted present value derive indication value business enterprise valuation method dependent upon assumptions made regarding future cash flow cash requirements second approach guideline company method focuses comparing us selected reasonably similar publicly traded companies method valuation multiples derived operating data selected similar companies ii evaluated adjusted based strengths weaknesses relative selected guideline companies iii applied operating data arrive indication value valuation method dependent upon assumption value evaluated analysis earnings strengths weaknesses relative selected similar companies significant unanticipated changes assumptions could require provision impairment future period income taxes determination evaluation annual income tax provision involves interpretation tax laws various jurisdictions operate requires significant judgment use estimates assumptions regarding significant future events amount timing character income deductions tax credits changes tax laws regulations level operations profitability jurisdiction may impact tax liability given year annual tax provision based information available us time number years may elapse ultimate tax liabilities certain tax jurisdictions determined current income tax expense reflects estimate income tax liability current year withholding taxes changes tax rates changes prior year tax estimates returns filed deferred tax assets liabilities recognized anticipated future tax effects temporary differences financial statement basis tax basis assets liabilities using enacted tax rates effect year end valuation allowance deferred tax assets recorded morelikelythannot benefit deferred tax asset realized provide uncertain tax positions pursuant fasb interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 intention permanently reinvest undistributed earnings nonus subsidiaries accordingly provided us deferred taxes undistributed earnings nonus subsidiaries distribution made us undistributed earnings subsidiaries could required record additional taxes cannot predict make distribution undistributed earnings unable make determination amount unrecognized deferred tax liability recently issued accounting standards september 2006 fasb issued sfas 157 fair value measurements sfas 157 clarifies principle fair value based assumptions market participants would use pricing asset liability establishes fair value hierarchy prioritizes information used develop assumptions standard fair value measurements would separately disclosed level within fair value hierarchy sfas 157 effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years early adoption permitted subsequently fasb provided oneyear deferral provisions statement 157 nonfinancial assets liabilities recognized disclosed fair value consolidated financial statements nonrecurring basis believe adoption sfas 157 material impact financial position results operations cash flows december 2007 fasb issued sfas 141r business combinations statement retains fundamental requirements sfas 141 “business combinations” acquisition method accounting used business combinations expands method accounting transactions events one entity obtains control one businesses assets acquisition date subsequent periods statement replaces sfas 141 requiring measurement acquisition date fair value assets acquired liabilities assumed noncontrolling interest additionally sfas 141r requires acquisitionrelated costs including restructuring costs recognized expense separately acquisition sfas 141r applies prospectively business combinations fiscal years beginning december 15 2008 adopt sfas 141r beginning january 1 2009 apply future acquisitions february 2007 fasb issued statement 159 fair value option financial assets financial liabilities permits entities elect measure many financial instruments certain items fair value upon adoption sfas 159 entity may elect fair value option eligible items exist adoption date subsequent initial adoption election fair value option made initial recognition asset liability upon remeasurement event gives rise newbasis accounting subsequent changes fair value instrument reported earnings sfas 159 affect existing accounting literature requires certain assets liabilities recorded fair value eliminate disclosure requirements included accounting standards sfas 159 effective beginning reporting entity’s first fiscal year begins november 15 2007 currently evaluating provisions sfas 159 yet determined impact financial statements december 2007 fasb issued sfas 160 noncontrolling interests consolidated financial statements amendment arb 51 sfas 160 requires noncontrolling minority interests reported component shareholders’ equity ii net income attributable parent noncontrolling interest separately identified consolidated statement operations iii changes parent’s ownership interest parent retains controlling interest accounted equity transactions iv retained noncontrolling equity investment upon deconsolidation subsidiary initially measured fair value v sufficient disclosures provided clearly identify distinguish interests parent interests noncontrolling owners sfas 160 effective annual periods beginning december 15 2008 applied prospectively presentation disclosure requirements statement shall applied retrospectively periods presented believe adoption sfas 160 material impact financial position results operations offbalance sheet arrangements balance sheet arrangements normal operating leases employee contracts likely current future material effect financial condition changes financial condition revenues expenses results operations liquidity capital expenditures capital resources 900 million revolving line credit maturity january 2010 december 31 2007 amounts borrowed facility availability reduced outstanding letters credit 84 million guarantee obligations unconsolidated entities item 7a item 7 management’s discussion analysis financial condition results operations following discussion analysis read conjunction selected historical financial data accompanying financial statements notes financial statements included elsewhere document following discussion contains forwardlooking statements within meaning private securities litigation reform act 1995 reflect plans estimates beliefs actual results could differ materially anticipated forwardlooking statements result risks uncertainties including limited discussed “item 1a risk factors” overview business multifaceted oilfield services company provides services equipment oil natural gas exploration production companies throughout us including texas oklahoma louisiana arkansas pennsylvania new mexico colorado offshore gulf mexico internationally primarily argentina mexico brazil operate three sectors oil natural gas service industry oilfield services drilling completion rental services derive operating revenues rates per job charge labor equipment required provide service rates per day equipment tools rent customers price charge services depends upon several factors including level oil natural gas drilling activity competitive environment particular geographic regions operate contracts awarded based price quality service equipment general reputation experience personnel demand drilling services historically volatile affected capital expenditures oil natural gas exploration development companies fluctuate based upon prices oil natural gas expectation prices oil natural gas rig count important indicator activity levels oil natural gas industry rig count us increased 862 december 27 2002 1721 december 26 2008 according baker hughes rig count however rig count 2008 reached peak 2031 august 2008 began decline fourth quarter 2008 continued decline 1243 february 27 2009 rapid decline us rig count due economic slowdown us decrease natural gas oil prices impacted capital expenditures customers turmoil financial markets impact availability capital customers also affected drilling activity us directional horizontal rig counts increased 283 december 27 2002 912 december 26 2008 accounted 33 53 total us rig count respectively directional horizontal rig count also decreased 692 february 27 2009 offshore gulf mexico rig count 51 rigs february 27 2009 58 february 28 2008 revenue correlated rig count operating costs fluctuate direct proportion changes revenues operating expenses consist principally labor costs benefits equipment rentals maintenance repairs equipment depreciation insurance fuel many costs fixed operating income percentage revenues generally affected level revenues company outlook believe revenue operating income oilfield service rental services segment suffer significantly 2009 due drop us rig count reduction customers’ spending already taken steps 2009 reduce costs including laying employees closing unprofitable operating locations even steps oilfield services segment may still generate negative operating income 2009 due focus us market although expect rental services segment negatively impacted material fashion industry wide reduction drilling completion activity believe rental services segment still generate positive operating income albeit lower revenue reduced margins anticipate drilling completion segment exceed 2008 results revenue operating income benefit full year operations rigs acquired 2008 acquisition bch end 2008 drilling completion segment primarily operates argentina brazil two rigs coming service 2009 us market currently firm commitments work us rigs impact revenue operating income rigs may insignificant bch relatively new company yet attained levels profitability forecasted expect incur less general administrative expenses 2009 reduce administrative staffs reflect decline activity net interest expense dependent upon level debt cash hand principally dependent acquisitions complete capital expenditures cash flows operations due shortage liquidity credit us financial markets may see increase effective interest rate 2009 addition interest rate credit facilities may increase violate financial covenants 2009 anticipate effective tax rate increase 2009 due lower taxable income spread negative effects nondeductible items state income taxes rate could exceed 500 us tax purposes 2009 addition favorable tax rates realized 2008 international operations due foreign currency fluctuations may realized 2009 sustainability future growth operating income principally dependent level revenues pricing environment services addition sustainability demand services dependent upon customers’ capital spending plans largely driven current commodity prices expectations future commodity prices recent declines natural gas oil prices caused customers delay curtail capital spending plans addition impact decline natural gas prices customers’ capital expenditures overall liquidity recent credit crisis limited availability funds lead decreased capital expenditures customers shortage liquidity credit combined recent substantial losses worldwide equity markets could lead extended global recession slowdown economic activity caused recession reduced demand energy resulted lower oil natural gas prices continued slowdown economic activity could material adverse effect revenue profitability monitoring credit worthiness customers well outstanding receivables light current credit crisis increased reserve doubtful accounts significantly december 31 2008 reserves may necessary 2009 continue monitor effect global financial crisis industry resulting impact capital spending budgets customers order estimate effect company already reduced planned capital spending significantly 2009 compared 2008 currently expect 2009 capital expenditures total approximately 750 million compared 2008 capital expenditures 1545 million believe 2009 extremely challenging year operations optimistic cost saving cuts coupled strategy striving mitigate cyclical risk international growth offering new equipment technology customers focus us land shale plays carry us current recession results operations april 2006 acquired outstanding stock rogers october 2006 acquired outstanding stock petro rentals results operations acquired companies included oilfield services segment august 2006 acquired outstanding stock dls december 2006 acquired outstanding stock tanus report operations dls tanus drilling completion segment january 2006 acquired outstanding stock specialty december 2006 acquired substantially assets ogr report operations specialty ogr rental services segment june 2007 acquired outstanding stock coker july 2007 acquired outstanding stock diggar november 2007 acquired substantially assets diamondback october 2007 acquired outstanding stock rebel june 2007 sold capillary assets report operations four acquisitions one disposition oilfield services segment december 2008 acquired outstanding stock bch reported part drilling completion segment august 2008 sold drill pipe tong manufacturing assets reported oilfield services segment consolidated results acquisitions day acquired foregoing acquisitions dispositions affect comparability period historical results historical results may indicative future results comparison years ended december 31 2008 december 31 revenues year ended december 31 2008 6759 million increase 184 compared 5710 million year ended december 31 2007 increase revenues due increase revenues drilling completion oilfield services segments offset part decrease revenues rental services segment significant increase revenues drilling completion segment due additional drilling service rigs placed service 2008 price increases drilling completion segment generated 2913 million revenues year ended december 31 2008 compared 2158 million year ended december 31 2007 oilfield services segment revenues increased 2808 million 2008 compared 2340 million 2007 due acquisitions completed third fourth quarters 2007 added downhole motors measurementwhiledrilling mwd tools directional drilling personnel resulting increased capacity increased market penetration revenues also increased oilfield services segment due purchase additional equipment principally new compressor packages underbalanced operations coiled tubing equipment expansion operations new geographic regions impact additional mwd tools downhole motors acquisitions diggar coker completed last half 2007 easily identifiable quickly integrated preexisting operations acquisition diamondback assets provided 303 million revenues year ended december 31 2008 compared 31 million revenues date acquisition december 31 2007 additional coiled tubing equipment provided additional 118 million revenues year ended december 31 2008 compared 2007 increases revenue partially offset significant decrease revenues rental services segment due reduction drilling activity us gulf mexico beginning last half 2007 rigs departed us gulf favor international markets impact hurricanes 2008 factors also caused pricing rental services segment become competitive also impacting revenues 55 million decrease revenues capillary tubing assets compared 2007 assets sold june 29 2007 direct costs year ended december 31 2008 increased 307 4462 million 660 revenues compared 3415 million 598 revenues year ended december 31 2007 percentage basis direct costs oilfield services segment outpaced growth revenue segment oilfield services revenue year ended december 31 2008 increased 200 revenue oilfield services segment year ended december 31 2007 direct costs increased 244 period unfavorable variance primarily associated costs incurred deployment new coiled tubing rigs percentage basis direct costs drilling completion segment outpaced growth revenue segment drilling completion revenue year ended december 31 2008 increased 350 revenue drilling completion segment year ended december 31 2007 direct costs increased 451 period unfavorable variance primarily attributed higher labor costs drilling completion segment relating labor concessions argentina granted oil industry last half 2007 significant increase labor force laborrelated expenses connection delivery new rigs prior activation direct costs rental services segment decrease percentage drop revenue segment rental services revenue year ended december 31 2008 decreased 144 revenue rental services segment year ended december 31 2007 direct costs decreased 59 period direct costs rental services segment largely fixed primarily relate yard expenses maintain rental inventory addition change service mix longerterm gulf mexico rentals benefited 2007 shorter term landdrilling rental work 2008 requires handling part increases costs depreciation expense increased 246 635 million year ended december 31 2008 509 million year ended december 31 2007 primary increase depreciation expense due acquisitions completed second half 2007 capital expenditures principally addition new service rigs one drilling rig argentina general administrative expense 600 million year ended december 31 2008 compared 586 million year ended december 31 2007 general administrative expense increased primarily due amortization sharebased compensation arrangements general administrative expense includes sharebased compensation expense 79 million 2008 47 million 2007 percentage revenues general administrative expenses 89 2008 compared 103 2007 effective august 1 2008 sold drill pipe tong manufacturing assets part oilfield services segment total consideration approximately 75 million recognized gain 166000 related transaction june 29 2007 sold capillary tubing assets part oilfield services segment total consideration approximately 163 million cash recognized gain 89 million related sale assets accordance fasb 142 recorded impairment goodwill 1158 million december 31 2008 light adverse market conditions affecting stock price market conditions determined impairment necessary goodwill associated rental services segment well tubular services production services reporting units included oilfield services segment performed annual impairment test december 31 2007 recorded impairment amortization expense 42 million year ended december 31 2008 compared 41 million year ended december 31 2007 loss operations year ended december 31 2008 totaled 135 million compared 1248 million income operations year ended december 31 2007 total decrease 1383 million decrease primarily related 1158 million goodwill impairment increased depreciation amortization expense 127 million year ended december 31 2008 compared year ended december 31 2007 89 million gain related sale capillary tubing assets 2007 interest expense 484 million year ended december 31 2008 compared 495 million year ended december 31 2007 2008 borrowed revolving credit facility december 31 2008 outstanding balance 365 million 2008 dls subsidiary argentina also entered new 250 million import finance facility bank fund portion purchase price new drilling service rigs january 2007 issued 2500 million senior notes bearing interest 85 pay part 3000 million bridge loan utilized complete acquisition substantially assets ogr working capital bridge loan repaid january 29 2007 average interest rate bridge loan approximately 106 interest expense 2007 includes writeoff deferred financing fees 12 million related repayment bridge loan interest expense also includes amortization expense deferred financing costs 21 million 19 million 2008 2007 respectively interest income 56 million year ended december 31 2008 compared 33 million year ended december 31 2007 january 2008 invested 400 million 15 convertible subordinated secured debenture bch earned interest note december 28 2008 acquired outstanding stock bch 2007 excess cash result senior note financing equity offering able generate interest income period benefit income taxes year ended december 31 2008 174 million 306 net loss income taxes compared income tax expense 288 million 364 net income taxes 2007 income tax benefit recorded 2008 result net loss income taxes compared net income taxes previous year lower effective tax rate lower effective tax rate 2008 attributable impact foreign currency losses foreign income tax well lower benefit loss generated us operations due nondeductible expenses state income taxes net loss 395 million year ended december 31 2008 compared net income 504 million year ended december 31 2007 following table compares revenues income loss operations business segments years ended december 31 2008 december 31 2007 income loss operations consists revenues gain asset dispositions less direct costs general administrative expenses goodwill impairment depreciation amortization oilfield services revenues year ended december 31 2008 oilfield services segment 2808 million increase 200 2340 million revenues year ended december 31 2007 increase revenues due purchase additional mwd tools new compressors new “foam” units underbalanced drilling operations new coiled tubing units benefit acquisitions completed last half 2007 added downhole motors mwds directional drillers additional equipment personnel enabled us strengthen presence new geographic markets increase market penetration impact acquisitions diggar coker completed last half 2007 additional mwd tools easily identifiable quickly integrated preexisting operations acquisition diamondback provided 303 million 2008 compared 31 million revenues date acquisition december 31 2007 income operations decreased 274 386 million 2008 532 million 2007 income operations year ended december 31 2008 includes goodwill impairment charge 94 million year ended december 31 2007 included 89 million gain sale capillary tubing assets depreciation amortization expense increased 468 247 million year ended december 31 2008 compared 168 million 2007 increase depreciation expense due capital expenditures principally new coiled tubing units delivered second half 2008 drilling completion drilling completion revenues 2913 million year ended december 31 2008 increase 350 2158 million revenues year ended december 31 2007 drilling completion revenues increased 2008 primarily due 16 new service rigs one drilling rig placed service various dates 2008 increased prices services income operations increased 402 million 2008 compared 388 million year ended december 31 2007 income operations percentage revenue decreased 138 2008 compared 180 2007 due primarily higher wages included payroll expenses increase administrative costs relating labor concessions argentina granted oil industry last half 2007 significant increase labor force laborrelated expenses connection delivery new rigs prior activation depreciation expense increased 30 million year ended december 31 2008 compared prior year due capital expenditures drilling completion segment 2008 2007 rental services rental services revenues 1038 million year ended december 31 2008 decrease 144 1212 million revenues year ended december 31 2007 decrease revenue primarily attributable competitive market environment due decreased us gulf mexico drilling activity beginning last half 2007 stemming departure drilling rigs favor international markets impact hurricanes us gulf mexico 2008 income operations decreased 1235 million loss 744 million 2008 compared income 491 million 2007 decrease operating income primarily attributable 1064 million noncash charge impairment goodwill recorded year ending december 31 2008 due decrease revenue comparison years ended december 31 2007 december 31 revenues year ended december 31 2007 5710 million increase 836 compared 3110 million year ended december 31 2006 revenues increased business segments due principally acquisitions completed two year period ended december 31 2007 investment new equipment opening new operating locations significant increase revenues due acquisition dls august 14 2006 established drilling completion segment drilling completion segment generated 2158 million revenues twelve months ended december 31 2007 compared 695 million period date dls acquisition december 31 2006 revenues also increased significantly rental services segment due acquisition ogr assets december 18 2006 ogr assets including two rental yards expanded assets available rent ogr assets generated revenues 822 million twelve months ended december 31 2007 compared 21 million period date acquisition ogr assets december 31 2006 experienced decline demand rental services segment last half 2007 due reduction drilling activity us gulf mexico rigs departed us gulf favor international markets oilfield services segment revenues increased 2007 period compared 2006 period due acquisitions completed third fourth quarters 2007 added downhole motors mwd tools directional drilling personnel resulting increased capacity increased market penetration revenues also increased oilfield services segment due acquisition petrorentals october 2006 purchase additional equipment principally new compressor packages underbalanced operations expansion operations new geographic regions impact additional mwd tools downhole motors acquisitions diggar coker completed last half 2007 easily identifiable quickly integrated preexisting operations acquisition diamondback assets provided 31 million revenues date acquisition december 31 2007 petrorentals acquisition additional coil tubing equipment provided additional 206 million revenues year ended december 31 2007 compared 2006 gains revenues partly offset reduction 67 million revenues capillary assets compared 2006 assets sold june 29 2007 direct costs year ended december 31 2007 increased 840 3415 million 598 revenues compared 1856 million 597 revenues year ended december 31 2006 increase direct costs due increase revenues business segments depreciation expense increased 1513 509 million year ended december 31 2007 203 million year ended december 31 2006 primary increase depreciation expense due acquisitions ogr assets dls petrorentals capital expenditures increase depreciation expense related ogr assets 159 million 166 million year ended december 31 2007 compared 650000 period date acquisition ogr assets december 31 2006 depreciation expense dls increased 72 million 113 million year ended december 31 2007 41 million period date acquisition dls december 31 2006 depreciation expense petrorentals year ended december 31 2007 36 million compared 688000 period date acquisition petrorentals december 31 2006 general administrative expense 586 million year ended december 31 2007 compared 355 million year ended december 31 2006 general administrative expense increased due acquisitions hiring additional sales operations accounting administrative personnel percentage revenues general administrative expenses 103 2007 compared 114 2006 general administrative expense includes sharebased compensation expense 47 million 2007 30 million 2006 june 29 2007 sold capillary tubing assets part oilfield services segment total consideration approximately 163 million cash recognized gain 89 million related sale assets amortization expense 41 million year ended december 31 2007 compared 19 million year ended december 31 2006 increase amortization expense primarily due amortization intangible assets connection acquisition ogr assets increased 22 million 23 million year ended december 31 2007 compared 96000 period date acquisition ogr assets december 31 2006 income operations year ended december 31 2007 totaled 1248 million 842 increase 677 million income operations year ended december 31 2006 reflecting increase revenues 2600 million offset part increased direct costs 1559 million increased general administrative expense 231 million increased amortization expense 22 million income operations percentage revenues increased slightly 219 2007 218 2006 income operations 2007 period includes 89 million gain sale capillary tubing assets second quarter 2007 net interest expense 463 million year ended december 31 2007 compared 203 million year ended december 31 2006 interest expense increased 2007 due increased debt august 2006 issued 950 million senior notes bearing interest 90 fund portion acquisition dls january 2007 issued 2500 million senior notes bearing interest 85 pay part 3000 million bridge loan utilized complete ogr acquisition working capital bridge loan repaid january 29 2007 average interest rate bridge loan approximately 106 interest expense 2007 includes writeoff deferred financing fees 12 million related repayment bridge loan interest expense includes amortization expense deferred financing costs 19 million 15 million 2007 2006 respectively income tax expense year ended december 31 2007 288 million 364 net income taxes compared 114 million 243 net income taxes 2006 increase income tax expense attributable increase operating income higher effective tax rate effective tax rate 2006 favorably impacted reversal valuation allowance deferred tax assets valuation allowance reversed due operating results allowed realization deferred tax assets net income 504 million year ended december 31 2007 increase 416 compared net income 356 million year ended december 31 2006 following table compares revenues income operations business segments years ended december 31 2007 december 31 2006 income operations consists revenues gain asset disposition less direct costs general administrative expenses depreciation amortization oilfield services revenues year ended december 31 2007 oilfield services segment 2340 million increase 232 1900 million revenues year ended december 31 2006 increase revenues due purchase additional mwd tools new compressors new “foam” units underbalanced drilling operations benefit acquisitions completed last half 2007 added downhole motors mwds directional drillers acquisition petrorentals completed last half 2006 additional equipment personnel enabled us strengthen presence new geographic markets increase market penetration impact acquisitions diggar coker completed last half 2007 additional mwd tools easily identifiable quickly integrated preexisting operations acquisition diamondback provided 31 million revenues date acquisition december 31 2007 income operations increased 233 532 million 2007 432 million 2006 income operations percentage revenues remained constant 227 income operations 2007 period includes 89 million gain sale capillary tubing assets drilling completion august 14 2006 acquired dls established drilling completion segment drilling completion revenues 2158 million year ended december 31 2007 increase 695 million revenues period date dls acquisition december 31 2006 income operations increased 388 million 2007 compared 122 million date dls acquisition december 31 2006 income operations percentage revenue increased 180 2007 compared 176 2006 believe increase percentage primarily due price increases implemented 2007 placed orders 16 service rigs workover rigs pulling rigs four drilling rigs four service rigs delivered fourth quarter 2007 rental services rental services revenues 1212 million year ended december 31 2007 increase 1352 515 million revenues year ended december 31 2006 income operations increased 869 491 million 2007 compared 263 million 2006 increase revenue operating income primarily attributable acquisition ogr assets december 2006 ogr assets including two rental yards expanded assets available rent generated 822 million twelve months ended december 31 2007 compared 21 million period date acquisition ogr assets december 31 2006 income operations percentage revenues decreased 405 2007 compared 510 prior year result higher depreciation expense associated ogr acquisition capital expenditures depreciation expense ogr assets increased 159 million 166 million year ended december 31 2007 compared 650000 period date acquisition ogr assets december 31 2006 rental services revenues operating income impacted competitive market environment due decreased us gulf mexico drilling activity last half 2007 attributed hurricane season departure drilling rigs favor international markets liquidity capital resources ongoing capital requirements arise primarily need service debt acquire maintain equipment fund working capital requirements complete acquisitions primary sources liquidity proceeds issuance debt equity securities cash flows operations amended restated revolving credit facility permits borrowings 900 million principal amount december 31 2008 477 million available borrowing amended restated revolving credit facility also 290 million available new credit agreement executed february 2009 fund portion purchase price two drilling rigs cash flows operations expected primary source liquidity fiscal 2009 cash equivalents 69 million december 31 2008 compared 437 million december 31 2007 revolving credit agreement requires us maintain specified financial ratios fail comply financial ratio covenants could limit eliminate availability revolving credit agreement ability maintain financial ratios may affected events beyond control including changes general economic business conditions cannot assure maintain meet ratios tests lenders credit agreement waive failure meet ratios tests decrease us rig count experienced late 2008 early 2009 expectation additional decreases us rig count resulting decrease demand services adversely impacts ability maintain meet financial ratios reduced planned capital spending 2009 compared 2008 exclusive opportunistic acquisitions currently expect spend total approximately 660 million 2009 net equipment deposits paid 2008 december 31 2008 commitments covering 414 million 660 million believe cash generated operations cash hand cash available credit facilities provide sufficient funds identified projects ability obtain capital opportunistic acquisitions additional projects implement growth strategy longer term depend upon future operating performance financial condition dependent upon prevailing conditions industry global market including availability equity debt financing many beyond control operating activities year ended december 31 2008 generated 1137 million cash operating activities net loss year ended december 31 2008 395 million noncash additions net loss totaled 1648 million 2008 period consisting primarily 1158 million impairment goodwill 677 million depreciation amortization 79 million related expensing stock options required sfas 123r 33 million bad debts 21 million amortization writeoff deferred financing fees partially offset 299 million deferred tax 19 million gains dispositions equipment year ended december 31 2008 changes working capital used 117 million cash principally due increase 275 million accounts receivable increase 97 million inventories increase current assets 16 million offset increase 219 million accounts payable increase 35 million accrued employee benefits payroll taxes increase 12 million accrued expenses increase accrued interest 567000 accounts receivables increased december 31 2008 primarily due increase revenues 2008 inventories increased december 31 2008 primarily due larger rig fleet drilling completion segment current assets increased primarily due estimated tax payments exceeding estimated tax liability december 31 2008 accounts payable accrued employee benefits payroll taxes accrued expenses increased primarily due increase costs due growth revenues year ended december 31 2007 generated 1035 million cash operating activities net income year ended december 31 2007 504 million noncash additions net income totaled 612 million 2007 period consisting primarily 550 million depreciation amortization 49 million related expensing stock options required sfas 123r 80 million deferred income tax 13 million bad debts 32 million amortization writeoff deferred financing fees partially offset 23 million gain disposition equipment 89 million gain sale capillary assets year ended december 31 2007 changes working capital used 81 million cash principally due increase 314 million accounts receivable increase 45 million assets increase inventories 54 million offset decrease 82 million current assets increase 107 million accounts payable increase 60 million accrued interest increase 40 million accrued employee benefits payroll taxes increase 15 million accrued expenses increase longterm liabilities 27 million accounts receivables increased december 31 2007 primarily due increase revenues 2007 assets increase primarily due contract costs related deployment new rigs drilling completion segment decrease current assets principally due collection working capital adjustment ogr acquisition approximately 71 million first quarter 2007 accrued interest increased december 31 2007 due principally interest accrued 85 senior notes issued january 2007 90 senior notes issued august 2006 payable semiannually accounts payable accrued employee benefits payroll taxes accrued expenses increased primarily due increase costs due growth revenues acquisition completed 2007 longterm liabilities increased primarily due deferral contract revenue related new rigs constructed drilling completion segment year ended december 31 2006 generated 537 million cash operating activities net income year ended december 31 2006 356 million noncash additions net income totaled 276 million 2006 period consisting primarily 221 million depreciation amortization 34 million related expensing stock options required sfas 123r 22 million deferred income tax 781000 bad debts 15 million amortization finance fees including bridge loan fees partially offset 24 million gain disposition equipment year ended december 31 2006 changes working capital used 99 million cash principally due increase 232 million accounts receivable increase 26 million inventories decrease 23 million accounts payable offset part decrease current assets 25 million increase 114 million accrued interest increase 34 million accrued employee benefits payroll taxes increase 872000 accrued expenses accounts receivables increased december 31 2006 primarily due increase revenues 2006 accrued interest increased december 31 2006 due principally interest accrued 90 senior notes payable semiannually accrued employee benefits payroll taxes accrued expenses increased primarily due increase costs due growth revenues acquisition completed 2006 investing activities year ended december 31 2008 used 2022 million investing activities year ended december 31 2008 acquired bch total net cash outlay 537 million consisting purchase price acquisition costs less cash acquired addition made capital expenditures approximately 1545 million year ended december 31 2008 including 734 million expand drilling fleet purchase improve replace equipment drilling completion segment 584 million purchase upgrade equipment oilfield services segment 226 million increase inventory equipment replace “lostinhole” equipment rental services segment received proceeds 30 million sale drill pipe tong manufacturing assets also received 115 million sale assets year ended december 31 2008 comprised mostly equipment “lostinhole” rental services segment 83 million oilfield services segment 23 million also made net advance payments 88 million purchase new drilling service rigs delivered 2009 drilling completion segment advance payments 11 million purchase new directional drilling tools oilfield services segment year ended december 31 2007 used 1371 million investing activities consisting four acquisitions capital expenditures year ended december 31 2007 completed following acquisitions total net cash outlay 410 million consisting purchase price acquisition costs less cash acquired • june 2007 acquired coker purchase price approximately 36 million cash promissory note 350000 • july 2007 acquired diggar purchase price approximately 67 million cash payment approximately 28 million debt promissory note 750000 • october 2007 acquired rebel purchase price approximately 50 million cash payment approximately 18 million debt escrow promissory notes aggregate 500000 • november 2007 acquired substantially assets diamondback purchase price approximately 231 million cash addition made capital expenditures approximately 1132 million year ended december 31 2007 including 486 million purchase upgrade equipment oilfield services segment 349 million increase inventory equipment replace “lostinhole” equipment rental services segment 289 million purchase improve replace equipment drilling completion segment received proceeds 163 million sale capillary assets also received 128 million sale assets year ended december 31 2007 comprised mostly equipment “lostinhole” rental services segment 110 million oilfield services segment 14 million also made advance payments 115 million purchase new drilling service rigs delivered 2008 drilling completion segment year ended december 31 2006 used 5594 million investing activities consisting six acquisitions capital expenditures year ended december 31 2006 completed following acquisitions total net cash outlay 5266 million consisting purchase price acquisition costs less cash acquired • effective january 1 2006 acquired specialty purchase price approximately 953 million cash • effective april 1 2006 acquired rogers purchase price approximately 113 million cash 125285 shares common stock promissory note 750000 • august 14 2006 acquired dls purchase price approximately 937 million cash 25 million shares common stock assumption 91 million indebtedness • october 16 2006 acquired petro rentals purchase price approximately 202 million cash 246761 shares common stock payment approximately 96 million debt • effective december 1 2006 acquired tanus purchase price 25 million cash • december 18 2006 acquired substantially assets ogr purchase price approximately 2910 million cash 32 million shares common stock addition made capital expenditures approximately 397 million year ended december 31 2006 including 291 million purchase upgrade equipment oilfield services segment 58 million purchase improve replace equipment drilling completion segment 45 million replace “lostinhole” equipment increase inventory equipment rental services segment also received 69 million sale assets year ended december 31 2006 comprised mostly equipment “lostinhole” rental services segment 38 million oilfield services segment 18 million financing activities year ended december 31 2008 financing activities provided net 517 million cash received 250 million proceeds longterm debt used finance expansion drilling completion segment’s rig fleet year ended december 31 2008 net draw revolving credit facility 365 million necessary due investment bch capital expenditures also received 633000 proceeds option exercises 558707 shares common stock issued equity compensation plans financing uses year ended december 31 2008 repayment 99 million longterm debt 525000 debt issuance costs year ended december 31 2007 financing activities provided net 376 million cash received 2500 million borrowings issuance 85 senior notes due 2017 also received 1001 million net proceeds issuance 6000000 shares common stock 17 million tax benefit stock compensation plans 33 million proceeds warrant option exercises 882624 shares common stock issued equity compensation plans proceeds used repay longterm debt totaling 3097 million pay 78 million debt issuance costs repayment longterm debt consisted primarily repayment 3000 million bridge loan used fund acquisition substantially assets ogr year ended december 31 2006 financing activities provided net 5436 million cash received 5578 million borrowings longterm debt facilities consisting primarily issuance 2550 million 90 senior notes due 2014 3000 million senior unsecured bridge loan bridge loan repaid january 29 2007 used fund acquisition substantially assets ogr also received 463 million net proceeds issuance 3450000 shares common stock 64 million tax benefit options 63 million proceeds warrant option exercises 1851377 shares common stock issued equity compensation plans proceeds used repay longterm debt totaling 540 million repay 64 million net borrowings revolving credit facility repay related party debt 30 million pay 99 million debt issuance costs january 18 2006 august 14 2006 closed private offerings qualified institutional buyers pursuant rule 144a securities act 1600 million 950 million aggregate principal amount senior notes respectively senior notes due january 15 2014 bear interest 90 proceeds used fund acquisitions specialty dls repay existing debt general corporate purposes debt repaid included outstanding balances credit agreement including 421 million term loan 64 million working capital advances 40 million subordinated note issued connection acquisition aircomp approximately 30 million subordinated note issued connection acquisition tubular approximately 548000 real estate loan approximately 350000 outstanding equipment financing december 18 2006 closed 3000 million senior unsecured bridge loan bridge loan due 18 months closing weighted average interest rate 106 bridge loan repaid january 29 2007 used fund acquisition substantially assets ogr january 2007 closed private offering qualified institutional buyers pursuant rule 144a securities act 2500 million principal amount 85 senior notes due 2017 proceeds senior notes offering together portion proceeds concurrent common stock offering used repay debt outstanding 3000 million bridge loan facility incurred finance acquisition substantially assets ogr january 18 2006 also executed amended restated credit agreement provides 250 million revolving line credit maturity january 2010 april 26 2007 entered second amended restated credit agreement increased revolving line credit 620 million final maturity date april 26 2012 december 3 2007 entered first amendment second amended restated credit agreement increased revolving line credit 900 million amended restated credit agreement contains customary events default financial covenants limits ability incur additional indebtedness make capital expenditures pay dividends make distributions create liens sell assets obligations amended restated credit agreement secured substantially assets located us credit agreement loan rates based prime libor plus margin compliance debt covenants december 31 2008 2007 weighted average interest rate 46 december 31 2008 december 31 2008 2007 amounts borrowed facility 365 million 0 availability reduced outstanding letters credit 58 million 84 million respectively part acquisition dls assumed various bank loans floating interest rates based libor plus margin terms ranging two five years weighted average interest rates loans 51 67 december 31 2008 2007 respectively bank loans denominated us dollars outstanding amount due december 31 2008 2007 25 million 49 million respectively february 15 2008 dls subsidiary argentina entered 250 million import finance facility bank borrowings facility used fund portion purchase price new drilling service rigs ordered drilling completion segment facility available borrowings december 31 2008 drawdown shall repaid four years equal semiannual installments beginning one year disbursement final principal payment due later march 15 2013 import finance facility unsecured contains customary events default financial covenants limits dls’ ability incur additional indebtedness make capital expenditures create liens sell assets compliance debt covenants december 31 2008 bank loan rates based libor plus margin weighted average interest rate 69 december 31 2008 bank loans denominated us dollars outstanding amount december 31 2008 250 million part acquisition bch assumed 236 million term loan credit facility bank credit agreement dated june 2007 contains customary events default financial covenants obligations facility secured substantially bch assets facility repayable quarterly principal installments plus interest final payment due later august 2012 compliance debt covenants december 31 2008 credit facility loan denominated us dollars interest rates based libor plus margin december 31 2008 outstanding balance 221 million interest rate 60 connection acquisition rogers issued seller note amount 750000 note bears interest 50 due april 3 2009 connection purchase coker issued seller note amount 350000 note bore interest 825 repaid june 2008 connection purchase diggar issued seller note amount 750000 note bore interest 60 repaid july 2008 connection purchase rebel issued sellers notes amount 500000 notes bore interest 50 repaid october 2008 connection purchase capcoil agreed pay total 500000 two management employees exchange noncompete agreements required make annual payments 110000 may 2008 total amounts due noncompete agreements december 31 2008 2007 0 110000 respectively 2000 compensated directors including current directors nederlander toboroff served board directors 1989 march 31 1999 without compensation issuing promissory notes totaling 325000 notes bear interest rate 50 december 31 2008 2007 principal accrued interest notes totaled approximately 32000 various rig equipment financing loans interest rates ranging 83 87 terms 2 5 years december 31 2008 2007 outstanding balances rig equipment financing loans 0 595000 respectively april 2007 august 2007 obtained insurance premium financings aggregate amount 44 million fixed weighted average interest rate 59 terms agreements amounts outstanding paid 10 11 month repayment schedules outstanding balance notes approximately 0 17 million december 31 2008 2007 respectively april 2008 august 2008 obtained insurance premium financings aggregate amount 30 million fixed average weighted interest rate 49 terms agreements amounts outstanding paid 10 11 month repayment schedules outstanding balance notes approximately 991000 december 31 2008 part acquisition bch assumed various capital leases terms two three years outstanding balance capital leases 779000 december 31 2008 also capital leases terms expired 2008 december 31 2007 amounts outstanding capital leases 14000 following table summarizes obligations commitments make future payments notes payable operating leases employment contracts consulting agreements periods specified december 31 2008 amounts represent minimum capital lease obligations net interest payments totaling 86000 recent developments february 2009 entered new credit agreement amount 290 million credit agreement subject customary closing conditions proceeds used fund 80 purchase price two land drilling rigs related equipment scheduled delivery second quarter 2009 loan secured equipment repaid quarterly installments six years funding date expect utilize two land drilling rigs existing client operating haynesville shale longterm alliance would include services would provide suspended construction two land drilling rigs ordered summer 2008 february 2009 executed joint venture agreement rawabi holding company ltd rawabi laws kingdom saudi arabia purpose joint venture provide oilfield services rental equipment kingdom saudi arabia 50 joint venture result economic environment decrease us rig count 2009 february 2009 announced cost reduction steps include reduction us workforce approximately 235 people reduction certain day rates paid personnel reduction consolidation certain operating yards reduction employee benefits additional workforce reductions cost saving measures anticipated capital expenditures 2009 limited required maintenance levels related firm commitments made 2008 critical accounting policies identified policies critical business operations understanding results operations impact associated risks related policies business operations discussed throughout management’s discussion analysis financial condition results operations policies affect reported expected financial results detailed discussion application accounting policies see note 1 notes consolidated financial statements included elsewhere document preparation report requires us make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period assurance actual results differ estimates allowance doubtful accounts determination collectibility amounts due customers requires us use estimates make judgments regarding future events trends including monitoring customer payment history current credit worthiness determine collectibility reasonably assured well consideration overall business climate customers operate uncertainties require us make frequent judgments estimates regarding customers’ ability pay amounts due us order determine appropriate amount valuation allowances required doubtful accounts provisions doubtful accounts recorded becomes evident customers able make required payments either contractual due dates future revenue recognition provide rental equipment drilling services customers per day daywork per job contractual rates recognize drilling related revenue work progresses collectibility reasonably assured revenue daywork contracts recognized realized realizable earned daywork contracts revenue recognized based number days completed fixed rates stipulated contract certain contracts receive lumpsum fees equipment mobilization costs mobilization fees related costs deferred amortized contract terms material impairment longlived assets longlived assets principally property plant equipment comprise significant amount total assets make judgments estimates conjunction carrying value assets including amounts capitalized depreciation amortization methods useful lives additionally carrying values assets reviewed impairment whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires us make longterm forecasts future revenues costs related assets subject review forecasts require assumptions demand products services future market conditions technological developments significant unanticipated changes assumptions could require provision impairment future period goodwill intangibles december 31 2008 recorded approximately 433 million goodwill 374 million identifiable intangible assets perform purchase price allocations intangible assets make business combination business combinations purchase price allocations consummated acquisitions reportable segments excess purchase price allocation fair values tangible assets allocated identifiable intangibles thereafter goodwill make judgments estimates conjunction carrying value assets including amounts capitalized whether asset finite live amortization purposes perform annual impairment test accordance fasb 142 tests included two approaches determine carrying amount individual reporting units first approach discounted cash flow method focuses expected cash flow applying approach cash flow available distribution projected finite period years cash flow available distribution defined amount cash could distributed dividend without impairing future profitability operations cash flow available distribution terminal value end estimation period discounted present value derive indication value business enterprise valuation method dependent upon assumptions made regarding future cash flow cash requirements second approach guideline company method focuses comparing us selected reasonably similar publicly traded companies method valuation multiples derived operating data selected similar companies ii evaluated adjusted based strengths weaknesses relative selected guideline companies iii applied operating data arrive indication value valuation method dependent upon assumption value evaluated analysis earnings strengths weaknesses relative selected similar companies recorded impairment charge 1158 million 2008 result test significant unanticipated changes assumptions could require additional provision impairment future period purchase price allocation acquired businesses allocate purchase price acquired businesses identifiable assets liabilities businesses post acquisition based estimated fair values excess purchase price amount allocated assets liabilities recorded goodwill engage thirdparty appraisal firms valuation experts assist determination identifiable assets liabilities judgments estimates allocation purchase price based information available measurement period judgments estimates materially impact financial position well results operations income taxes determination evaluation annual income tax provision involves interpretation tax laws various jurisdictions operate requires significant judgment use estimates assumptions regarding significant future events amount timing character income deductions tax credits changes tax laws regulations level operations profitability jurisdiction may impact tax liability given year annual tax provision based information available us time number years may elapse ultimate tax liabilities certain tax jurisdictions determined current income tax expense benefit reflects estimate income tax liability current year withholding taxes changes tax rates changes prior year tax estimates returns filed deferred tax assets liabilities recognized anticipated future tax effects temporary differences financial statement basis tax basis assets liabilities using enacted tax rates effect year end valuation allowance deferred tax assets recorded morelikelythannot benefit deferred tax asset realized provide uncertain tax positions pursuant fasb interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 intention permanently reinvest undistributed earnings nonus subsidiaries accordingly provided us deferred taxes undistributed earnings nonus subsidiaries distribution made us undistributed earnings subsidiaries could required record additional taxes cannot predict make distribution undistributed earnings unable make determination amount unrecognized deferred tax liability recently issued accounting standards september 2006 financial accounting standards board fasb issued statement financial accounting standards 157 fair value measurements sfas 157 sfas 157 clarifies principle fair value based assumptions market participants would use pricing asset liability establishes fair value hierarchy prioritizes information used develop assumptions standard fair value measurements would separately disclosed level within fair value hierarchy sfas 157 effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years early adoption permitted subsequently fasb provided oneyear deferral provisions sfas 157 nonfinancial assets liabilities recognized disclosed fair value consolidated financial statements nonrecurring basis allowed sfas 157 adopted requirements sfas 157 january 1 2008 except relate nonfinancial assets liabilities adopted january 1 2009 neither adoption impact financial statements february 2007 fasb issued statement financial accounting standards 159 fair value option financial assets financial liabilities sfas 159 permits entities elect measure many financial instruments certain items fair value upon adoption sfas 159 entity may elect fair value option eligible items exist adoption date subsequent initial adoption election fair value option made initial recognition asset liability upon remeasurement event gives rise newbasis accounting subsequent changes fair value instrument reported earnings sfas 159 affect existing accounting literature requires certain assets liabilities recorded fair value eliminate disclosure requirements included accounting standards sfas 159 effective beginning reporting entity’s first fiscal year begins november 15 2007 adopted sfas 159 january 1 2008 impact financial statements december 2007 fasb issued statement financial accounting standards 141 revised 2007 business combinations sfas 141r sfas 141r changes requirements acquirer’s recognition measurement assets acquired liabilities assumed business combination additionally sfas 141r requires acquisitionrelated costs including restructuring costs recognized expense separately acquisition adopted sfas 141r january 1 2009 impact financial statements december 2007 fasb issued statement financial accounting standards 160 noncontrolling interests consolidated financial statements amendment arb 51 sfas 160 sfas 160 requires noncontrolling minority interests reported component shareholders’ equity ii net income attributable parent noncontrolling interest separately identified consolidated statement operations iii changes parent’s ownership interest parent retains controlling interest accounted equity transactions iv retained noncontrolling equity investment upon deconsolidation subsidiary initially measured fair value v sufficient disclosures provided clearly identify distinguish interests parent interests noncontrolling owners sfas 160 effective annual periods beginning december 15 2008 applied prospectively presentation disclosure requirements statement shall applied retrospectively periods presented adopted sfas 160 january 1 2009 impact financial statements march 2008 fasb issued statement financial accounting standards 161 disclosures derivative instruments hedging activities amendment fasb statement 133 sfas 161 sfas 161 requires qualitative disclosures objectives strategies using derivatives quantitative data fair value gains losses derivative contracts details creditriskrelated contingent features hedged positions statement also requires enhanced disclosures regarding entities use derivative instruments derivative instruments related hedged items accounted derivative instruments related hedged items affect entities’ financial position financial performance cash flows sfas 161 effective fiscal years beginning november 15 2008 adopted sfas 161 january 1 2009 impact financial statements april 2008 fasb issued fasb staff position sfas 1423 determination useful life intangible assets fsp sfas 1423 fsp sfas 1423 amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset sfas 142 objective fsp sfas 1423 improve consistency useful life recognized intangible asset sfas 142 period expected cash flows used measure fair value asset sfas 141r us gaap principles fsp sfas 1423 effective fiscal years beginning december 15 2008 adopted fsp sfas 1423 january 1 2009 impact financial statements offbalance sheet arrangements balance sheet arrangements normal operating leases employee contracts likely current future material effect financial condition changes financial condition revenues expenses results operations liquidity capital expenditures capital resources 900 million revolving credit facility maturity april 2012 december 31 2008 365 million borrowed facility availability reduced outstanding letters credit 58 million guarantee obligations unconsolidated entities item 7a item 7 managements discussion analysis financial condition results operations discussion read conjunction consolidated financial statements including notes consolidated financial statements overview allischalmers emerging chapter 11 plan reorganization entered agreement alch company lp investor pursuant investor agreed purchase 61 million shares prereverse stock split basis common stock 40 outstanding common stock 3750000 cash investor limited partnership controlled messrs robert e nederlander leonard toboroff two companys directors company continues efforts conserve cash resources however expenses associated ongoing securities exchange commission governmental reporting well legal accounting audit insurance costs associated corporate requirements publicly held company continue make difficult company present size achieve positive cash flow date chapter 11 filings june 1987 company sponsored 19 defined benefit plans providing pensions substantially us employees pension plan us salaried employees capped frozen effective march 31 1987 benefit accruals date result divestitures chapter 11 proceedings eight active plans transferred buyers businesses leaving company sponsor 11 plans none permitted additional benefit accruals effective january 1 1989 11 remaining plans consolidated single plan allischalmers consolidated pension plan consolidated plan 1994 companys independent pension actuaries changed assumptions mortality administrative expenses used determine liabilities consolidated plan primarily result changes mortality assumptions reflect decreased mortality rates companys retirees consolidated plan underfunded present value basis first quarter 1996 company made required cash contribution consolidated plan amount 205000 company however financial resources make required payments 1996 1997 given inability company fund obligations current financial resources february 1997 allischalmers applied pension benefit guaranty corporation pbgc distress termination consolidated plan section 4041c employee retirement income security act 1974 amended erisa pbgc approved distress termination application september 1997 agreed plan termination date april 14 1997 pbgc became trustee terminated consolidated plan september 30 1997 upon termination consolidated plan allischalmers subsidiaries incurred liability pbgc amount equal consolidated plans unfunded benefit liabilities allischalmers subsidiaries also liability pbgc trustee terminated consolidated plan outstanding balance consolidated plans accumulated funding deficiencies pbgc estimated unfunded benefit liabilities accumulated funding deficiencies together pbgc liability total approximately 679 million september 1997 allischalmers pbgc entered agreement principle settlement pbgc liability pbgc agreement pbgc agreement calls pbgc release allischalmers subsidiaries pbgc liability return number shares allischalmers common stock represents 35 total number shares issued outstanding fullydiluted basis pbgc agreement subject negotiation definitive documentation discussions regarding definitive documentation continue pbgc certain issues contained proposed agreement company pbgc company close resolving issues pbgc agreement company pbgc signed near future however satisfactory agreement cannot finalized pbgc allischalmers evaluate alternatives including bankruptcy filing pbgc agreement also subject satisfactory resolution companys tax obligations respect consolidated plan section 4971 internal revenue code 1986 amended code section 4971a code imposes taxable year firsttier tax 10 percent amount accumulated funding deficiency plan like consolidated plan section 4971b code imposes additional secondtier tax equal 100 percent accumulated funding deficiency corrected within specified period liability taxes imposed section 4971 extends jointly severally allischalmers commonlycontrolled subsidiary corporations prior termination consolidated plan accumulated funding deficiency taxable years 1995 1996 1997 deficiencies resulted estimated firsttier taxes code section 4971a approximately 900000 march 2 1998 allischalmers sent internal revenue service irs formal offer compromise companys tax liability code section 4971 july 16 1998 parties reached settlement agreement principle amount 75000 following final irs approval payment amount made august 11 1998 acquisition environment unfavorable since investors 1989 cash contribution company remained difficult company 1998 problems continued include companys lack cash investment limited availability debt financing acquisitions financial exposure associated consolidated plan therefore company continues proceed cautiously efforts identify evaluate potential candidates acquisition results operations results operations 1998 1997 1996 reflect sole operation business allischalmers machine repair business hds sales totaled 50 million 1998 compared 41 million 1997 1996 increase sales 1998 1997 1996 primarily result strong market conditions coupled focused marketing strategy product offering gross margins percentage sales 297 250 261 1998 1997 1996 respectively marketing administrative expense 17 million 17 million 14 million 1998 1997 1996 respectively marketing administrative expense 336 sales 1998 compared 409 1997 348 1996 additional costs incurred 1998 pursuit acquisitions certain engineering costs hds costs offset reduction 1998 legal expenses compared 1997 nonrecurring legal expenses associated termination consolidated plan related negotiations pbgc irs significant portion companys administrative expense relates expenses securities exchange commission governmental reporting well legal accounting audit insurance requirements publicly held company interest income years resulted mainly earnings shortterm investments interest expense primarily relates term loan proceeds used purchase shop office building hds operates additional financing capital improvements hds pension expense relates recognition pension liability associated consolidated plan accordance statement financial accounting standards 87 employers accounting pensions 1397000 1422000 1997 1996 respectively 1998 expense result termination consolidated plan 1997 expense nine month period transfer consolidated plan pbgc took place september 30 1997 termination consolidated plan resulted additional 645 million pension expense 1997 including 9 million irs excise taxes company net income 618000 62 per common share 1998 compared net loss 66545000 including recognition pension expense 65926000 6634 per common share 1997 net loss 1728000 1996 net income 1998 included income 825000 result 900000 irs liability settled 75000 pension expense accounted 6573 per common share net loss 1997 liquidity capital resources december 31 1998 company cash shortterm investments totaling 223000 decrease 699000 december 31 1997 decrease result acquisition expenses 1998 expenses associated ongoing corporate reporting well legal accounting audit insurance expenses addition hds expenditures 353000 capital items trade receivables december 31 1998 796000 compared 683000 december 31 1997 increase primarily result increased sales certain major projects completed billed hds near end year inventory december 31 1998 127000 increase 101000 year end 1997 net property plant equipment december 31 1998 1308000 increase 1107000 december 31 1997 company incurred 353000 capital expenditures 1998 approximately 234000 invested machinery equipment acquisitions approximately 119000 spent improve hdss facilities including air conditioning upgrading telephone system expenditures additional upgrades machinery tooling necessary reduce production costs decreasing downtime increasing production efficiency output helping position company growth increased capacity service capabilities offers marketplace current maturities longterm debt december 31 1998 60000 compared 38000 yearend 1997 increase due financing air conditioning system installed hds addition payments real estate loan refinanced hds august 1996 proceeds original loan used 1990 purchase land building hds operates business houston texas amount refinanced required repaid monthly installments 3278 august 20 2001 remaining unpaid balance due december 31 1998 interest rate note 105 rate subject adjustments term note accordance increases decreases prime rate note secured hds facility net book value 444000 december 31 1998 companys guaranty companys principal sources cash include earnings operations interest income shortterm investments cash requirements needed administrative expenses associated publicly held company significant management believes company continue use substantial portion cash balances generated hds purposes 1999 ac reorganization trust pursuant plan reorganization funds costs incurred allischalmers relate implementation plan reorganization costs include allocated share certain expenses company employees professional fees certain administrative expenses epa certain state environmental protection agencies requested information connection eleven potential hazardous waste disposal sites products manufactured allischalmers consummation plan reorganization disposed epa claimed allischalmers liable cleanup costs associated several additional sites epas claims respect one site withdrawn 1994 based upon settlements reached epa bankruptcy proceeding addition certain third parties asserted allischalmers liable cleanup costs associated epa fines connection additional sites one instances former site operator joined allischalmers 47 potentially responsible parties thirdparty defendant lawsuit involving cleanup one sites instance environmental claims asserted company involve prebankruptcy operations accordingly allischalmers taken position cleanup costs liabilities related sites discharged bankruptcy one particular site epas region iii concurred companys position claims environmental cleanup discharged pursuant bankruptcy site unique different circumstances company notified regional offices epa determination associated region iii site company received responses regional offices environmental claims asserted company involving postbankruptcy operations management considers companys significant application year 2000 sensitive accounting system company received written assurances software provider accounting system year 2000 compliant financial condition shareholders deficit december 31 1998 674 million threeyear comparison shareholders deficit follows millions 1998 1997 1996 january 1 680 136 99 net income loss 6 665 17 pension liability adjustment 0 121 20 december 31 674 680 136 item 7a item 7 managements discussion analysis financial condition results operations pages 6 11 1995 annual report shareholders item 8 item 7 managements discussion analysis financial condition results operations background prior 2001 operated primarily houston dynamic services inc hds may 2001 part strategy acquire develop businesses natural gas oil services industry consummated merger oilquip merger acquired 100 capital stock oilquip rentals inc oilquip owned 100 capital stock mountain air december 2001 disposed hds february 2002 acquired substantially capital stock strata approximately 81 capital stock jens business conducted 2001 include operations jens strata accounting purposes oilquip merger treated reverse acquisition allischalmers financial statements presented herein periods prior may 2001 present results operations financial condition oilquip result oilquip merger fixed assets goodwill intangibles allischalmers existence immediately prior merger prior ac assets increased 2691000 critical accounting policies identified policies critical business operations understanding results operations impact associated risks related policies business operations discussed throughout managements discussion analysis financial condition results operations policies affect reported expected financial results detailed discussion application accounting policies see note 1 notes consolidated financial statements item 8 financial statements note preparation annual report form 10k requires us make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period assurance actual results differ estimates revenue recognition revenue recognition policy significant revenue key component results operations addition revenue recognition policy determines timing certain expenses commissions royalties follow specific detailed guidelines measuring revenue however certain judgments affect application revenue policy revenue results difficult predict shortfall revenue delay recognizing revenue could cause operating results vary significantly quarter could result future operating losses revenues recognized company subsidiaries services provided impairment longlived assets longlived assets include property plant equipment goodwill intangibles comprise significant amount companys total assets company makes judgments estimates conjunction carrying value assets including amounts capitalized depreciation amortization methods useful lives additionally carrying values assets reviewed impairment whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires company make longterm forecasts future revenues costs related assets subject review forecasts require assumptions demand companys products services future market conditions technological developments significant unanticipated changes assumptions could require provision impairment future period goodwill intangibles company recorded approximately 10479000 goodwill identifiable intangible assets company performs purchase price allocations makes business combination business combinations subsequent purchase price allocations consummated purchase mountain air strata jens operating segments excess purchase price allocation fair values tangible assets allocated goodwill identifiable intangibles subsequently company performed initial impairment tests annual impairment tests accordance financial accounting standards board 141 business combinations financial accounting standards board 142 goodwill intangible assets valuations required use thirdparty valuation experts turn developed assumptions value carrying value individual reporting units significant unanticipated changes assumptions could require provision impairment future period new accounting pronouncements june 2001 fasb issued sfas 143 accounting asset retirement obligations sfas 143 sfas 143 addresses financial accounting reporting obligations associated retirement longlived assets associated asset retirement costs sfas 143 requires fair value liability associated asset retirement recognized period incurred reasonable estimate fair value made associated retirement costs capitalized part carrying amount longlived asset subsequently depreciated life asset company completed analysis impact adoption sfas 143 consolidated financial statements company adopt sfas 143 fiscal year beginning january 1 2003 july 2002 fasb issued sfas 146 accounting costs associated exit disposal activities sfas 146 sfas 146 requires companies recognize costs associated exit disposal activities incurred rather date commitment exit disposal plan provisions sfas 146 apply exit disposal activities initiated company december 31 2002 sfas 146 expected material effect results operations financial position company sfas 147 acquisitions certain financial institutions issued december 2002 expected apply companys current planned activities december 2002 fasb approved sfas 148 accounting stockbased compensation transition disclosure amendment fasb statement 123 sfas 148 sfas 148 amends sfas 123 provide alternative methods transition voluntary change fair value based method accounting stockbased employee compensation addition sfas 148 amends disclosure requirements sfas 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results sfas 148 effective financial statements fiscal years ending december 15 2002 company continue account stock based compensation using methods detailed stockbased compensation accounting policy results operations results operations 2001 2000 reflect business operations oilquip inception february 4 2000 february 6 2001 oilquip developmental stage oilquips activities period prior february 6 2001 consisted developing business plan raising capital negotiating potential acquisition targets therefore results operations prior february 6 2001 reflect sales cost sales marketing administrative expenses would reflective operating company february 6 2001 oilquip acquired assets mountain air provides air drilling services natural gas exploration operations compressed air drilling services may 9 2001 oilquip acquired prior ac assets including operations hds results operation hds sold december 2001 included discontinued operations may 9 2001 february 6 2002 allischalmers acquired 81 outstanding stock jens oilfield service inc supplies highly specialized equipment operations install casing production tubing required drill complete oil gas wells casing services february 6 2002 company also purchased substantially outstanding common stock preferred stock strata directional technology inc provides highend directional horizontal drilling services specific targeted reservoirs cannot reached vertically directional drilling services results operations included february 1 2002 year ended december 31 2002 compared december 31 2001 sales year 2002 totaled 17990000 reflecting revenue jens strata acquired february 2002 comparable period 2001 revenues 4796000 revenues year ended december 31 2002 casing services directional drilling services compressed air drilling services segments 7796000 6529000 3665000 respectively revenues compressed air drilling services segment decreased 4796000 year ended december 31 2001 primarily due lower revenues resulting decline revenues burlington resources 3310788 1827681 burlington resources represented 499 626 compressed air drilling services revenues 2002 2001 respectively revenues also declined result overall downturn petroleum industry rig counts southwestern united states companys revenues derived provide measure oil natural gas drilling activities rig counts decreased 1275 june 30 2001 840 june 30 2002 based upon baker hughes gulf coast region rig count gross margin ratio percentage sales 171 year ended december 31 2002 compared 305 year ended december 31 2001 gross margin ratio declined result jens strata acquisitions 2002 lower gross margin ratios mountain air resulting lower revenues made significant investments equipment personnel many costs fixed result gross profit margins severely impacted decreases revenues general administrative expense 3792000 2002 compared 2898000 2001 general administrative expenses increased 2002 compared 2001 due acquisition jens strata third quarter 2002 response default debt covenants company restructured order contain costs recorded charges related reorganization amount 495000 charges consisted related payroll costs terminated employees 307000 consulting fees 113000 costs associated terminated rent obligation 75000 company also recorded onetime charges costs related abandoned acquisitions abandoned private placement amount 233000 operating income loss year 2002 totaled 1440000 reflecting operating income loss jens strata acquired february 2002 comparable period 2001 operating income loss 1433000 operating income loss year ended december 31 2002 casing services directional drilling services compressed air drilling services general corporate segments 2255000 576000 945000 2174000 respectively operating income compressed air drilling services segment decreased income 433000 year ended december 31 2001 primarily due lower revenues resulting overall downturn petroleum industry operating loss general corporate segment increased 1866000 year ended december 31 2001 third quarter 2002 response default debt covenants company reorganized order contain costs recorded charges related reorganization amount 495000 charges consisted related payroll costs terminated employees 307000 consulting fees 113000 costs associated terminated rent obligation 75000 company also recorded onetime charges costs related abandoned acquisitions abandoned private placement amount 233000 incurred net loss attributed common shareholders 4290000 023 per common share year ended december 312002 compared loss 4577000 115 per common share year end december 31 2001 net loss 2002 included discount given holder hds note amount 191000 incentive payoff note september 2002 third quarter 2002 response default debt covenants company reorganized order contain costs recorded charges related reorganization amount 495000 charges consisted related payroll costs terminated employees 307000 consulting fees 113000 costs associated terminated rent obligation 75000 company also recorded onetime charges costs related abandoned acquisitions abandoned private placement amount 233000 pro forma results following unaudited pro forma consolidated summary financial information illustrates effects acquisitions jens strata mountain air merger oilquip companys results operations based historical statements operations transactions occurred beginning periods presented discontinued hds operations included pro forma information pro forma results operations set forth includes results operations 2002 2001 financial statements read conjunction pro forma financial statements included herein pro forma sales year 2002 totaled 19142000 reflecting revenue mountain air jens strata comparable period 2001 pro forma sales 28244000 pro forma revenues year ended december 31 2002 casing services directional drilling services compressed air drilling services segments 8500000 6977000 3665000 respectively pro forma revenues year ended december 31 2001 casing services directional drilling services compressed air drilling services segments 9949000 12986000 5289000 respectively decrease 2002 compared 2001 primarily due lower revenues resulting overall downturn petroleum industry revenues casing services directional drilling services compressed air drilling services declined 17 47 37 2002 compared 2001 pro forma gross margin percentage sales 184 year ended december 31 2002 compared pro forma gross margin 338 year ended december 31 2001 gross margin ratio declined result jens strata acquisitions 2002 lower gross margin ratios mountain air resulting lower revenues pro forma general administrative expense 3040000 2002 compared 4719000 2001 pro forma general administrative expense decreased 2002 due cost reductions strata corporate company pro forma operating loss year 2002 401000 compared pro forma operating income 4089000 2001 pro forma operating income loss year ended december 31 2002 casing services directional drilling services compressed air drilling services general corporate segments 2756000 584000 795000 1778000 respectively pro forma operating income year ended december 31 2001 casing services directional drilling services compressed air drilling services general corporate segments 3954000 1420000 581000 1866000 respectively decrease pro forma operating income 2002 primarily due lower revenues resulting overall downturn petroleum industry company incurred pro forma net loss 4431000 024 per common share year ended december 31 2002 compared pro forma net loss 71000 002 per common share year ended december 31 2001 pro forma net loss 2002 included factoring discount given holder hds note amount 191000 incentive payoff note september 30 2002 third quarter 2002 response default debt covenants company reorganized order contain costs recorded charges related reorganization amount 495000 charges consisted related payroll costs terminated employees 307000 consulting fees 113000 costs associated terminated rent obligation 75000 company also recorded onetime charges costs related abandoned acquisitions abandoned private placement amount 233000 year ended december 31 2001 compared period february 4 2000 inception december 31 2000 sales year 2001 totaled 4796000 reflecting revenue mountain air following acquisition assets mountain airs predecessor mountain air drilling inc mountain air acquisition period february 4 2000 inception december 31 2000 oilquip revenues gross margin percentage sales 305 2001 general administrative expense 2898000 2001 compared 627000 period february 4 2000 inception december 31 2000 increasing result mountain air acquisition issuance stock options 2001 incurred net loss continuing operations 2273000 057 per common share year 2001 compared loss oilquip 627000 157 per common share period february 4 2000 inception december 31 2000 company incurred net loss 4577000 115 per common share year 2001 compared loss oilquip 627000 157 per common share period february 4 2000 inception december 31 2000 loss discontinued operations 2001 2304000 includes loss 2013000 sale hds pro forma results following unaudited pro forma consolidated summary financial information illustrates effects acquisitions jens strata mountain air merger oilquip companys results operations based historical statements operations transactions occurred beginning periods presented discontinued hds operations included pro forma information pro forma results operations set forth includes results operations 2001 2000 financial statements read conjunction pro forma financial statements included herein pro forma sales year 2001 totaled 28224000 reflecting revenue mountain air jens strata comparable period 2000 pro forma sales 24653000 pro forma revenues year ended december 31 2001 casing services directional drilling services compressed air drilling services segments 9949000 12986000 5289000 respectively pro forma revenues year ended december 31 2000 casing services directional drilling services compressed air drilling services segments 7400000 11561000 5692000 respectively increase 2001 compared 2000 primarily due higher revenues resulting overall upturn petroleum industry revenues casing services directional drilling services increased 34 12 revenues compressed air drilling services declined 8 2001 compared 2000 pro forma gross margin percentage sales 338 year ended december 31 2001 compared pro forma gross margin 267 year ended december 31 2000 gross margin ratio increased result higher gross margin ratios jens strata mountain air resulting higher revenues pro forma general administrative expense 4719000 2001 compared 3916000 2000 pro forma general administrative expense increased 2001 due higher employee costs company pro forma operating income year 2001 4089000 compared pro forma operating income 2678000 2000 pro forma operating income loss year ended december 31 2001 casing services directional drilling services compressed air drilling services general corporate segments 3954000 1420000 581000 1866000 respectively pro forma operating income year ended december 31 2000 casing services directional drilling services compressed air drilling services general corporate segments 2313000 564000 742000 941000 respectively increase pro forma operating income 2001 primarily due higher revenues resulting overall upturn petroleum industry company incurred pro forma net loss 71000 002 per common share year ended december 312001 compared pro forma net income 269000 067 per common share year end december 31 2000 pro forma net loss 2001 included increased employee costs interest expense lower margins mountain air schedule contractual obligations following table summarizes companys obligations commitments make future payments notes payable operating leases employment contracts consulting agreements periods specified december 31 2002 financial condition liquidity cash equivalents totaled 146000 december 31 2002 compared 152000 december 31 2001 net trade receivables december 31 2002 4409000 compared 973000 december 31 2001 due jens strata acquisitions net property plant equipment 17124000 december 31 2002 compared 4246000 december 31 2001 result jens strata acquisitions capital expenditures year 2002 518000 capital expenditures year 2001 402000 capital expenditures 2003 projected approximately 600000 trade accounts payable december 31 2002 2106000 compared 298000 december 31 2001 primarily due jens strata acquisitions current liabilities excluding current portion longterm debt december 31 2002 2597000 consisting interest amount 811000 accrued salary benefits amount 280000 income taxes payable 45000 accrued restructuring costs 606000 advance officers company 99000 accrued operating expenses 543000 legal professional expenses amount 213000 included accrued restructuring costs compensation amount 244000 due former employees company december 31 2001 current liabilities excluding current portion longterm debt 1637000 consisting interest amount 176000 accrued salary benefits amount 851000 legal professional expenses amount 610000 balance sheet accounts increased significantly december 31 2001 balances due jens strata acquisitions included salary benefits payable december 31 2001 deferred compensation amount 318000 due ceo company longterm debt including current maturities 21221000 december 31 2002 compared 7856000 december 31 2001 increase longterm debt primarily result cost jens strata acquisitions february 2002 longterm debt follows discussed bank debt may accelerated may come due payable company fails refinance mountain air bank debt due june 30 2003 mountain air december 31 2002 mountain air following debt outstanding term loan payable wells fargo energy amount 3550000 floating interest rate quarterly principal payments 147917 interest rate 525 december 31 2002 december 31 2002 outstanding amount due 2392000 maturity date loan june 30 2003 sellers note amount 2200000 575 simple interest principal interest due february 6 2006 subordinated debt payable wells fargo energy capital amount 2000000 12 interest principal due june 30 2003 connection incurring debt company issued redeemable warrants recorded liability 600000 discount face amount debt amount amortizable three years additional interest expense 200000 debt amortized 2002 183000 debt amortized 2001 delayed draw term loan payable wells fargo energy amount 282291 libor plus 05 interest payable quarterly commencing november 30 2001 interest rate 475 december 31 2002 december 31 2002 outstanding amount due 160000 principal due june 30 2003 500000 line credit wells fargo bank 330000 outstanding december 31 2002 committed line credit due june 30 2003 interest accrues rate equal prime rate plus 05 125 475 december 31 2002 committed portion additionally company pays 05 fee uncommitted portion jens december 31 2002 jens following debt outstanding term loan payable wells fargo business credit inc amount 4042396 floating interest rate monthly principal payments 67373 interest rate 875 december 31 2002 december 31 2002 outstanding amount due 3369000 maturity date loan february 1 2005 sellers note payable jens mortensen amount 4000000 75 simple interest quarterly interest payments december 31 2002 275000 interest accrued included accrued interest principal interest due january 31 2006 real estate loan payable wells fargo business credit inc amount 532000 floating interest rate monthly principal payments 14778 interest rate 875 december 31 2002 december 31 2002 outstanding amount due 384000 principal due february 1 2005 1000000 line credit wells fargo bank 67000 outstanding december 31 2002 committed line credit due january 31 2005 interest accrues floating rate plus 3 875 december 31 2002 committed portion additionally company pays 005 fee uncommitted portion conjunction purchase jens company agreed pay total 1234560 seller jens exchange noncompete agreement company make monthly payments 20576 period ended january 31 2007 december 31 2002 balance due approximately 1008000 including 247000 classified shortterm strata december 31 2002 strata following debt outstanding term loan payable wells fargo business credit inc amount 1654000 floating interest rate monthly principal payments 27567 interest rate 925 december 31 2002 december 31 2002 outstanding amount due 1041000 maturity date loan february 1 2005 addition monthly principal payments june 2002 company entered agreement target mwd lease mwd kits according terms lease target mwd required make monthly payments 15000 20000 applied reduce outstanding principal balance loan 2500000 line credit wells fargo bank 1275000 outstanding december 31 2002 committed line credit due january 31 2005 interest accrues floating rate plus 3 925 december 31 2002 committed portion additionally company pays 005 fee uncommitted portion 1996 amended 2000 2002 strata entered shortterm vendor financing agreement major supplier drilling motors drilling motor rentals motor lease costs motor repair costs agreement amended provides repayment amounts due later september 30 2003 payment interest note due monthly however company may make payments respect principal interest time without bonus penalty vendor financing incurs interest rate 80 december 31 2002 outstanding balance including accrued interest approximately 455000 note payable dated june 30 1998 former shareholder strata directional technology inc bearing interest 8 payable 60 equal monthly installments 2030 note matures paid full prior june 30 2003 balance december 31 2002 approximately 12000 allischalmers december 31 2002 allischalmers following debt obligations outstanding subordinated debt payable wells fargo energy capital amount 3000000 12 interest principal amount due january 31 2005 connection incurring debt company issued redeemable warrants recorded liability 900000 discount face amount debt amount amortizable three years beginning february 6 2002 additional interest expense 275000 amortized 2002 connection acquisition strata issued 3500000 shares series 10 cumulative convertible preferred stock shares along accrued unpaid dividend rights redeemable option holder february 1 2004 4200000 1999 compensated former continuing directors served without compensation 1989 march 31 1999 without compensation issuing promissory notes totaling 325000 notes bear interest rate 5 due march 28 2005 december 31 2002 principal accrued interest notes totaled approximately 370000 associated issuance 2 million subordinated debt recorded mountain air 3 million subordinated debt recorded allischalmers collectively subordinated debt company issued redeemable warrants exercisable maximum 1165000 shares companys common stock exercise price 015 per share warrants b nonredeemable warrants exercisable maximum 335000 shares companys common stock 100 per share warrant c warrants b subject cash redemption provisions puts 600000 900000 respectively discretion warrant holders beginning earlier final maturity date subordinated debt three years closing subordinated debt january 31 2004 january 31 2005 respectively warrant c contain puts provisions addition previously issued warrants purchase common stock mountain air cancelled company recorded liability 600000 mountain air 900000 allischalmers total 1500000 amortizing effects puts interest expense life related subordinated debt instruments addition debt discussed company available lines credit totaling 4000000 december 31 2002 1672000 outstanding compared available line credit totaling 77500 december 31 2001 375000 outstanding increase lines credit due jens strata acquisitions july 16 2002 lenders declared company subsidiaries default numerous credit agreements wells fargo bank affiliates bank lenders defaults resulted primarily failure meet financial covenants result decreased revenues result defaults bank lenders imposed default interest rates retroactive april 1 2002 resulting increase approximately 15000 monthly interest payments additionally bank lenders suspended interest payments aggregating 275000 december 31 2002 40 million subordinated seller note issued bank lenders connection jens acquisition resulted jens default terms subordinated seller note suspended interest payments aggregating 150000 december 31 2002 30 million subordinated bank note issued connection jens acquisition resulted jens default terms note pursuant terms intercreditor agreements lenders holders obligations precluded taking action enforce obligations without consent bank lenders effective january 1 2003 company entered amendment forbearance agreements forbearance agreements amended certain operating covenants addition bank lenders agreed forbear taking action waive underlying defaults respect alleged defaults period six months ending june 30 2003 forbearance period pursuant forbearance agreements mountain airs obligations modified follows mountain air allowed apply security deposit offset payments equipment lease lowering additional payments 58574 35000 per month forbearance period lease payments return 58574 per month though february 15 2006 date final payment 58574 due principal payments senior debt reduced forbearance period 57000 45000 per month interest payments subordinated debt reduced forbearance period 12 6 balance accrued mountain airs senior subordinated debt approximately 4882000 due payable june 30 2003 jens obligations amended follows forbearance period jens allowed resume payments 30000 per month subordinated debts wells fargo energy capital interest rate jens senior debt increased prime plus 3 jens allowed distribute 300000 allischalmers corporation allow allischalmers corporation pay legal accounting expenses connection preparation financial statements year ended december 31 2002 securities exchange commission filing shareholder communications stratas obligations amended follows interest rate stratas term debt revolving debt increased prime plus 312 company made outstanding principal interest payments senior debt bank lenders also believe company able comply terms forbearance agreements forbearance period however june 30 2003 4882000 debt owed mountain air become due forbearance respect jens stratas debts bank lenders expire negotiating bank lenders amend replace mountain air credit agreements bank lenders connection amendment seek waiver past defaults however assurance able amend terms refinance outstanding debt bank lenders favorable terms unable renegotiate refinance company debt bank lenders right accelerate amounts due totaled 14264000 march 31 2003 foreclose assets securing loans constitute substantially assets company event may unable continue operations accordingly bank debt subordinated seller note recorded current liabilities companys financial statements result company working capital deficit 13016000 december 31 2002 foregoing risks auditors qualified opinion regarding financial statements include going concern exception indicates evaluation financial condition premised upon assumption continue operations based upon current financial condition risk may able longterm capital needs refinance existing debt provide funds existing operations redeem series preferred stock secure funds acquisitions oil gas equipment rental services industry order pay debts become due including amounts due bank lenders described require additional financing within three months may include issuance new warrants equity debt securities well secured unsecured loans new issuance equity securities would dilute existing shareholders recent developments acquisition jens oilfield service inc strata directional technology inc jens oil field acquisition february 2002 purchased 81 outstanding stock jens 10250000 cash ii 4000000 note payable 75 interest rate principal due four years iii 1234560 noncompete agreement payable monthly five years iv additional payment 841000 based upon jens working capital february 1 2002 v 1397849 shares common stock entered threeyear employment agreement mr mortensen pay mr mortensen base salary 150000 per year also entered shareholders agreement jens mr mortensen providing restrictions transfer stock jens us mr mortensen providing mr mortensen option february 1 2003 exchange shares stock jens shares common stock value equal 46 times trailing ebitda earnings interest tax depreciation amortization jens determined accordance gaap generally accepted accounting principles less intercompany loans third party investments jens times nineteen percent 19 common stock valued based average closing bid price stock preceding 30 days mr mortensen demand registration right pursuant shareholder agreement requires company register shares company securities act 1933 amended exercised august 1 2005 mr mortensens cost along piggyback registration rights strata acquisition acquired 100 preferred stock 95 common stock strata consideration issuance energy spectrum partners lp energy spectrum 6559863 shares common stock warrants purchase additional 437500 shares company common stock exercise price 015 per share 3500000 shares newly created series 10 cumulative convertible preferred stock company series preferred stock addition result failure redeem series preferred stock prior february 4 2003 issued energy spectrum additional warrant acquire 875000 shares exercise price 015 per share energy spectrum largest shareholder private equity fund headquartered dallas texas may 2002 purchased remaining minority interest strata exchange 87500 shares allischalmers common stock series preferred stock issued energy spectrum connection strata transaction entitled receive cumulative annual dividends 10 per share payable cash additional shares series preferred stock dividends declared date company accrues obligation issue additional shares series preferred stock additionally share series preferred stock convertible two shares common stock series preferred stock also subject antidilution event issue common stock price 050 per share subject mandatory redemption second anniversary date issuance earlier net proceeds new equity sales subject optional redemption us anytime option energy spectrum february 1 2004 obligated redeem series preferred stock along accrued unpaid dividend rights 4200000 based current operations appears unlikely able secure financing enable us redeem series preferred stock therefore attempt renegotiate terms addition energy spectrum entitled appoint number directors board directors closely approximates percentage ownership common stock fullydiluted basis currently entitles energy spectrum elect onehalf five directors currently three persons designated energy spectrum thomas whitener jr james w spann michael tapp serve board directors also granted energy spectrum registration rights includes two demand registrations expense piggyback registration rights risk factors annual report form 10k including without limitation following risk factors contains forwardlooking statements within meaning section 27a securities act 1933 securities act section 21e securities exchange act 1934 regarding business financial condition results operations prospects words expects anticipates intends plans believes seeks estimates similar expressions variations words intended identify forwardlooking statements exclusive means identifying forwardlooking statements annual report form 10k although forwardlooking statements annual report form 10k reflect good faith judgment management statements based facts factors currently know consequently forwardlooking statements inherently subject risks uncertainties actual results outcomes may differ materially results outcomes discussed forwardlooking statements factors could cause contribute differences results outcomes include limited discussed elsewhere annual report form 10k sec filings publicly available documents readers urged place undue reliance forwardlooking statements speak date annual report form 10k undertake obligation revise update forwardlooking statements order reflect event circumstance may arise date annual report form 10k low prices oil natural gas adversely affect demand services products natural gas exploration drilling business highly cyclical exploration drilling activity declines marginally profitable projects become uneconomic either delayed eliminated decline number operating oil rigs would adversely affect business accordingly oil natural gas prices relatively low revenues income suffer oil gas industry extremely volatile subject change based political economic factors outside control highly leveraged default credit agreements lenders result acquisition financing highly leveraged march 31 2003 approximately 14264000 lender debt outstanding 2002 defaulted credit agreements result defaults july 2002 senior lenders required us suspend payments subordinated debt lenders agreed forbear taking action respect debt june 30 2003 attempting refinance debt however fail refinance debt lenders could accelerate outstanding debt foreclose upon assets securing debt constitute substantially assets level debt impair ability obtain additional financing makes us vulnerable economic downturns declines oil natural gas prices makes us vulnerable increases interest rates may maintain sufficient revenues meet debt obligations fund operations lack funds may limit flexibility planning reacting changes business industry place us competitive disadvantage compared competitors greater access funds limit ability borrow additional funds subject going concern opinion independent auditors means may able continue operations unless obtain additional funding shown accompanying financial statements net loss 3969000 2002 4882000 debt due june 2003 december 31 2002 current liabilities exceeded current assets 13016000 net worth 1009000 factors among others indicate unless successful refinancing debt may unable continue going concern reasonable period time independent auditors added explanatory paragraph audit opinion issued connection financial statements year ended december 31 2002 states financial statements raise substantial doubt ability continue going concern ability obtain additional funding determine ability continue going concern financial statements include adjustments might result outcome uncertainty service indebtedness require significant amount cash ability generate cash depends many factors beyond control ability fund operations make payments refinance indebtedness fund planned acquisitions capital expenditures depend ability generate cash future ability certain extent subject general economic financial competitive legislative regulatory factors beyond control failure obtain additional financing may adversely affect us must refinance debt becoming due june 2003 order continue operations expansion operations acquisition additional companies require substantial amounts capital availability financing may affect ability expand assurance funds expansion whether equity debt financings sources available terms satisfactory us may also enter strategic partnerships purpose developing new businesses future growth may limited unable complete acquisitions strategic partnerships mandatory redemption series 10 cumulative convertible preferred stock outstanding 3500000 shares series 10 cumulative convertible preferred stock preferred stock pursuant terms certificate designation preferences rights preferred stock company obligated february 1 2004 redeem outstanding preferred stock along cumulative dividend rights 4200000 may difficulties integrating acquired businesses may able successfully integrate business operating subsidiaries business acquire future integration businesses complex time consuming may disrupt future business may encounter substantial difficulties costs delays involved integrating common information communication systems operating procedures financial controls human resources practices including incompatibility business cultures loss key employees customers various risks associated acquisition businesses uncertainties regarding profitability operations could material adverse effect us success dependent upon ability acquire integrate additional businesses business strategy acquire companies operating oil natural gas equipment rental services industry however assurance successful acquiring additional companies successful acquisition new companies depend various factors including ability obtain financing competitive environment acquisitions well integration issues described preceding paragraph assurance able acquire successfully operate particular business able expand areas targeted may experience expected synergies may able achieve synergies expect combination businesses including plans reduce overhead shared facilities systems crossmarket businesses customers access larger pool customers due combined businesses ability provide larger range services trading market common stock common stock registered exchange nasdaq traded sporadically counter bulletin board investigating listing common stock exchange however currently meet listing requirement national us exchange assurance able list common stock exchange future assurance active market common stock develop future expect pay dividends common stock within last ten years paid intentions foreseeable future pay cash dividends common stock therefore investor common stock likelihood realize profit investment market price common stock increases value existing stockholders may diluted connection additional financings expect issue additional equity securities repay debt connection acquisition additional businesses well connection employee benefit plans issuances dilute holdings existing stockholders securities may prior parity common stock competition could cause business suffer natural gas equipment rental services industry highly competitive despite recent consolidation activities industry remains highly fragmented competitors significantly larger greater financial technological operating resources addition number individual regional operators compete us throughout existing targeted markets competitors compete us customers acquisitions businesses competition may cause business suffer products services may become obsolete business success dependent upon providing customers efficient costeffective oil gas drilling equipment technology possible competing technologies may render equipment technologies obsolete material adverse effect us historical results indicator future operations business conducted three subsidiaries one acquired february 2001 two acquired february 2002 result past performance indicative future results likelihood success must considered light volatility industry leveraged condition competition factors set forth herein controlled stockholders small number stockholders effectively control us energy spectrum partners lp energy spectrum president chief executive officer chairman munawar h hidayatallah colebrook investments inc beneficially approximately 546 223 172 respectively common stock shares common stock beneficially owned energy spectrum include 7875000 shares issuable upon conversion series preferred stock preferred stock including accrued dividend rights 1312500 shares common stock issuable upon exercise outstanding warrants addition february 28 2003 series preferred stock accrued cumulative dividend rights entitling receive either 379167 cash 379167 additional shares preferred stock holder preferred stock energy spectrum right elect number directors board directors closely reflects energy spectrums ownership interest common stock fullydiluted basis currently energy spectrum entitled elect five directors energy spectrum either mr hidayatallah colebrook investments inc voting together power control outcome matters requiring stockholder approval including election directors proposed change control company natural person controls colebrooke none officers directors financial interest colebrooke owner colebrookes shares jupiter trust guernsey trust corporate trustee jupiter trust ansbacher trust company ansbacher guernsey trust action taken upon majority vote trusts three directors messrs robert bannister phillip retz ms rachel whatley directors absolute discretion take action make investment decisions behalf ansbacher deemed control ansbacher sole voting dispository power shares colebrooke individual directors colebrooke corporate director colebrooke plaiderie corporate directors one limited guernsey company plaiderie whollyowned ansbacher guernsey limited ansbacher limited controlled registered bank guernsey ultimate parent ansbacher limited first rand limited first rand publiclyowned company listed johannesburg stock exchange first rand deemed control plaiderie dependence upon key personnel dependent upon efforts skills executives including president chief executive officer chairman munawar h hidayatallah manage business well identify consummate additional acquisitions addition business strategy acquire businesses dependent upon skilled management personnel retain personnel operate business loss services mr hidayatallah one key personnel operating subsidiaries could material adverse effect us maintain key man insurance personnel addition development expansion require additional experienced management operations personnel assurance given able identify retain employees customers credit risks could cause business suffer customers engaged oil natural gas drilling business southwestern united states mexico concentration customers may impact overall exposure credit risk customers may similarly affected changes economic industry conditions vulnerable personal injury property damage services used exploration production oil natural gas operations subject inherent hazards cause personal injury loss life damage destruction property equipment environment marine life suspension operations litigation arising accident location products services used provided may result named defendant lawsuits asserting potentially large claims maintain customary insurance protect business potential losses however could become subject material uninsured liabilities government regulations could cause business suffer subject various federal state local laws regulations relating energy industry general environment particular environmental laws recent years become stringent generally sought impose greater liability larger number potentially responsible parties although aware proposed material changes statutes rules regulations changes could cause business suffer labor costs unavailability skilled workers could cause business suffer dependent upon available labor pool skilled employees also subject fair labor standards act governs matters minimum wage overtime working conditions shortage labor pool general inflationary pressures changes applicable laws regulations could require us enhance wage benefits packages assurance labor costs increase operating costs could cause business suffer may subject certain environmental liabilities relating discontinued operations reorganized bankruptcy laws 1988 since time number parties including environmental protection agency epa asserted responsible cleanup hazardous waste sites assertions made respect prebankruptcy activities believe claims barred applicable bankruptcy law however prevail respect claims could become subject material environmental liabilities may subject certain products liability claims reorganized bankruptcy laws 1988 since time regularly named products liability lawsuits primarily resulting manufacture products containing asbestos connection bankruptcy special products liability trust established responsible claims believe claims allischalmers corporation banned applicable bankruptcy law products liability trust continue responsible claims since 1988 court ruled responsible claims however products liability trust terminated funds disbursed prevail claim bankruptcy bars claims us could become subject material products liabilities related prebankruptcy activities manufactured products containing asbestos since bankruptcy item 7a item 7 management’s discussion analysis financial condition results operations pursuant general instruction form 10k “omission information certain whollyowned subsidiaries” section includes management’s narrative analysis results operations year ended december 31 2010 recent fiscal year compared year ended december 31 2009 fiscal year immediately preceding following discussion analysis read conjunction accompanying financial statements notes financial statements included elsewhere document following discussion contains forwardlooking statements within meaning private securities litigation reform act 1995 reflect plans estimates beliefs actual results could differ materially anticipated forwardlooking statements result risks uncertainties including limited discussed “item 1a risk factors” overview business multifaceted oilfield service company provides services equipment oil natural gas exploration production companies throughout united states including texas louisiana pennsylvania arkansas west virginia oklahoma colorado offshore gulf mexico internationally primarily argentina brazil bolivia mexico operate three sectors oil natural gas service industry oilfield services drilling completion rental services derive operating revenues rates per day rates per job charge labor equipment required provide service rates per day equipment tools rent customers price charge services depends upon several factors including level oil natural gas drilling activity competitive environment particular geographic regions operate contracts awarded based price quality service equipment general reputation experience personnel demand drilling services historically volatile affected capital expenditures oil natural gas exploration development companies fluctuate based upon prices oil natural gas expectation prices oil natural gas operating costs fluctuate direct proportion changes revenues operating expenses consist principally labor costs benefits equipment rentals maintenance repairs equipment depreciation insurance fuel many costs fixed operating income percentage revenues generally affected level revenues merger seawell february 23 2011 merged wellco sub company wholly owned subsidiary seawell share common stock converted right receive either 115 seawell common shares 425 cash connection merger wellco sub company changed name allischalmers energy inc 24 index financial statements recorded approximately 21 million costs related merger year ended december 31 2010 included selling general administrative expense consolidated statements operations approval merger resulted certain contractual obligations triggered accelerated “change control” provisions contractual arrangements examples arrangements include stockbased compensation awards severance retirement plan agreements applicable executive officers directors certain employees certain debt obligations including senior notes company outlook throughout first half 2009 saw significant decline global economy led reduced activity energy sector reduced activity energy sector resulted lower demand services incurred significant losses since second quarter 2009 experienced quarter improvement total revenues resulted reduced net losses april 20 2010 fire explosion occurred onboard semisubmersible drilling rig deepwater horizon owned transocean ltd contract subsidiary bp plc accident resulted loss life significant oil spill response incident minerals management service united states department interior mms issued notice may 30 2010 implementing sixmonth moratorium certain drilling activities united states gulf mexico notice also stated mms would consider drilling permits new wells related activities specified water depths sixmonth moratorium period addition entities process drilling wells covered moratorium required halt drilling take steps secure wells october 12 2010 moratorium lifted deepwater oil natural gas drilling united states gulf mexico allowed resume provided operators certify compliance existing rules requirements including recently went effect demonstrate availability adequate blowout containment resources first new permit issued march 2011 although moratorium oil natural gas drilling united states gulf mexico lifted new guidelines regulations restrictions could increase costs exploration production reduce area operations result permitting delays may include new additional bonding safety requirements regarding certification equipment enactment stricter restrictions offshore drilling regulation offshore drilling contracting services operations could materially affect business financial condition results operations results operations july 2010 acquired outstanding stock awc reported part rental services segment consolidated results acquisition day acquired foregoing acquisition affects comparability period historical results historical results may indicative future results comparison years ended december 31 2010 december 31 2009 revenues year ended december 31 2010 6597 million increase 303 compared 5063 million year ended december 31 2009 revenues increased three segments oilfield services rental services segments strong concentration united states domestic oil natural gas market due increased drilling activity united states particularly natural gas shale plays compared 2009 experienced significant improvement equipment utilization pricing resulted increase revenues oilfield services segment 2106 million year ended december 31 2010 compared revenues 1436 million year ended december 31 2009 rental services segment increase revenues 709 million year ended december 31 2010 compared revenues 587 million year ended december 31 2009 acquisition awc july 2010 contributed 157 million increase revenues rental services segment contribution revenues awc increase activity united states land shale plays partially offset drilling moratorium gulf mexico increase revenues drilling completion segment due higher rig utilization pricing argentina operations drilling completion segment generated 3782 million revenues year ended december 31 2010 compared revenues 3040 million year ended december 31 2009 25 index financial statements direct costs year ended december 31 2010 increased 313 4981 million 755 revenues compared 3794 million 750 revenues year ended december 31 2009 increase direct costs consistent increase revenues oilfield services segment direct costs year ended december 31 2010 increased 350 million 314 direct costs year ended december 31 2009 revenues increased 467 period resulting improved gross margin 304 2010 compared 223 2009 addition oilfield services segment 12 million expenses recorded year ended december 31 2009 related severance payments closing unprofitable locations downsizing locations direct costs drilling completion segment increased 744 million 302 year ended december 31 2010 compared year ended december 31 2009 revenues increased 244 period resulting reduction gross margin 151 2010 compared 188 2009 unfavorable variance primarily attributed labor cost increases due inflationary environment argentina decreased utilization pricing rigs brazil rental services segment direct costs year ended december 31 2010 increased 93 million 439 direct costs year ended december 31 2009 revenues increased 207 period resulting reduction gross margin 570 2010 compared 639 2009 awc acquisition july 2010 contributed 157 million revenues 95 million direct costs rental services segment year ended december 31 2010 effective gross margin percentage revenues 395 lower margin manufacturing operation awc primary reason gross margin percentage rental services segment declined year ended december 31 2010 compared year ended december 31 2009 depreciation expense increased 75 841 million year ended december 31 2010 783 million year ended december 31 2009 primary increase depreciation expense due ongoing investment equipment serve customer base selling general administrative expense 604 million year ended december 31 2010 compared 508 million year ended december 31 2009 selling general administrative expense increased primarily due bonuses amortization sharebased compensation arrangements merger related transaction costs partially offset reduced bad debt provision bonus expense year ended december 31 2010 69 million compared 13 million prior year due improved operating results 2010 compared 2009 selling general administrative expense includes sharebased compensation expense 80 million 2010 48 million 2009 transaction costs related merger seawell 21 million included fairness opinion professional fees bad debt expense year ended december 31 2010 368000 compared 28 million year ended december 31 2009 reflection improved market conditions united states oilfield industry percentage revenues selling general administrative expenses 92 2010 compared 100 2009 year ended december 31 2010 recorded 106 million loss sale two drilling rigs constructed 2008 never able operate reliable basis received 250 million rigs costs related rig 352 million addition incurred 311000 early repayment fee wrote deferred financing costs 115000 related underlying debt two rigs year ended december 31 2009 recorded 16 million loss asset disposition total loss rig blowout drilling completion segment insurance proceeds loss sufficient cover book value rig related assets amortization expense 48 million year ended december 31 2010 compared 47 million year ended december 31 2009 increase primarily attributable intangible assets associated acquisition awc july 2010 income operations year ended december 31 2010 totaled 16 million compared 85 million loss year ended december 31 2009 improvement 101 million improvement primarily related increased revenues segments partially offset higher selling general administrative costs increased loss asset dispositions increased depreciation amortization expense year ended december 31 2010 compared year ended december 31 2009 interest expense 458 million year ended december 31 2010 compared 481 million year ended december 31 2009 june 29 2009 purchased 748 million senior notes proceeds 1256 million equity issuances date also prepaid 350 million outstanding loan balance revolving credit facility june 29 2009 equity proceeds outstanding balance revolving credit facility 365 million december 31 2010 compared borrowings december 31 2009 november 2010 repaid outstanding balance 208 million term loan two rigs sold 2010 interest expense includes amortization expense debt issuance costs 22 million years ended december 31 2010 2009 26 index financial statements interest income 537000 year ended december 31 2010 compared 72000 year ended december 31 2009 received 405000 interest income related receivable collected bankruptcy proceedings 2010 year ended december 31 2009 recorded gain 264 million result tender offer completed june 29 2009 purchased 306 million aggregate principal 90 senior notes 442 million aggregate principal 85 senior notes approximately 464 million included computation gain writeoff 15 million debt issuance costs related retired notes incurred approximately 466000 expenses related transactions benefit income taxes year ended december 31 2010 74 million 158 net loss income taxes compared income tax benefit 99 million 318 net loss income taxes 2009 effective tax rate united states 294 2010 compared 355 2009 effective tax rate international activities increased 856 2010 compared 444 2009 decrease united states tax rate primarily attributable higher nondeductible items 2010 year including transaction costs meals entertainment increase international tax rate primarily due bch operations generate loss brazil incurs withholding tax revenues reported income tax net loss 395 million year ended december 31 2010 compared net loss 212 million year ended december 31 2009 net loss year ended december 31 2010 included 106 million loss sale two rigs net loss 2009 includes 264 million gain result senior notes tender offer net loss attributed common stockholders years ended december 31 2010 2009 421 million 225 million respectively 25 million 13 million preferred stock dividends respectively preferred stock dividend relates 36393 shares 1000 par value preferred shares 70 following table compares revenues income loss operations business segments years ended december 31 2010 december 31 2009 income loss operations consists revenues gain loss asset dispositions less direct costs general administrative expenses depreciation amortization oilfield services revenues year ended december 31 2010 oilfield services segment 2106 million increase 467 1436 million revenues year ended december 31 2009 income operations oilfield services segment increased 301 million resulted income operations 154 million year ended december 31 2010 compared loss operations 147 million year ended december 31 2009 oilfield services segment revenues operating income year ended december 31 2010 increased compared year ended december 31 2009 due improved market conditions resulted increased demand pricing services year ended december 31 2009 incurred 12 million costs related severance payments closing unprofitable locations downsizing locations oilfield services segment drilling completion drilling completion revenues 3782 million year ended december 31 2010 increase 244 3040 million revenues year ended december 31 2009 drilling completion revenues increased 2010 primarily due increased activity argentina income operations decreased 44 million 2010 compared 192 million year ended december 31 2009 income operations percentage revenue decreased 12 2010 compared 63 2009 reduction due 1 106 million loss disposition two drilling rigs manufactured 2008 never achieved acceptable performance 2 increased labor costs argentina year ended december 31 2010 3 increase 41 million 184 depreciation amortization year ended december 31 2010 4 reduced rig utilization rig rates brazil year ended december 31 2010 compared prior year results drilling completion segment 2010 also impacted high incidence labor strikes argentina year operating income 2009 impacted 1 16 million noncash loss recorded year ended december 31 2009 rig destroyed blowout 2 17 million severance costs year ended december 31 2009 related workforce reductions argentina result lower activity 3 329000 costs incurred consolidate operating locations brazil year ended december 31 2009 increase depreciation amortization expense result continual upgrade equipment 27 index financial statements rental services rental services revenues 709 million year ended december 31 2010 increase 207 587 million revenues year ended december 31 2009 income operations rental services segment increased 41 million year ended december 31 2010 compared 140000 year ended december 31 2009 rental services segment revenues operating income year ended december 31 2010 increased compared prior year due primarily acquisition awc generated 157 million revenues 53 million operating income acquisition july 2010 december 31 2010 rental services segment negatively impacted moratorium gulf mexico resulting deepwater horizon incident partially offset increased pricing utilization certain equipment result focus land shale drilling activity bad debt expense recorded rental services segment year ended december 31 2010 compared 15 million year ended december 31 2009 general corporate general corporate expenses increased 91 million 223 million year ended december 31 2010 compared 132 million year ended december 31 2009 increase primarily due increase sharebased compensation expense bonus expense transaction costs related merger seawell sharebased compensation expense included general corporate 67 million year ended december 31 2010 compared 37 million year ended december 31 2009 increase primarily attributed accelerated vesting restricted stock connection pending merger seawell bonus expense year ended december 31 2010 64 million higher previous year due new bonus plan adopted 2010 achievement certain performance goals 2010 incurred 21 million costs related seawell merger year ended december 31 2010 liquidity capital resources ongoing capital requirements arise primarily need service debt acquire maintain equipment fund working capital requirements complete acquisitions past primary source liquidity proceeds issuance debt equity securities cash flows operations completion merger revolving credit facility repaid cancelled future funds provided operating cash flow advances parent company operating activities year ended december 31 2010 generated 549 million cash operating activities net loss year ended december 31 2010 395 million noncash additions net loss totaled 960 million 2010 period consisting primarily 889 million depreciation amortization 106 million related loss disposition two drilling rigs 80 million related expensing stock options 22 million amortization writeoff deferred financing fees 15 million loss sale investment exploration production company 08 million losses incurred joint venture operating saudi arabia 07 million losses disposition equipment partially offset 171 million deferred income taxes year ended december 31 2010 changes working capital used 16 million cash provided decreases prepaid expenses 111 million 17 million assets increases trade payables 111 million 74 million accrued expense 99 million accrued salaries benefits payroll taxes offset cash used increases accounts receivable 357 million 60 million inventories decrease 09 million liabilities accounts receivables increased december 31 2010 primarily due increase revenues 2010 inventories increased december 31 2010 primarily due acquisition awc 30 million manufacturing related inventory december 31 2010 also due increase activity prepaid expenses current assets decreased primarily due tax prepayments argentina utilized cover current period income taxes due amortization insurance premiums financed decrease assets relates recurring amortization deferred mobilization costs well amortization oil gas investments accounts payable accrued expenses increased primarily due increase costs due increase activity approximately 50 million increase accrued salaries benefits payroll taxes relates yearend bonus accruals december 31 2010 rest increase relates general timing differences payroll paid year ended december 31 2009 generated 555 million cash operating activities net loss year ended december 31 2009 212 million noncash additions net loss totaled 493 million 2009 period consisting primarily 830 million depreciation amortization 48 million related expensing stock options 28 million bad debts 22 million amortization writeoff deferred financing fees 16 million related loss rig destroyed fire partially offset 264 million gain debt extinguishment 179 million deferred income taxes 09 million gains dispositions equipment 28 index financial statements year ended december 31 2009 changes working capital provided 274 million cash principally due decrease 500 million accounts receivable decrease 46 million inventories decrease current assets 46 million increase 27 million accrued employee benefits payroll taxes offset decrease 276 million accounts payable decrease 46 million accrued expenses decrease accrued interest 28 million accounts receivables decreased december 31 2009 primarily due decrease revenues 2009 inventories decreased december 31 2009 primarily due slow activity current assets decreased primarily due tax refunds received 2009 accounts payable accrued expenses decreased primarily due decrease costs due decrease activity investing activities year ended december 31 2010 used 677 million investing activities consisting 1022 million capital expenditures 159 million acquisition awc offset decrease 183 million deposits asset commitments 66 million proceeds equipment sales 250 million proceeds sale two drilling rig manufactured 2008 included 1022 million capital expenditures 266 million oilfield services segment 384 million two domestic drilling rigs 218 million additional equipment drilling completion segment 146 million drill pipe equipment used rental services segment acquired awc cash payment 172 million directly seller 10 million shares common stock value 20 million acquired assets awc included 12 million cash decrease deposits asset commitments primarily due completion drilling rigs construction december 31 2010 also received 66 million sale assets year ended december 31 2010 comprised mostly equipment “lostinhole” rental services segment 40 million oilfield services segment 18 million year ended december 31 2009 used 640 million investing activities consisting 781 million capital expenditures 11 million additional investments offset decrease 27 million deposits asset commitments 86 million proceeds equipment sales 39 million insurance proceeds drilling rig destroyed blowout included 781 million capital expenditures 114 million oilfield services segment 385 million two domestic drilling rigs 199 million additional equipment drilling completion segment 82 million drill pipe equipment used rental services segment invested 24 million cash expenditures equipment investment saudi arabia joint venture received 13 million insurance proceeds related preacquisition contingency bch decrease assets due conversion deposits equipment purchases capital expenditures drilling rigs assets used directional drilling services also received 86 million sale assets year ended december 31 2009 comprised mostly equipment “lostinhole” rental services segment 35 million oilfield services segment 08 million along 39 million sale plane rental services segment also transferred 16 million rental assets part investment saudi arabia joint venture noncash transaction 2009 reduced carrying value goodwill bch acquisition 13 million due utilization preacquisition tax asset financing activities year ended december 31 2010 financing activities used 73 million cash borrowed net 365 million revolving credit facility additional 40 million term loan facility repaid 422 million longterm debt including 208 million repayment rig financing term loan proceeds two rigs sold november 2010 also paid 25 million preferred dividends year ended december 31 2010 incurred 189000 debt issuance costs revolving credit facility primarily modify loan covenants result net exercises restricted grant vesting net cash outlay 17 million related payment payroll taxes exercises recorded income tax impact 12 million result expense recorded restricted stock grants exceeding actual tax deduction generated awards addition financed renewal 29 million insurance policy premiums noncash transactions year ended december 31 2009 financing activities provided 427 million cash raised 1202 million net expenses issuance common preferred stock borrowed 250 million loan facility acquire two drilling rigs offset part repayments 648 million longterm debt net repayment revolving credit facility 365 million 665000 preferred dividend payments repayments longterm debt consisted 464 million senior notes result tender offer 184 million scheduled debt repayment including prepayment bch loan facility also incurred 658000 debt issuance costs consisting 528000 revolving credit facility primarily modify loan covenants 131000 rig financing agreement addition financed renewal 32 million insurance policy premiums noncash transactions 29 index financial statements january 18 2006 august 14 2006 closed private offerings qualified institutional buyers pursuant rule 144a securities act 1933 1600 950 million aggregate principal amount senior notes respectively senior notes due january 15 2014 bear interest 90 proceeds used fund acquisitions specialty rental tools inc dls repay existing debt general corporate purposes june 29 2009 closed tender offer purchased 306 million aggregate principal 90 senior notes total consideration 650 per 1000 principal amount january 2007 closed private offering qualified institutional buyers pursuant rule 144a securities act 1933 2500 million principal amount 85 senior notes due 2017 proceeds senior notes offering together portion proceeds concurrent common stock offering used repay debt outstanding 3000 million bridge loan facility incurred finance acquisition substantially assets oil gas rental services inc june 29 2009 closed tender offer purchased 442 million aggregate principal 85 senior notes total consideration 600 per 1000 principal amount 900 million revolving line credit final maturity date april 26 2012 pursuant revolving credit agreement contains customary events default financial covenants limits ability incur additional indebtedness make capital expenditures pay dividends make distributions create liens sell assets april 9 2009 amended revolving credit agreement modify leverage interest coverage ratio covenants effective december 31 2009 amended leverage interest coverage ratio covenants revolving credit agreement amendment relaxed required financial ratios quarter ended december 31 2009 quarters 2010 obligations amended restated credit agreement secured substantially assets located united states compliance debt covenants december 31 2010 december 31 2009 december 31 2010 365 million borrowings outstanding 41 million outstanding letters credit revolving credit facility december 31 2009 usage revolving credit facility consisted 42 million outstanding letters credit interest rate revolving credit facility based prime libor plus margin weightedaverage interest rate 78 december 31 2010 connection merger seawell facility repaid cancelled part acquisition dls assumed various bank loans floating interest rates based libor plus margin terms ranging 2 5 years weighted average interest rates loans 20 21 december 31 2010 2009 respectively outstanding amount due bank loans december 31 2010 2009 350000 11 million respectively february 15 2008 dls subsidiary argentina entered 250 million import finance facility bank borrowings facility used fund portion purchase price new drilling service rigs ordered drilling completion segment loan repayable four years equal semiannual installments beginning one year disbursement final principal payment due later march 15 2013 import finance facility unsecured contains customary events default financial covenants limits dls’ ability incur additional indebtedness make capital expenditures create liens sell assets compliance debt covenants december 31 2010 2009 bank loan rates based libor plus margin weighted average interest rate 42 44 december 31 2010 2009 respectively outstanding amount import finance facility december 31 2010 2009 144 million 201 million respectively part acquisition bch assumed 236 million term loan credit facility bank credit agreement dated june 2007 contains customary events default financial covenants based bch’s standalone financial statements obligations facility secured substantially bch assets bch compliance debt covenants december 31 2009 bank waived certain financial ratio covenants september 30 2010 december 31 2010 measurement periods could certain bch would attain compliance covenants within one year classified entire outstanding balance loan current portion longterm debt december 31 2010 facility repayable quarterly principal installments plus interest final payment due later august 2012 interest rates based libor plus margin december 31 2010 2009 outstanding amount loan 70 million 162 million interest rate 35 time merger facility prepaid may 22 2009 drew 250 million new term loan credit facility lending institution facility utilized fund portion purchase price two new drilling rigs loan secured equipment repaid november 2010 equipment sold manufacturer facility repayable quarterly installments approximately 14 million principal interest mature may 2015 loan bore interest fixed rate 90 december 31 2009 outstanding amount loan 234 million 30 index financial statements february 9 2010 dls subsidiary entered 40 million term loan facility loan repayable semiannual installments beginning april 14 2011 bears interest 85 per annum final maturity date april 14 2014 loan unsecured 2010 obtained insurance premium financings aggregate amount 29 million fixed weightedaverage interest rate 48 terms agreements amounts outstanding paid eight 11 month repayment schedules outstanding balance notes approximately 10 million december 31 2010 2009 obtained insurance premium financings aggregate amount 32 million fixed weightedaverage interest rate 48 terms agreements amounts outstanding paid 10 11 month repayment schedules outstanding balance notes approximately 0 997000 december 31 2010 2009 respectively part acquisition bch assumed various capital leases terms two three years outstanding balance capital leases 0 254000 december 31 2010 2009 respectively following table summarizes obligations commitments make future payments notes payable operating leases employment contracts consulting agreements periods specified december 31 2010 critical accounting policies identified policies critical business operations understanding results operations impact associated risks related policies business operations discussed throughout management’s discussion analysis financial condition results operations policies affect reported expected financial results detailed discussion application accounting policies see note 1 notes consolidated financial statements included elsewhere document preparation report requires us make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period assurance actual results differ estimates allowance doubtful accounts determination collectibility amounts due customers requires us use estimates make judgments regarding future events trends including monitoring customer payment history current credit worthiness determine collectibility reasonably assured well consideration overall business climate customers operate uncertainties require us make frequent judgments estimates regarding customers’ ability pay amounts due us order determine appropriate amount valuation allowances required doubtful accounts provisions doubtful accounts recorded becomes evident customers able make required payments either contractual due dates future revenue recognition provide rental equipment oilfield services drilling services customers per day daywork per job contractual rates recognize drilling related revenue work progresses collectibility reasonably assured revenue daywork contracts recognized realized realizable earned daywork contracts revenue recognized based number days completed fixed rates stipulated contract certain contracts receive lumpsum fees equipment mobilization costs mobilization fees related costs deferred amortized contract terms material 31 index financial statements impairment longlived assets longlived assets principally property plant equipment comprise significant amount total assets make judgments estimates conjunction carrying value assets including amounts capitalized depreciation amortization methods useful lives additionally carrying values assets reviewed impairment whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires us make longterm forecasts future revenues costs related assets subject review forecasts require assumptions demand products services future market conditions technological developments significant unanticipated changes assumptions could require provision impairment future period goodwill intangibles december 31 2010 recorded approximately 463 million goodwill 339 million identifiable intangible assets perform purchase price allocations intangible assets make business combination business combinations purchase price allocations consummated acquisitions reportable segments excess purchase price allocation fair values tangible assets allocated identifiable intangibles thereafter goodwill make judgments estimates conjunction carrying value assets including amounts capitalized whether asset finite life amortization purposes annual impairment tests involve use different valuation techniques including income approach andor market approach determine fair value reporting units determining fair value reporting unit matter judgment often involves use significant estimates assumptions fair value reporting unit less carrying value impairment loss recorded extent implied fair value reporting unit’s goodwill less carrying value recorded impairment charge 1158 million 2008 result test december 31 2010 2009 impairment deeded necessary significant unanticipated changes assumptions could require additional provision impairment future period purchase price allocation acquired businesses allocate purchase price acquired businesses identifiable assets liabilities businesses post acquisition based estimated fair values excess purchase price amount allocated assets liabilities recorded goodwill engage thirdparty appraisal firms valuation experts assist determination identifiable assets liabilities judgments estimates allocation purchase price based information available measurement period judgments estimates materially impact financial position well results operations income taxes determination evaluation annual income tax provision involves interpretation tax laws various jurisdictions operate requires significant judgment use estimates assumptions regarding significant future events amount timing character income deductions tax credits changes tax laws regulations level operations profitability jurisdiction may impact tax liability given year annual tax provision based information available us time number years may elapse ultimate tax liabilities certain tax jurisdictions determined current income tax expense benefit reflects estimate income tax liability current year withholding taxes changes tax rates changes prior year tax estimates returns filed deferred tax assets liabilities recognized anticipated future tax effects temporary differences financial statement basis tax basis assets liabilities using enacted tax rates effect year end valuation allowance deferred tax assets recorded morelikelythannot benefit deferred tax asset realized intention permanently reinvest undistributed earnings nonunited states subsidiaries accordingly provided united states deferred taxes undistributed earnings nonunited states subsidiaries distribution made us undistributed earnings subsidiaries could required record additional taxes cannot predict make distribution undistributed earnings unable make determination amount unrecognized deferred tax liability recently issued accounting standards discussion new accounting standards see applicable section note 1 consolidated financial statements included “item 8 financial statements supplementary data” 32 index financial statements offbalance sheet arrangements balance sheet arrangements normal operating leases employee contracts likely current future material effect financial condition changes financial condition revenues expenses results operations liquidity capital expenditures capital resources 900 million revolving credit facility maturity april 2012 december 31 2010 365 million borrowings facility availability reduced outstanding letters credit 41 million guarantee obligations unconsolidated entities item 7a item 7a quantitative qualitative disclosure market risk exposed market risk primarily changes interest rates foreign currency exchange risks interest rate risk fluctuations general level interest rates current future fixed variable rate debt obligations expose us market risk vulnerable significant fluctuations interest rates variable rate debt future refinancing fixed rate debt future debt december 31 2006 exposed interest rate fluctuations approximately 81 million bank loans carrying variable interest rates hypothetical one hundred basis point increase interest rates notes payable would increase annual interest expense approximately 81000 due uncertainty fluctuations interest rates specific actions might taken us mitigate impact fluctuations possible effects foregoing sensitivity analysis assumes changes financial structure also subject interest rate market risk shortterm invested cash equivalents principal invested funds would subject fluctuating value highly liquid shortterm nature december 31 2006 283 million invested shortterm maturing investments foreign currency exchange rate risk designated us dollar functional currency operations international locations contract customers purchase equipment finance capital using us dollar local currency transaction gains losses arising remeasurement certain assets liabilities denominated local currency included consolidated statements income year ended december 31 2006 net foreign exchange loss 515000 relating dls operations conduct business mexico mexican partner matyep business exposes us foreign exchange risk control risk provide payment us dollars item 8 item 7a quantitative qualitative disclosures market risk applicable item 8 item 7a quantitative qualitative disclosure market risk exposed market risk primarily changes interest rates foreign currency exchange risks interest rate risk fluctuations general level interest rates current future fixed variable rate debt obligations expose us market risk vulnerable significant fluctuations interest rates variable rate debt future repricing refinancing fixed rate debt future debt december 31 2005 exposed interest rate fluctuations approximately 490 million notes payable bank credit facility borrowings carrying variable interest rates hypothetical one hundred basis point increase interest rates notes payable would increase annual interest expense approximately 490000 due uncertainty fluctuations interest rates specific actions might taken us mitigate impact fluctuations possible effects foregoing sensitivity analysis assumes changes financial structure also subject interest rate market risk shortterm invested cash equivalents principal invested funds would subject fluctuating value highly liquid shortterm nature december 31 2005 11 million invested shortterm maturing investments foreign currency exchange rate risk conduct business mexico mexican partner matyep business exposes us foreign exchange risk control risk provide payment us dollars however historically provided partner discount upon payment equal 50 loss suffered partner result devaluation mexican peso date invoicing date payment 2005 2004 discounts exceeded 10000 per year item 8 item 7a quantitative qualitative disclosures market risk none item 8 item 7a quantitative qualitative disclosures market risk none item 8 item 7a quantitative qualitative disclosure market risk exposed market risk primarily changes interest rates foreign currency exchange risks interest rate risk fluctuations general level interest rates current future fixed variable rate debt obligations expose us market risk vulnerable significant fluctuations interest rates variable rate debt future refinancing fixed rate debt future debt december 31 2009 exposed interest rate fluctuations approximately 374 million bank loans carrying variable interest rates hypothetical one hundred basis point increase interest rates notes payable would increase annual interest expense approximately 374000 due uncertainty fluctuations interest rates specific actions might taken us mitigate impact fluctuations possible effects foregoing sensitivity analysis assumes changes financial structure also subject interest rate market risk shortterm invested cash equivalents principal invested funds would subject fluctuating value highly liquid shortterm nature december 31 2009 approximately 240 million shortterm maturing investments foreign currency exchange rate risk designated us dollar functional currency operations international locations contract customers purchase equipment finance capital using us dollar local currency transaction gains losses arising remeasurement certain assets liabilities denominated local currency included consolidated statements income years ended december 31 2009 2008 2007 net foreign exchange loss 07 million 12 million 128000 respectively relating drilling completion operations also conduct international business rental services oilfield services segments control foreign exchange risk provide payment us dollars item 8 item 7a quantitative qualitative disclosures market risk none item 8 item 7a quantitative qualitative disclosure market risk exposed market risk primarily changes interest rates foreign currency exchange risks interest rate risk fluctuations general level interest rates current future fixed variable rate debt obligations expose us market risk vulnerable significant fluctuations interest rates variable rate debt future repricing refinancing fixed rate debt future debt december 31 2004 exposed interest rate fluctuations approximately 176 million notes payable bank credit facility borrowings carrying variable interest rates hypothetical one hundred basis point increase interest rates notes payable would increase annual interest expense approximately 176000 due uncertainty fluctuations interest rates specific actions might taken us mitigate impact fluctuations possible effects foregoing sensitivity analysis assumes changes financial structure also subject interest rate market risk shortterm invested cash equivalents principal invested funds would subject fluctuating value highly liquid shortterm nature december 31 2004 73 million invested shortterm maturing investments foreign currency exchange rate risk conduct business mexico mexican partner matyep business exposes us foreign exchange risk control risk provide payment us dollars however historically provided partner discount upon payment equal 50 loss suffered partner result devaluation mexican peso date invoicing date payment 2004 2003 discounts exceeded 10000 per year item 8 item 7a quantitative qualitative disclosures market risk none item 8 item 7a quantitative qualitative disclosure market risk exposed market risk primarily changes interest rates foreign currency exchange risks interest rate risk fluctuations general level interest rates current future fixed variable rate debt obligations expose us market risk vulnerable significant fluctuations interest rates variable rate debt future refinancing fixed rate debt future debt december 31 2007 exposed interest rate fluctuations approximately 49 million bank loans carrying variable interest rates hypothetical one hundred basis point increase interest rates notes payable would increase annual interest expense approximately 49000 due uncertainty fluctuations interest rates specific actions might taken us mitigate impact fluctuations possible effects foregoing sensitivity analysis assumes changes financial structure also subject interest rate market risk shortterm invested cash equivalents principal invested funds would subject fluctuating value highly liquid shortterm nature december 31 2007 311 million invested shortterm maturing investments foreign currency exchange rate risk designated us dollar functional currency operations international locations contract customers purchase equipment finance capital using us dollar local currency transaction gains losses arising remeasurement certain assets liabilities denominated local currency included consolidated statements income years ended december 31 2007 2006 net foreign exchange loss 128000 515000 respectively relating dls operations conduct business mexico mexican partner matyep business exposes us foreign exchange risk control risk provide payment us dollars item 8 item 7a quantitative qualitative disclosure market risk exposed market risk primarily changes interest rates foreign currency exchange risks interest rate risk fluctuations general level interest rates current future fixed variable rate debt obligations expose us market risk vulnerable significant fluctuations interest rates variable rate debt future refinancing fixed rate debt future debt december 31 2008 exposed interest rate fluctuations approximately 861 million bank loans carrying variable interest rates hypothetical one hundred basis point increase interest rates notes payable would increase annual interest expense approximately 861000 due uncertainty fluctuations interest rates specific actions might taken us mitigate impact fluctuations possible effects foregoing sensitivity analysis assumes changes financial structure also subject interest rate market risk shortterm invested cash equivalents principal invested funds would subject fluctuating value highly liquid shortterm nature december 31 2008 shortterm maturing investments foreign currency exchange rate risk designated us dollar functional currency operations international locations contract customers purchase equipment finance capital using us dollar local currency transaction gains losses arising remeasurement certain assets liabilities denominated local currency included consolidated statements income years ended december 31 2008 2007 2006 net foreign exchange loss 12 million 128000 515000 respectively relating drilling completion operations also conduct international business rental services oilfield services segments control foreign exchange risk provide payment us dollars item 8 item 7a quantitative qualitative disclosures market risk none item 8 item 7a quantitative qualitative disclosures market risk none item 8 item 7a quantitative qualitative disclosures market risk exposed market risk primarily changes interest rates foreign currency exchange risks interest rate risk fluctuations general level interest rates current future fixed variable rate debt obligations expose us market risk vulnerable significant fluctuations interest rates variable rate debt future refinancing fixed rate debt future debt december 31 2010 exposed interest rate fluctuations approximately 582 million bank loans carrying variable interest rates hypothetical one hundred basis point increase interest rates notes payable would increase annual interest expense approximately 582000 due uncertainty fluctuations interest rates specific actions might taken us mitigate impact fluctuations possible effects foregoing sensitivity analysis assumes changes financial structure also subject interest rate market risk shortterm invested cash equivalents principal invested funds would subject fluctuating value highly liquid shortterm nature foreign currency exchange rate risk designated united states dollar functional currency operations international locations contract customers purchase equipment finance capital using united states dollar local currency transaction gains losses arising remeasurement certain assets liabilities denominated local currency included consolidated statements income years ended december 31 2010 2009 2008 net foreign exchange loss 05 million 07 million 12 million respectively relating drilling completion operations also conduct international business rental services oilfield services segments control foreign exchange risk provide payment united states dollars 33 index financial statements item 8 item 8 financial statements allischalmers energy inc subsidiaries management’s report stockholders allischalmers energy inc management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting allischalmers energy inc subsidiaries allischalmers order evaluate effectiveness internal control financial reporting required section 404 sarbanesoxley act 2002 conducted assessment including testing using criteria internal controlintegral framework issued committee sponsoring organization treadway commission coso allischalmers’ system internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance accounting principles generally accepted united states america inherent limitation internal control financial reporting may prevent detect misstatements based assessment concluded allischalmers maintained effective internal control financial reporting december 31 2006 based criteria internal controlintegrated framework issued coso assessment effectiveness allischalmers internal control financial reporting december 31 2006 audited uhy llp independent registered public accounting firm stated report included herein management’s certifications allischalmers’ chief executive officer chief financial officer required sarbanesoxley act 2002 included exhibits 31 32 allischalmers’ form 10k allischalmers energy inc report independent registered public accounting firm board directors stockholders allischalmers energy inc houston texas audited accompanying consolidated balance sheets allischalmers energy inc subsidiaries “company” december 31 2006 2005 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2006 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position allischalmers energy inc subsidiaries december 31 2006 2005 consolidated results operations cash flows three years period ended december 31 2006 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states effectiveness allischalmers energy inc subsidiaries’ internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated march 15 2007 expressed unqualified opinion management’s assessment effective operation internal control financial reporting discussed note 1 consolidated financial statements effective january 1 2006 company changed method accounting stockbased compensation uhy llp houston texas march 15 2007 report independent registered public accounting firm board directors stockholders allischalmers energy inc audited management’s assessment included accompanying management’s report internal control financial reporting appearing page 49 allischalmers energy inc subsidiaries company maintained effective internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control finance reporting responsibility express opinion management’s assessment opinion effectiveness company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded receipts expenditures company made accordance authorization management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion management’s assessment allischalmers energy inc subsidiaries maintained effective internal control financial reporting december 31 2006 fairly stated material respects based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission also opinion allischalmers energy inc subsidiaries maintained material respects effective internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission also audited accordance standards public company accounting oversight board united states consolidated balance sheets allischalmers energy inc subsidiaries december 31 2006 2005 related consolidated statements operations stockholders equity cash flows three years period ended december 31 2006 report dated march 15 2007 expressed unqualified opinion consolidated financial statements uhy llp houston texas march 15 2007 allischalmers energy inc consolidated balance sheets accompanying notes integral part consolidated financial statements allischalmers energy inc consolidated statements operations accompanying notes integral part consolidated financial statements allischalmers energy inc consolidated statement stockholders’ equity accompanying notes integral part consolidated financial statements allischalmers energy inc consolidated statements cash flows accompanying notes integral part consolidated financial statements allischalmers energy inc notes consolidated financial statements note 1 nature business summary significant accounting policies organization business allischalmers energy inc “allischalmers” “we” “our” “us” incorporated delaware 1913 multifaceted oilfield services company provides services equipment oil natural gas exploration production companies domestically texas louisiana new mexico colorado oklahoma mississippi utah wyoming arkansas alabama west virginia offshore gulf mexico internationally primarily argentina mexico operate six sectors oil natural gas service industry rental tools international drilling directional drilling services casing tubing services compressed air drilling services production services nature operations many regions operate subject us changing economic regulatory political conditions vulnerable nearterm longterm changes demand prices oil natural gas related demand oilfield service operations use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period future events effects cannot perceived certainty accordingly accounting estimates require exercise judgment management believes estimates assumptions used preparation consolidated financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts recoverability longlived assets intangibles useful lives used depreciation amortization income taxes valuation allowances accounting estimates used preparation consolidated financial statements may change new events occur experience acquired additional information obtained operating environment changes principles consolidation consolidated financial statements include accounts allischalmers subsidiaries december 31 2006 oil quip rentals inc “oil quip” mountain compressed air inc “mountain air” allischalmers tubular services inc “tubular” strata directional technology inc “strata” aircomp llc “aircomp” allischalmers rental services inc “rental” allischalmers production services inc “production” allischalmers management lp drilling logistics services corporation “dls” petrorentals incorporated “petrorental” significant intercompany transactions eliminated revenue recognition provide rental equipment drilling services customers per day per job contractual rates recognize drilling related revenue work progresses collectibility reasonably assured payments customers cost oilfield rental equipment damaged lostinhole reflected revenues recognized revenue damaged lostinhole equipment 24 million 970000 41000 year ended december 31 2006 2005 2004 respectively securities exchange commission’s sec staff accounting bulletin sab 104 revenue recognition financial statements “sab 104” provides guidance sec staff’s views application generally accepted accounting principles selected revenue recognition issues revenue recognition policy accordance generally accepted accounting principles sab 104 allischalmers energy inc notes consolidated financial statements continued allowance doubtful accounts receivable customer obligations due normal trade terms sell services oil natural gas exploration production companies perform continuing credit evaluations customers’ financial condition although generally require collateral letters credit may required customers certain circumstances allowance doubtful accounts represents estimate amount probable credit losses existing accounts receivable significant individual accounts receivable balances outstanding greater 90 days reviewed individually collectibility limited number customers individually large amounts due given date unanticipated change one customer’s credit worthiness matters affecting collectibility amounts due customers could material effect results operations period changes events occur attempts collect receivable failed receivable written allowance december 31 2006 2005 recorded allowance doubtful accounts 826000 383000 respectively bad debt expense 781000 219000 104000 years ended december 31 2006 2005 2004 respectively cash equivalents consider highly liquid investments original maturity three months less time purchase cash equivalents inventories stated lower cost market cost determined using firstin firstout “fifo” method average cost method approximates fifo includes cost materials labor manufacturing overhead property equipment property equipment recorded cost less accumulated depreciation certain equipment held capital leases classified equipment related obligations recorded liabilities maintenance repairs improve extend life related assets charged operations incurred refurbishments renewals capitalized value equipment enhanced extended period property equipment sold otherwise disposed asset account related accumulated depreciation account relieved gain loss included operations cost property equipment currently service depreciated estimated useful lives related assets range three twenty years depreciation computed straightline method financial reporting purposes capital leases amortized using straightline method estimated useful lives assets lease amortization included depreciation expense depreciation expense charged operations 203 million 49 million 27 million years ended december 31 2006 2005 2004 respectively goodwill intangible assets amortization goodwill including goodwill associated equity method investments intangible assets infinite lives amortized tested impairment annually frequently circumstances indicate impairment may exist intangible assets finite useful lives amortized either straight allischalmers energy inc notes consolidated financial statements continued line basis asset’s estimated useful life basis reflects pattern economic benefits intangible assets realized impairment test requires allocation goodwill assets liabilities reporting units fair value reporting unit less book value including goodwill reduced implied fair value amount writedown charged earnings perform impairment tests carrying value goodwill annual basis december 31st reportable segments december 31 2006 2005 impairment deemed necessary increases estimated future costs decreases projected revenues could lead impairment portion goodwill future period impairment longlived assets longlived assets include property plant equipment intangible assets certain assets reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable impairment loss recorded period determined carrying amount recoverable determination recoverability made based upon estimated undiscounted future net cash flows excluding interest expense impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets financial instruments financial instruments consist cash equivalents accounts receivable payable debt carrying value cash equivalents accounts receivable payable approximate fair value due shortterm nature believe fair values carrying value debt would materially different due instruments’ interest rates approximating market rates similar borrowings december 31 2006 2005 concentration credit customer risk financial instruments potentially subject us concentrations credit risk consist principally cash equivalents trade accounts receivable december 31 2006 approximately 20 million cash equivalents residing argentina transact business several financial institutions however amount deposit six financial institutions exceeded 100000 federally insured limit december 31 2006 total 105 million management believes financial institutions financially sound risk loss minimal sell services major independent domestic international oil natural gas companies perform ongoing credit valuations customers provide allowances probable credit losses appropriate 2006 one customers pan american energy llc sucursal argentina pan american energy represented 117 consolidated revenues 2005 none customers accounted 10 consolidated revenues year ended december 31 2004 materiales equipo petroleo matyep mexico represented 108 burlington resources represented 101 consolidated revenues respectively revenues matyep represented 83 945 980 international revenues 2006 2005 2004 respectively revenues pan american energy represented 456 international revenues debt issuance costs related issuance debt capitalized amortized interest expense using straightline method approximates interest method maturity periods related debt allischalmers energy inc notes consolidated financial statements continued income taxes income tax expense based income statutory tax rates tax planning opportunities available us various jurisdictions operate provide income taxes based tax laws rates effect countries operations conducted income earned income tax expense expected fluctuate year operations conducted different taxing jurisdictions amount pretax income fluctuates determination evaluation annual income tax provision involves interpretation tax laws various jurisdictions operate requires significant judgment use estimates assumptions regarding significant future events amount timing character income deductions tax credits changes tax laws regulations level operations profitability jurisdiction may impact tax liability given year annual tax provision based information available us time number years may elapse ultimate tax liabilities certain tax jurisdictions determined current income tax expense reflects estimate income tax liability current year withholding taxes changes tax rates changes prior year tax estimates returns filed deferred tax assets liabilities recognized anticipated future tax effects temporary differences financial statement basis tax basis assets liabilities using enacted tax rates effect year end valuation allowance deferred tax assets recorded morelikelythannot benefit deferred tax asset realized intention permanently reinvest undistributed earnings nonus subsidiaries accordingly provided us deferred taxes undistributed earnings nonus subsidiaries distribution made us undistributed earnings subsidiaries could required record additional taxes cannot predict make distribution undistributed earnings unable make determination amount unrecognized deferred tax liability stockbased compensation adopted sfas 123r sharebased payment “sfas 123r” effective january 1 2006 statement requires sharebased payments employees including grants employee stock options recognized financial statements based grantdate fair values compensation cost awards granted prior vested january 1 2006 would based grant date attributes originally used value awards pro forma purposes sfas 123 accounting stockbased compensation “sfas 123” adopted sfas 123r using modified prospective transition method utilizing blackscholes option pricing model calculation fair value employee stock options modified prospective method record compensation cost related unvested stock awards december 31 2005 recognizing unamortized grant date fair value awards remaining vesting periods awards change historical reported earnings estimated forfeiture rates 2006 based historical experience blackscholes model incorporates assumptions value stockbased awards riskfree rate interest related us treasury yield curve periods within expected term option time grant dividend yield common stock assumed zero historically paid dividends current plans future expected volatility based historical volatility common stock prior january 1 2006 accounted stockbased compensation using accounting principle board opinion 25 “apb 25” apb 25 compensation expense recognized stock options exercise price less market price grant date option stock allischalmers energy inc notes consolidated financial statements continued options exercise prices market value stock grant date adopted disclosureonly provisions sfas 123 also adopted disclosureonly provisions sfas 123 stock options granted employees directors accordingly compensation cost recognized apb 25 net income year ended december 31 2006 includes approximately 34 million compensation costs related sharebased payments tax benefit recorded association sharebased payments 12 million yearended december 31 2006 december 31 2006 13 million unrecognized compensation expense related nonvested stock based compensation grants compensation expense options granted recorded based fair value grant date options consistent provisions sfas 123 net incomeloss net incomeloss per share years ended december 31 2005 2004 would decreased pro forma amounts indicated thousands except per share amounts options granted 2006 2005 2004 see note 12 disclosures regarding stock options following assumptions applied determining pro forma compensation costs segments enterprise related information disclose results segments accordance sfas 131 disclosures segments enterprise related information “sfas 131” designate internal organization used management allocating resources assessing performance source reportable segments sfas 131 also requires disclosures products services geographic areas major customers please see note 16 disclosure segment information accordance sfas 131 allischalmers energy inc notes consolidated financial statements continued income per common share compute income per common share accordance provisions sfas 128 earnings per share “sfas 128” sfas 128 requires companies complex capital structures present basic diluted earnings per share basic earnings per share computed basis weighted average number shares common stock outstanding period periods april 12 2004 preferred dividends deducted net income considered calculation income available common stockholders computing basic earnings per share diluted earnings per share similar basic earnings per share presents dilutive effect per share basis potential common shares eg convertible preferred stock options etc converted potential dilutive common shares antidilutive effect eg increase income per share excluded diluted earnings per share components basic diluted earnings per share follows thousands except per share amounts reclassification certain prior period balances reclassified conform current year presentation new accounting pronouncements february 2006 fasb issued sfas 155 accounting certain hybrid financial instruments “sfas 155” sfas 155 provides entities relief separately determine fair value embedded derivative would otherwise required bifurcated host contract accordance sfas 133 accounting derivative instruments hedging activities sfas 155 allows entity make irrevocable election measure hybrid financial instrument fair value entirely changes fair value recognized earning sfas 155 effective financial instruments acquired issued subject remeasurement event occurring beginning entity’s allischalmers energy inc notes consolidated financial statements continued first fiscal year begins september 15 2006 believe adoption sfas 155 material impact financial position results operations cash flows march 2006 fasb issued sfas 156 accounting servicing financial assets amendment fasb statement 140 “sfas 156” sfas 156 requires entities recognize servicing asset liability time undertake obligation service financial asset entering servicing contract certain situations statement also requires separately recognized servicing assets servicing liabilities initially measured fair value permits choice either amortization fair value measurement method subsequent measurement effective date statement annual periods beginning september 15 2006 earlier adoption permitted beginning entity’s fiscal year provided entity issued financial statements year plan adopt sfas 156 early currently assessing impact consolidated financial statements july 2006 fasb issued fasb interpretation fin 48 accounting uncertainty income taxes interpretation fasb statement 109 “fin 48” fin 48 clarifies accounting uncertainty income taxes recognized enterprise’s financial statements accordance sfas 109 accounting income taxes prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return new standard also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition provisions fin 48 applied tax positions upon initial adoption standard tax positions meet likelythannot recognition threshold effective date may recognized continue recognized upon adoption fin 48 cumulative effect applying provisions fin 48 reported adjustment opening balance retaining earnings appropriate components equity net assets statement financial position fiscal year provisions fin 48 effective fiscal years beginning december 15 2006 currently evaluating impact applying provisions fin 48 september 2006 fasb issued sfas 157 fair value measurements “sfas 157” sfas 157 clarifies principle fair value based assumptions market participants would use pricing asset liability establishes fair value hierarchy prioritizes information used develop assumptions standard fair value measurements would separately disclosed level within fair value hierarchy sfas 157 effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years early adoption permitted believe adoption sfas 157 material impact financial position results operations cash flows september 2006 fasb issued fsp aug air1 accounting planned major maintenance activities “fsp aug air1” fsp aug air1 prohibits use accruedinadvance method accounting major maintenance activities confirms acceptable methods accounting planned major maintenance activities fsp aug air1 effective first fiscal year beginning december 15 2006 believe adoption fsp aug air1 material impact financial position results operations cash flows september 2006 securities exchange commission issued staff accounting bulletin 108 considering effects prior year misstatements quantifying misstatements current year financial statements “sab 108” sab 108 requires public companies utilize “dualapproach” assessing quantitative effects financial misstatements dual approach includes income statement focused assessment balance sheet focused assessment sab 108 effective fiscal years ending november 15 2006 adopted sab 108 december 31 2006 impact consolidated financial statements allischalmers energy inc notes consolidated financial statements continued note 2 restatement earnings per share understated diluted earnings per share due incorrect calculation weighted shares outstanding first three quarters 2004 year ended december 31 2004 quarter ended march 31 2005 addition understated basic earnings per share due incorrect calculation weighted average basic shares outstanding quarter ended september 30 2004 consequently restated financial statements periods incorrect calculation resulted mathematical error improper application sfas 128 restated earnings per share calculation affected periods reflecting adjustments results previously restated see following section presented amounts thousands except per share amounts allischalmers energy inc notes consolidated financial statements continued aircomp acquisition connection formation aircomp llc 2003 along mi llc contributed assets aircomp exchange 55 interest 45 interest respectively aircomp originally accounted formation aircomp joint venture however february 2005 determined transaction accounted using purchase accounting pursuant sfas 141 business combinations recorded sale interest subsidiary accordance sec staff accounting bulletin 51 accounting sales stock subsidiary consequently restated financial statements three quarters ended september 30 2004 reflect following adjustments increase book value fixed assets joint venture accounting originally recorded value assets contributed mi aircomp mi’s historical cost 69 million purchase accounting increased recorded value assets contributed mi approximately 33 million 103 million reflect fair market value determined third party appraisal addition joint venture accounting established negative goodwill reduced fixed assets amount 16 million negative goodwill amortized us lives related fixed assets purchase accounting increased fixed assets 16 million reverse negative goodwill previously recorded reversed amortization expenses recorded 2004 therefore cost fixed assets increased total 49 million time acquisition result increase fixed assets reversal amortization negative goodwill depreciation expense increased 2004 financial statements restated previously filed interim financial statements included form 10q first second third quarters 2004 effect restatement individual quarterly financial statements follows thousands except per share amounts allischalmers energy inc notes consolidated financial statements continued note 3 post retirement benefit obligations medical life pursuant plan reorganization confirmed bankruptcy court acceptances creditors stockholders consummated december 2 1988 assumed contractual obligation simplicity manufacturing inc smi reimburse smi 50 actual cost medical life insurance claims select group retirees smi retirees prior simplicity manufacturing division allischalmers actuarial present value expected retiree benefit obligation determined actuary amount results applying actuarial assumptions 1 historical claimscost data 2 estimates time value money discounts interest 3 probability payment including decrements death disability withdrawal retirement today expected date benefit payments december 31 2006 2005 postretirement benefit obligations 304000 335000 respectively 401k savings plan june 30 2003 adopted 401k profit sharing plan “plan” plan defined contribution savings plan designed provide retirement income eligible employees plan intended qualified section 401k internal revenue code 1986 amended funded voluntary pretax contributions eligible employees may contribute percentage eligible compensation limited subject statutory limits plan also funded discretionary matching employer contributions us eligible employees cannot participate plan attained age 21 completed sixmonths service us participant 100 vested respect participants’ contributions matching contributions vested threeyear period accordance plan document contributions invested directed participant investment funds available plan matching contributions approximately 735000 114000 35000 paid 2006 2005 2004 respectively note 4 acquisitions september 2004 acquired 100 outstanding stock safcooil field products inc “safco” 10 million safco rented spiral drill pipe oil drilling industry safco renamed allischalmers rental services inc september 2004 acquired remaining 19 tubular exchange 13 million shares common stock total value consideration paid seller jens mortensen 64 million equal number shares common stock issued mr mortensen 13 million multiplied last sale price 495 common stock reported american stock exchange date issuance amount treated contribution stockholders’ equity balance sheet 19 million minority interest tubular eliminated balance contribution 44 million allocated follows june 2004 obtained appraisal fixed assets tubular valued fixed assets 201 million book value fixed assets 158 million fixed assets appraised value 43 million book value increased value fixed assets 19 amount excess appraised value book value 8 million remaining balance 36 million allocated goodwill november 2004 aircomp acquired substantially assets diamond air drilling services inc marquis bit co llc collectively “diamond air” 46 million cash assumption approximately 450000 accrued liabilities contributed 25 million mi llc contributed 21 million aircomp llc order fund purchase goodwill 375000 intangible assets 23 million recorded connection acquisition diamond air provided air drilling technology allischalmers energy inc notes consolidated financial statements continued products oil gas industry west texas new mexico oklahoma diamond air leading brand air hammers hammer bit products december 2004 acquired downhole injection services llc “downhole” approximately 11 million cash 568466 shares common stock assumption approximately 950000 debt goodwill 442000 intangible assets 795000 recorded connection acquisition downhole provided economical chemical treatments wells inserting small diameter stainless steel coiled tubing producing oil gas wells 2006 downhole merged allischalmers production services inc april 1 2005 acquired 100 outstanding stock delta rental service inc “delta” 46 million cash 223114 shares common stock two promissory notes totaling 350000 purchase price allocated fixed assets inventory delta located lafayette louisiana rental tool company providing specialty rental items oil gas industry spiral heavy weight drill pipe test plugs used test blowout preventors well head retrieval tools spacer spools assorted handling tools 2006 delta merged rental may 1 2005 acquired 100 outstanding capital stock capcoil tubing services inc “capcoil” 27 million cash 168161 shares common stock payment assumption approximately 13 million debt capcoil located kilgore texas engaged downhole well servicing providing coil tubing services enhance production existing wells goodwill 184000 identifiable intangible assets 14 million recorded connection acquisition 2006 capcoil renamed allischalmers production services inc july 11 2005 acquired compressed air drilling assets wt enterprises inc based south texas 60 million cash equipment includes compressors boosters mist pumps vehicles goodwill 82000 identifiable intangible assets 15 million recorded connection acquisition july 11 2005 acquired mi llc “mi” 45 interest aircomp subordinated note principal amount 48 million issued aircomp paid mi 71 million cash issued mi 40 million subordinated note bearing interest 5 per annum result 100 aircomp effective august 1 2005 acquired 100 outstanding capital stock target energy inc “target” 13 million cash forgiveness lease receivable approximately 06 million purchase price allocated fixed assets target results target included directional horizontal drilling segment measure drilling equipment utilized segment target merged strata december 2006 september 1 2005 acquired casing tubing service assets patterson services inc approximately 156 million assets located corpus christi texas kilgore texas lafayette louisiana houma louisiana allischalmers energy inc notes consolidated financial statements continued effective january 1 2006 acquired 100 outstanding stock specialty rental tools inc specialty 960 million cash specialty located lafayette louisiana engaged rental high quality drill pipe heavy weight spiral drill pipe tubing work strings blowout preventors choke manifolds various valves handling tools oil natural gas drilling following table summarizes allocation purchase price estimated fair value assets acquired liabilities assumed date acquisition thousands approximately 588000 costs incurred relation specialty acquisition specialty’s historical property equipment values increased approximately 716 million based thirdparty valuations specialty merged rental 2006 effective april 1 2006 acquired 100 outstanding stock rogers oil tools inc rogers based lafayette louisiana total consideration approximately 137 million includes 113 million cash 16 million common stock 750000 threeyear promissory note addition purchased patents proprietary technology tommie l rogers’ founder chief executive officer developed rogers sells services rents power drill pipe tongs accessories rental tongs snubbing well control applications rogers also provides specialized tong operators rental jobs following table summarizes allocation purchase price estimated fair value assets acquired liabilities assumed date acquisition thousands approximately 380000 costs incurred relation rogers acquisition rogers’ historical property equipment values increased approximately 84 million based thirdparty valuations intangible assets include 28 million assigned goodwill 20 million assigned patents 150000 assigned noncompete based thirdparty valuations employment contracts amortizable intangibles weightedaverage useful life 113 years rogers merged tubular december 2006 effective august 14 2006 acquired 100 outstanding stock dls based argentina total consideration approximately 1179 million includes 937 million cash 381 million common stock 34 million acquisition costs less approximately 173 million debt assigned us dls allischalmers energy inc notes consolidated financial statements continued operates fleet 51 rigs including 20 drilling rigs 18 workover rigs 12 pulling rigs argentina one drilling rig bolivia following table summarizes preliminary allocation purchase price estimated fair value assets acquired liabilities assumed date acquisition thousands approximately 34 million costs incurred relation dls acquisition dls’ historical property equipment values increased approximately 227 million based thirdparty valuations expect material differences preliminary allocation purchase price final purchase price allocations october 16 2006 acquired 100 outstanding stock petro rental based lafayette louisiana total consideration approximately 336 million includes 202 million cash 38 million common stock payment 96 million existing petro rental debt petrorental provides variety productionrelated rental tools equipment services including wire line services equipment land offshore pumping services coiled tubing following table summarizes preliminary allocation purchase price estimated fair value assets acquired liabilities assumed date acquisition thousands approximately 82000 costs incurred relation petro rental acquisition petro rental’s historical property equipment values increased approximately 134 million based thirdparty valuations expect material differences preliminary allocation purchase price final purchase price allocations intangible assets include 30 million assigned goodwill 28 million assigned customer relationships based thirdparty valuations amortizable intangibles weightedaverage useful life 10 years effective december 1 2006 acquired 100 outstanding stock tanus argentina sa “tanus” based argentina total consideration 25 million tanus engaged research allischalmers energy inc notes consolidated financial statements continued manufacturing additives oil natural gas water well drilling completion fluids argentina following table summarizes preliminary allocation purchase price estimated fair value assets acquired liabilities assumed date acquisition thousands approximately 17000 costs incurred relation tanus acquisition expect material differences preliminary allocation purchase price final purchase price allocations results tanus reported dls international drilling segment december 18 2006 acquired substantially assets oil gas rental services inc ogr based morgan city louisiana total consideration approximately 3424 million includes 2910 million cash 514 million common stock following table summarizes preliminary allocation purchase price estimated fair value assets acquired date acquisition thousands approximately 30 million costs incurred relation ogr rental acquisition ogr’s historical property equipment values increased approximately 1689 million based thirdparty valuations expect material differences preliminary allocation purchase price final purchase price allocations intangible assets include 1061 million assigned goodwill 220 million customer relations 831000 patents 35000 assigned employment agreements based thirdparty valuations amortizable intangibles weightedaverage useful life 101 years acquisitions accounted using purchase method accounting results operations acquired entities since date acquisition included consolidated income statement allischalmers energy inc notes consolidated financial statements continued following unaudited pro forma consolidated summary financial information year ended december 31 2006 illustrates effects acquisitions related public offerings debt equity rogers dls petrorentals ogr acquisitions occurred january 1 2006 based historical results acquisitions following unaudited pro forma consolidated summary financial information year ended december 31 2005 illustrates effects acquisitions related public offerings debt equity delta capcoil wt minority interest aircomp specialty rogers dls petrorentals ogr acquisitions occurred january 1 2005 based historical results acquisitions following unaudited pro forma consolidated summary financial information year ended december 31 2004 illustrates effects acquisitions related public offerings debt equity diamond air downhole delta capcoil wt minority interest aircomp specialty rogers dls petrorentals ogr acquisitions occurred beginning period based historical results acquisitions unaudited historical results ogr based historical year end october 31 thousands except per share amounts note 5 inventories comprised following thousands allischalmers energy inc notes consolidated financial statements continued note 6 property intangible assets property equipment comprised following december 31 thousands net book value equipment recorded capital leases 10 million 11 million december 31 2006 2005 respectively intangible assets follows december 31 thousands allischalmers energy inc notes consolidated financial statements continued future amortization intangible assets december 31 2006 follows thousands note 7 income taxes income taxes 359 million 85 million 14 million us years ended december 31 2006 2005 2004 respectively 2006 also income taxes 111 million nonus countries treat withholding taxes incurred us subsidiaries foreign countries foreign tax although anticipate using tax payments offset us tax income tax provision consists following thousands required file consolidated us federal income tax return pay foreign income taxes argentina related dls’s operations mexico related allischalmers tubular services’ revenues matyep approximately 24 million us foreign tax credits available us foreign tax credits begin expire year 2007 allischalmers energy inc notes consolidated financial statements continued following table reconciles us statutory tax rate actual tax rate significant components deferred income tax assets related allowance december 31 follows thousands net future taxdeductible items relate primarily timing differences timing differences tax basis assets liabilities reported amounts financial statements result differences income tax purposes income financial statement purposes future years tax reform act 1986 contains provisions limit utilization net operating loss tax credit carry forwards “change ownership” described section 382 internal revenue code change ownership may limit utilization net operating loss tax credit carry forwards could triggered public offering subsequent sales securities us stockholders provision limited amount net operating losses available us currently projecting release net operating losses provisions section 382 net operating loss carry forwards tax purposes december 31 2006 2005 estimated 49 million 166 million respectively expiring 2024 prior 2006 record asset us foreign tax credit believed would recoverable based taxable income allischalmers energy inc notes consolidated financial statements continued 1988 plan reorganization established ac reorganization trust settle claims make distributions creditors certain stockholders transferred cash certain property ac reorganization trust december 2 1988 payments made us ac reorganization trust generate tax deductions us upon transfer generate deductions us ac reorganization trust makes payments holders claims plan reorganization also created trust process liquidate product liability claims payments made ac reorganization trust product liability trust generate current tax deductions us upon payment generate deductions us product liability trust makes payments liquidate claims incurs expenses believe aforementioned trusts grantor trusts therefore include income loss trusts income loss tax purposes resulting adjustment tax basis net operating capital loss carry forwards income loss trusts included results operations financial reporting purposes valuation allowance established deferred tax assets management based upon available information considers likely benefit assets realized valuation allowance relieved 2006 due increase operating results year ended december 31 2006 project utilize net operating loss carryforwards available us revaluation deferred tax asset related ac reorganization trust product liability trust 2005 2004 valuation allowance equal excess deferred tax assets deferred tax liabilities unable determine likely deferred tax asset realized note 8 debt longterm debt consists following thousands december 31 2006 2005 debt approximately 5684 million 606 million respectively weighted average interest rate outstanding debt approximately 98 december 31 2006 75 december 31 2005 allischalmers energy inc notes consolidated financial statements continued maturities debt obligations december 31 2006 follows thousands senior notes bank loans line credit agreements january 18 2006 august 14 2006 closed private offerings qualified institutional buyers pursuant rule 144a securities act 1933 1600 950 million aggregate principal amount senior notes respectively senior notes due january 15 2014 bear interest 90 proceeds used fund acquisitions specialty dls repay existing debt general corporate purposes december 18 2006 closed 3000 million senior unsecured bridge loan bridge loan due 18 months closing bears weighted average interest rate 106 bridge loan repaid january 29 2007 used fund acquisition ogr prior january 18 2006 party july 2005 credit agreement provided following senior secured credit facilities • 130 million revolving line credit borrowings limited 85 eligible accounts receivable plus 50 eligible inventory maximum 20 million borrowings based inventory line credit used finance working capital requirements general corporate purposes including issuance standby letters credit outstanding borrowings line credit 64 million margin prime libor rates plus margin averaging approximately 81 december 31 2005 • two term loans totaling 420 million outstanding borrowings term loans 420 million december 31 2005 loans libor rates plus margin averages approximately 78 december 31 2005 borrowings july 2005 credit facilities mature july 2007 amounts outstanding term loans july 2006 repaid monthly principal payments based 48 month repayment schedule remaining balance due maturity additionally second year required prepay remaining balance term loans 75 excess cash flow debt service capital expenditures interest rate payable borrowings based margin london interbank offered rate referred libor prime rate 05 fee undrawn portion revolving line credit margin libor increase 10 second year amounts outstanding july 2005 credit agreement paid proceeds senior notes offering january 18 2006 january 18 2006 also executed amended restated credit agreement provides 250 million revolving line credit maturity january 2010 january 2006 amended restated credit agreement contains customary events default financial allischalmers energy inc notes consolidated financial statements continued covenants limits ability incur additional indebtedness make capital expenditures pay dividends make distributions create liens sell assets obligations january 2006 amended restated credit agreement secured substantially assets excluding dls assets including 23 shares dls december 31 2006 amounts borrowed facility availability reduced outstanding letters credit 97 million part acquisition dls assumed various bank loans floating interest rates based libor plus margin terms ranging 2 5 years weighted average interest rates loans 70 december 31 2006 bank loans denominated us dollars outstanding amount due december 31 2006 73 million tubular two bank term loans remaining balance 90000 december 31 2005 interest accruing floating interest rate based prime plus 20 925 december 31 2005 monthly principal payments 13000 plus interest maturity date one loans balance 60000 september 17 2006 second loan balance 30000 final maturity january 12 2007 balances two loans repaid full january 2006 proceeds senior notes offering notes payable real estate loan july 11 2005 acquired mi 45 equity interest aircomp subordinated note principal amount 48 million issued aircomp paid mi 71 million cash issued new 40 million subordinated note bearing interest 50 per annum subordinated note issued mi required quarterly interest payments principal amount due october 9 2007 contingent upon future equity offering subordinated note convertible 700000 shares common stock conversion price equal market value common stock time conversion note repaid proceeds offering 950 million 90 senior notes completed august 2006 december 31 2005 tubular subordinated note outstanding payable jens mortensen seller tubular one directors amount 30 million fixed interest rate 75 interest payable quarterly final maturity note january 31 2006 subordinated note subordinated rights bank lenders balance subordinated note repaid full january 2006 proceeds senior notes offering part acquisition mountain air 2001 issued note sellers mountain air original amount 22 million accruing interest rate 575 per annum note reduced 15 million result settlement legal action sellers 2003 march 2005 reached agreement sellers holders note result action brought us sellers terms agreement paid holders note 10 million cash agreed pay additional 350000 june 1 2006 additional 150000 june 1 2007 settlement claims december 31 2006 2005 outstanding amounts due 150000 500000 respectively connection purchase delta issued sellers note amount 350000 note bore interest 2 principal accrued interest repaid maturity april 1 2006 december 31 2005 outstanding amounts due 350000 note repaid 2006 connection acquisition rogers issued seller note amount 750000 note bears interest 50 due april 3 2009 connection purchase tubular agreed pay total 12 million mr mortensen exchange noncompete agreement monthly payments 20576 due agreement january 31 2007 connection purchase safcooil field products inc safco also agreed allischalmers energy inc notes consolidated financial statements continued pay total 150000 sellers exchange noncompete agreement required make annual payments 50000 september 30 2007 connection purchase capcoil agreed pay total 500000 two management employees exchange noncompete agreements required make annual payments 110000 may 2008 total amounts due noncompete agreements december 31 2006 2005 270000 698000 respectively 2000 compensated directors including current directors nederlander toboroff served board directors 1989 march 31 1999 without compensation issuing promissory notes totaling 325000 notes bear interest rate 50 december 31 2006 2005 principal accrued interest notes totaled approximately 32000 96000 respectively also real estate loan payable equal monthly installments 4344 remaining outstanding balance due january 1 2010 loan floating interest rate based prime plus 20 outstanding principal balance 548000 december 31 2005 balance loan repaid full january 2006 proceeds senior notes offering debt various rig equipment financing loans interest rates ranging 50 87 terms 2 5 years december 31 2006 2005 outstanding balances rig equipment financing loans 35 million 19 million respectively april 2006 august 2006 obtained insurance premium financings amount 19 million 896000 fixed interest rates 56 60 respectively terms agreements amounts outstanding paid 10 month 11 month repayment schedules outstanding balance notes approximately 10 million december 31 2006 also various capital leases terms expire 2008 december 31 2006 2005 amounts outstanding capital leases 414000 917000 respectively january 2006 prepaid 350000 outstanding equipment loans proceeds senior notes offering note 9 commitments contingencies placed orders capital equipment totaling 423 million received paid 2007 amount 274 million rental equipment principally drillpipe 46 million six measurement drilling kits ancillary equipment directional drilling segment 34 million two new capillary tubing units production services segment 45 million casing tubing tools equipment orders subject cancellation minimal loss prior cash deposits rent office space fiveyear lease expires november 2009 also rent certain facilities shop yards equipment storage maintenance facility rent expense years ended december 31 2006 2005 2004 16 million 987000 577000 respectively december 31 2006 future minimum rental commitments operating leases follows thousands allischalmers energy inc notes consolidated financial statements continued note 10 stockholders’ equity march 3 2004 entered agreement investment banking firm whereby would provide underwriting fundraising activities behalf exchange services investment banking firm received stock purchase warrant purchase 340000 shares common stock exercise price 250 per share warrant exercised august 2005 fair value total warrants issued connection fundraising activities established accordance blackscholes valuation model result 641000 added stockholders’ equity following assumptions utilized determine fair value dividend yield expected volatility 897 risk free interest rate 700 expected life five years 2004 issued two warrants “warrants b” purchase 233000 total shares common stock exercise price 075 per share one warrant purchase 67000 shares common stock exercise price 500 per share “warrant c” connection subordinated debt financing warrants b redeemed total 1500000 december 7 2004 fair value warrant c established accordance blackscholes valuation model result 47000 added stockholders’ equity following assumptions utilized determine fair value dividend yield expected volatility 6724 risk free interest rate 500 expected life four years april 2 2004 completed following transactions • exchange investment 20 million issued 620000 shares common stock purchase price equal 250 per share issued warrants purchase 800000 shares common stock exercise price 250 per share expiring april 1 2006 investor group “investor group” consisting entities affiliated donald christopher engel directors robert nederlander leonard toboroff aggregate purchase price common stock 155 million fair value warrants 450000 • energy spectrum converted 3500000 shares series 10 cumulative convertible preferred stock including accrued dividend rights 1718090 shares common stock energy spectrum granted preferred stock connection strata acquisition august 10 2004 completed private placement 3504667 shares common stock price 300 per share net proceeds selling commissions expenses approximately 96 million issued shares pursuant exemption securities act 1933 agreed subsequently register common stock securities act 1933 allow investors resell common stock public markets september 30 2004 completed private placement 1956634 shares common stock price 300 per share net proceeds selling commission expenses approximately 53 million issued shares pursuant exemption securities act 1933 agreed subsequently register common stock securities act 1933 allow investors resell common stock public markets september 30 2004 issued 13 million shares common stock jens mortensen director exchange 19 interest tubular result transaction 100 tubular total value consideration paid jens 64 million equal number shares common stock issued mr mortensen multiplied last sale price 495 common stock reported american stock exchange date issuance amount treated contribution stockholders equity december 10 2004 acquired downhole approximately 11 million cash 568466 shares common stock payment assumption 950000 debt approximately 22 million value allischalmers energy inc notes consolidated financial statements continued common stock issued downhole’s sellers based closing price common stock issued date acquisition added stockholders’ equity january 1 2005 relation acquisition downhole executed business development agreement cttv investments llc affiliate chevrontexaco inc whereby issued 20000 shares common stock cttv agreed issue additional 60000 shares cttv contingent upon subsidiaries receiving certain levels revenues 2005 chevrontexaco affiliates cttv minority owner downhole acquired 2004 based terms agreement additional shares issued 2006 2005 april 1 2005 acquired 100 outstanding stock delta 46 million cash 223114 shares common stock two promissory notes totaling 350000 approximately 10 million value common stock issued delta’s sellers based closing price common stock issued date acquisition added stockholders’ equity may 1 2005 acquired 100 outstanding capital stock capcoil 27 million cash 168161 shares common stock payment assumption approximately 13 million debt approximately 750000 value common stock issued capcoil’s sellers based closing price common stock issued date acquisition added stockholders’ equity august 2005 stockholders approved amendment certificate incorporation increase authorized number shares common stock 20 million 100 million increase authorized preferred stock 10 million shares 25 million shares completed secondary public offering sold 1761034 shares approximately 155 million net expenses also options warrants exercised 2005 exercises resulted 1076154 shares common stock issued 14 million issued 125285 25 million 246761 32 million shares common stock relation rogers dls petro rental ogr acquisition respectively see note 4 august 14 2006 closed public offering 3450000 shares common stock public offering price 1450 per share net proceeds public offering 463 million used fund portion acquisition dls also options warrants exercised 2006 resulted 1851377 shares common stock issued approximately 63 million recognized approximately 34 million compensation expense related stock options 2006 recorded capital excess par value see note 1 also recorded approximately 64 million tax benefit related stock compensation plans note 11 reverse stock split effected reverse stock split june 10 2004 result reverse stock split every five shares common stock combined one share common stock reverse stock split reduced number shares outstanding common stock 31393789 approximately 6265000 reduced number stockholders 6070 approximately 2140 share related amounts presented retroactively adjusted stock split note 12 stock options 2000 issued stock options promissory notes certain current former directors compensation services directors see note 8 board directors granted stock options individuals options purchase 4800 shares common stock granted exercise price 1375 per share options vested immediately may exercised time prior march 28 allischalmers energy inc notes consolidated financial statements continued 2010 december 31 2006 4000 stock options remain outstanding compensation expense recorded options issued exercise price equal fair value common stock date grant may 31 2001 board granted leonard toboroff one directors option purchase 100000 shares common stock 250 per share exercisable 10 years october 15 2001 option granted services provided mr toboroff oilquip prior merger including providing financial advisory services assisting oilquip’s capital structure assisting oilquip finding strategic acquisition opportunities recorded compensation expense 500000 issuance option year ended december 31 2001 december 31 2006 stock options exercised 2003 incentive stock plan “2003 plan” amended permits us grant key employees outside directors various forms stock incentives including among others incentive nonqualified stock options restricted stock 2003 plan administered compensation committee board consists two directors appointed board following benefits may granted 2003 plan stock appreciation rights b restricted stock c performance awards incentive stock options e nonqualified stock options f stockbased awards stock incentive terms excess ten years maximum number shares may issued 2003 plan shall lesser 3000000 shares 15 total number shares common stock outstanding 2006 incentive plan “2006 plan” approved stockholders november 2006 plan administered compensation committee board consists two directors appointed board maximum number shares company’s common stock par value 001 per share “common stock” may issued 2006 plan equal 1500000 shares subject adjustment event stock splits certain corporate events 2006 plan provides grant following types awards stock options including incentive stock options nonqualified stock options ii bonus stock iii restricted stock awards iv performance awards v stockbased awards except respect awards incentive stock options employees consultants nonemployee directors company affiliates eligible participate 2006 plan term award shall period may determined committee provided event shall term award exceed period ten 10 years date grant summary stock option activity related information follows allischalmers energy inc notes consolidated financial statements continued following table summarizes additional information stock options outstanding december 31 2006 december 31 2006 914000 total unrecognized compensation cost related stock option 900000 recognized year ended december 31 2007 remaining portion year ended december 31 2008 restricted stock awards addition stock options 2003 2006 plan allow grant restricted stock awards “rsa” award common stock exercise price unit represents right receive end stipulated period one unrestricted share stock exercise price rsa restrictions lapse periodically extended period time exceeding 10 years determine fair value rsas based market price common stock date grant compensation cost rsas primarily recognized straightline basis vesting service period net forfeitures following table summarizes activity nonvested restricted stock awards december 31 2006 393000 total unrecognized compensation cost related nonvested rsas expected recognized year ended december 31 2007 note 13 stock purchase warrants conjunction mountain air purchase oilquip february 2001 mountain air issued common stock warrant 620000 shares thirdparty investment firm assisted us initial identification purchase mountain air assets warrant entitles holder acquire 620000 shares common stock mountain air exercise price 01 per share nineyear period commencing february 7 2001 allischalmers energy inc notes consolidated financial statements continued issued two warrants “warrants b” purchase 233000 total shares common stock exercise price 075 per share one warrant purchase 67000 shares common stock exercise price 500 per share “warrant c” connection subordinated debt financing mountain air 2001 warrants b paid december 7 2004 warrant c exercised november 2006 february 6 2002 connection acquisition substantially outstanding stock strata issued warrant purchase 87500 shares common stock exercise price 075 per share term four years warrants exercised august 2005 connection strata acquisition february 19 2003 issued energy spectrum additional warrant purchase 175000 shares common stock exercise price 075 per share warrants exercised august 2005 march 2004 issued warrant purchase 340000 shares common stock exercise price 250 per share morgan joseph co consideration financial advisory services provided morgan joseph pursuant consulting agreement warrants exercised august 2005 april 2004 issued warrants purchase 20000 shares common stock exercise price 075 per share wells fargo credit inc connection extension credit wells fargo credit inc warrants exercised august 2005 april 2004 completed private placement 620000 shares common stock warrants purchase 800000 shares common stock following investors christopher engel donald engel defined benefit plan rer corp corporation whollyowned director robert nederlander leonard toboroff director investors invested 1550000 exchange 620000 shares common stock purchase price equal 250 per share invested 450000 exchange warrants purchase 800000 shares common stock exercise 250 per share expiring april 1 2006 total 486557 warrants exercised 2005 remaining portion exercised 2006 may 2004 issued warrant purchase 3000 shares common stock exercise price 475 per share jeffrey r freedman consideration financial advisory services provided mr freedman pursuant consulting agreement warrants exercised may 2004 mr freedman also granted 16000 warrants may 2004 exercisable 465 per share warrants exercised november 2005 warrants 4000 shares common stock exercise price 465 also issued may 2004 remain outstanding december 31 2006 note 14 condensed consolidated financial information set forth following pages condensed consolidating financial statements allischalmers energy inc ii subsidiaries guarantors senior notes revolving credit facility iii subsidiaries guarantors senior notes revolving credit facility thousands prior acquisition dls subsidiaries guarantors senior notes revolving credit facility parent company independent assets operations guarantees full unconditional joint several allischalmers energy inc notes consolidated financial statements continued condensed consolidating balance sheets december 31 2006 allischalmers energy inc notes consolidated financial statements continued condensed consolidating income statements year ended december 31 2006 allischalmers energy inc notes consolidated financial statements continued condensed consolidating statements cash flow year ended december 31 2006 unaudited allischalmers energy inc notes consolidated financial statements continued note 15 related party transactions july 2005 entered lease yard buffalo texas part owned former chief operating officer david wilde monthly rent 3500 december 2004 chief executive officer chairman munawar h hidayatallah wife personal guarantors substantially financing extended us commercial banks december 2004 refinanced outstanding bank debt obtained release certain guarantees refinancing mr hidayatallah continued guarantee tubular 40 million subordinated seller note july 2005 paid mr hidayatallah annual guarantee fee equal onequarter one percent total amount debt guaranteed mr hidayatallah fees aggregated 7250 2005 paid quarterly arrears based upon average amount debt outstanding prior quarter allischalmers energy inc notes consolidated financial statements continued april 2004 entered oral consulting agreement leonard toboroff one directors pursuant pay 12000 per month 2006 10000 per month 2005 advise us regarding financing acquisition opportunities jens mortensen one former directors former owner tubular held 19 minority interest tubular september 30 2004 also holder 40 million subordinated note payable issued tubular december 31 2005 owed 60000 accrued interest 267000 related noncompete agreement see note 8 subordinated note repaid january 2006 accrued interest paid january 2006 mr mortensen formerly sole proprietor tubular owns shop yard leases jens’ monthly basis lease payments made terms lease 0 16800 28800 years ended december 31 2006 2005 2004 respectively addition mr mortensen members family 100 texmex rental supply co texas corporation sold approximately 0 167000 equipment supplies tubular years ended december 31 2006 2005 2004 respectively dls acquired three british virgin island corporations two directors alejandro p bulgheroni carlos bulgheroni indirectly beneficially substantially shares dls sellers dls’ largest customer pan american energy joint venture british petroleum bridas corporation alejandro p bulgheroni carlos bulgheroni indirectly beneficially substantially shares bridas corporation described note 8 several former directors issued promissory notes 2000 lieu compensation services current maturities longterm debt includes 32000 96000 december 31 2006 2005 respectively relative notes note 16 segment information december 31 2006 six operating segments including rental tools international drilling directional drilling services casing tubing services compressed air drilling services production services segments provide services energy industry revenues operating income loss depreciation amortization capital expenditures assets reporting segments plus corporate function reported thousands allischalmers energy inc notes consolidated financial statements continued allischalmers energy inc notes consolidated financial statements continued allischalmers energy inc notes consolidated financial statements continued note 17 supplemental cash flows information thousands note 18 legal matters named time legal proceedings related activities prior bankruptcy 1988 however believe discharged liability claims bankruptcy believe likelihood material loss relating legal proceeding remote involved various legal proceedings ordinary course business legal proceedings different stages however believe likelihood material loss relating legal proceeding remote note 19 subsequent events january 2007 closed private offering qualified institutional buyers pursuant rule 144a securities act 2550 million principal amount 85 senior notes due 2017 proceeds senior notes offering together portion proceeds concurrent common stock offering used repay debt outstanding 3000 million bridge loan facility incurred finance acquisition substantially assets ogr allischalmers energy inc notes consolidated financial statements continued january 2007 closed public offering 60 million shares common stock 1765 per share proceeds common stock offering together proceeds concurrent senior notes offering used repay debt outstanding 3000 million bridge loan facility incurred finance acquisition substantially assets ogr general corporate purposes note 20 summarized quarterly financial data unaudited thousands except per share amounts item 9 item 8 financial statements supplementary data index consolidated financial statements page financial statements report independent accountants 16 statement operations three years ended december 31 1997 17 statement accumulated deficit three years ended december 31 1997 17 statement financial condition december 31 1997 1996 18 statement cash flows three years ended december 31 1997 19 notes consolidated financial statements 20 financial statement schedule ii valuation qualifying accounts 40 report independent accountants board directors shareholders allischalmers corporation opinion consolidated financial statements listed accompanying index present fairly material respects financial position allischalmers corporation subsidiaries december 31 1997 1996 results operations cash flows three years period ended december 31 1997 conformity generally accepted accounting principles financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed accompanying financial statements prepared assuming company continue going concern companys application distress termination allischalmers consolidated pension plan consolidated plan approved pension benefit guaranty corporation pbgc september 30 1997 date pbgc became trustee consolidated plan company subsidiaries incurred estimated liability pbgc unfunded benefit liabilities accumulated funding deficiencies totaling approximately 68 million company financial resources fund liability pbgc matter raises substantial doubt companys ability continue going concern managements plans regard matter described notes 9 10 financial statements financial statements include adjustments might result outcome uncertainty price waterhouse llp milwaukee wisconsin march 24 1998 statement operations year ended december 31 1997 1996 1995 thousands except per share sale 4062 4060 3190 cost sales 3048 3000 2371 gross margin 1014 1060 819 marketing administrative expense 1660 1413 1310 loss operations 646 353 491 income expense interest income 54 70 136 interest expense 45 39 46 pension expense 65926 1422 1067 18 16 20 net loss 66545 1728 1448 net loss per common share basic diluted 6634 172 144 statement accumulated deficit year ended december 31 1997 1996 1995 thousands accumulated deficit beginning year 9746 8018 6570 net loss 66545 1728 1448 accumulated deficit end year 76291 9746 8018 accompanying notes integral part financial statements statement financial condition december 31 1997 1996 thousands assets cash shortterm investments 699 1568 trade receivables net note 3 683 652 inventories net 101 93 current assets 121 136 total current assets 1604 2449 net property plant equipment note 4 1107 937 total assets 2711 3386 liabilities shareholders deficit current maturities longterm debt 38 54 trade accounts payable 219 82 accrued employee benefits 123 136 reserve legal expenses 174 50 accrued pension liability note 9 68801 6949 current liabilities 110 356 total current liabilities 69465 7627 accrued pension liability note 9 8131 accrued postretirement benefit obligations note 9 990 993 longterm debt note 6 240 279 shareholders deficit note 7 common stock 15 par value authorized 2000000 shares outstanding 1003028 december 31 1997 december 31 1996 152 capital excess par value 8155 accumulated deficit accumulated deficit 424208 eliminated december 2 1988 76291 9746 pension liability adjustment 12205 total shareholders deficit 67984 13644 commitments contingent liabilities note 10 total liabilities shareholders deficit 2711 3386 accompanying notes integral part financial statements notes consolidated financial statements note 1 emergence chapter 11 allischalmers corporation allischalmers company emerged chapter 11 proceedings october 31 1988 plan reorganization consummated december 2 1988 company thereby discharged debts arose confirmation first amended restated joint plan reorganization plan reorganization capital stock cancelled made eligible exchange shares common stock reorganized company common stock claims asserted company allowed bankruptcy court beyond recorded prior consummation date amounted approximately 483 million amounts subsequently recorded company 1988 total recorded liabilities discharged consummation exceeded book value assets common stock distributed creditors various trusts date extraordinary income 3881 million recorded see plan reorganization first amended disclosure statement dated september 14 1988 additional information regarding distributions holders claims interests note 2 summary significant accounting policies description business allischalmers whollyowned subsidiary houston dynamic service inc services repairs various types mechanical equipment including compressors pumps turbines engines heat exchangers centrifuges rollers gears valves blowers kilns crushers mills principles consolidation consolidated financial statements include accounts allis chalmers subsidiaries significant intercompany transactions eliminated shortterm investments shortterm investments consist primarily government repurchase agreements commercial paper original maturities date purchase less three months fair value financial instruments carrying amounts statement financial condition cash shortterm investments trade receivables longterm debt approximate fair market value inventories stated lower cost determined firstin firstout method market properties depreciation plant equipment used business stated cost depreciated straightline basis estimated useful lives assets generally range 40 years buildings 3 12 years machinery equipment 3 12 years tools patterns furniture fixtures maintenance repairs expensed incurred expenditures significantly increase asset values extend useful lives capitalized income taxes deferred income taxes determined liability method accordance statement financial accounting standards fasb 109 see note 5 income taxes loss income per common share february 1997 financial accounting standards board fasb issued statement financial accounting standards sfas 128 earnings per share statement establishes revised standards computing presenting earnings per share adopted company fourth quarter 1997 given fact company common stock equivalents past several years loss income per common share remain unchanged basis diluted per share amounts identical adoption statement impact historically reported loss income per common share amounts statement cash flows purposes statement cash flows company considers highly liquid debt instruments maturity three months less date purchase cash equivalents use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates major customers 1997 1996 1995 amoco chemical customer accounted 10 total sales 12 1997 sales 16 1996 sales 26 1995 note 3 receivables december 31 1997 1996 thousands trade accounts receivable 719 682 allowance doubtful receivables 36 30 683 652 note 4 property plant equipment december 31 1997 1996 thousands land buildings 545 machinery equipment 1426 1339 tools patterns furniture fixtures leasehold improvements 582 441 2553 2325 accumulated depreciation 1446 1388 1107 937 note 5 income taxes temporary differences tax basis assets liabilities reported amounts financial statements result differences income tax purposes income financial statement purposes future years valuation allowance established deferred tax assets management based upon available information considers likely benefit assets realized following table depicts temporary differences december 31 1997 1996 1997 1996 millions net future tax deductible items 36 13 net operating loss carryforwards tax credits 188 189 valuation allowance 224 202 net deferred taxes 0 net future tax deductible items relate primarily estimated future bankruptcy claim payments made companys two grantor trusts gross deferred tax liabilities december 31 1997 material plan reorganization established ac reorganization trust settle claims make distributions creditors certain shareholders company transferred cash certain property ac reorganization trust december 2 1988 payments made company ac reorganization trust generate tax deductions company upon transfer generate deductions company payments made ac reorganization trust holders claims plan reorganization also created trust process liquidate product liability claims payments made ac reorganization trust product liability trust generate current tax deductions company future deductions available company product liability trust makes payments liquidate claims company believes abovenamed trusts grantor trusts therefore includes income loss trusts companys income loss tax purposes resulting adjustment tax basis net operating capital loss carryforwards income loss trusts included companys results operations financial reporting purposes tax carryforwards december 31 1997 estimated consist net operating losses 510 million expiring 1998 2009 investment tax credits 7 million expiring 1998 2001 energy tax credits 3 million expiring 1998 2001 1990 company initiated litigation internal revenue service irs united states bankruptcy court southern district new york challenging validity retroactive applicability proposed regulations issued irs august 13 1990 january 2 1992 irs issued final regulations sections 269 382 internal revenue code 1986 relating use net operating loss carryforwards following corporate reorganizations bankruptcy code following issuance final regulations company withdrew retroactivity challenge final regulations made retroactive august 14 1990 applicable plan reorganization completed companys plan reorganization consummated december 2 1988 company however continued challenge validity provisions regulations june 8 1992 bankruptcy court issued decision denying companys motion judgment irs respect application section 269 irs code company court also granted irss motion dismiss companys complaint challenging regulations court entered judgment pursuant decision june 29 1992 consistent advice counsel company decided appeal judgment although company unable obtain judgment would prevented irs applying section 269 company courts ruling leaves company substantially position prior issuance final regulations possibility irs challenge section 269 internal revenue code companys use prepetition net operating loss carryforwards always existed light courts ruling possibility continues exist court however stated irs ever seek use new section 269 regulations limit companys use net operating loss carryforwards nothing opinion would prejudice companys right defend using courts confirmation finding primary purpose companys plan reorganization tax avoidance companys common stock subject trading restrictions designed maximize likelihood preserving net operating loss carryforwards change ownership company could also limit use net operating loss carryforwards note 6 longterm debt december 31 1997 1996 thousands real estate loan 248 267 30 66 278 333 less amounts classified current 38 54 240 279 real estate loan relates 1990 purchase land building houston texas previously leased hds august 1996 hds refinanced loan required repaid monthly installments 3278 august 20 2001 remaining unpaid balance shall due december 31 1997 1996 interest rate note 105 1025 respectively rate adjusted term note accordance increases decreases prime rate note secured hds facility net book value 456000 december 31 1997 companys guaranty note 7 shareholders deficit components shareholders deficit follows december 31 1997 1996 thousands common stock 152 capital excess par value 8155 accumulated deficit 76291 9746 pension liability adjustment 12205 shareholders deficit 67984 13644 statement financial accounting standards 87 employers accounting pensions requires recognition statement financial condition minimum pension liability minimum pension liability must recognized equal excess accumulated benefit obligation plan assets reduction shareholders investment amount 122 million 1996 recorded unfunded amount recognized expense 1997 connection distress termination consolidated plan recognition companys liability pbgc note 8 longterm stock incentive plan companys longterm stock incentive plan 1989 provides grant stock options stock appreciation rights performance shares restricted stock restricted stock units stockbased awards plan maximum number shares may granted respect stockbased awards 50000 options may granted prices equal less fair market value date grant except options purchase 13333 shares may granted price less fair market value october 25 1989 date plan approved shareholders options exercisable within period exceed 10 years date grant plan also provides discretionary grant stock appreciation rights allow holder receive cash shares common stock difference exercise price fair market value stock date exercise grants plan note 9 postretirement benefit obligations pensions date chapter 11 filings june 1987 company sponsored 19 defined benefit plans providing pensions substantially us employees pension plan us salaried employees capped frozen effective march 31 1987 benefit accruals date result divestitures chapter 11 proceedings eight active plans transferred buyers businesses leaving company sponsor 11 plans none permitted additional benefit accruals effective january 1 1989 11 remaining plans consolidated single plan allis chalmers consolidated pension plan consolidated plan accordance plan reorganization 11 plans received company contribution 538 million december 1988 result actions taken connection contribution thenexisting securities pension plans assets consolidated plan invested dedicated bond portfolio consisted highgrade fixed income securities market value assets matched present value anticipated pension benefits administrative expenses consolidated plan way intended make pension fund immune interest rate fluctuations plan reorganization future contributions consolidated plan required mortality assumptions used calculating present value pension benefits expected paid assumptions used calculating future administrative expenses proved inaccurate years 1989 1993 retirees eligible benefits consolidated plan group outlived projections mortality assumptions used plan reorganization funding consolidated plan five years actual administrative expenses slightly excess assumed levels effective january 1 1994 companys independent actuaries reflected decreased mortality funding calculation purposes years 1994 1996 mortality experience negative compared revised assumptions amount excess 19891993 average actuarial loss mortality loss partially offset however gains asset portfolio underfunded condition consolidated plan required company make significant cash contributions consolidated plan pursuant employment retirement income security act 1974 amended erisa funding requirements starting 1996 company failed make required quarterly contributions starting april 1996 resulting filing lien pension benefit guaranty corporation pbgc company given inability company fund obligations lack financial resources february 1997 allischalmers applied pbgc distress termination consolidated plan section 4041c erisa pbgc approved distress termination application september 1997 agreed termination date april 14 1997 pbgc became trustee terminated consolidated plan september 30 1997 upon termination consolidated plan allischalmers subsidiaries incurred liability pbgc amount equal consolidated plans unfunded benefit liabilities allischalmers subsidiaries also liability pbgc trustee terminated consolidated plan outstanding balance consolidated plans accumulated funding deficiencies pbgc estimated unfunded benefit liabilities accumulated funding deficiencies together pbgc liability total approximately 679 million september 1997 allischalmers pbgc entered agreement principle settlement pbgc liability pbgc agreement pbgc agreement calls pbgc release allis chalmers subsidiaries pbgc liability return number shares allischalmers common stock represents 35 total number shares issued outstanding fullydiluted basis pbgc agreement subject negotiation definitive documentation satisfactory resolution allischalmers tax obligations respect consolidated plan section 4971 internal revenue code 1986 amended code section 4971a code imposes taxable year firsttier tax 10 percent amount accumulated funding deficiency plan like consolidated plan section 4971b code imposes additional secondtier tax equal 100 percent accumulated funding deficiency corrected within specified period liability taxes imposed section 4971 extends jointly severally allischalmers commonlycontrolled subsidiary corporations prior termination consolidated plan accumulated funding deficiency taxable years 1995 1996 1997 deficiencies resulted result firsttier taxes code section 4971a approximately 900000 amount accrued company december 31 1997 march 2 1998 allischalmers sent irs formal offer compromise companys tax liability code section 4971 accepted irs offer compromise require allischalmers pay irs 25000 plus interest march 2 1998 ii extinguish companys tax liability code section 4971 subject standard conditions attendant offer compromise although irs yet responded offer compromise allis chalmers management hopeful mutually acceptable settlement achieved satisfactory settlement cannot reached irs definitive documentation pbgc agreement achieved reason allischalmers evaluate alternatives including bankruptcy filing medical life pursuant plan reorganization company assumed contractual obligation simplicity manufacturing inc smi reimburse smi 50 actual cost medical life insurance claims select group retirees smi retirees prior simplicity manufacturing division allischalmers net postretirement benefit expense years ended december 31 1997 1996 1995 included following components thousands 1997 1996 1995 service cost interest cost accumulated benefit obligation 62 54 59 amortization unrecognized net gain 3 17 24 net postretirement benefit expense 59 37 35 presently companys postretirement benefit obligations funded status companys postretirement benefit obligations december 31 1997 1996 follows thousands 1997 1996 actuarial present value accumulated postretirement benefit obligation 733 867 unrecognized net gain 257 126 accrued postretirement benefit liability 990 993 assumed health care cost trend rate used measuring accumulated postretirement benefit obligation 70 december 31 1997 75 december 31 1996 assumed rate 1998 decreases 12 per year ultimate rate 50 reached december 31 2001 health care cost trend rate significant effect amounts reported example one percentage point increase health care cost trend rate would increase accumulated postretirement benefit obligation approximately 100000 december 31 1997 discount rate used determining accumulated postretirement benefit obligation 750 december 31 1997 december 31 1996 note 10 commitments contingent liabilities substantially litigation proceedings pending company resolved pursuant emergence chapter 11 proceedings 1988various loans lease agreements commitments contractual obligations company also satisfied pursuant plan reorganization company knows significant preplan reorganization lawsuits presently pending subsidiaries assumed various trusts entities company party litigation matters claims normal course operations results litigation claims cannot predicted certainty management believes final outcome matters material adverse effect companys consolidated financial position environmental matters environmental protection agency epa certain state environmental protection agencies requested information connection eleven potential hazardous waste disposal sites products manufactured allischalmers consummation plan reorganization disposed epa claimed allischalmers liable cleanup costs associated several additional sites epas claims respect one site withdrawn 1994 based upon settlements reached epa bankruptcy proceeding addition certain third parties asserted allischalmers liable cleanup costs associated epa fines connection additional sites one instances former site operator joined allischalmers 47 potentially responsible parties third party defendant lawsuit involving cleanup one sites instance environmental claims asserted company involve prebankruptcy operations accordingly allischalmers taken position cleanup costs liabilities related sites discharged bankruptcy one particular site epas region iii concurred companys position claims environmental cleanup discharged pursuant bankruptcy site unique different circumstances company notified regional offices epa determination associated region iii site company received responses regional offices environmental claims asserted company involving postbankruptcy operations allischalmers consolidated pension plan contributions consolidated plan required starting 1996 due change mortality assumptions used calculating present value pension benefits expected paid assumptions used calculating future administrative expenses compared projections mortality administrative expense assumptions used plan reorganization funding consolidated plan contributions projected 25 million 1996 increasing 31 million 1997 81 million 1998 making one installment 205000 january 15 1996 company failed make subsequent installments companys failure make required quarterly contributions starting april 1996 resulted filing lien pbgc company given inability company fund obligations current financial resources february 1997 allischalmers applied pbgc distress termination consolidated plan section 4041c erisa pbgc approved distress termination application september 1997 agreed plan termination date april 14 1997 pbgc became trustee terminated consolidated plan september 30 1997 upon termination consolidated plan allischalmers subsidiaries incurred liability pbgc amount equal consolidated plans unfunded benefit liabilities allischalmers subsidiaries also liability pbgc trustee terminated consolidated plan outstanding balance consolidated plans accumulated funding deficiencies pbgc estimated pbgc liability totals approximately 679 million september 1997 allischalmers pbgc entered agreement principle settlement pbgc liability pbgc agreement pbgc agreement calls pbgc release allis chalmers subsidiaries pbgc liability return number shares allischalmers common stock represents 35 total number shares issued outstanding fullydiluted basis pbgc agreement subject negotiation definitive documentation satisfactory resolution allischalmers tax obligations respect consolidated plan section 4971 code section 4971a code imposes taxable year firsttier tax 10 percent amount accumulated funding deficiency plan like consolidated plan section 4971b code imposes additional secondtier tax equal 100 percent accumulated funding deficiency corrected within specified period liability taxes imposed section 4971 extends jointly severally allischalmers commonlycontrolled subsidiary corporations prior termination consolidated plan accumulated funding deficiency taxable years 1995 1996 1997 deficiencies resulted result firsttier taxes code section 4971a approximately 900000 amount accrued company december 31 1997 march 2 1998 allischalmers sent irs formal offer compromise companys tax liability code section 4971 accepted irs offer compromise require allischalmers pay irs 25000 plus interest march 2 1998 ii extinguish companys tax liability code section 4971 subject standard conditions attendant offer compromise although irs yet responded offer compromise allis chalmers management hopeful mutually acceptable settlement achieved satisfactory settlement cannot reached irs definitive documentation pbgc agreement achieved reason allischalmers evaluate alternatives including bankruptcy filing note 11 related party transactions h sean mathis chairman board chief executive officer leonard toboroff vice chairman board executive vice president john grigsby jr vice chairman board executive vice president chief financial officer receive compensation services executive officers company three years ended december 31 1997 item 9 item 8 financial statements report independent registered public accounting firm board directors stockholders allischalmers energy inc houston texas audited accompanying consolidated balance sheets allischalmers energy inc subsidiaries december 31 2005 2004 related consolidated statements operations stockholders’ equity cash flows years ended consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position allischalmers energy inc subsidiaries december 31 2005 2004 consolidated results operations cash flows years ended conformity accounting principles generally accepted united states america uhy mann frankfort stein lipp cpas llp houston texas march 21 2006 report independent registered public accounting firm board directors allischalmers energy inc houston texas audited accompanying consolidated statements operations stockholders’ equity cash flows year ended december 31 2003 allischalmers energy inc consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion consolidated financial statements referred present fairly material respects results consolidated operations cash flows year ended december 31 2003 allischalmers energy inc conformity accounting principles generally accepted united states america discussed note2 consolidated financial statements company restated consolidated financial statements year ended december 31 2003 gordon hughes banks llp greenwood village colorado march 3 2004 except note 11 date june 10 2004 notes 2 17 date february 10 2005 note 2 date august 5 2005 allischalmers energy inc consolidated balance sheets accompanying notes integral part consolidated financial statements allischalmers energy inc consolidated statements operations accompanying notes integral part consolidated financial statements allischalmers energy inc consolidated statement stockholders’ equity accompanying notes integral part consolidated financial statements allischalmers energy inc consolidated statements cash flows accompanying notes integral part consolidated financial statements allischalmers energy inc notes consolidated financial statements note 1 nature business summary significant accounting policies organization business allischalmers energy inc “allischalmers” “we” incorporated delaware 1913 oilquip rentals inc “oilquip” oil gas rental company incorporated february 4 2000 find acquire acquisition targets operate subsidiaries february 6 2001 oilquip subsidiary mountain compressed air inc “mountain air” texas corporation acquired certain assets mountain air drilling service co inc whose business consisted providing equipment trained personnel four corners area southwestern united states mountain air primarily provided compressed air equipment related products services trained operators companies business drilling natural gas may 9 2001 oilquip merged subsidiary allischalmers energy inc merger oilquip’s outstanding common stock converted 20 million shares allischalmers’ common stock legal purposes allischalmers acquired oilquip parent company mountain air however accounting purposes oilquip treated acquiring company reverse acquisition allischalmers february 6 2002 acquired 81 outstanding stock allischalmers tubular services inc “tubular” formerly known jens’ oilfield service inc supplies highly specialized equipment operations install casing production tubing required drill complete oil gas wells february 2 2002 also purchased substantially outstanding common stock preferred stock strata directional technology inc “strata” provides highend directional horizontal drilling services specific targeted reservoirs cannot reached vertically july 2003 subsidiary mountain air entered limited liability company operating agreement division mi llc “mi” joint venture smith international schlumberger nv schlumberger limited form texas limited liability company named aircomp llc “aircomp” assets contributed mountain air recorded mountain air’s historical cost 63 million assets contributed mi recorded fair market value 103 million originally owned 55 mi originally owned 45 aircomp result controlling interest operating control consolidated aircomp financial statements aircomp compressed air drilling services segment september 23 2004 acquired 100 outstanding stock safcooil field products inc “safco” 10 million safco leases spiral drill pipe provides related oilfield services oil drilling industry september 30 2004 acquired remaining 19 tubular’ exchange 13 million shares common stock total value consideration paid seller jens mortensen 64 million equal number shares common stock issued mr mortensen multiplied last sale price 495 common stock reported american stock exchange date issuance november 10 2004 aircomp acquired substantially assets diamond air drilling services inc marquis bit co llc collectively “diamond air” 46 million cash assumption approximately 450000 accrued liabilities contributed 25 million mi llc contributed 21 million aircomp llc order fund purchase diamond air provides air drilling technology products oil gas industry west texas new mexico oklahoma diamond air leading provider air hammers hammer bit products december 10 2004 acquired downhole injection services llc “downhole” approximately 11 million cash 568466 shares common stock payment assumption 950000 debt downhole headquartered midland texas provides chemical treatments wells inserting small diameter stainless steel coiled tubing producing oil gas wells allischalmers energy inc notes consolidated financial statements continued april 1 2005 acquired 100 outstanding stock delta rental service inc “delta” 46 million cash 223114 shares common stock two promissory notes totaling 350000 delta located lafayette louisiana rental tool company providing specialty rental items oil gas industry spiral heavy weight drill pipe test plugs used test blowout preventors well head retrieval tools spacer spools assorted handling tools may 1 2005 acquired 100 outstanding capital stock capcoil tubing services inc “capcoil” 27 million cash 168161 shares common stock payment assumption approximately 13 million debt capcoil located kilgore texas engaged downhole well servicing providing coil tubing services enhance production existing wells july 11 2005 acquired compressed air drilling assets wt enterprises inc “wt” based south texas 60 million cash equipment includes compressors boosters mist pumps vehicles july 11 2005 acquired mi 45 interest aircomp subordinated note principal amount 48 million issued aircomp paid mi 71 million cash issued mi 40 million subordinated note bearing interest 5 per annum result 100 aircomp effective august 1 2005 acquired 100 outstanding capital stock target energy inc “target” 13 million cash forgiveness lease receivable approximately 06 million results target included directional horizontal drilling segment measure drilling equipment utilized segment september 1 2005 acquired casing tubing service assets patterson services inc approximately 156 million assets located corpus christi texas kilgore texas lafayette louisiana houma louisiana vulnerabilities concentrations provide oilfield services several regions including states texas utah louisiana colorado oklahoma new mexico gulf mexico southern portions mexico nature operations many regions operate subject us changing economic regulatory political conditions vulnerable nearterm longterm changes demand prices oil natural gas related demand oilfield service operations use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period future events effects cannot perceived certainty accordingly accounting estimates require exercise judgment management believes estimates assumptions used preparation consolidated financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts recoverability longlived assets intangibles useful lives used depreciation amortization income taxes valuation allowances accounting estimates used preparation consolidated financial statements allischalmers energy inc notes consolidated financial statements continued may change new events occur experience acquired additional information obtained operating environment changes principles consolidation consolidated financial statements include accounts allischalmers subsidiaries december 31 2005 oil quip mountain air tubular strata aircomp safco downhole delta capcoil target significant intercompany transactions eliminated revenue recognition provide rental equipment drilling services customers per day per job contractual rates recognize drilling related revenue work progresses collectibility reasonably assured securities exchange commission’s sec staff accounting bulletin sab 104 revenue recognition financial statements “sab 104” provides guidance sec staff’s views application generally accepted accounting principles selected revenue recognition issues revenue recognition policy accordance generally accepted accounting principles sab 104 allowance doubtful accounts receivable customer obligations due normal trade terms sell services oil natural gas exploration production companies perform continuing credit evaluations customers’ financial condition although generally require collateral letters credit may required customers certain circumstances record allowance doubtful accounts based specifically identified amounts determined uncollectible limited number customers individually large amounts due given date unanticipated change one customer’s credit worthiness matters affecting collectibility amounts due customers could material effect results operations period changes events occur attempts collect receivable failed receivable written allowance december 31 2005 2004 recorded allowance doubtful accounts 383000 265000 respectively bad debt expense 219000 104000 136000 years ended december 31 2005 2004 2003 respectively cash equivalents consider highly liquid investments original maturity three months less time purchase cash equivalents inventories stated lower cost market cost determined using first “fifo” method average cost method approximates fifo includes cost materials labor manufacturing overhead property equipment property equipment recorded cost less accumulated depreciation certain equipment held capital leases classified equipment related obligations recorded liabilities maintenance repairs improve extend life related assets charged operations incurred refurbishments renewals capitalized value equipment enhanced extended period property equipment sold otherwise disposed asset allischalmers energy inc notes consolidated financial statements continued account related accumulated depreciation account relieved gain loss included operations cost property equipment currently service depreciated estimated useful lives related assets range three twenty years depreciation computed straightline method financial reporting purposes capital leases amortized using straightline method estimated useful lives assets lease amortization included depreciation expense depreciation expense charged operations 49 million 27 million 21 million years ended december 31 2005 2004 2003 respectively goodwill intangible assets amortization goodwill including goodwill associated equity method investments intangible assets infinite lives amortized tested impairment annually frequently circumstances indicate impairment may exist intangible assets finite useful lives amortized either straightline basis asset’s estimated useful life basis reflects pattern economic benefits intangible assets realized perform impairment tests carrying value goodwill annual basis december 31st reportable segments december 31 2005 2004 evidence impairment exists impairment longlived assets longlived assets include property plant equipment intangible assets certain assets reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable impairment loss recorded period determined carrying amount recoverable determination recoverability made based upon estimated undiscounted future net cash flows excluding interest expense impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets financial instruments financial instruments consist cash equivalents accounts receivable payable debt carrying value cash equivalents accounts receivable payable approximate fair value due shortterm nature believe fair values carrying value debt would materially different due instruments’ interest rates approximating market rates similar borrowings december 31 2005 2004 concentration credit customer risk financial instruments potentially subject us concentrations credit risk consist principally cash equivalents trade accounts receivable transact business several financial institutions however amount deposit two financial institutions exceeded 100000 federally insured limit december 31 2005 total 20 million management believes financial institutions financially sound risk loss minimal sell services major independent domestic international oil gas companies perform ongoing credit valuations customers provide allowances probable credit losses appropriate 2005 none customers accounted 10 consolidated revenues year ended december 31 2004 matyep mexico represented 108 burlington resources represented 101 consolidated revenues respectively year ended december 31 2003 matyep burlington allischalmers energy inc notes consolidated financial statements continued resources inc el paso energy corporation represented 102 111 141 respectively consolidated revenues matyep represented 945 980 100 international revenues 2005 2004 2003 respectively debt issuance costs related issuance debt capitalized amortized interest expense using straightline method approximates interest method maturity periods related debt income taxes use liability method determining income taxes current deferred tax liabilities assets recorded accordance enacted tax laws rates method amounts deferred tax liabilities assets end period determined using tax rate expected effect taxes actually paid recovered future tax benefits recognized extent realization benefits likely deferred income taxes provided estimated income tax effect temporary differences financial tax bases assets liabilities deferred tax assets also provided certain tax credit carryforwards valuation allowance reduce deferred tax assets established likely portion deferred tax assets realized stockbased compensation account stockbased compensation using accounting principle board opinion 25 “apb 25” apb 25 compensation expense recognized stock options exercise price less market price grant date option stock options exercise prices market value stock grant date adopted disclosureonly provisions statement financial accounting standards “sfas” 123 accounting stockbased compensation “sfas 123” also adopted disclosureonly provisions sfas 123 stock options granted employees directors accordingly compensation cost recognized apb 25 compensation expense options granted recorded based fair value grant date options consistent provisions sfas 123 net incomeloss net incomeloss per share years ended december 31 2005 2004 2003 would decreased pro forma amounts indicated thousands except per share amounts allischalmers energy inc notes consolidated financial statements continued options granted 2005 2004 2003 see note 12 disclosures regarding stock options following assumptions applied determining pro forma compensation costs segments enterprise related information disclose results segments accordance sfas 131 disclosures segments enterprise related information “sfas 131” designate internal organization used management allocating resources assessing performance source reportable segments sfas 131 also requires disclosures products services geographic areas major customers please see note 18 disclosure segment information accordance sfas 131 pension post retirement benefits sfas 132 employer’s disclosures pension post retirement benefits “sfas 132” requires certain disclosures employers’ pension post retirement benefit plans specifies accounting measurement recognition plans sfas 132 requires disclosure information changes benefit obligations fair values plan assets facilitates financial analysis please see note 3 disclosure accordance sfas 132 income per common share compute income per common share accordance provisions sfas 128 earnings per share “sfas 128” sfas 128 requires companies complex capital structures present basic diluted earnings per share basic earnings per share computed basis weighted average number shares common stock outstanding period periods april 12 2004 preferred dividends deducted net income considered calculation income available common stockholders computing basic earnings per share diluted earnings per share similar basic earnings per share presents dilutive effect per share basis potential common shares eg convertible preferred stock options etc converted potential dilutive common shares antidilutive effect eg increase income per share excluded diluted earnings per share allischalmers energy inc notes consolidated financial statements continued components basic diluted earnings per share follows thousands except per share amounts reclassification certain prior period balances reclassified conform current year presentation new accounting pronouncements may 2005 fasb issued sfas 154 accounting changes error corrections sfas 154 requires retroactive application voluntary change accounting principle prior period financial statements unless impracticable sfas 154 also requires change method depreciation amortization depletion longlived nonfinancial assets accounted change accounting estimate affected change accounting principle sfas 154 replaces apb opinion 20 “accounting changes” sfas 3 “reporting accounting changes interim financial statements” sfas 154 effective fiscal years beginning december 15 2005 adopt provisions sfas 154 january 1 2006 expect adoption material impact results operations financial condition december 2004 fasb issued sfas 123r sharebased payment sfas 123r revises sfas 123 accounting stockbased compensation focuses accounting sharebased payments services employer employee statement requires sharebased payments employees including grants employee stock options recognized financial statements based fair values adopt sfas 123r january 1 2006 use modified prospective transition method utilizing blackscholes option pricing model calculation fair value employee stock options modified prospective method stock option awards granted modified settled january 1 2006 measured accounted accordance sfas 123r compensation cost awards granted prior vested january 1 2006 would based grant date attributes originally used value awards pro forma purposes allischalmers energy inc notes consolidated financial statements continued sfas 123 believe adoption standard result expense approximately 32 million reduction diluted earnings per share approximately 018 per share estimate assumes additional grants stock options beyond outstanding december 31 2005 estimate based many assumptions including level stock option grants expected 2006 stock price significant assumptions option valuation model including volatility expected life options actual expenses could differ estimate november 2004 fasb issued sfas 151 inventory costs amendment arb 43 chapter 4 amends guidance arb 43 clarify accounting abnormal amounts idle facility expense freight handling costs wasted material sfas 151 requires items recognized current period charges addition sfas 151 requires allocation fixed production overheads inventory based normal capacity production facilities required adopt provisions sfas 151 prospective basis january 1 2006 believe adoption sfas 151 material impact future results operations note 2 restatement earnings per share understated diluted earnings per share due incorrect calculation weighted shares outstanding third quarter 2003 first three quarters 2004 years ended december 31 2003 2004 quarter ended march 31 2005 addition understated basic earnings per share due incorrect calculation weighted average basic shares outstanding quarter ended september 30 2004 consequently restated financial statements periods incorrect calculation resulted mathematical error improper application sfas 128 effect restatement reduce weighted average basic diluted shares outstanding three nine months ended september 30 2004 consequently weighted average basic diluted earnings per share three nine months ended september 30 2004 increased restated earnings per share calculation affected periods reflecting adjustments results previously restated see following section presented amounts thousands except per share amounts allischalmers energy inc notes consolidated financial statements continued aircomp acquisition connection formation aircomp llc 2003 along mi llc contributed assets aircomp exchange 55 interest 45 interest respectively aircomp originally allischalmers energy inc notes consolidated financial statements continued accounted formation aircomp joint venture however february 2005 determined transaction accounted using purchase accounting pursuant sfas 141 business combinations recorded sale interest subsidiary accordance sec staff accounting bulletin 51 accounting sales stock subsidiary consequently restated financial statements quarter ended september 30 2003 year ended december 31 2003 three quarters ended september 30 2004 reflect following adjustments increase book value fixed assets joint venture accounting originally recorded value assets contributed mi aircomp mi’s historical cost 69 million purchase accounting increased recorded value assets contributed mi approximately 33 million 103 million reflect fair market value determined third party appraisal addition joint venture accounting established negative goodwill reduced fixed assets amount 16 million negative goodwill amortized us lives related fixed assets purchase accounting increased fixed assets 16 million reverse negative goodwill previously recorded reversed amortization expenses recorded 2004 therefore cost fixed assets increased total 49 million time acquisition result increase fixed assets reversal amortization negative goodwill depreciation expense increased 98000 year ended december 31 2003 increase minority interest capital excess par value purchase accounting minority interest increased 15 million partially offset minority interest expense 44000 year ended december 31 2003 purchase accounting capital excess par increased 955000 allischalmers energy inc notes consolidated financial statements continued restated consolidated balance sheet reflecting adjustments follows thousands allischalmers energy inc notes consolidated financial statements continued increase net income joint venture accounting gain loss recognized connection formation aircomp purchase accounting recorded 24 million nonoperating gain third quarter 2003 result increase fixed assets depreciation expense increased year ended december 31 2003 98000 minority interest expense decreased 44000 resulting reduction net income attributable common stockholders 54000 however result recording nonoperating gain net income attributed common stockholders increased 24 million year ended december 31 2003 restated consolidated income statement reflecting adjustments follows thousands except per share amounts allischalmers energy inc notes consolidated financial statements continued restated consolidated statement cash flows reflecting adjustments follows thousands allischalmers energy inc notes consolidated financial statements continued addition 2004 financial statements restated previously filed interim financial statements included form 10q first second third quarters 2004 effect restatement individual quarterly financial statements follows thousands except per share amounts addition accompanying 2003 financial statements restated previously filed interim financial statements included form 10q first second third quarters 2003 adjustment recorded fourth quarter 2003 reflect change estimate recoverability foreign taxes paid 2002 2003 effect significant fourth quarter adjustment individual quarterly financial statements follows thousands except per share amounts note 3 post retirement benefit obligations medical life pursuant plan reorganization confirmed bankruptcy court acceptances creditors stockholders consummated december 2 1988 assumed contractual obligation simplicity manufacturing inc smi reimburse smi 50 actual cost medical life insurance claims select group retirees smi retirees prior simplicity manufacturing allischalmers energy inc notes consolidated financial statements continued division allischalmers actuarial present value expected retiree benefit obligation determined actuary amount results applying actuarial assumptions 1 historical claimscost data 2 estimates time value money discounts interest 3 probability payment including decrements death disability withdrawal retirement today expected date benefit payments december 31 2005 2004 2003 postretirement benefit obligations 335000 687000 545000 respectively 401k savings plan june 30 2003 adopted 401k profit sharing plan “plan” plan defined contribution savings plan designed provide retirement income eligible employees plan intended qualified section 401k internal revenue code 1986 amended funded voluntary pretax contributions eligible employees may contribute percentage eligible compensation limited subject statutory limits plan also funded discretionary matching employer contributions us eligible employees cannot participate plan attained age 21 completed sixmonths service us participant 100 vested respect participants’ contributions matching contributions vested threeyear period accordance plan document contributions invested directed participant investment funds available plan matching contributions approximately 114000 35000 10000 paid 2005 2004 2003 respectively note 4 acquisitions july 2003 subsidiary mountain air entered limited liability company operating agreement division mi joint venture smith international schlumberger nv schlumberger limited form aircomp texas limited liability company assets contributed mountain air recorded mountain air’s historical cost 63 million assets contributed mi recorded fair market value 103 million originally owned 55 mi originally owned 45 aircomp result controlling interest operating control consolidated aircomp financial statements aircomp comprises compressed air drilling services segment september 2004 acquired 100 outstanding stock safco 10 million safco leases spiral drill pipe provides related oilfield services oil drilling industry september 2004 acquired remaining 19 tubular exchange 13 million shares common stock total value consideration paid seller jens mortensen 64 million equal number shares common stock issued mr mortensen 13 million multiplied last sale price 495 common stock reported american stock exchange date issuance amount treated contribution stockholders’ equity balance sheet 19 million minority interest tubular eliminated balance contribution 44 million allocated follows june 2004 obtained appraisal fixed assets tubular valued fixed assets 201 million book value fixed assets 158 million fixed assets appraised value 43 million book value increased value fixed assets 19 amount excess appraised value book value 8 million remaining balance 36 million allocated goodwill november 2004 aircomp acquired substantially assets diamond air 46 million cash assumption approximately 450000 accrued liabilities contributed 25 million mi llc contributed 21 million aircomp llc order fund purchase goodwill 375000 intangible assets 23 million recorded connection acquisition diamond air provides air drilling technology products oil gas industry west texas new mexico oklahoma diamond air leading provider air hammers hammer bit products allischalmers energy inc notes consolidated financial statements continued december 2004 acquired downhole approximately 11 million cash 568466 shares common stock assumption approximately 950000 debt goodwill 442000 intangible assets 795000 recorded connection acquisition downhole provides economical chemical treatments wells inserting small diameter stainless steel coiled tubing producing oil gas wells april 1 2005 acquired 100 outstanding stock delta 46 million cash 223114 shares common stock two promissory notes totaling 350000 purchase price allocated fixed assets inventory delta located lafayette louisiana rental tool company providing specialty rental items oil gas industry spiral heavy weight drill pipe test plugs used test blowout preventors well head retrieval tools spacer spools assorted handling tools may 1 2005 acquired 100 outstanding capital stock capcoil 27 million cash 168161 shares common stock payment assumption approximately 13 million debt capcoil located kilgore texas engaged downhole well servicing providing coil tubing services enhance production existing wells goodwill 184000 identifiable intangible assets 14 million recorded connection acquisition july 11 2005 acquired compressed air drilling assets wt based south texas 60 million cash equipment includes compressors boosters mist pumps vehicles goodwill 82000 identifiable intangible assets 15 million recorded connection acquisition july 11 2005 acquired mi 45 interest aircomp subordinated note principal amount 48 million issued aircomp paid mi 71 million cash issued mi 40 million subordinated note bearing interest 5 per annum result 100 aircomp effective august 1 2005 acquired 100 outstanding capital stock target 13 million cash forgiveness lease receivable approximately 06 million purchase price allocated fixed assets target resulted recording 08 million deferred tax liability results target included directional horizontal drilling segment measure drilling equipment utilized segment september 1 2005 acquired casing tubing service assets patterson services inc approximately 156 million assets located corpus christi texas kilgore texas lafayette louisiana houma louisiana acquisitions accounted using purchase method accounting results operations acquired entities since date acquisition included consolidated income statement following unaudited pro forma consolidated summary financial information year ended december 31 2005 illustrates effects acquisitions delta capcoil wt minority interest aircomp acquisitions occurred january 1 2005 based historical results acquisitions following unaudited pro forma consolidated summary financial information years ended december 31 2004 2003 illustrates effects acquisitions diamond air downhole delta capcoil wt minority interest aircomp acquisitions occurred beginning allischalmers energy inc notes consolidated financial statements continued period based historical results acquisitions unaudited thousands except per share amounts note 5 inventories comprised following thousands note 6 property intangible assets property equipment comprised following december 31 thousands allischalmers energy inc notes consolidated financial statements continued net book value equipment recorded capital leases 908 0 december 31 2005 2004 respectively intangible assets follows december 31 thousands future amortization intangible assets december 31 2005 follows thousands allischalmers energy inc notes consolidated financial statements continued note 7 income taxes income tax provision consists following thousands required file consolidated us federal income tax return pay foreign income taxes mexico related allischalmers tubular services’ mexico revenues approximately 16 million us foreign tax credits available us amount available us foreign tax credits may recoverable us depending upon availability taxable income future years therefore recorded asset december 31 2005 foreign tax credits begin expire year 2007 following table reconciles us statutory tax rate actual tax rate temporary differences tax basis assets liabilities reported amounts financial statements result differences income tax purposes income financial statement purposes future years valuation allowance established deferred tax assets management based upon available information considers likely benefit assets realized recorded valuation allowance equal excess deferred tax assets deferred tax liabilities unable determine likely deferred tax asset realized tax reform act 1986 contains provisions limit utilization net operating loss tax credit carry forwards “change ownership” described section 382 internal revenue code change ownership may limit utilization net operating loss tax credit carry forwards could triggered public offering subsequent sales securities us stockholders allischalmers energy inc notes consolidated financial statements continued deferred income tax assets related allowance december 31 follows thousands net operating loss carry forwards tax purposes december 31 2005 2004 estimated 166 million 145 million respectively expiring 2024 net future taxdeductible items relate primarily timing differences 1988 plan reorganization established ac reorganization trust settle claims make distributions creditors certain stockholders transferred cash certain property ac reorganization trust december 2 1988 payments made us ac reorganization trust generate tax deductions us upon transfer generate deductions us ac reorganization trust makes payments holders claims plan reorganization also created trust process liquidate product liability claims payments made ac reorganization trust product liability trust generate current tax deductions us upon payment generate deductions us product liability trust makes payments liquidate claims incurs expenses believe abovenamed trusts grantor trusts therefore include income loss trusts income loss tax purposes resulting adjustment tax basis net operating capital loss carry forwards income loss trusts included results operations financial reporting purposes allischalmers energy inc notes consolidated financial statements continued note 8 debt longterm debt consists following thousands december 31 2005 2004 debt approximately 606 million 305 million respectively weighted average interest rate outstanding debt approximately 75 december 31 2005 73 december 31 2004 maturities debt obligations december 31 2005 follows thousands bank loans line credit agreements july 11 2005 replaced previous credit agreement new agreement provided following senior secured credit facilities • 130 million revolving line credit borrowings limited 85 eligible accounts receivable plus 50 eligible inventory maximum 20 million borrowings based inventory line credit used finance working capital requirements general corporate purposes including issuance standby letters credit outstanding borrowings allischalmers energy inc notes consolidated financial statements continued line credit 64 million margin prime libor rates plus margin averaging approximately 81 december 31 2005 • two term loans totaling 420 million outstanding borrowings term loans 420 million december 31 2005 loans libor rates plus margin averages approximately 78 borrowed july 2005 facilities refinance prior credit facility aircomp credit facility fund acquisition mi’s interest aircomp air drilling assets wt pay transaction costs related refinancing acquisitions incurred debt retirement expense 11 million related refinancing amount includes prepayment penalties writeoff deferred financing fees previous financing included interest expense consolidated statement operations borrowings july 2005 credit facilities mature july 2007 amounts outstanding term loans july 2006 repaid monthly principal payments based 48 month repayment schedule remaining balance due maturity additionally second year required prepay remaining balance term loans 75 excess cash flow debt service capital expenditures interest rate payable borrowings based margin london interbank offered rate referred libor prime rate 05 fee undrawn portion revolving line credit margin libor increase 10 second year credit facilities secured substantially assets contain customary events default financial covenants including limitations ability incur additional indebtedness make capital expenditures pay dividends make distributions create liens sell assets amounts outstanding july 2005 credit agreement paid proceeds senior notes offering january 2006 executed amended restated credit agreement provides 250 million revolving line credit see note 22 prior july 11 2005 credit agreement dated december 7 2004 provided following credit facilities • 100 million revolving line credit borrowings limited 85 eligible accounts receivables defined outstanding borrowings line credit 24 million december 31 2004 • term loan amount 63 million repaid monthly payments principal 105583 per month also required prepay term loan amount equal 20 receipts largest customer mexico proceeds term loan used prepay term loan owed tubular services prepay 12 24 million subordinated note retire related warrants outstanding balance 63 million december 31 2004 • 60 million capital expenditure acquisition line credit borrowings facility payable monthly four years beginning january 2006 availability capital expenditure term loan facility subject security acceptable lender form equipment acquired collateral outstanding borrowings december 31 2004 credit facilities mature december 31 2007 secured liens substantially assets agreement governing credit facilities contained customary events default financial covenants also limited ability incur additional indebtedness make capital expenditures pay dividends make distributions create liens sell assets interest accrued adjustable rate based prime rate 625 december 31 2004 paid 05 per annum fee undrawn portion revolving line credit capital expenditure line allischalmers energy inc notes consolidated financial statements continued connection acquisition tubular strata 2002 issued 12 secured subordinated note original amount 30 million connection subordinated note issued redeemable warrants valued 15 million recorded discount subordinated debt liability discount amortized life subordinated note beginning february 6 2002 additional interest expense 350000 300000 recognized years ended december 31 2004 december 31 2003 respectively debt recorded 27 million december 31 2003 net unamortized portion put obligation december 7 2004 prepaid 24 million balance 12 subordinated note retired 15 million warrants portion proceeds 63 million bank term loan prior july 11 2005 aircomp subsidiary credit facilities described credit facilities repaid connection acquisition minority interest aircomp refinancing bank credit facilities described • 35 million bank line credit interest accrued adjustable rate based prime rate paid 05 per annum fee undrawn portion borrowings line credit subject borrowing base consisting 80 eligible accounts receivable balance december 31 2004 15 million • 71 million term loan accrued interest adjustable rate based either libor prime rate principal payments 286000 plus interest due quarterly final maturity date june 27 2007 balance december 31 2004 68 million • “delayed draw” term loan facility amount 15 million used capital expenditures interest accrued adjustable rate based either libor prime rate quarterly principal payments commence march 31 2006 amount equal 50 outstanding balance december 31 2005 final maturity june 27 2007 borrowings outstanding facility december 31 2004 aircomp credit facilities secured liens substantially aircomp’s assets agreement governing credit facilities contained customary events default required aircomp satisfy various financial covenants also limited aircomp’s ability incur additional indebtedness make capital expenditures pay dividends make distributions create liens sell assets guaranteed 55 obligations aircomp facilities tubular two bank term loans remaining balance totaling 90000 263000 december 31 2005 2004 interest accruing floating interest rate based prime plus 20 interest rate 925 725 december 31 2005 2004 monthly principal payments 13000 plus interest maturity date one loans balance 60000 september 17 2006 second loan balance 30000 final maturity january 12 2007 balances two loans repaid full january 2006 proceeds senior notes offering notes payable real estate loan aircomp subordinated note payable mi amount 48 million bearing interest annual rate 50 2007 party right cause aircomp sell assets party may buy party’s interest event note including accrued interest due payable note also due payable mi sells interest aircomp upon termination aircomp december 31 2004 376000 interest included accrued interest july 11 2005 acquired mi 45 equity interest aircomp subordinated note principal amount 48 million issued aircomp paid mi 71 million cash issued new 40 million subordinated note bearing interest 5 per annum subordinated note issued mi requires quarterly interest payments principal amount due october 9 2007 contingent upon future equity offering allischalmers energy inc notes consolidated financial statements continued subordinated note convertible 700000 shares common stock conversion price equal market value common stock time conversion tubular subordinated note payable jens mortensen seller tubular one directors amount 40 million fixed interest rate 75 interest payable quarterly final maturity note january 31 2006 subordinated note subordinated rights bank lenders balance outstanding note december 31 2005 2004 30 40 million respectively balance subordinated note repaid full january 2006 proceeds senior notes offering part acquisition mountain air 2001 issued note sellers mountain air original amount 22 million accruing interest rate 575 per annum note reduced 15 million result settlement legal action sellers 2003 march 2005 reached agreement sellers holders note result action brought us sellers terms agreement paid holders note 10 million cash agreed pay additional 350000 june 1 2006 additional 150000 june 1 2007 settlement claims see note 16 december 31 2005 2004 outstanding amounts due 500000 16 million including accrued interest connection purchase delta issued sellers note amount 350000 note bears interest 2 principal accrued interest due april 1 2006 connection purchase tubular agreed pay total 12 million mr mortensen exchange noncompete agreement monthly payments 20576 due agreement january 31 2007 connection purchase safco also agreed pay total 150000 sellers exchange noncompete agreement required make annual payments 50000 september 30 2007 connection purchase capcoil agreed pay total 500000 two management employees exchange noncompete agreements required make annual payments 110000 may 2008 total amounts due noncompete agreements december 31 2005 2004 698000 664000 respectively 2000 compensated directors including current directors nederlander toboroff served board directors 1989 march 31 1999 without compensation issuing promissory notes totaling 325000 notes bear interest rate 50 december 31 2005 2004 principal accrued interest notes totaled approximately 96000 402000 respectively subsidiary downhole notes payable two former shareholders totaling 49000 required make monthly payments 8878 june 30 2005 december 31 2005 2004 amounts outstanding 0 49000 also real estate loan payable equal monthly installments 4344 remaining outstanding balance due january 1 2010 loan floating interest rate based prime plus 20 outstanding principal balance 548000 december 31 2005 balance loan prepaid full january 2006 proceeds senior notes offering debt december 2003 strata directional drilling subsidiary entered financing agreement major supplier downhole motors repayment motor lease repair cost totaling 17 million agreement provided repayment amounts later december 30 2005 payment interest due monthly principal payments 582000 due april 2005 december 2005 interest rate fixed 80 december 31 2005 2004 outstanding balance 0 12 million allischalmers energy inc notes consolidated financial statements continued various equipment financing loans interest rates ranging 5 115 terms ranging 2 5 years december 31 2005 2004 outstanding balances equipment financing loans 19 million 530000 respectively also various capital leases terms expire 2008 december 31 2005 2004 amounts outstanding capital leases 917000 0 respectively january 2006 prepaid 350000 outstanding equipment loans proceeds senior notes offering note 9 commitments contingencies placed orders capital equipment totaling 68 million received paid 2006 amount 31 million six measurement drilling kits ancillary equipment directional drilling segment 37 million two new capillary tubing units two new coil tubing units production services segment 68 million orders firmly committed approximately 44 million balance may subject cancellation minimal loss prior cash deposits rent office space fiveyear lease expires november 2009 also rent certain facilities shop yards equipment storage maintenance facility rent expense years ended december 31 2005 2004 2003 987000 577000 370000 respectively december 31 2005 future minimum rental commitments operating leases follows thousands note 10 stockholders’ equity connection formation aircomp july 2003 eliminated 955000 negative investment assets contributed aircomp purchase accounting recognized 955000 increase stockholders equity year ended december 31 2003 accrued 350000 dividends payable preferred stock holders dividends declared paid march 3 2004 entered agreement investment banking firm whereby would provide underwriting fundraising activities behalf exchange services investment banking firm received stock purchase warrant purchase 340000 shares common stock exercise price 250 per share warrant exercised august 2005 fair value total warrants issued connection fundraising activities established accordance blackscholes valuation model result 641000 added stockholders’ equity following assumptions utilized determine fair value dividend yield expected volatility 897 risk free interest rate 700 expected life five years 2004 issued two warrants “warrants b” purchase 233000 total shares common stock exercise price 075 per share one warrant purchase 67000 shares common stock exercise price 500 per share “warrant c” connection allischalmers energy inc notes consolidated financial statements continued subordinated debt financing warrants b redeemed total 1500000 december 7 2004 fair value warrant c established accordance blackscholes valuation model result 47000 added stockholders’ equity following assumptions utilized determine fair value dividend yield expected volatility 6724 risk free interest rate 500 expected life four years april 2 2004 completed following transactions • exchange investment 20 million issued 620000 shares common stock purchase price equal 250 per share issued warrants purchase 800000 shares common stock exercise price 250 per share expiring april 1 2006 investor group “investor group” consisting entities affiliated donald christopher engel directors robert nederlander leonard toboroff aggregate purchase price common stock 155 million fair value warrants 450000 • energy spectrum converted 3500000 shares series 10 cumulative convertible preferred stock including accrued dividend rights 1718090 shares common stock energy spectrum granted preferred stock connection strata acquisition august 10 2004 completed private placement 3504667 shares common stock price 300 per share net proceeds selling commissions expenses approximately 96 million issued shares pursuant exemption securities act 1933 agreed subsequently register common stock securities act 1933 allow investors resell common stock public markets september 30 2004 completed private placement 1956634 shares common stock price 300 per share net proceeds selling commission expenses approximately 53 million issued shares pursuant exemption securities act 1933 agreed subsequently register common stock securities act 1933 allow investors resell common stock public markets september 30 2004 issued 13 million shares common stock jens mortensen director exchange 19 interest tubular result transaction 100 tubular total value consideration paid jens 64 million equal number shares common stock issued mr mortensen multiplied last sale price 495 common stock reported american stock exchange date issuance amount treated contribution stockholders equity december 10 2004 acquired downhole approximately 11 million cash 568466 shares common stock payment assumption 950000 debt approximately 22 million value common stock issued downhole’s sellers based closing price common stock issued date acquisition added stockholders’ equity january 1 2005 relation acquisition downhole executed business development agreement cttv investments llc affiliate chevrontexaco inc whereby issued 20000 shares common stock cttv agreed issue additional 60000 shares cttv contingent upon subsidiaries receiving certain levels revenues 2005 chevrontexaco affiliates cttv minority owner downhole acquired 2004 based terms agreement additional shares issued 2005 april 1 2005 acquired 100 outstanding stock delta 46 million cash 223114 shares common stock two promissory notes totaling 350000 approximately 10 million value common stock issued delta’s sellers based closing price common stock issued date acquisition added stockholders’ equity allischalmers energy inc notes consolidated financial statements continued may 1 2005 acquired 100 outstanding capital stock capcoil 27 million cash 168161 shares common stock payment assumption approximately 13 million debt approximately 750000 value common stock issued capcoil’s sellers based closing price common stock issued date acquisition added stockholders’ equity august 2005 stockholders approved amendment certificate incorporation increase authorized number shares common stock 20 million 100 million increase authorized preferred stock 10 million shares 25 million shares completed secondary public offering sold 1761034 shares approximately 155 million net expenses also options warrants exercised 2005 exercises resulted 1076154 shares common stock issued 14 million note 11 reverse stock split effected reverse stock split june 10 2004 result reverse stock split every five shares common stock combined one share common stock reverse stock split reduced number shares outstanding common stock 31393789 approximately 6265000 reduced number stockholders 6070 approximately 2140 share related amounts presented retroactively adjusted stock split note 12 stock options 2000 issued stock options promissory notes certain current former directors compensation services directors see note 8 board directors granted stock options individuals options purchase 4800 shares common stock granted exercise price 1375 per share options vested immediately may exercised time prior march 28 2010 december 31 2005 none stock options exercised compensation expense recorded options issued exercise price equal fair value common stock date grant may 31 2001 board granted leonard toboroff one directors option purchase 100000 shares common stock 250 per share exercisable 10 years october 15 2001 option granted services provided mr toboroff oilquip prior merger including providing financial advisory services assisting oilquip’s capital structure assisting oilquip finding strategic acquisition opportunities recorded compensation expense 500000 issuance option year ended december 31 2001 2003 incentive stock plan amended permits us grant key employees outside directors various forms stock incentives including among others incentive nonqualified stock options restricted stock incentive terms excess ten years disclosed note 1 account stockbased compensation using apb 25 adopted disclosureonly provisions sfas 123 stock options granted employees directors accordingly compensation cost recognized options allischalmers energy inc notes consolidated financial statements continued summary stock option activity related information follows following table summarizes additional information stock options outstanding december 31 2005 note 13 stock purchase warrants conjunction mountain air purchase oilquip february 2001 mountain air issued common stock warrant 620000 shares thirdparty investment firm assisted us initial identification purchase mountain air assets warrant entitles holder acquire 620000 shares common stock mountain air exercise price 01 per share nineyear period commencing february 7 2001 issued two warrants “warrants b” purchase 233000 total shares common stock exercise price 075 per share one warrant purchase 67000 shares common stock exercise price 500 per share “warrant c” connection subordinated debt financing mountain air 2001 warrants b paid december 7 2004 warrant c still outstanding december 31 2005 february 6 2002 connection acquisition substantially outstanding stock strata issued warrant purchase 87500 shares common stock exercise price 075 per share term four years warrants exercised august 2005 connection strata acquisition february 19 2003 issued energy spectrum additional warrant purchase 175000 shares common stock exercise price 075 per share warrants exercised august 2005 allischalmers energy inc notes consolidated financial statements continued march 2004 issued warrant purchase 340000 shares common stock exercise price 250 per share morgan joseph co consideration financial advisory services provided morgan joseph pursuant consulting agreement warrants exercised august 2005 april 2004 issued warrants purchase 20000 shares common stock exercise price 075 per share wells fargo credit inc connection extension credit wells fargo credit inc warrants exercised august 2005 april 2004 completed private placement 620000 shares common stock warrants purchase 800000 shares common stock following investors christopher engel donald engel defined benefit plan rer corp corporation whollyowned director robert nederlander leonard toboroff director investors invested 1550000 exchange 620000 shares common stock purchase price equal 250 per share invested 450000 exchange warrants purchase 800000 shares common stock exercise 250 per share expiring april 1 2006 total 486557 warrants exercised 2005 may 2004 issued warrant purchase 3000 shares common stock exercise price 475 per share jeffrey r freedman consideration financial advisory services provided mr freedman pursuant consulting agreement warrants exercised may 2004 mr freedman also granted 16000 warrants may 2004 exercisable 465 per share warrants exercised november 2005 warrants 4000 shares common stock exercise price 465 also issued may 2004 remain outstanding december 31 2005 note 14 lease receivable june 2002 subsidiary strata sold mwd assets third party 13 million terms sale would receive least 15000 per month thirtysix months thirtysix months purchaser option pay remaining balance continue paying minimum 15000 per month twentyfour additional months expiration additional twentyfour months purchaser would repay remaining balance transaction accounted direct financing lease nominal residual gain asset sale deferred income life lease august 2005 acquired 100 outstanding stock buyer balance lease receivable part consideration acquisition years ended december 31 2005 2004 2003 received total 146000 229000 251000 respectively payments third party related lease note 15 related party transactions july 2005 entered lease yard buffalo texas part owned chief operating officer david wilde monthly rent 3500 alya h hidayatallah daughter chairman chief executive officer munawar h hidayatallah served vice presidentplanning development since april 2005 paid ms hidayatallah salary rate 80000 per annum december 31 2005 2004 owed chief executive officer 0 175000 respectively related deferred compensation march april 2005 paid amounts due mr hidayatallah december 2004 chief executive officer chairman munawar h hidayatallah wife personal guarantors substantially financing extended us commercial banks december 2004 refinanced outstanding bank debt obtained release certain guarantees refinancing mr hidayatallah continued guarantee tubular 40 million allischalmers energy inc notes consolidated financial statements continued subordinated seller note july 2005 paid mr hidayatallah annual guarantee fee equal onequarter one percent total amount debt guaranteed mr hidayatallah fees aggregated 7250 2005 paid quarterly arrears based upon average amount debt outstanding prior quarter april 2004 entered oral consulting agreement leonard toboroff one directors pursuant pay 10000 per month advise us regarding financing acquisition opportunities jens mortensen one directors former owner tubular held 19 minority interest tubular september 30 2004 also holder 40 million subordinated note payable issued tubular december 31 2005 owed 60000 accrued interest 267000 related noncompete agreement see note 8 subordinated note repaid january 2006 see note 22 accrued interest paid january 2006 mr mortensen formerly sole proprietor tubular owns shop yard leases jens’ monthly basis lease payments made terms lease 16800 28800 years ended december 31 2005 2004 2003 respectively addition mr mortensen members family 100 texmex rental supply co texas corporation sold approximately 0 167000 173000 equipment supplies tubular years ended december 31 2005 2004 2003 respectively described note 8 several former directors issued promissory notes 2000 lieu compensation services current maturities longterm debt includes 96000 402000 december 31 2005 2004 respectively relative notes note 16 settlement lawsuit june 2003 subsidiary mountain air filed lawsuit former owners mountain air drilling service company breach asset purchase agreement pursuant mountain air acquired mountain air drilling services company alleging sellers stored hazardous materials property leased us without consent violated noncompete clause asset purchase agreement july 15 2003 entered settlement agreement sellers date agreement owed sellers total 26 million including 22 million principal approximately 363000 accrued interest part settlement agreement note payable sellers reduced 22 million 15 million due date note payable extended february 6 2006 september 30 2007 lumpsum payment due sellers date 19 million recorded onetime gain reduction note payable sellers 10 million third quarter 2003 gain calculated discounting note payable 15 million using present value calculation accreting note payable 19 million amount due september 2007 march 2005 reached agreement sellers settle action brought sellers note terms agreement paid 10 million april 2005 pay 350000 june 1 2006 remaining 150000 june 1 2007 settlement claims note 17 gain sale interest subsidiary july 2003 subsidiary mountain air entered limited liability company operating agreement division mi form texas limited liability company named aircomp companies contributed assets combined value 166 million aircomp contributed assets mountain air contributed historical book value approximately 63 million assets contributed mi contributed fair market value approximately 103 million prior formation aircomp owned 100 mountain air formation aircomp mountain air owned 55 mi owned 45 business combination business combination accounted purchase recorded onetime nonoperating gain sale 45 interest subsidiary allischalmers energy inc notes consolidated financial statements continued approximately 2433000 gain calculated recording assets contributed mi approximately 103 million less subordinated note issued mi amount approximately 48 million recording minority interest approximately 2049000 increase equity 955000 accordance staff accounting bulletin 51 “sab 51” recorded deferred income taxes increase assets gain permanent timing difference adopted policy gain loss future incurred sale stock interest subsidiary would recognized income statement note 18 segment information december 31 2005 five operating segments including directional drilling services strata target compressed air drilling services aircomp casing tubing services tubular rental tools safco delta production services downhole capcoil segments provide services energy industry revenues operating income loss depreciation amortization capital expenditures assets reporting segments plus corporate function reported thousands allischalmers energy inc notes consolidated financial statements continued allischalmers energy inc notes consolidated financial statements continued note 19 supplemental cash flows information thousands allischalmers energy inc notes consolidated financial statements continued note 20 quarterly results unaudited thousands except per share amounts note 21 legal matters named time legal proceedings related activities prior bankruptcy 1988 however believe discharged liability claims bankruptcy believe likelihood material loss relating legal proceeding remote involved various legal proceedings ordinary course business legal proceedings different stages however believe likelihood material loss relating legal proceeding remote note 22 subsequent events january 2006 acquired 100 outstanding stock specialty rental tools inc “specialty” 960 million cash specialty located lafayette louisiana engaged rental high quality drill pipe heavy weight spiral drill pipe tubing work strings blowout preventors choke manifolds various valves handling tools oil natural gas drilling nine months ended september 30 2005 specialty generated aggregate revenues 218 million allischalmers energy inc notes consolidated financial statements continued january 2006 closed private offering qualified institutional buyers pursuant rule 144a securities act 1933 1600 million principal amount 90 senior notes due 2014 refer senior notes proceeds offering used fund acquisition specialty repay existing debt general corporate purposes january 2006 amended restated july 2005 credit agreement increase borrowing capacity exchanging existing two year 550 million facility new four year 250 million facility refer july 2005 credit agreement amended restated new credit agreement amounts outstanding previous 550 million credit facility repaid proceeds issuance senior notes new credit agreement’s interest rate based margin libor prime rate 05 fee undrawn portion credit facility secured first priority lien substantially assets january 2006 proceeds sale senior notes also prepaid 30 million subordinated seller note due jens mortensen 548000 real estate loan 430000 various outstanding term equipment loans february 2006 david groshoff resigned board directors audit committee mr groshoff served board since 1999 initially agreement behalf pension benefit guaranty corporation client mr groshoff’s employer agreement permitted pbgc appoint member board long pbgc held minimum number shares stock pbgc sold holdings stock august 2005 investment management employee jpmorgan asset management mr groshoff subject employer’s policies generally prohibit employees serving public company boards directors without meaningful client interest companies light pbgc’s sale stock policies required mr groshoff’s resignation board march 2006 robert nederlander appointed audit committee replace mr groshoff march 13 2006 received proceeds approximately 784000 exercise 313000 warrants item 9 item 8 financial statements index consolidated financial statements page financial statements independent auditors report 26 consolidated statements operations year ended december 31 2001 period february 4 2000 inception december 31 2000 27 consolidated balance sheets december 31 2001 2000 28 consolidated statement stockholders equity year ended december 31 2001 period february 4 2000 inception december 31 2000 29 consolidated statements cash flows year ended december 31 2001 period february 4 2000 inception december 31 2000 30 notes consolidated financial statements 31 independent auditors report board directors allischalmers corporation houston texas audited consolidated balance sheets allischalmers corporation company december 31 2001 2000 related statements operations stockholders equity cash flows year ended december 31 2001 period february 4 2000 inception december 31 2000 financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position allischalmers corporation december 31 2001 2000 results consolidated operations cash flows year ended december 31 2001 period february 4 2000 inception december 31 2000 conformity accounting principles generally accepted united states america gordon hughes banks llp greenwood village co february 21 2002 allischalmers corporation consolidated statements operations thousands except per share period year february 4 ended 2000 december 31 december 31 2001 2000 revenues 4796 cost revenues 3331 gross margin 1465 general administrative expense 2898 383 abandoned acquisition costs 244 total operating expense 2898 627 loss operations 1433 627 income expense interest income 41 interest expense 869 12 total income expense 840 net income loss continuing operations 2273 627 loss discontinued operations 291 loss sale discontinued operations 2013 net income loss discontinued operations 2304 net income loss 4577 627 income loss per common share basic diluted continuing operations 57 157 discontinued operations 58 net income loss per common share 115 157 weighted average number common shares outstanding basic 3952 400 diluted 3952 400 accompanying notes integral part financial statements accompanying notes integral part financial statements notes financial statements note 1 nature business smummary significant accounting policies organization business may 9 2001 oilquip rentals inc oil gas rental company oilquip merged subsidiary allischalmers corporation allischalmers company merger oilquips outstanding common stock converted 400000 shares allischalmers common stock right receive additional 9600000 shares allischalmers common stock upon filing amendment amended restated certificate incorporation certificate authorize issuance shares authorization issuance occurred october 15 2001 legal purposes allischalmers acquired oilquip parent company mountain compressed air inc mca however accounting purposes oilquip treated acquiring company reverse acquisition allischalmers financial statements prior merger including period 2000 financial statements oilquip result merger fixed assets goodwill intangibles allischalmers increased 2691000 goodwill intangibles amortized 10 20 years fixed assets depreciated 7 years oilquip incorporated february 4 2000 find acquire targets operate subsidiaries period february 4 2000 inception february 6 2001 oilquip development stage oilquips activities february 6 2001 consisted developing business plan raising capital negotiating potential acquisition targets february 6 2001 oilquip subsidiary mca acquired certain assets mountain air drilling service co inc mountain air whose business consists providing equipment trained personnel four corner areas southwestern united states mca primarily provides compressed air equipment trained operators companies business drilling natural gas acquisition mountain air assets oilquip ceased development stage november 30 2001 company entered agreement sell wholly owned subsidiary houston dynamic service inc hds clayton lau general manager hds management buyout sale hds finalized december 12 2001 conjunction sale hds company formally discontinued operations related precision machining rotating equipment principal hds business use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period future events effects cannot perceived certainty accordingly companys accounting estimates require exercise judgment management believes estimates assumptions used preparation consolidated financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts reserves recoverability longlived assets useful lives used depreciation amortization income taxes related valuation allowances insurance legal accruals accounting estimates used preparation consolidated financial statements may change new events occur experience acquired additional information obtained companys operating environment changes principles consolidation consolidated financial statements include accounts allischalmers whollyowned subsidiaries significant intercompany transactions eliminated revenue recognition companys operating unit december 31 2001 mountain compressed air terms service agreements revenues recognized monthly basis services revenues billed time service rendered costs recorded incurred cash equivalents company considers highly liquid investments original maturity three months less time purchase cash equivalents property equipment property equipment represents cost equipment use operations mountain compressed air maintenance repairs charged operations incurred betterments renewals capitalized property equipment sold otherwise disposed asset account related accumulated depreciation account relieved gain loss included operations cost property equipment currently service depreciated estimated useful lives related assets range three seven years depreciation computed straightline method financial reporting purposes depreciation expense charged operations 621000 year ended december 31 2001 expense period february 4 2000 december 31 2000 impairment longlived assets longlived assets include property plant equipment goodwill intangibles certain assets reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable impairment loss recorded period determined carrying amount recoverable determination recoverability made based upon estimated undiscounted future net cash flows excluding interest expense impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets financial instruments financial instruments consist cash equivalents accounts receivable payable longterm debt carrying values cash equivalents accounts receivable payable approximate fair value company believes fair values carrying value longterm debt would materially different due instruments interest rates approximating market rates similar borrowings december 31 2001 2000 concentrations credit risk major customers statement financial accounting standards 105 disclosure information financial instruments offbalancesheet risk financial instruments concentrations credit risk requires disclosure significant concentration credit risk regardless degree risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents trade accounts receivable company concentrations credit risk within cash equivalents deposits several financial institutions approximately 79 companys revenues year ended december 31 2001 derived two customers including one customer accounted 65 companys revenues period february 4 2000 december 31 2000 accounts receivable december 31 2001 includes 550000 two customers debt issuance costs related issuance debt capitalized amortized interest expense straightline interest methods depending upon principal payments streams notes lives related debt advertising company expenses advertising costs incurred advertising expenses year ended december 31 2001 period february 4 2000 december 31 2000 totaled 31400 0 respectively income taxes company adopted provisions statement financial accounting standards sfas 109 accounting income taxes sfas 109 requires recognition deferred tax liabilities assts expected future tax consequences events included financial statements tax returns method deferred tax liabilities assets determined based difference financial statement tax basis assets liabilities using enacted tax rates effect year differences expected reverse comprehensive income adjustments necessary net loss presented accompanying statements operations derive comprehensive income accordance sfas 130 reporting comprehensive income reclassifications certain prior period balances reclassified conform current year presentation business acquisition costs company capitalizes direct costs associated successful business acquisitions expenses acquisitions costs unsuccessful acquisition efforts capital structure company utilizes sfas 129 disclosure information capital structure requires companies disclose relevant information regarding capital structure stockbased compensation company follows accounting principles board opinion apb 25 accounting stock issued employees accounting stock based compensation apb 25 company recognizes compensation expense related employee director stock options unless options granted exercise price fair value day grant sfas 123 accounting stock based compensation provides alternative method accounting stockbased compensation arrangements employees directors based fair value stockbased compensation utilizing various assumptions regarding underlying attributes options stock options warrants issued consultants outsiders recorded fair value sfas 123 financial accounting standards board encourages require entities adopt fairvalue based method company continue accounting apb 25 employees directors uses disclosureonly provisions sfas 123 options warrants issued employees directors segments enterprise related information sfas 131 disclosures segments enterprise related information replaces industry segment approach previously issued pronouncements management approach management approach designates internal organization used management allocating resources assessing performance source companys reportable segments sfas 131 also requires disclosures products services geographic areas major customers december 31 2001 company operates one segment pension post retirement benefits sfas 132 employers disclosures pension post retirement benefits requires certain disclosures employers pension post retirement benefit plans specifies accounting measurement recognition plans sfas 132 requires disclosure information changes benefit obligations fair values plan assets facilitates financial analysis derivative instruments hedging activities sfas 133 accounting derivative instruments hedging activities establishes accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging sfas 133 effective fiscal quarters fiscal years beginning june 15 1999 currently company derivative instruments adoption sfas 133 impact companys financial condition results operations income loss per common share company computes loss per common share accordance provisions sfas 128 earnings per share sfas 128 requires companies complex capital structures present basic diluted earnings per share basic earnings per share measured income loss available common stockholders divided weighted average outstanding common shares period diluted earnings per share similar basic earnings per share presents dilutive effect per share basis potential common shares eg convertible securities stock options etc converted beginning periods presented potential common shares antidilutive effect eg increase income per share decrease loss per share excluded diluted earnings per share basic diluted loss per common share periods presented herein computed dividing net loss attributable common shares weighted average outstanding common shares period potential common shares included computation weighted average shares outstanding inclusion would antidilutive new accounting pronouncements june 2001 financial accounting standards board finalized fasb statement 141 business combinations sfas 141 142 goodwill intangible assets sfas 142 sfas 141 requires use purchase method accounting prohibits use poolingofinterests method accounting business combinations initiated june 30 2001 sfas 141 also requires company recognize acquired intangible assets apart goodwill acquired intangible assets meet certain criteria sfas 141 applies business combinations initiated june 30 2001 purchase business combinations completed july 1 2001 also requires upon adoption sfas 142 company reclassify carrying amounts intangible assets goodwill based criteria sfas 141 sfas 142 requires among things companies longer amortize goodwill instead test goodwill impairment least annually addition sfas 142 requires company identify reporting units purposes assessing potential future impairments goodwill reassess useful lives existing recognized intangible assets cease amortization intangible assets indefinite useful life intangible asset indefinite useful life tested impairment accordance guidance sfas 142 sfas 142 required applied fiscal years beginning december 15 2001 goodwill intangible assets recognized date regardless assets initially recognized sfas 142 requires company complete transitional goodwill impairment test six months date adoption company also required reassess useful lives intangible assets within first interim quarter adoption sfas 142 june 2001 fasb issued sfas 143 accounting asset retirement obligations sfas 143 addresses financial accounting reporting obligations associated retirement longlived assets associated asset retirement costs sfas 143 requires fair value liability associated asset retirement recognized period incurred reasonable estimate fair value made associated retirement costs capitalized part carrying amount longlived asset subsequently depreciated life asset company completed analysis impact adoption sfas 143 consolidated financial statements company adopt sfas 143 fiscal year beginning january 1 2003 august 2001 fasb issued sfas 144 accounting impairment disposal longlived assets sfas 144 addresses financial accounting reporting impairment disposal longlived assets sfas 144 replaces sfas 121 accounting impairment longlived assets longlived assets disposed sfas 144 provides updated guidance concerning recognition measurement impairment loss certain types longlived assets modifies accounting reporting discontinued operations sfas 144 expected materially change methods used company measure impairment losses longlived assets may result future dispositions reported discontinued operations greater extent currently permitted company adopt sfas 144 fiscal year beginning january 1 2002 companys previous business combinations accounted using purchase method december 31 2001 net carrying amount goodwill 3706411 intangible assets 1360589 amortization expense twelvemonth period ended december 31 2001 403186 currently company assessing yet determined adoption sfas 141 sfas 142 impact financial position results operations company plans adopt sfas 141 sfas 142 fiscal year beginning january 1 2002 note 2 emergence chapter 11 allischalmers corporation emerged chapter 11 proceedings october 31 1988 plan reorganization consummated december 2 1988 company thereby discharged debts arose confirmation first amended restated joint plan reorganization plan reorganization capital stock cancelled made eligible exchange shares common stock reorganized company common stock note 3 postretirement obligationspension plan 1994 companys independent pension actuaries changed assumptions mortality administrative expenses used determine liabilities allischalmers consolidated pension plan consolidated plan result consolidated plan funded present value basis company unable fund obligations september 1997 obtained pension benefit guaranty corporation pbgc distress termination consolidated plan section 4041c employee retirement income security act 1974 amended erisa pbgc agreed plan termination date april 14 1997 pbgc became trustee terminated consolidated plan september 30 1997 upon termination consolidated plan company subsidiaries incurred liability pbgc estimated approximately 679 million pbgc liability september 1997 company pbgc entered agreement principle settlement pbgc liability required among things satisfactory resolution companys tax obligations respect consolidated plan section 4971 internal revenue code 1986 amended code august 1998 company internal revenue service irs settled companys tax liability code section 4971 75000 june 1999 company pbgc entered agreement settlement pbgc liability pbgc agreement pursuant terms pbgc agreement company issued 585100 shares common stock pbgc reducing pension liability estimated fair market value shares 669 million company right first refusal respect sale shares connection pbgc agreement company pbgc entered following agreements registration rights agreement registration rights agreement ii lockup agreement among allischalmers pbgc others connection merger oilquip described lockup agreement terminated registration rights agreement amended provide pbgc right shares common stock registered securities act 1933 form s3 12 month period following merger extent company eligible use form s3 currently thereafter shares registered form s1 s2 order satisfy discharge pbgc liability pbgc agreement provided company either receive single transaction series related transactions debt financing made available company least 10 million borrowings ii consummate acquisition single transaction series related transactions assets andor business purchase price including funded debt assumed least 10 million release event merger oilquip merger may 9 2001 described note 1 constituted release event satisfied discharged pbgc liability connection merger company pbgc agreed pbgc right appoint one member board directors company long holds least 117020 shares common stock connection merger lockup agreement terminated entirety company recorded postretirement benefit obligation 824000 associated transaction actuarial present value expected retiree benefit obligation determined actuary amount results applying actuarial assumptions 1 historical claimscost data 2 estimates time value money discounts interest 3 probability payment including decrements death disability withdrawal retirement today expected date benefit payments note 4 acquisitions january 25 2001 oilquip formed subsidiary mca note 1 texas corporation february 6 2001 mca acquired business certain assets mountain air private company 10000000 including 200000 deposit paid 2000 cash 2200000 promissory note sellers interest 5 34 percent principal interest due february 6 2006 acquisition accounted using purchase method accounting goodwill 3660000 identifiable intangible assets 800000 recorded acquisition may 9 2001 oilquip merged subsidiary allischalmers merger oilquips outstanding common stock converted initially 400000 shares allischalmers common stock plus 9600000 shares allischalmers common stock issued october 15 2001 acquisition accounted using purchase method accounting reverse acquisition goodwill 1319000 identifiable intangible assets 500000 recorded connection merger effective date merger oilquip retroactively became reporting company result financial statements prior merger oilquip following unaudited pro forma consolidated summary financial information illustrates effects acquisition mountain air merger oilquip companys results operations based historical statements operations transactions occurred beginning periods presented discontinued hds operations included pro forma information year ended december 31 2001 2000 thousands revenues 5289 2360 operating loss 1188 199 net loss 2039 957 loss per share 018 008 note 5 discontinued operations discussed note 1 december 12 2001 company consummated sale wholly owned subsidiary houston dynamic service inc hds clayton lau buyer general manager hds management buyout terms sale company received promissory note buyer amount 790500 due november 30 2007 secured certain hds equipment note accrues interest rate 7 payment date hds assigned company hds accounts receivable company assumed obligation pay hds accounts payable outstanding balance revolving line credit amount 375000 loss sale approximately 20 million recorded year ended december 31 2001 conjunction sale hds company formally discontinued operations related precision machining rotating equipment principal hds business operating results business sold reported separately discontinued operations accompanying statement operations consists following period may 9 2001 november 30 thousands revenues 1925 cost sales 1486 gross profit 439 operating expenses 594 depreciation amortization 124 income loss operations 279 expense income interest expense 12 income loss discontinued operations 291 loss sale discontinued operations 2013 note 6 property goodwill intangibles property equipment comprised following december 31 depreciation period 2001 2000 thousands machinery equipment 3 7 years 4559 tools patterns furniture fixtures leasehold improvements 3 7 years 351 total 4910 less accumulated depreciation 664 property equipment net 4246 goodwill intangibles follows december 31 amortization period 2001 2000 goodwill 10 20 years 3951 intellectual property 20 years 719 intangible assets 3 20 years 800 total 5470 less accumulated amortization 403 goodwill intangibles net 5067 note 7 income taxes temporary differences tax basis assets liabilities reported amounts financial statements result differences income tax purposes income financial statement purposes future years valuation allowance established deferred tax assets management based upon available information considers likely benefit assets realized company recorded valuation allowance equal excess deferred tax assets deferred tax liabilities company unable determine likely deferred tax asset realized tax reform act 1986 contains provisions limit utilization net operating loss tax credit carryforwards change ownership described section 382 internal revenue code change ownership may limit companys utilization net operating loss tax credit carryforwards could triggered initial public offering subsequent sales securities company stockholders deferred income tax assts related allowance december 31 2001 2000 follows 2001 2000 thousands deferred noncurrent income tax assets net future tax deductible items 498 net operating loss carry forwards 2087 128 ac reorganization trust claims 35000 total deferred noncurrent income tax assets 37585 128 valuation allowance 37585 128 net deferred noncurrent income taxes net operating loss carry forwards tax purposes december 31 2001 estimated 54 million expiring starting 2002 2021 net future taxdeductible items relate primarily differences book tax depreciation amortization compensation expense related issuance stock options gross deferred tax liabilities december 31 2001 2000 material plan reorganization established ac reorganization trust settle claims make distributions creditors certain shareholders company transferred cash certain property ac reorganization trust december 2 1988 payments made company ac reorganization trust generate tax deductions company upon transfer generate deductions company ac reorganization trust makes payments holders claims plan reorganization also created trust process liquidate product liability claims payments made ac reorganization trust product liability trust generate current tax deductions company future deductions available company product liability trust makes payments liquidate claims company believes abovenamed trusts grantor trusts therefore includes income loss trusts companys income loss tax purposes resulting adjustment tax basis net operating capital loss carry forwards income loss trusts included companys results operations financial reporting purposes note 8 debt longterm debt follows december 31 notes payable certain current former directors allischalmers board established arrangement compensate former continuing board members served 1989 march 31 1999 without compensation pursuant arrangement 1999 allischalmers issued promissory notes totaling 325000 current former directors officers notes bear interest rate 5 due march 28 2005 december 31 2001 notes recorded 354000 including accrued interest line credit wells fargo december 31 2001 company 775000 line credit wells fargo bank 375000 outstanding committed line credit due april 30 2002 interest accrues rate equal prime rate plus 05 125 525 december 31 2001 committed portion additionally company pays 05 fee uncommitted portion notes payable wells fargo term note term loan amount 3550000 variable interest rates related prime libor rates 7125 december 31 2001 interest payable quarterly principal payments 147917 due last day april july october january maturity date loan february 7 2004 notes payable wells fargo subordinated debt amortization redeemable warrant subordinated debt amount 2000000 12 interest payable quarterly commencing april 1 2001 principal due january 31 2004 connection incurring debt company issued redeemable warrants valued 600000 recorded discount subordinated debt liability discount amortizable three years additional interest expense 183000 amortized 2001 notes payable wells fargo equipment term loan delayed draw term loan amount 282291 libor plus 05 interest payable quarterly commencing november 30 2001 interest rate 525 december 31 2001 principal due february 7 2004 notes payable seller mountain air sellers note amount 2200000 575 simple interest principal interest due february 6 2004 substantially companys assets pledged collateral outstanding debt agreements december 31 2001 companys weighted average interest rate outstanding debt approximately 7 maturities debt december 31 2001 follows 2002 1023000 2003 648000 2004 5831000 2005 354000 redeemable warrants company issued redeemable warrants exercisable maximum 1350000 shares companys common stock exercise price 015 per share warrants exercisable beginning january 31 2004 warrants subject cash redemption provision put discretion warrant holder beginning january 31 2004 extending january 31 2006 warrant holder decides exercise warrants company recorded liability 600000 amortizing effects put interest expense life debt instrument note 9 commitments contingencies february 6 2001 mca subsidiary oilquip completed purchase certain assets including rental equipment mountain air portion purchased equipment sold leasing company leased back equipment lease accounted operating lease payments totaling 3480000 made period six years lease expense year ended december 31 2001 586000 leasing company holds lease deposit 701000 length lease company rents office space fiveyear lease expires february 5 2006 rent expense year ended december 31 2001 90000 company lease obligations december 31 2001 future minimum rental commitments operating leases follows operating leases 2002 810893 2003 810893 2004 810893 2005 810893 2006 67574 thereafter total minimum lease payments 3311146 note 10 shareholders equity 2000 oilquip entered following transactions various investors subscribed 4250 shares common stock 400000 94 per share 3068 shares common stock 1000000 326 per share 1250 shares common stock 437500 350 per share december 31 2000 1837500 subscriptions receivable outstanding entire amount received investors cash january february 2001 2000 oilquip also issued 1000 shares common stock 250000 250 per share oilquip also recorded 250000 compensation expense services contributed companys president majority stockholder president majority stockholder also advanced aggregate 538106 company paying corporate expenses companys behalf contributed amounts recorded contribution companys capital equity per share data financial statements 2000 presented give effect recapitalization company occurred reverse acquisition allischalmers may 9 2001 recapitalization original number shares outstanding formerly private oilquip considered exchanged 400000 shares allischalmers issued date reverse acquisition owners oilquip result 390125 shares presented issued 2000 increase outstanding shares oilquip december 31 2000 400000 october 15 2001 additional 9600000 shares allischalmers issued former owners oilquip shareholder approval increase maximum authorized number shares allischalmers legal purposes allischalmers acquired oilquip parent company mca however accounting purposes oilquip treated acquiring company reverse acquisition allischalmers business combination accounted purchase result 2779000 value allischalmers common stock outstanding date acquisition added shareholders equity reflects recapitalization allischalmers reorganization combined company note 11 stock options 2000 conjunction promissory notes issued certain current former directors note 8 allischalmers board directors also granted stock options individuals options purchase 24000 shares common stock granted exercise price 275 options vested immediately may exercised time prior march 28 2010 2000 2001 none stock options exercised compensation expense recorded options issued exercise price approximately equal fair value common stock date grant may 31 2001 board granted leonard toboroff director allischalmers option purchase 500000 shares common stock 050 per share exercisable 10 years october 15 2001 option granted services provided mr toboroff oilquip prior merger including providing financial advisory services assisting oilquips capital structure assisting oilquip finding strategic acquisition opportunities company recorded compensation expense 500000 issuance option year ended december 31 2001 summary companys stock option activity related information follows following table summarizes additional information companys stock options outstanding december 31 2001 weighted average remaining contractual exercise price shares option life 050 500000 975 years 275 24000 825 years compensation expense options granted 2000 determined based option fair value grant date prescribed sfas 123 accounting stock based compensation effect allischalmers net loss 2000 would material note 12 stock purchase warrants conjunction mountain air purchase oilquip rentals february 2001 company issued common stock warrant 620000 shares thirdparty investment firm assisted company initial identification purchase mountain air assets warrant entitles holder acquire 620000 shares common stock mca exercise price 01 per share nineyear period commencing february 7 2001 stock purchase warrant recorded fair value 200000 year ended december 31 2001 fully described note 8 mca issued warrant purchase 1350000 shares 001 per share holder may redeem warrant 600000 note 13 related party transactions mca leases shop administrative office space colorado partnership whose partners former owners mca current employees mca current lease agreement requires monthly rent payment 9000 expires february 5 2006 rent expense charged operations lease 90000 year ended december 31 2001 december 31 2001 company owed president majority stockholder company 318000 related deferred compensation time president majority stockholder owed company 61000 amounts settled first quarter 2002 note 14 supplemental cash flows information note 15 quarterly results unaudited first second third fourth quarter thousands except per share amounts year 2001 revenues 606 1341 1521 1328 operating income loss continuing operations 150 549 35 769 net income loss continuing operations 270 775 80 1148 discontinued operations 4 108 2200 270 771 188 3348 income loss per common share basic diluted continuing operations 006 019 002 030 discontinued operations 003 055 006 019 005 085 year 2000 revenues operating income loss continuing operations 61 111 102 353 net income loss continuing operations 61 111 102 353 discontinued operations 61 111 102 353 income loss per common share basic diluted continuing operations 015 028 026 088 discontinued operations 015 028 026 088 note 16 subsequent events company completed two acquisitions related financing february 6 2002 company purchased 81 outstanding stock jens oil field service inc jens supplies highly specialized equipment operations install casing production tubing required drill complete oil gas wells company also purchased substantially outstanding common stock preferred stock strata directional technology inc strata provides high end directional horizontal drilling technology specific targeted reservoirs cannot reached vertically purchase price jens strata 10250000 cash ii 4000000 note payable due four years iii 1000000 noncompete agreement payable five years iv 7957712 shares common stock company v 3500000 shares newly created series 10 cumulative convertible preferred stock company series preferred stock vi additional payment estimated 1000000 1250000 based upon jens working capital february 1 2002 connection acquisition strata jens companys bank provided financing 12728396 consisting revolving credit facilities amount 3500000 term facilities amount 5696396 subordinated loan amount 3000000 connection strata purchase company authorized creation series preferred stock 3500000 shares series preferred stock issued seller energy spectrum series preferred stock cumulative dividends ten percent 10 per annum payable cash additional series preferred stock additionally series preferred stock convertible common stock company series preferred stock also subject mandatory redemption february 4 2004 earlier net proceeds new equity sales optional redemption company time redemption price series preferred stock 100 per share addition connection strata acquisition energy spectrum issued warrants 437500 shares company common stock exercise price 015 per share company issued banks warrants 1165000 shares common stock exercise price 015 per share 335000 warrants purchase common stock 100 per share connection subordinated debt financing shares subject redemption option warrant holders 1500000 three years company result transactions company approximately 195 million shares common stock outstanding march 31 2002 well options warrants purchase 96 million additional shares substantially companys tangible assets pledged collateral loans banks item 9 item 8 financial statements supplementary data pages 11 26 1996 annual report shareholders item 9 item 8 financial statements supplementary data index consolidated financial statements page financial statements report independent accountants 16 statement operations three years ended december 31 2000 17 statement accumulated deficit three years ended december 31 2000 17 statement financial condition december 31 2000 1999 18 statement cash flows three years ended december 31 2000 19 notes consolidated financial statements 20 financial statement schedule ii valuation qualifying accounts 43 report independent accountants board directors shareholders allischalmers corporation opinion consolidated financial statements listed accompanying index present fairly material respects financial position allischalmers corporation subsidiaries december 31 2000 1999 results operations cash flows three years period ended december 31 2000 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion accompanying consolidated financial statements prepared assuming company continue going concern companys application distress termination allischalmers consolidated pension plan consolidated plan approved pension benefit guaranty corporation pbgc september 30 1997 date pbgc became trustee consolidated plan company subsidiaries incurred estimated liability pbgc unfunded benefit liabilities accumulated funding deficiencies totaling approximately 68 million effective march 31 1999 company issued 585100 shares pbgc reducing pension liability estimated fair market value shares approximately 67 million company financial resources fund liability pbgc matter raises substantial doubt companys ability continue going concern managements plans regard matter described note 9 consolidated financial statements consolidated financial statements include adjustments might result outcome uncertainty pricewaterhousecoopers llp milwaukee wisconsin march 9 2001 accompanying notes integral part financial statements accompanying notes integral part financial statements notes consolidated financial statements note 1 emergence chapter 11 allischalmers corporation allischalmers company emerged chapter 11 proceedings october 31 1988 plan reorganization consummated december 2 1988 company thereby discharged debts arose confirmation first amended restated joint plan reorganization plan reorganization capital stock cancelled made eligible exchange shares common stock reorganized company common stock claims asserted company allowed bankruptcy court beyond recorded prior consummation date amounted approximately 483 million amounts subsequently recorded company 1988 total recorded liabilities discharged consummation exceeded book value assets common stock distributed creditors various trusts date extraordinary income 3881 million recorded see plan reorganization first amended disclosure statement dated september 14 1988 additional information regarding distributions holders claims interests note 2 summary significant accounting policies description business allischalmers whollyowned subsidiary houston dynamic service inc services repairs various types mechanical equipment including compressors pumps turbines engines heat exchangers centrifuges rollers gears valves blowers kilns crushers mills principles consolidation consolidated financial statements include accounts allischalmers subsidiaries significant intercompany transactions eliminated revenue recognition fourth quarter 2000 company adopted staff accounting bulletin 101 sab 101 revenue recognition financial statements adoption sab 101 significant impact revenue recognized company fair value financial instruments carrying amounts statement financial condition cash equivalents trade receivables trade accounts payable longterm debt approximate fair market value inventories stated lower cost determined firstin firstout method market properties depreciation plant equipment used business stated cost depreciated straightline basis estimated useful lives assets generally range 40 years buildings 3 12 years machinery equipment 3 12 years tools patterns furniture fixtures maintenance repairs expensed incurred expenditures significantly increase asset values extend useful lives capitalized longlived assets reviewed impairment whenever events changes circumstances indicate related carrying amount may recoverable measurement impairment losses recognized based estimated fair value asset income taxes deferred income taxes determined liability method accordance statement financial accounting standards sfas 109 see note 5 statement cash flows purposes statement cash flows company considers highly liquid investments maturity three months less date purchase cash equivalents use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates major customers entergy accounted 25 sales amoco chemical 14 sales 2000 1999 entergy accounted 13 total sales 1998 amoco chemical accounted 24 total sales note 3 trade receivables december 31 2000 1999 thousands trade accounts receivable 569 692 allowance doubtful receivables 20 122 549 570 note 4 property plant equipment december 31 2000 1999 thousands land buildings 545 machinery equipment 1575 1550 tools patterns furniture fixtures leasehold improvements 731 721 2851 2816 accumulated depreciation 1796 1646 1055 1170 note 5 income taxes temporary differences tax basis assets liabilities reported amounts financial statements result differences income tax purposes income financial statement purposes future years valuation allowance established deferred tax assets management based upon available information considers likely benefit assets realized following table depicts temporary differences december 31 2000 1999 2000 1999 millions net future tax deductible items 35 net operating loss carryforwards tax credits 112 123 valuation allowance 147 158 net deferred taxes net future tax deductible items relate primarily estimated future bankruptcy claim payments made companys two grantor trusts gross deferred tax liabilities december 31 2000 1999 material plan reorganization established ac reorganization trust settle claims make distributions creditors certain shareholders company transferred cash certain property ac reorganization trust december 2 1988 payments made company ac reorganization trust generate tax deductions company upon transfer generate deductions company payments made ac reorganization trust holders claims plan reorganization also created trust process liquidate product liability claims payments made ac reorganization trust product liability trust generate current tax deductions company future deductions available company product liability trust makes payments liquidate claims company believes abovenamed trusts grantor trusts therefore includes income loss trusts companys income loss tax purposes resulting adjustment tax basis net operating capital loss carryforwards income loss trusts included companys results operations financial reporting purposes tax carryforwards december 31 2000 estimated consist net operating losses 319 million expiring 2001 2019 investment tax credits 16000 expiring 2001 energy tax credits 141000 expiring 2001 2002 1990 company initiated litigation internal revenue service irs united states bankruptcy court southern district new york challenging validity retroactive applicability proposed regulations issued irs august 13 1990 january 2 1992 irs issued final regulations sections 269 382 internal revenue code 1986 relating use net operating loss carryforwards following corporate reorganizations bankruptcy code following issuance final regulations company withdrew retroactivity challenge final regulations made retroactive august 14 1990 applicable plan reorganization completed companys plan reorganization consummated december 2 1988 company however continued challenge validity provisions regulations june 8 1992 bankruptcy court issued decision denying companys motion judgment irs respect application section 269 irs code company court also granted irss motion dismiss companys complaint challenging regulations court entered judgment pursuant decision june 29 1992 consistent advice counsel company decided appeal judgment although company unable obtain judgment would prevented irs applying section 269 company courts ruling leaves company substantially position prior issuance final regulations possibility irs challenge section 269 internal revenue code companys use prepetition net operating loss carryforwards always existed light courts ruling possibility continues exist court however stated irs ever seek use new section 269 regulations limit companys use net operating loss carryforwards nothing opinion would prejudice companys right defend using courts confirmation finding primary purpose companys plan reorganization tax avoidance companys common stock subject trading restrictions designed maximize likelihood preserving net operating loss carryforwards change ownership company could also limit use net operating loss carryforwards note 6 longterm debt december 31 2000 1999 thousands notes payable certain current former directors 337 0 real estate loan 173 203 capital lease obligations 39 50 549 253 less amounts classified current 212 60 337 193 march 2000 companys board directors approved arrangement compensate former continuing directors served 1989 march 31 1999 without compensation company issued promissory notes amount 25000 seven current former directors 150000 john grigsby jr former director current executive vice president chief financial officer notes bear interest payable inkind five percent 5 due march 28 2005 however may prepaid time discretion company addition notes canceled event subsequent bankruptcy company real estate loan relates 1990 purchase land building houston texas previously leased hds august 1996 hds refinanced loan required repaid monthly installments 3278 august 20 2001 remaining unpaid balance due december 31 2000 1999 interest rate loan 115 105 respectively rate adjusted term loan accordance increases decreases prime rate loan collateralized hds facility net book value 421000 december 31 2000 companys guaranty obligations capital lease arrangements totaled 39000 50000 2000 1999 respectively note 7 shareholders deficit 1999 company issued 585100 shares common stock pbgc see note 9 transaction recorded increase common stock capital excess par value 86000 938000 respectively reduction accrued pension liability 1024000 note 8 longterm stock incentive plan companys longterm stock incentive plan 1989 provides grant stock options stock appreciation rights performance shares restricted stock restricted stock units stockbased awards plan maximum number shares may granted respect stockbased awards 50000 options may granted prices equal less fair market value date grant except options purchase 13333 shares may granted price less fair market value october 25 1989 date plan approved shareholders options exercisable within period exceed 10 years date grant plan also provides discretionary grant stock appreciation rights allow holder receive cash shares common stock difference exercise price fair market value stock date exercise stock options stock appreciation rights granted date plan discussed note 11 companys board directors granted 24000 stock options 2000 subject plan note 9 pension postretirement benefit obligations pensions date chapter 11 filings june 1987 company sponsored 19 defined benefit plans providing pensions substantially us employees pension plan us salaried employees capped frozen effective march 31 1987 benefit accruals date result divestitures chapter 11 proceedings eight active plans transferred buyers businesses leaving company sponsor 11 plans none permitted additional benefit accruals effective january 1 1989 11 remaining plans consolidated single plan allischalmers consolidated pension plan consolidated plan 1994 companys independent pension actuaries changed assumptions mortality administrative expenses used determine liabilities consolidated plan primarily result changes mortality assumptions reflect decreased mortality rates companys retirees consolidated plan underfunded present value basis first quarter 1996 company made required cash contribution consolidated plan amount 205000 company however financial resources make required payments 1996 1997 given inability company fund obligations current financial resources february 1997 allischalmers applied pension benefit guaranty corporation pbgc distress termination consolidated plan section 4041c employee retirement income security act 1974 amended erisa pbgc approved distress termination application september 1997 agreed plan termination date april 14 1997 pbgc became trustee terminated consolidated plan september 30 1997 upon termination consolidated plan allischalmers subsidiaries incurred liability pbgc amount equal consolidated plans unfunded benefit liabilities allischalmers subsidiaries also liability pbgc trustee terminated consolidated plan outstanding balance consolidated plans accumulated funding deficiencies september 30 1997 pbgc estimated unfunded benefit liabilities accumulated funding deficiencies together pbgc liability totaled approximately 679 million effective march 31 1999 company issued 585100 shares common stock reducing pension liability estimated fair market value shares 669 million september 1997 allischalmers pbgc entered agreement principle settlement pbgc liability required among things satisfactory resolution companys tax obligations respect consolidated plan section 4971 internal revenue code 1986 amended code section 4971a code imposes taxable year firsttier tax 10 amount accumulated funding deficiency plan like consolidated plan section 4971b code imposes additional secondtier tax equal 100 accumulated funding deficiency corrected within specified period liability taxes imposed section 4971 extends jointly severally company commonlycontrolled subsidiary corporations prior termination consolidated plan accumulated funding deficiency taxable years 1995 1996 1997 deficiencies resulted estimated firsttier taxes code section 4971a approximately 900000 july 16 1998 company internal revenue service irs reached agreement principal settle companys tax liability code section 4971 75000 following final irs approval payment amount made august 11 1998 gain 825000 recorded income accompanying 1998 statement operations june 1999 effective march 31 1999 company pbgc entered agreement settlement pbgc liability pbgc agreement pursuant terms pbgc agreement company issued 585100 shares common stock pbgc 35 total number shares issued outstanding fullydiluted basis company right first refusal respect sale shares common stock owned pbgc conjunction share issuance company reduced pension liability pbgc based estimated fair market value shares issued effective date march 31 1999 accordance terms pbgc agreement company required decreased size board directors company board seven members ii caused sufficient number current directors company resign board committees thereof iii caused three designees pbgc elected board pbgc caused company amend bylaws conform terms pbgc agreement furthermore company agreed pay pbgcs reasonable professional fees 90th day release event hereinafter defined term pbgc agreement company agreed issue agree issue common stock company common stock equivalent less fair value determined majority board company also agreed merge consolidate entity sell transfer convey 50 property assets without majority board approval agreed amend amended restated certificate incorporation certificate bylaws order satisfy discharge pbgc liability pbgc agreement provides company must either receive single transaction series related transactions debt financing makes available company least 10 million borrowings ii consummate acquisition single transaction series related transactions assets andor business purchase price including funded debt assumed least 10 million release event company continues pursue various strategic alternatives facilitate consummation release event 585100 shares disposed pbgc prior release event final satisfaction discharge pbgc liability accreted estimated fair market value 1024000 shares issued pbgc connection pbgc agreement additional consideration settling pbgc liability following agreements dated march 31 1999 also entered registration rights agreement company pbgc registration rights agreement ii lockup agreement among company pbgc alch company lp delaware limited partnership alch wells fargo bank trustee certain amended restated retiree health trust agreement uaw retired employees allischalmers corporation uaw trust firstar trust company trustee certain amended restated retiree health trust agreement nonuaw retired employees allischalmers corporation nonuaw trust lockup agreement registration rights agreement grants holder registrable shares defined registration rights agreement basically mean shares common stock issued pbgc agreement right shares registered pursuant securities act 1933 amended demand incidental registration statement filed company order demand registration registrable shares request registration holders less 20 registrable shares necessary company may deny request registration shares company contemplates filing registration statement within 90 days receipt notice holders registration rights agreement also contains provisions allow company postpone filing registration statement 180 days registration rights agreement contains indemnification language similar usually contained agreements kind lockup agreement governs transfer disposition shares companys common stock voting shares well grants pbgc right sale shares prior alch uaw trust nonuaw trust pursuant lockup agreement unless board terminated common stock transfer restrictions set forth article xiii companys certificate alch uaw trust nonuaw trust agreed period commencing march 31 1999 ending third anniversary release event directly indirectly sell transfer assign dispose shares company stock beneficially owns commencing third anniversary release event continuing fifth anniversary release event alch uaw trust nonuaw trust agreed sell transfer dispose shares company stock without first giving pbgc opportunity sell portion shares company stock pbgc owns foregoing right pbgc applies sale company stock public offering otherwise lockup agreement also contains voting component term lockup agreement party agreement agreed vote meeting company stockholders written consent shares company stock owned favor election directors company persons nominated nominating committee board refrain taking action contrary inconsistent obligation term lockup agreement party agreement agreed vote shares company stock take action amend companys certificate bylaws manner inconsistent breach pbgc agreement party agreed vote shares favor certain specified amendments companys certificate ii election persons designated pbgc director serve board iii favor election company directors committed cause one pbgc director appointed nominating committee board one pbgc director appointed chairman compensation committee board medical life pursuant plan reorganization company assumed contractual obligation simplicity manufacturing inc smi reimburse smi 50 actual cost medical life insurance claims select group retirees smi retirees prior simplicity manufacturing division allischalmers net postretirement benefit expense years ended december 31 2000 1999 1998 included following components thousands 2000 1999 1998 service cost interest cost 32 41 53 recognized actuarial gain 49 37 22 net periodic postretirement benefit cost 17 4 31 change benefit obligation plan assets reconciliation funded status years ended december 31 2000 1999 follows thousands change apbo 2000 1999 benefit obligation beginning year 464 606 interest cost 32 41 actuarial gain 18 125 benefits paid 22 58 benefit obligation end year 456 464 change plan assets fair value plan assets beginning year employer contribution 22 58 benefits paid 22 58 fair value plan assets end year reconciliation funded status benefit obligation end year 456 464 fair value plan assets end year funded status 456 464 unrecognized net actuarial gain 433 463 accrued benefit cost 889 927 assumed health care cost trend rate used measuring accumulated postretirement benefit obligation assumed 75 2001 assumed rate decreases year ultimate rate 50 reached december 31 2006 health care cost trend rate significant effect amounts reported example one percentage point increase health care cost trend rate would increase accumulated postretirement benefit obligation approximately 24000 december 31 2000 discount rate used determining accumulated postretirement benefit obligation 75 december 31 2000 725 december 31 1999 note 10 commitments contingent liabilities substantially litigation proceedings pending company resolved pursuant emergence chapter 11 proceedings 1988 various loans lease agreements commitments contractual obligations company also satisfied pursuant plan reorganization company knows significant preplan reorganization lawsuits presently pending subsidiaries assumed various trusts entities company party litigation matters claims normal course operations results litigation claims cannot predicted certainty management believes final outcome matters material adverse effect companys consolidated financial position environmental matters environmental protection agency epa certain state environmental protection agencies requested information connection several potential hazardous waste disposal sites products manufactured allischalmers consummation plan reorganization disposed epa claimed allischalmers liable cleanup costs associated several additional sites addition certain third parties asserted allischalmers liable cleanup costs associated epa fines connection additional sites instance environmental claims asserted company involve prebankruptcy operations accordingly allischalmers taken position cleanup costs liabilities related sites discharged bankruptcy environmental claims asserted company involving postbankruptcy operations allischalmers consolidated pension plan contributions consolidated plan required starting 1996 due change mortality assumptions used calculating present value pension benefits expected paid assumptions used calculating future administrative expenses compared projections mortality administrative expense assumptions used plan reorganization funding consolidated plan contributions projected 25 million 1996 increasing 31 million 1997 81 million 1998 paying one installment 205000 january 15 1996 company failed make subsequent payments companys failure make required quarterly contributions starting april 1996 resulted filing lien pbgc company given inability company fund obligations current financial resources february 1997 allischalmers applied pbgc distress termination consolidated plan section 4041c erisa pbgc approved distress termination application september 1997 agreed plan termination date april 14 1997 pbgc became trustee terminated consolidated plan september 30 1997 additional information regarding consolidated plan see note 9 note 11 related party transactions discussed note 6 2000 companys board directors issued promissory notes totaling 325000 compensation certain current former directors transaction reflected marketing administrative expense 325000 accompanying 2000 statement operations companys board directors receive compensation services executive officers company period april 1 1999 december 31 2000 conjunction promissory notes issued certain current former directors companys board directors also granted stock options individuals options purchase 24000 shares common stock granted exercise price 275 options vested immediately may exercised time prior march 28 2010 2000 stock options exercised compensation expense recorded options issued exercise price approximately equal fair value common stock date grant stock options dilutive companys net loss per share 2000 compensation expense options granted 2000 determined based option fair value grant date prescribed sfas 123 accounting stock based compensation effect companys net loss 2000 would material 1999 allischalmers received payments totaling 400000 reimbursement expenditures company incurred prior years behalf ac reorganization trust payments included income accompanying statement operations note 12 quarterly financial data unaudited item 9 item 8 financial statements supplementary data allischalmers energy inc subsidiaries management’s report stockholders allischalmers energy inc management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting allischalmers energy inc subsidiaries allischalmers order evaluate effectiveness internal control financial reporting required section 404 sarbanesoxley act 2002 conducted assessment including testing using criteria internal controlintegral framework issued committee sponsoring organization treadway commission coso allischalmers’ system internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance accounting principles generally accepted united states america inherent limitation internal control financial reporting may prevent detect misstatements based assessment concluded allischalmers maintained effective internal control financial reporting december 31 2009 based criteria internal controlintegrated framework issued coso effectiveness allischalmers internal control financial reporting december 31 2009 audited uhy llp independent registered public accounting firm stated report included herein management’s certifications allischalmers’ chief executive officer chief financial officer required sarbanesoxley act 2002 included exhibits 31 32 allischalmers’ form 10k allischalmers energy inc report independent registered public accounting firm board directors stockholders allischalmers energy inc audited accompanying consolidated balance sheets allischalmers energy inc subsidiaries “company” december 31 2009 2008 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2009 audits also included financial statement schedule listed index item 15 consolidated financial statements financial statement schedule responsibility company’s management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position allischalmers energy inc subsidiaries december 31 2009 2008 consolidated results operations cash flows three years period ended december 31 2009 conformity accounting principles generally accepted united states america also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states allischalmers energy inc’s internal control financial reporting december 31 2009 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated march 9 2010 expressed unqualified opinion thereon uhy llp houston texas march 9 2010 report independent registered public accounting firm board directors stockholders allischalmers energy inc audited allischalmers energy inc’s internal control financial reporting december 31 2009 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria allischalmers energy inc’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion allischalmers energy inc subsidiaries maintained material respects effective internal control financial reporting december 31 2009 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets allischalmers energy inc subsidiaries december 31 2009 2008 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2009 report dated march 9 2010 expressed unqualified opinion thereon uhy llp houston texas march 9 2010 allischalmers energy inc consolidated balance sheets accompanying notes integral part consolidated financial statements allischalmers energy inc consolidated statements operations accompanying notes integral part consolidated financial statements allischalmers energy inc consolidated statement stockholders’ equity accompanying notes integral part consolidated financial statements allischalmers energy inc consolidated statements cash flows accompanying notes integral part consolidated financial statements allischalmers energy inc notes consolidated financial statements note 1 nature business summary significant accounting policies organization business allischalmers energy inc “allischalmers” “we” “our” “us” incorporated delaware 1913 provide services equipment oil natural gas exploration production companies throughout us including texas louisiana arkansas pennsylvania oklahoma new mexico offshore gulf mexico internationally primarily argentina brazil bolivia mexico operate three sectors oil natural gas service industry oilfield services drilling completion rental services nature operations many regions operate subject us changing economic regulatory political conditions vulnerable nearterm longterm changes demand prices oil natural gas related demand oilfield service operations use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period future events effects cannot perceived certainty accordingly accounting estimates require exercise judgment management believes estimates assumptions used preparation consolidated financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts recoverability longlived assets intangibles useful lives used depreciation amortization income taxes valuation allowances accounting estimates used preparation consolidated financial statements may change new events occur experience acquired additional information obtained operating environment changes principles consolidation consolidated financial statements include accounts allischalmers subsidiaries december 31 2009 aircomp llc allischalmers tubular services llc allischalmers directional drilling services llc allischalmers rental services llc allischalmers production services llc allischalmers management llc allischalmers holdings inc dls drilling logistics services company “dls” dls argentina limited tanus argentina sa petrorentals llc rebel rentals llc “rebel” allischalmers drilling llc bch ltd “bch” aly brasil servicos petroleo ltda drilling logistics services de mexico bch energy brasil servicos de petroleo ltda significant intercompany transactions eliminated revenue recognition provide rental equipment oilfield services drilling services customers per day daywork per job contractual rates recognize drilling related revenue work progresses collectibility reasonably assured revenue daywork contracts recognized realized realizable earned daywork contracts revenue recognized based number days completed fixed rates stipulated contract certain contracts receive lumpsum fees equipment mobilization costs mobilization fees related costs deferred amortized contract terms material recognize reimbursements received outofpocket expenses incurred revenues account outofpocket expenses direct costs payments customers cost oilfield rental equipment damaged lostinhole reflected revenues recognized revenue allischalmers energy inc notes consolidated financial statements continued damaged lostinhole equipment 43 million 106 million 126 million years ended december 31 2009 2008 2007 respectively allowance doubtful accounts receivable customer obligations due normal trade terms sell services oil natural gas exploration production companies perform continuing credit evaluations customers’ financial condition although generally require collateral letters credit may required customers certain circumstances allowance doubtful accounts represents estimate amount probable credit losses existing accounts receivable significant individual accounts receivable balances outstanding greater 90 days reviewed individually collectibility limited number customers individually large amounts due given date unanticipated change one customer’s credit worthiness matters affecting collectibility amounts due customers could material effect results operations period changes events occur attempts collect receivable failed receivable written allowance december 31 2009 2008 recorded allowance doubtful accounts 49 million 42 million respectively bad debt expense 28 million 33 million 13 million years ended december 31 2009 2008 2007 respectively cash equivalents consider highly liquid investments original maturity three months less time purchase cash equivalents inventories stated lower cost market cost determined using first “fifo” method average cost method approximates fifo includes cost materials labor manufacturing overhead property equipment property equipment recorded cost less accumulated depreciation certain equipment held capital leases classified equipment related obligations recorded liabilities maintenance repairs improve extend life related assets charged operations incurred refurbishments renewals capitalized value equipment enhanced extended period property equipment sold otherwise disposed asset account related accumulated depreciation account relieved gain loss included operations interest capitalized construction progress weighted average cost debt outstanding construction period interest rate debt incurred construction cost property equipment currently service depreciated estimated useful lives related assets range two twenty years depreciation computed straightline method financial reporting purposes capital leases amortized using straightline method estimated useful lives assets lease amortization included depreciation expense depreciation expense charged operations 783 million 635 million 509 million years ended december 31 2009 2008 2007 respectively allischalmers energy inc notes consolidated financial statements continued goodwill intangible assets amortization goodwill intangible assets infinite lives amortized tested impairment annually frequently circumstances indicate impairment may exist intangible assets finite useful lives amortized either straightline basis asset’s estimated useful life basis reflects pattern economic benefits intangible assets realized impairment test requires allocation goodwill assets liabilities reporting units reporting units business unit level one level operating segments perform impairment tests carrying value goodwill annual basis december 31st reportable segments annual impairment tests involve use different valuation techniques including income approach andor market approach determine fair value reporting units determining fair value reporting unit matter judgment often involves use significant estimates assumptions fair value reporting unit less carrying value impairment loss recorded extent implied fair value reporting unit’s goodwill less carrying value result recorded impairment 1158 million december 31 2008 december 31 2009 2007 impairment deemed necessary significant unanticipated changes assumptions could require additional provision impairment future period impairment longlived assets longlived assets include property plant equipment intangible assets certain assets reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable impairment loss recorded period determined carrying amount recoverable determination recoverability made based upon estimated undiscounted future net cash flows excluding interest expense impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets financial instruments financial instruments consist cash equivalents accounts receivable accounts payable debt carrying value cash equivalents accounts receivable payable approximate fair value due shortterm nature believe fair values carrying value debt excluding senior notes would materially different due instruments’ interest rates approximating market rates similar borrowings december 31 2009 2008 senior notes aggregate amount 4302 million 5050 million december 31 2009 2008 respectively trade “over counter” limited amounts infrequent basis based trades estimate fair value senior notes approximately 394 million 284 million december 31 2009 2008 respectively price senior notes trade based many factors level interest rates economic environment outlook oilfield services industry perceived credit risk additionally due turmoil financial markets 2008 2009 impact investors senior notes price senior notes trade may affected investors’ financial distress need liquidity concentration credit customer risk financial instruments potentially subject us concentrations credit risk consist principally cash equivalents trade accounts receivable december 31 2009 approximately 16 million 76 million cash equivalents residing argentina brazil respectively cash equivalents 18 million restricted conjunction financial institution obligations brazil transact business several financial institutions however amount deposit two financial institutions exceeded 250000 federally insured limit december 31 2009 total allischalmers energy inc notes consolidated financial statements continued 320 million management believes financial institutions financially sound risk loss minimal sell services major independent domestic international oil natural gas companies perform ongoing credit valuations customers provide allowances probable credit losses appropriate 2009 2008 2007 one customers pan american energy llc sucursal argentina pan american energy represented 355 285 207 consolidated revenues respectively revenues pan american energy represented 566 620 510 international revenues 2009 2008 2007 respectively see note 14 debt issuance costs related issuance debt capitalized amortized interest expense using straightline method approximates interest method maturity periods related debt interest expense related debt issuance costs 22 million 21 million 19 million years ended december 31 2009 2008 2007 respectively income taxes income tax expense based income statutory tax rates tax planning opportunities available us various jurisdictions operate provide income taxes based tax laws rates effect countries operations conducted income earned income tax expense expected fluctuate year operations conducted different taxing jurisdictions amount pretax income fluctuates determination evaluation annual income tax provision involves interpretation tax laws various jurisdictions operate requires significant judgment use estimates assumptions regarding significant future events amount timing character income deductions tax credits changes tax laws regulations level operations profitability jurisdiction may impact tax liability given year annual tax provision based information available us time number years may elapse ultimate tax liabilities certain tax jurisdictions determined current income tax expense reflects estimate income tax liability current year withholding taxes changes tax rates changes prior year tax estimates returns filed deferred tax assets liabilities recognized anticipated future tax effects temporary differences financial statement basis tax basis assets liabilities using enacted tax rates effect year end valuation allowance deferred tax assets recorded morelikelythannot benefit deferred tax asset realized us federal tax purposes tax returns tax years 2001 2008 remain open examination tax authorities foreign tax returns remain open examination tax years 2001 2008 generally state tax purposes 2003 2008 tax years remain open examination tax authorities four year statute limitations however certain states may keep statute open six ten years intention permanently reinvest undistributed earnings nonus subsidiaries accordingly provided us deferred taxes 650 million undistributed earnings nonus subsidiaries december 31 2009 distribution made us undistributed earnings subsidiaries could required record additional taxes cannot predict make distribution undistributed earnings unable make determination amount unrecognized deferred tax liability allischalmers energy inc notes consolidated financial statements continued stockbased compensation recognize sharebased payments employees including grants employee stock options financial statements based grantdate fair values utilize blackscholes model determine fair value incorporates assumptions value stockbased awards dividend yield common stock assumed zero historically paid dividends current plans future expected volatility based historical volatility common stock riskfree interest rate related united states treasury yield curve periods within expected term option time grant estimate forfeiture rates based historical experience net income loss years ended december 31 2009 2008 2007 includes approximately 48 million 79 million 49 million compensation costs related sharebased payments respectively tax benefit recorded association sharebased payments 9000 17 million yearsended december 31 2008 2007 respectively due expired unexercised nonqualified stock options restricted stock vesting market prices lower grant price adjusted 23 million excess tax asset additional paid capital december 31 2009 54 million unrecognized compensation expense related nonvested stock based compensation grants options granted 2008 see note 10 disclosures regarding stock options following assumptions applied determining compensation costs options granted 2009 2007 income loss per common share basic earnings per share computed basis weighted average number shares common stock outstanding period diluted earnings per share similar basic earnings per share presents dilutive effect per share basis potential common shares eg convertible preferred stock options etc converted restricted stock grants legally considered issued outstanding included basic diluted earnings per share extent vested unvested restricted stock included computation diluted earnings per share using treasury stock method potential dilutive common shares antidilutive effect eg increase income per share excluded diluted earnings deficit per share allischalmers energy inc notes consolidated financial statements continued components basic diluted earnings deficit per share follows thousands except per share amounts convertible preferred stock share based compensation shares approximately 75 million 332000 excluded computation diluted earnings per share 2009 2008 respectively effect would antidilutive due net loss year segments enterprise related information designate internal organization used management allocating resources assessing performance source reportable segments please see note 15 disclosure segment information disclosures geographic region reclassification certain prior period balances reclassified conform current year presentation new accounting pronouncements september 2006 financial accounting standards board fasb issued new accounting guidance related fair value measurements related disclosures new guidance defines fair value establishes framework measuring fair value expands disclosures fair value measurements subsequently fasb provided oneyear deferral provisions relates fair value measurement requirements nonfinancial assets liabilities recognized disclosed fair value consolidated financial statements nonrecurring basis adopted provisions january 1 2008 except relate nonfinancial assets liabilities adopted january 1 2009 neither adoption impact financial position results operations december 2007 fasb issued new accounting guidance related accounting business combinations related disclosures guidance changes requirements acquirer’s recognition allischalmers energy inc notes consolidated financial statements continued measurement assets acquired liabilities assumed business combination additionally guidance requires acquisitionrelated costs including restructuring costs recognized expense separately acquisition adopted guidance january 1 2009 guidance applied prospectively business combinations subsequent effective date april 2009 fasb updated fair value measurement standard provide additional guidance estimating fair value volume level activity asset liability significantly decreased update reemphasizes regardless market conditions fair value measurement exit price concept defined original standard clarifies includes additional factors consider determining whether significant decrease market activity asset liability provides additional clarification estimating fair value market activity asset liability declined significantly adopted update april 1 2009 impact financial position results operations april 2009 fasb issued new accounting guidance related interim disclosures fair value financial instruments guidance requires disclosures fair value financial instruments whenever public company issues financial information interim reporting periods adopted additional disclosure requirements june 30 2009 financial statements impact financial position results operations may 2009 fasb issued new accounting guidance establishes general standards accounting disclosures events occur balance sheet date financial statements issued available issued requires disclosure date entity evaluated subsequent events adopted guidance period ending june 30 2009 impact financial position results operations june 2009 fasb issued new accounting guidance related variable interest entities provide relevant reliable information users financial statements guidance requires analysis determine whether entity variable interest entity requires enterprise perform analysis determine whether enterprise’s variable interest interests give controlling financial interest guidance also requires ongoing reassessment eliminates quantitative approach previously required determining whether entity primary beneficiary guidance effective annual reporting periods beginning november 15 2009 currently evaluating impact adoption guidance financial position operating results august 2009 fasb updated fair value measurement guidance clarify entity measure liabilities fair value update reaffirms fair value based orderly transaction market participants even though liabilities infrequently transferred due contractual legal restrictions however identical liabilities traded active market used available quoted prices available quoted price identical liability traded asset quoted prices similar liabilities similar liabilities traded asset another valuation approach used update also clarifies restrictions preventing transfer liability considered separate input adjustment measurement fair value adopted guidance period ending december 31 2009 impact financial position results operations october 2009 fasb issued update existing guidance revenue recognition arrangements multiple deliverables update allow companies allocate consideration received qualified separate deliverables using estimated selling price delivered undelivered items vendorspecific objective evidence thirdparty evidence unavailable update requires expanded qualitative quantitative disclosures effective fiscal years beginning june 15 2010 however companies may elect adopt early interim periods ended september 30 2009 update may applied either prospectively beginning fiscal year new materially modified allischalmers energy inc notes consolidated financial statements continued arrangements retrospectively currently evaluating timing impact adopting update consolidated financial statements note 2 employee benefit plans 401k savings plan june 30 2003 adopted 401k profit sharing plan “plan” plan defined contribution savings plan designed provide retirement income eligible employees plan intended qualified section 401k internal revenue code 1986 amended funded voluntary pretax contributions eligible employees may contribute percentage eligible compensation limited subject statutory limits plan also funded discretionary matching employer contributions eligible employees cannot participate plan attained age 21 completed threemonths service us participant 100 vested respect participants’ contributions matching contributions invested directed participant investment funds available plan matching contributions approximately 349000 15 million 18 million paid 2009 2008 2007 respectively note 3 acquisitions asset dispositions june 29 2007 acquired coker directional inc coker total consideration approximately 39 million included approximately 36 million cash promissory note 350000 addition approximately 5000 costs incurred relation coker acquisition coker directional drilling company operating gulf coast central texas regions following table summarizes allocation purchase price related acquisition costs estimated fair value assets acquired liabilities assumed date acquisition thousands intangible assets included approximately 18 million assigned goodwill 21 million assigned customer relationships noncompete amortizable intangibles weightedaverage useful life 94 years results coker since acquisition included oilfield services segment july 26 2007 acquired diggar tools llc diggar total consideration approximately 103 million included approximately 67 million cash promissory note 750000 payment approximately 28 million existing diggar debt addition approximately 29000 costs incurred relation diggar acquisition diggar directional drilling company operating rocky mountains inventory 115 downhole motors following table summarizes allocation purchase price related acquisition costs estimated fair value assets acquired date acquisition thousands allischalmers energy inc notes consolidated financial statements continued diggar’s historical property equipment values increased approximately 34 million based thirdparty valuations intangible assets included approximately 27 million assigned goodwill results diggar since acquisition included oilfield services segment october 23 2007 acquired rebel total consideration approximately 73 million included approximately 50 million cash promissory notes aggregate 500000 payment approximately 15 million existing rebel debt deposit 305000 escrow cover distributions owed rebel defined benefit pension plan trust addition approximately 214000 costs incurred relation rebel acquisition rebel based lafayette louisiana extensive inventory tubular services equipment primarily provided tubing installation services following table summarizes allocation purchase price related acquisition costs estimated fair value assets acquired date acquisition thousands rebel’s historical property equipment values increased approximately 85 million based thirdparty valuations intangible assets included approximately 461000 assigned goodwill 683000 assigned customer relations amortizable intangibles useful life 15 years results rebel since acquisition included oilfield services segment november 1 2007 acquired substantially assets diamondback oilfield services inc diamondback total consideration approximately 231 million cash approximately 89000 costs incurred relation diamondback acquisition diamondback directional drilling company based conroe texas operations focused texas panhandle oklahoma diamondback assets included 30 downhole motors five measurement drilling kits eight wireline steering vehicles following table summarizes allocation purchase price related acquisition costs estimated fair value assets acquired date acquisition thousands diamondback’s historical property equipment values increased approximately 20 million based thirdparty valuations intangible assets included approximately 76 million assigned goodwill 650000 assigned noncompete 620000 assigned trade name 34 million assigned customer relations based thirdparty valuations amortizable intangibles weightedaverage useful life 133 years subsequent date acquisition sellers earned additional 30 million cash earnout allischalmers energy inc notes consolidated financial statements continued payment business achieved certain earning objectives earnout increased goodwill accrued december 31 2008 paid 2009 results diamondback assets since acquisition included oilfield services segment december 31 2008 completed acquisition outstanding stock bch total consideration approximately 561 million approximately 251000 costs incurred relation bch acquisition bch land drilling contractor operating brazil following table summarizes allocation purchase price related acquisition costs estimated fair value assets acquired date acquisition thousands bch’s historical property equipment values decreased approximately 28 million based thirdparty valuations intangible assets included approximately 185 million assigned goodwill 49 million customer contracts 22 million assigned trade name 600000 noncompetes based thirdparty valuations amortizable intangibles weightedaverage useful life 126 years goodwill subsequently reduced 2009 13 million insurance proceeds received rig loss occurred prior acquisition 13 million utilization pre acquisition tax asset results bch since acquisition included drilling completion segment aforementioned acquisitions accounted using purchase method accounting june 29 2007 sold capillary tubing units related equipment approximately 163 million reported gain approximately 89 million assets sold represented small portion oilfield services segment effective august 1 2008 sold drill pipe tong manufacturing assets approximately 75 million received cash approximately 20 million time sale 90day note 10 million 10year noninterest bearing note 45 million repayment 10year note tied various performance targets assigned fair value approximately 31 million note reported gain approximately 166000 transaction assets sold represented small portion oilfield services segment 2009 recorded 16 million loss asset disposition drilling completion segment insurance proceeds 39 million related damages incurred blowout destroyed one drilling rigs sufficient cover book value rig related assets allischalmers energy inc notes consolidated financial statements continued note 4 inventories comprised following december 31 thousands note 5 property intangible assets property equipment comprised following december 31 thousands net book value equipment recorded capital leases 10 million 17 million december 31 2009 2008 respectively interest expense capitalized property equipment 22 million 19 million years ended december 31 2009 2008 respectively allischalmers energy inc notes consolidated financial statements continued intangible assets follows december 31 thousands amortization expense related intangibles 47 million 42 million 41 million years ended december 31 2009 2008 2007 respectively future amortization intangible assets december 31 2009 follows thousands note 6 income taxes loss income taxes 439 million 953 million us tax purposes years ended december 31 2009 2008 respectively income taxes 417 million us tax purposes year ended december 31 2007 also income taxes 129 million 384 million 376 million reported nonus countries years ended december 31 2009 2008 2007 respectively treat withholding taxes incurred us subsidiaries foreign countries foreign tax anticipate using tax payments offset us tax required file allischalmers energy inc notes consolidated financial statements continued consolidated us federal income tax return file foreign income tax returns argentina brazil bolivia canada related drilling completion operations recognize impact uncertain tax positions financial statements tax position challenged taxing authority likely chance tax position disallowed based technical merits position recognize interest penalties related uncertain tax positions component income tax expense identified uncertain tax positions three years period ended december 31 2009 income tax provision consists following thousands allischalmers energy inc notes consolidated financial statements continued significant components deferred income tax assets december 31 follows thousands following table reconciles statutory tax rates actual tax rate net future taxdeductible items relate primarily timing differences timing differences tax basis assets liabilities reported amounts financial statements result differences income tax purposes income financial statement purposes future years tax reform act 1986 contains provisions limit utilization net operating loss tax credit carry forwards “change ownership” described section 382 internal revenue code change ownership may limit utilization net operating loss tax credit carryforwards could triggered public offering subsequent sales securities us stockholders provision limited amount net operating losses available us currently net operating loss carryforwards tax purposes december 31 2009 2008 678 million 67 million respectively expiring 2029 allischalmers energy inc notes consolidated financial statements continued valuation allowance established deferred tax assets management based upon available information considers likely benefit assets realized december 31 2009 2008 valuation allowance 140 million 133 million respectively valuation allowances relate net operating losses incurred bch pre post acquisition currently tax strategy utilize approximately 44 million 47 million ad valorem franchise income sales tax accruals included accrued expense balances 219 million 266 million december 31 2009 2008 respectively note 7 debt longterm debt consists following december 31 thousands weighted average interest rate current total debt approximately 50 84 december 31 2009 64 83 december 31 2008 respectively maturities debt obligations december 31 2009 follows thousands senior notes term loans line credit agreements january 18 2006 august 14 2006 closed private offerings qualified institutional buyers pursuant rule 144a securities act 1933 1600 950 million aggregate principal amount senior notes respectively senior notes due january 15 2014 bear interest 90 proceeds used fund acquisitions specialty rental tools inc dls repay existing debt general corporate purposes june 29 2009 closed tender offer purchased allischalmers energy inc notes consolidated financial statements continued 306 million aggregate principal 90 senior notes total consideration 650 per 1000 principal amount january 2007 closed private offering qualified institutional buyers pursuant rule 144a securities act 2500 million principal amount 85 senior notes due 2017 proceeds senior notes offering together portion proceeds concurrent common stock offering used repay debt outstanding 3000 million bridge loan facility incurred finance acquisition substantially assets oil gas rental services inc ogr june 29 2009 closed tender offer purchased 442 million aggregate principal 85 senior notes total consideration 600 per 1000 principal amount january 18 2006 also executed amended restated credit agreement provided 250 million revolving line credit maturity january 2010 april 26 2007 entered second amended restated credit agreement increased revolving line credit 620 million final maturity date april 26 2012 december 3 2007 entered first amendment second amended restated credit agreement increased revolving line credit 900 million amended restated credit agreement contains customary events default financial covenants limits ability incur additional indebtedness make capital expenditures pay dividends make distributions create liens sell assets april 9 2009 entered third amendment existing second amended restated credit agreement dated april 26 2007 modified leverage interest coverage ratio covenants credit agreement addition permitted maximum capital expenditures reduced 850 million 2009 compared previous limit 1200 million effective december 31 2009 amended leverage interest coverage ratio covenants credit agreement amendment relaxed required financial ratios quarter ended december 31 2009 quarters 2010 obligations amended restated credit agreement secured substantially assets located us compliance debt covenants december 31 2009 2008 december 31 2009 borrowings facility except 42 million outstanding letters credit december 31 2008 365 million borrowings outstanding 58 million outstanding letters credit agreement loan rates based prime libor plus margin weighted average interest rate 46 december 31 2008 part acquisition dls assumed various bank loans floating interest rates based libor plus margin terms ranging 2 5 years weighted average interest rates loans 21 51 december 31 2009 2008 respectively bank loans denominated us dollars outstanding amount due december 31 2009 2008 11 million 25 million respectively february 15 2008 dls subsidiary argentina entered 250 million import finance facility bank borrowings facility used fund portion purchase price new drilling service rigs ordered drilling completion segment loan repayable four years equal semiannual installments beginning one year disbursement final principal payment due later march 15 2013 import finance facility unsecured contains customary events default financial covenants limits dls’ ability incur additional indebtedness make capital expenditures create liens sell assets compliance debt covenants december 31 2009 2008 bank loan rates based libor plus margin weighted average interest rate 44 69 december 31 2009 2008 respectively bank loans denominated us dollars outstanding amount december 31 2009 2008 201 million 250 million respectively part acquisition bch assumed 236 million term loan credit facility bank credit agreement dated june 2007 contains customary events default financial covenants obligations facility secured substantially bch assets facility repayable allischalmers energy inc notes consolidated financial statements continued quarterly principal installments plus interest final payment due later august 2012 compliance debt covenants december 31 2009 2008 credit facility loan denominated us dollars interest rates based libor plus margin december 31 2009 2008 outstanding amount loan 162 million 221 million interest rate 35 60 respectively may 22 2009 drew 250 million new term loan credit facility lending institution facility utilized fund portion purchase price two new drilling rigs loan secured equipment facility repayable quarterly installments approximately 14 million principal interest matures may 2015 loan bears interest fixed rate 90 december 31 2009 outstanding amount loan 234 million notes payable connection acquisition rogers oil tools inc issued seller note amount 750000 note bore interest 50 paid full april 2009 accordance terms 2000 compensated directors served board directors 1989 march 31 1999 without compensation issuing promissory notes totaling 325000 notes bear interest rate 50 december 31 2009 2008 principal accrued interest notes totaled approximately 0 32000 respectively april 2008 august 2008 obtained insurance premium financings aggregate amount 30 million fixed average weighted interest rate 49 terms agreements amounts outstanding paid 10 11 month repayment schedules outstanding balance notes approximately 0 991000 december 31 2009 2008 respectively 2009 obtained insurance premium financings aggregate amount 32 million fixed average weighted interest rate 48 terms agreements amount outstanding paid 10 11 month repayment schedules outstanding balance notes approximately 997000 december 31 2009 debt part acquisition bch assumed various capital leases terms two three years outstanding balance capital leases 254000 779000 december 31 2009 2008 respectively note 8 commitments contingencies placed orders capital equipment totaling 192 million received paid 2010 approximately 121 million drilling rigs drilling completion segment 23 million drill pipe drilling completion segment 47 million various equipment utilized oilfield services segment rent office space certain facilities shop yards equipment storage maintenance facility rent expense years ended december 31 2009 2008 2007 33 million 28 million 27 million respectively allischalmers energy inc notes consolidated financial statements continued december 31 2009 future minimum rental commitments operating leases follows thousands note 9 stockholders’ equity january 2007 closed public offering 60 million shares common stock public offering price 1765 per share net proceeds public offering together proceeds concurrent senior notes offering used repay debt outstanding 3000 million bridge loan facility incurred finance ogr acquisition general corporate purposes 2007 also restricted stock award grants options warrants exercised resulted 882624 shares common stock issued approximately 33 million recognized approximately 49 million compensation expense related share based payments recorded capital excess par value see note 1 also recorded approximately 17 million tax benefit related stock compensation plans 2008 restricted stock award grants options exercised resulted 558707 shares common stock issued approximately 633000 recognized approximately 79 million compensation expense related share based payments recorded capital excess par value see note 1 also recorded approximately 9000 tax benefit related stock compensation plans june 2009 closed backstopped rights offering private placement convertible preferred stock received proceeds approximately 1202 million net 54 million offering expenses pursuant investment agreement lime rock partners v lp lime rock agreed backstop rights offering purchasing subscription price shares common stock purchased existing stockholders sold 15794644 shares common stock existing stockholders exercised rights offering 19889044 shares common stock lime rock price 250 per share issued 36393 shares 70 convertible perpetual preferred stock lime rock received proceeds approximately 342 million net 22 million offering expenses preferred stock initial liquidation preference 1000 per share adjusted 3000 per share upon certain liquidation events dividends preferred stock declared quarterly approved board directors dividends accumulate paid preferred stock respect dividend rights upon liquidation windingup dissolution 1 senior common stock class series capital stock terms expressly provide class series ranks senior parity preferred stock 2 parity class series capital stock terms provide rank parity preferred stock 3 junior class series capital stock common stock established original issue date terms expressly provide rank senior preferred stock 4 junior existing future debt obligations liabilities including claims trade creditors allischalmers energy inc notes consolidated financial statements continued year ended december 31 2009 declared 13 million dividends preferred stock accrued dividends approximately 637000 included accrued expense balance 219 million december 31 2009 accrued dividends paid february 2010 share preferred stock convertible holder’s option time 3902439 shares common stock certain conditions subject specified adjustments conversion rate represents equivalent conversion price approximately 256 per share conversion limited earlier june 26 2012 date transfer restrictions included investment agreement expire unless immediately giving effect conversion person group would beneficially number shares common stock exceeding 35 total number issued outstanding shares common stock unless given prior written consent conversion addition able cause preferred stock converted common stock five years issuance common stock trading premium 300 conversion price 30 consecutive trading days prior issuance press release announcing mandatory conversion generally holders preferred stock vote together common stock asconverted basis however preferred stock voting rights held person group aggregated common stock limited 35 votes cast stockholders including holders common stock 2009 restricted stock award grants options exercised resulted 20099 shares common stock issued approximately 43000 recognized approximately 48 million compensation expense related share based payments recorded capital excess par value see note 1 due expired unexercised nonqualified stock options restricted stock vesting market prices lower grant price adjusted 23 million excess tax asset additional paid capital note 10 stock options 2000 issued stock options promissory notes certain directors compensation services directors see note 7 board directors granted stock options individuals options purchase 4800 shares common stock granted exercise price 1375 per share options vested immediately may exercised time prior march 28 2010 december 31 2009 4000 stock options remain outstanding compensation expense recorded options issued exercise price equal fair value common stock date grant 2003 incentive stock plan 2003 plan amended permits us grant key employees outside directors various forms stock incentives including among others incentive nonqualified stock options restricted stock 2003 plan administered compensation committee board consists two directors appointed board following benefits may granted 2003 plan stock appreciation rights b restricted stock c performance awards incentive stock options e nonqualified stock options f stockbased awards stock incentive terms excess ten years maximum number shares common stock may issued 2003 plan shall lesser 3000000 shares 15 total number shares common stock outstanding 2006 incentive plan 2006 plan approved amended stockholders november 2006 2009 2006 plan administered compensation committee board maximum number shares common stock may issued 2006 plan equal 8500000 shares subject adjustment event stock splits certain corporate events 2006 plan provides grant following types awards stock options including incentive stock options nonqualified stock options ii bonus stock iii restricted stock awards iv performance awards v stockbased awards except respect awards incentive stock options employees consultants nonemployee directors eligible participate 2006 plan term award allischalmers energy inc notes consolidated financial statements continued shall period may determined committee provided event shall term award exceed period ten years date grant summary stock option activity related information follows total intrinsic value stock options amount market price underlying stock date exercise exceeds exercise price option exercised approximately 36000 542000 66 million years ended december 31 2009 2008 2007 respectively december 31 2009 approximately 572000 total unrecognized compensation cost related stock options 539000 28000 5000 recognized years ended december 31 2010 2011 2012 respectively following table summarizes additional information stock options outstanding december 31 2009 aggregate pretax intrinsic value stock options outstanding exercisable approximately 320000 2000 respectively december 31 2009 amount represents value would received option holders respective options exercised december 31 2009 restricted stock awards addition stock options 2003 2006 plans allow grant restricted stock awards rsa timelapse rsa award common stock unit represents right receive end stipulated period one unrestricted share stock exercise price timelapse rsa restrictions lapse periodically extended period time exceeding 10 years determine fair value rsas based market price common stock date grant compensation cost rsas primarily recognized straightline basis vesting service period net forfeitures performancebased rsa award common stock unit represents right receive one unrestricted share stock exercise price attainment established performance criteria 2007 granted 710000 performance based rsas market conditions performancebased rsas granted earned issued certain annual total shareholder return criteria allischalmers energy inc notes consolidated financial statements continued attained next 3 years fair value performancebased rsas based thirdparty valuations following table summarizes activity nonvested restricted stock awards total fair value rsa shares vested 2009 approximately 371000 december 31 2009 approximately 48 million total unrecognized compensation cost related nonvested rsas 34 million 12 million 195000 recognized years ended december 31 2010 2011 2012 respectively note 11 stock purchase warrants conjunction purchase mountain compressed air inc mca february 2001 mca issued common stock warrant 620000 shares thirdparty investment firm assisted us initial identification purchase mca assets warrant entitles holder acquire 620000 shares common stock mca exercise price 01 per share nineyear period commencing february 7 2001 may 2004 issued warrant purchase 3000 shares common stock exercise price 475 per share consultant consideration financial advisory services provided pursuant consulting agreement warrants exercised may 2004 consultant also granted 16000 warrants may 2004 exercisable 465 per share warrants exercised november 2005 warrants 4000 shares common stock exercise price 465 also issued consultant may 2004 exercised january 2007 conjunction bch debt financing january 2007 bch issued common stock warrant 250000 shares financial institution warrant entitles holder acquire 250000 shares common stock bch exercise price 1000 per share fiveyear period note 12 gain debt extinguishment recorded gain 264 million result tender offer completed june 29 2009 purchased 306 million aggregate principal 90 senior notes 442 million aggregate principal 85 senior notes approximately 464 million also wroteoff 15 million debt issuance costs related retired notes incurred approximately 466000 expenses related transactions allischalmers energy inc notes consolidated financial statements continued note 13 condensed consolidated financial information set forth following pages condensed consolidating financial statements allischalmers energy inc ii subsidiaries guarantors senior notes revolving credit facility iii subsidiaries guarantors senior notes revolving credit facility thousands condensed consolidating balance sheets december 31 2009 allischalmers energy inc notes consolidated financial statements continued condensed consolidating income statements year ended december 31 2009 allischalmers energy inc notes consolidated financial statements continued condensed consolidating statements cash flow year ended december 31 2009 allischalmers energy inc notes consolidated financial statements continued allischalmers energy inc notes consolidated financial statements continued december 31 allischalmers energy inc notes consolidated financial statements continued condensed consolidating income statements year ended december 31 2008 allischalmers energy inc notes consolidated financial statements continued condensed consolidating statements cash flow year ended december 31 2008 allischalmers energy inc notes consolidated financial statements continued allischalmers energy inc notes consolidated financial statements continued condensed consolidating income statements year ended december 31 2007 allischalmers energy inc notes consolidated financial statements continued condensed consolidating statements cash flow year ended december 31 2007 allischalmers energy inc notes consolidated financial statements continued condensed consolidating statements cash flow continued note 14 related party transactions largest customer pan american energy joint venture british petroleum bridas corporation one directors alejandro p bulgheroni indirectly beneficially owns 50 shares bridas corporation 2009 2008 2007 pan american energy represented 355 285 207 consolidated revenues respectively december 31 2009 2008 trade receivables pan american energy 110 million 400 million respectively 2009 2008 2007 derived revenue approximately 33 million 10 million 17 million beusa energy inc beusa company controlled alejandro p bulgheroni december 31 2009 2008 trade receivables beusa approximately 12 million 558000 respectively lime rock partners iii lp affiliated fund lime rock partners v lp owns majority stake parent company ges global energy services inc ges global energy houston based global supplier drilling rigs rig components 2008 ordered two drilling rigs ges global energy aggregate value approximately 307 million made payments totaling approximately 186 million rigs interest due payable transaction expect take delivery rigs 2010 pay remaining balance approximately 121 million time saad bargach john reynolds managing director lime rock management lp manager lime rock partners iii lp lime rock partners v lp messrs bargach reynolds also members board directors february 26 2010 lime rock partners v lp holds 19889044 shares common stock representing approximately 278 issued outstanding shares addition lime allischalmers energy inc notes consolidated financial statements continued rock partners v lp owns 36393 shares preferred stock convertible 14202146 shares common stock ownership common preferred stock lime rock partners v lp controls aggregate 35 stockholders’ voting power note 15 segment information segments provide services energy industry revenues operating income loss depreciation amortization capital expenditures assets reporting segments plus corporate function reported thousands allischalmers energy inc notes consolidated financial statements continued allischalmers energy inc notes consolidated financial statements continued note 16 supplemental cash flows information thousands allischalmers energy inc notes consolidated financial statements continued note 17 legal matters named time legal proceedings related activities prior bankruptcy 1988 however believe discharged liability claims bankruptcy believe likelihood material loss relating legal proceeding remote involved various legal proceedings ordinary course business legal proceedings different stages however believe likelihood material loss relating legal proceeding remote note 18 summarized quarterly financial data unaudited thousands except per share amounts item 9 item 8 financial statements index consolidated financial statements page financial statements independent auditors report 29 consolidated statements operations years ended december 31 2003 december 31 2002 december 31 2001 30 consolidated balance sheets december 31 2003 2002 31 consolidated statement stockholders equity years ended december 31 2003 december 31 2002 december 31 2001 32 consolidated statements cash flows years ended december 31 2003 december 31 2002 december 31 2001 33 notes consolidated financial statements 34 independent auditors report board directors allischalmers corporation houston texas audited accompanying consolidated balance sheets allischalmers corporation december 31 2003 2002 related consolidated statements operations stockholders equity cash flows three years period ended december 31 2003 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position allischalmers corporation december 31 2003 2002 results consolidated operations cash flows three years period ended december 31 2003 conformity accounting principles generally accepted united states america sgordon hughes banks llp march 3 2004 greenwood village colorado allischalmers corporation consolidated balance sheets thousands december 31 2003 2002 assets cash equivalents 1299 146 trade receivables net allowance doubtful accounts 168 32 respectively 8823 4409 lease deposit 525 lease receivable current note 13 180 prepaids current assets 887 317 total current assets 11189 5577 property equipment net accumulated depreciation 2487 2340 december 31 2003 2002 respectively 26339 17124 goodwill 7661 intangible assets net accumulated amortization 1254 726 december 31 2003 2002 respectively 2290 2818 debt issuance costs net accumulated amortization 462 331 december 31 2003 2002 respectively 567 515 lease receivable less current portion note 13 787 1042 assets 40 41 total assets 48873 34778 liabilities shareholders equity current maturities longterm debt note 8 5150 13890 trade accounts payable 3133 2106 accrued salaries benefits payroll taxes 591 280 accrued interest 152 811 accrued expenses 1761 1506 accounts payable related parties note 14 787 total current liabilities 11574 18593 accrued postretirement benefit obligations note 3 545 670 longterm debt net current maturities note 8 27083 7331 longterm liabilities 270 redeemable warrants notes 8 12 1500 redeemable convertible preferred stock 001 par value 4200000 shares authorized 3500000 issued outstanding december 31 2003 1 redemption value including accrued dividends note 10 4171 3821 total liabilities 45143 32185 commitments contingencies note 9 note 19 minority interests 2523 1584 common stockholders equity note 10 common stock 15 par value 110000000 shares authorized 19633340 issued outstanding 2945 capital excess par value 6887 7237 accumulated deficit 8625 9173 total shareholders equity 1207 1009 total liabilities shareholders equity 48873 34778 accompanying notes integral part financial statements notes financial statements note 1 nature business summary significant accounting policies organization business oilquip rentals inc oil gas rental company oilquip incorporated february 4 2000 find acquire acquisition targets operate subsidiaries february 6 2001 oilquip subsidiary mountain compressed air inc mountain air texas corporation acquired certain assets mountain air drilling service co inc madsco whose business consists providing equipment trained personnel four corner areas southwestern united states mountain air primarily provides compressed air equipment related products services trained operators companies business drilling natural gas may 9 2001 oilquip merged subsidiary allischalmers corporation allischalmers company merger oilquips outstanding common stock converted 10000000 shares allischalmers common stock legal purposes allischalmers acquired oilquip parent company mountain air however accounting purposes oilquip treated acquiring company reverse acquisition allischalmers financial statements prior merger financial statements oilquip result merger fixed assets goodwill intangibles allischalmers increased 2691000 november 30 2001 company entered agreement sell wholly owned subsidiary houston dynamic service inc hds general manager hds management buyout sale hds finalized december 12 2001 conjunction sale hds company formally discontinued operations related precision machining rotating equipment principal hds business february 6 2002 allischalmers acquired 81 outstanding stock jens oilfield service inc jens supplies highly specialized equipment operations install casing production tubing required drill complete oil gas wells company also purchased substantially outstanding common stock preferred stock strata directional technology inc strata provides highend directional horizontal drilling services specific targeted reservoirs cannot reached vertically july 2003 subsidiary mountain air entered limited liability company operating agreement division mi llc mi joint venture smith international schlumberger nv schlumberger limited form texas limited liability company named aircomp llc aircomp companies contributed assets net book value approximately 13 million aircomp llc aircomp company owns 55 mi owns 45 aircomp company controls aircomp company accounted joint venture business combination vulnerabilities concentrations company provides oilfield services several regions including states california texas utah louisiana new mexico gulf mexico southern portions mexico nature companys operations many regions operates subject changing economic regulatory political conditions company believes vulnerable risk nearterm longterm severe changes demand prices oil natural gas use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period future events effects cannot perceived certainty accordingly companys accounting estimates require exercise judgment management believes estimates assumptions used preparation consolidated financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts recoverability longlived assets intangibles useful lives used depreciation amortization income taxes related valuation allowances accounting estimates used preparation consolidated financial statements may change new events occur experience acquired additional information obtained companys operating environment changes principles consolidation consolidated financial statements include accounts allischalmers subsidiaries joint venture aircomp companys subsidiaries mountain air jens strata significant intercompany transactions eliminated revenue recognition companys revenue recognition policy significant revenue key component results operations addition revenue recognition determines timing certain expenses commissions royalties company follows specific detailed guidelines measuring revenue revenues recognized company subsidiaries services rendered pricing fixed determinable collection reasonably assured securities exchange commissions sec staff accounting bulletin sab 104 revenue recognition financial statements sab 104 provides guidance sec staffs views application generally accepted accounting principles selected revenue recognition issues companys revenue recognition policy accordance generally accepted accounting principles sab 104 allowance doubtful accounts receivable customer obligations due normal trade terms company sells services oil natural gas drilling companies company performs continuing credit evaluations customers financial condition although company generally require collateral letters credit may required customers certain circumstances company records allowance doubtful accounts based specifically identified amounts uncollectible company limited number customers individually large amounts due given balance sheet date unanticipated change one customers credit worthiness matters affecting collectibility amounts due customers could material effect results operations period changes events occur attempts collect receivable failed receivable written allowance december 31 2003 2002 company recorded allowance doubtful accounts 168000 32000 respectively bad debt expense 136000 32000 0 years ended december 31 2003 2002 2001 respectively cash equivalents company considers highly liquid investments original maturity three months less time purchase cash equivalents property equipment property equipment recorded cost less accumulated depreciation maintenance repairs charged operations incurred refurbishments renewals capitalized value equipment enhanced extended period cost exceeds minimum amount 1000 property equipment sold otherwise disposed asset account related accumulated depreciation account relieved gain loss included operations cost property equipment currently service depreciated estimated useful lives related assets range three fifteen years depreciation computed straightline method financial reporting purposes depreciation expense charged operations 1954000 year ended december 31 2003 1837000 year ended december 31 2002 621000 year ended december 31 2001 goodwill intangible assets amortization january 1 2002 company adopted statement financial accounting standards sfas 142 goodwill intangible assets sfas 142 goodwill including goodwill associated equity method investments intangible assets infinite lives amortized tested impairment annually frequently circumstances indicate impairment may exist intangible assets finite useful lives amortized either straightline basis assets estimated useful life basis reflects pattern economic benefits intangible assets realized company performs impairment tests carrying value goodwill reporting unit annual basis june 30th december 31st mountain air strata operating subsidiaries respectively december 31 2003 2002 evidence impairment exists result formation aircomp july 1 2003 company subsidiary mountain air contributed assets whose cost less mountain airs underlying equity net assets aircomp difference cost investment amount companys underlying equity net assets aircomp accounted similar business combination per requirements sfas 141 business combinations difference approximately 1551000 recorded prorata contraasset historical net book values property equipment aircomp effects reflected accompanying consolidated financial statements include majorityowned controlled joint venture aircomp period applicable depreciable lives assets company amortize basis differences depreciation expense 2001 goodwill amortized using straightline method expected useful life 20 years period ended december 31 2001 company recorded 403000 amortization expense related goodwill impairment longlived assets longlived assets include property plant equipment goodwill intangibles certain assets reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable impairment loss recorded period determined carrying amount recoverable determination recoverability made based upon estimated undiscounted future net cash flows excluding interest expense impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets financial instruments financial instruments consist cash equivalents accounts receivable payable debt carrying values cash equivalents accounts receivable payable approximate fair value company believes fair values carrying value debt would materially different due instruments interest rates approximating market rates similar borrowings december 31 2003 2002 concentrations credit risk major customers sfas 105 disclosure information financial instruments offbalancesheet risk financial instruments concentrations credit risk requires disclosure significant concentration credit risk regardless degree risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents trade accounts receivable company transacts business several financial institutions however amount deposit three financial institutions exceeded 100000 federally insured limit december 31 2003 total 1050793 management believes financial institutions financially sound risk loss minimal approximately 25 companys revenues year ended december 31 2003 derived two customers compared approximately 20 companys revenues year ended december 31 2002 approximately 20 companys revenues year ended december 31 2002 derived two customers compared approximately 79 companys revenues year ended december 31 2001 including one customer accounted 65 companys revenues 2001 accounts receivable december 31 2003 includes 1387000 compared 706000 december 31 2002 two customers jenss largest customer maytep revenues 3329000 accounted 33 jens total revenues year ended december 31 2003 revenues 2699000 accounted 35 jens total revenues year ended december 31 2002 company provides extended payment terms maytep maintains high account receivable balance due terms account receivable reached maximum approximately 16 million 2003 1354000 december 31 2003 default receivable could material adverse effect company debt issuance costs related issuance debt capitalized amortized interest expense using straightline method maturity periods related debt maturity periods range 2 5 years advertising company expenses advertising costs incurred advertising expenses years ended december 31 2003 2002 2001 totaled 41000 96500 31400 respectively income taxes company adopted provisions sfas 109 accounting income taxes sfas 109 sfas 109 requires recognition deferred tax liabilities assets expected future tax consequences events included financial statements income tax returns method deferred tax assets liabilities determined based difference financial statement tax basis assets liabilities using enacted tax rates effect year differences expected reverse comprehensive income statement financial accounting standards 130 reporting comprehensive income requires presentation disclosure changes equity nonowner sources comprehensive income company items comprehensive income reported periods reclassifications restatement form 10q certain prior period balances reclassified conform current year presentation reclassification accompanying consolidated balance sheet december 31 2003 occurred since companys september 30 2003 interim condensed balance sheet reported companys september 30 2003 form 10q basis differences created companys cost investment aircomp companys underlying equity net assets aircomp reclassified additional paid capital reflect pro rata reduction companys property equipment balances effect results operations previously reported companys september 30 2003 form 10q current year presentation conforms generally accepted accounting principles accompanying 2003 financial statements restated previously filed interim financial statements included form 10q first second third quarters 2003 discussed note 7 accompanying financial statements adjustment recorded fourth quarter 2003 reflect change estimate recoverability foreign taxes paid 2002 2003 effect significant fourth quarter adjustment individual quarterly financial statements follows certain amounts accompanying statement operations year ended december 31 2002 reclassified conform restatement including reclassification foreign income taxes cost goods sold foreign tax expense personnel restructuring costs company recorded classified separately recurring selling general administrative costs approximately 495000 incurred terminate relocate several members management occurred september 2002 business acquisition costs company capitalizes direct costs associated successful business acquisitions expenses acquisition costs unsuccessful acquisition efforts stockbased compensation company accounts stockbased compensation using accounting principle board opinion 25 apb 25 apb 25 compensation expense recognized stock options exercise price less market price grant date option stock options exercise prices market value stock grant date company adopted disclosureonly provisions sfas 123 accounting stockbased compensation sfas 123 company also adopted disclosureonly provisions sfas 123 stock options granted employees directors company accordingly compensation cost recognized apb 25 compensation expense options granted recorded based fair value grant date options consistent provisions sfas 123 companys net incomeloss net incomeloss per share years ended december 31 2003 2002 2001 would decreased pro forma amounts indicated year ended december 31 thousands except per share 2003 2002 2001 net income loss reported 108 3969 4577 pro forma 2457 3969 4577 net loss per share basic reported 001 023 115 pro forma 010 023 115 diluted reported 001 023 115 pro forma 010 023 115 options granted 2003 2001 see note 11 disclosures regarding stock options year ended december 31 2003 2002 2001 expected dividend yield 0 expected price volatility 26508 100 riskfree interest rate 625 5 expected life options 7 years 4 years segments enterprise related information company discloses results segments accordance sfas 131 disclosures segments enterprise related information sfas 131 company designates internal organization used management allocating resources assessing performance source companys reportable segments sfas 131 also requires disclosures products services geographic areas major customers december 31 2003 2002 company operates three segments organized service line casing services directional drilling services compressed air drilling services december 31 2001 company operated one segment please see note 15 disclosure accordance sfas 131 pension post retirement benefits sfas 132 employers disclosures pension post retirement benefits sfas 132 requires certain disclosures employers pension post retirement benefit plans specifies accounting measurement recognition plans sfas 132 requires disclosure information changes benefit obligations fair values plan assets facilitates financial analysis please see note 3 disclosure accordance sfas 132 derivative instruments hedging activities sfas 133 accounting derivative instruments hedging activities sfas 133 establishes accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities currently company derivative instruments income loss per common share company computes income loss per common share accordance provisions sfas 128 earnings per share sfas 128 sfas 128 requires companies complex capital structures present basic diluted earnings per share basic earnings per share measured income loss available common stockholders divided weighted average outstanding common shares period diluted earnings per share similar basic earnings per share presents dilutive effect per share basis potential common shares eg convertible securities stock options etc converted beginning periods presented potential dilutive common shares antidilutive effect eg increase income per share decrease loss per share excluded diluted earnings per share result companys net loss years ended december 31 2002 2001 common stock equivalents excluded effect would antidilutive new accounting pronouncements september 2003 fasb approved sfas 150 accounting certain financial instruments characteristics liabilities equity sfas 150 sfas 150 establishes standards issuer classifies measures certain financial instruments characteristics liabilities equity statement effective financial instruments entered modified may 31 2003 otherwise effective beginning first interim period beginning september 15 2003 effect companys financial position include fact beginning july 1 2003 redeemable warrants classified liabilities shown mezzanine equity section balance sheet adoption sfas 150 could also affect companys debt covenant calculations purposes bank loans december 31 2003 company default certain covenants jenss strata obtained waivers covenant defaults lender note 2 emergence chapter 11 allischalmers corporation emerged chapter 11 proceedings october 31 1988 plan reorganization consummated december 2 1988 company thereby discharged debts arose confirmation first amended restated joint plan reorganization plan reorganization capital stock cancelled made eligible exchange shares common stock reorganized company may 9 2001 reverse merger oilquip described note 1 constituted event whereby exchange shares common stock reorganized company occurred note 3 pension post retirement benefit obligations pension plan 1994 companys independent pension actuaries changed assumptions mortality administrative expenses used determine liabilities allischalmers consolidated pension plan consolidated plan result consolidated plan funded present value basis company unable fund obligations september 1997 obtained pension benefit guaranty corporation pbgc distress termination consolidated plan section 4041c employee retirement income security act 1974 amended erisa pbgc agreed plan termination date april 14 1997 pbgc became trustee terminated consolidated plan september 30 1997 upon termination consolidated plan company subsidiaries incurred liability pbgc estimated approximately 679 million pbgc liability september 1997 company pbgc entered agreement principle settlement pbgc liability required among things satisfactory resolution companys tax obligations respect consolidated plan section 4971 internal revenue code 1986 amended code august 1998 company internal revenue service irs settled companys tax liability code section 4971 75000 june 1999 company pbgc entered agreement settlement pbgc liability pbgc agreement pursuant terms pbgc agreement company issued 585100 shares common stock pbgc reducing pension liability estimated fair market value shares 669 million company right first refusal respect sale shares connection pbgc agreement company pbgc entered following agreements registration rights agreement registration rights agreement ii lockup agreement among allischalmers pbgc others connection merger oilquip described lockup agreement terminated registration rights agreement amended provide pbgc right shares common stock registered securities act 1933 form s3 12 month period following merger extent company eligible use form s3 currently thereafter shares registered form s1 s2 order satisfy discharge pbgc liability pbgc agreement provided company either receive single transaction series related transactions debt financing made available company least 10 million borrowings ii consummate acquisition single transaction series related transactions assets andor business purchase price including funded debt assumed least 10 million release event merger oilquip merger may 9 2001 described note 1 constituted release event satisfied discharged pbgc liability connection merger company pbgc agreed pbgc right appoint one member board directors company long holds least 117020 shares common stock connection merger lockup agreement terminated entirety december 31 2003 2002 company longer liable obligations consolidated plan medical life pursuant plan reorganization company assumed contractual obligation simplicity manufacturing inc smi reimburse smi 50 actual cost medical life insurance claims select group retirees smi retirees prior simplicity manufacturing division allischalmers actuarial present value expected retiree benefit obligation determined actuary amount results applying actuarial assumptions 1 historical claimscost data 2 estimates time value money discounts interest 3 probability payment including decrements death disability withdrawal retirement today expected date benefit payments december 31 2003 2002 company recorded postretirement benefit obligations 545000 670000 respectively associated transaction 401k savings plan january 1 2003 company adopted 401k profit sharing plan defined contribution savings plan designed provide retirement income eligible employees company subsidiaries plan intended qualified section 401k internal revenue code 1986 amended funded voluntary pretax contributions eligible employees may contribute percentage eligible compensation limited subject statutory limits plan also funded discretionary matching employer contributions company eligible employees cannot participate plan attained age 21 completed sixmonths service company upon leaving company participant 100 vested respect participants contributions companys matching contributions vested threeyear period accordance plan document contributions invested directed participant investment funds available plan matching contributions approximately 10000 paid 2003 note 4 acquisitions february 6 2001 mountain air acquired business certain assets madsco private company 10000000 including 200000 deposit paid 2000 cash 2200000 promissory note sellers interest 5 34 percent principal interest due february 6 2006 acquisition accounted using purchase method accounting goodwill 3661000 identifiable intangible assets 800000 recorded acquisition may 9 2001 oilquip merged subsidiary allischalmers merger oilquips outstanding common stock converted initially 400000 shares allischalmers common stock plus 9600000 shares allischalmers common stock issued october 15 2001 acquisition accounted using purchase method accounting reverse acquisition goodwill 290000 identifiable intangible assets 719000 recorded connection merger effective date merger oilquip retroactively became reporting company result financial statements prior merger oilquip company completed two acquisitions related financing february 6 2002 company purchased 81 outstanding stock jens supplies highly specialized equipment operations install casing production tubing required drill complete oil gas wells company also purchased substantially outstanding common stock preferred stock strata provides highend directional horizontal drilling technology specific targeted reservoirs cannot reached vertically aggregate purchase price jens strata 10250000 cash ii 4000000 note payable due four years iii 1234560 noncompete agreement payable five years iv 7957712 shares common stock company v 3500000 shares newly created series 10 cumulative convertible preferred stock company preferred stock vi additional payment estimated 1000000 1250000 based upon jens working capital february 1 2002 actual working capital adjustment approximately 983000 addition connection strata acquisition energy spectrum partners lp issued warrants purchase 437500 shares company common stock exercise price 015 per share acquisitions accounted using purchase method accounting goodwill 4168000 identifiable intangible assets 2035000 recorded acquisitions july 2003 subsidiary mountain air entered limited liability company operating agreement division mi llc mi joint venture smith international schlumberger nv schlumberger limited form texas limited liability company named aircomp llc aircomp formation aircomp created second largest provider compressed air related products services drilling workover completion transmission segments oil gas geothermal industries pursuant terms aircomp operating agreement company contributed approximately 63 million assets subsidiary mountain air exchange 55 ownership aircomp mi contributed approximately 68 million exchange 45 ownership aircomp result companys controlling interest company consolidated aircomp financial statements following unaudited pro forma consolidated summary financial information illustrates effects formation aircomp companys results operations december 31 2003 acquisitions jens strata companys results operations december 31 2002 based historical statements operations transactions occurred beginning periods presented year ended december 31 unaudited thousands except per share 2003 2002 revenues 33605 19142 operating income loss 3098 401 net income loss 577 4431 net income loss per common share basic 03 024 diluted 02 024 note 5 discontinued operations december 12 2001 company consummated sale wholly owned subsidiary hds general manager hds buyer management buyout effective date november 30 2001 terms sale company received promissory note buyer amount 790500 due november 30 2007 secured certain hds equipment note accrue interest rate 7 payment date september 30 2002 company received cash amount 600000 recorded 191000 factoring costs related early termination promissory note buyer hds loss sale approximately 20 million recorded year ended december 31 2001 conjunction sale hds company formally discontinued operations related precision machining rotating equipment principal hds business operating results business sold reported separately discontinued operations accompanying statement operations consists following period may 9 2001 november 30 2001 thousands revenues 1925 cost sales 1486 gross profit 439 operating expenses 594 depreciation amortization 124 loss operations 279 expense income interest expense 12 loss discontinued operations 291 loss sale discontinued operations 2013 note 6 property intangibles assets property equipment comprised following december 31 depreciation period 2003 2002 thousands land 27 25 building improvements 15 20 years 729 706 machinery equipment 3 15 years 23972 14674 tools furniture fixtures leasehold improvements 3 7 years 4098 4059 total 28726 19464 less accumulated depreciation 2487 2340 property equipment net 26339 17124 intangible assets follows december 31 amortization period 2003 2002 thousands intellectual property 20 years 1009 noncompete agreements 3 5 years 1535 intangible assets 3 10 years 1000 total 3544 less accumulated amortization 1254 726 intangible assets net 2290 2818 note 7 income taxes temporary differences tax basis assets liabilities reported amounts financial statements result differences income tax purposes income financial statement purposes future years valuation allowance established deferred tax assets management based upon available information considers likely benefit assets realized company recorded valuation allowance equal excess deferred tax assets deferred tax liabilities company unable determine likely deferred tax asset realized tax reform act 1986 contains provisions limit utilization net operating loss tax credit carry forwards change ownership described section 382 internal revenue code change ownership may limit companys utilization net operating loss tax credit carry forwards could triggered public offering subsequent sales securities company stockholders deferred income tax assets related allowance december 31 2003 2002 follows 2003 2002 thousands deferred noncurrent income tax assets net future tax deductible items 500 net operating loss carry forwards 2975 2033 ac reorganization trust claims 35000 total deferred noncurrent income tax assets 38475 37533 valuation allowance 38475 37533 net deferred noncurrent income taxes net operating loss carry forwards tax purposes december 31 2003 2002 estimated 85 million 59 million respectively expiring 2022 net future taxdeductible items relate primarily differences book tax depreciation amortization compensation expense related issuance stock options gross deferred tax liabilities december 31 2003 2002 material company subsidiaries file consolidated us federal income tax return company current tax expense years ended december 31 2003 2002 2001 respectively company specifically jens subsidiary pay foreign income taxes within country mexico related earnings mexico revenues company paid 370000 270000 foreign income taxes mexico years ended december 31 2003 2002 respectively approximately 640000 us foreign tax credits available company amount company determined approximately 205000 recoverable future period applying credits back taxable income jens subsidiary 2001 2000 205000 recoverable foreign income taxes recorded current assets accompanying balance sheet company december 31 2003 remaining 435000 available us foreign tax credits may recoverable company depending upon availability taxable income future years therefore recorded asset december 31 2003 foreign tax credits available company begin expire year 2007 following table reconciles income taxes based us statutory tax rate companys income tax expense continuing operations 2003 2002 2001 income tax expense based us statutory tax rate foreign income subject foreign taxes rate different us statutory rate 370468 269568 total 370468 269568 plan reorganization established ac reorganization trust settle claims make distributions creditors certain shareholders company transferred cash certain property ac reorganization trust december 2 1988 payments made company ac reorganization trust generate tax deductions company upon transfer generate deductions company ac reorganization trust makes payments holders claims plan reorganization also created trust process liquidate product liability claims payments made ac reorganization trust product liability trust generate current tax deductions company deductions available company product liability trust makes payments liquidate claims incurs expenses company believes abovenamed trusts grantor trusts therefore includes income loss trusts companys income loss tax purposes resulting adjustment tax basis net operating capital loss carry forwards income loss trusts included companys results operations financial reporting purposes note 8 debt follows december 31 debt stated december 31 2003 2002 net remaining put obligations totaling approximately 325000 842000 respectively disclosed redeemable warrants december 31 2003 2002 gross debt equal approximately 32558000 22063000 respectively substantially companys assets pledged collateral outstanding debt agreements december 31 2003 companys weighted average interest rate outstanding debt approximately 634 december 31 2002 companys weighted average interest rate outstanding debt approximately 85 maturities debt obligations december 31 2003 follows maturities debt thousands year ended december 31 2004 6800 december 31 2005 9465 december 31 2006 5533 december 31 2007 5581 december 31 2008 thereafter 4854 total 32233 april 2004 discussed note 20 recent developments maturity dates obligations aggregating 9768000 extended january february 2005 january february 2006 delay maturity portion amounts set forth maturity dates years ending december 31 2004 december 31 2005 debt agreements follows mountain air notes payable wells fargo equipment leasing term loan original amount 267000 interest rates 5 interest payable monthly principal payments 5039 due last day month maturity date loan june 30 2008 balance december 31 2003 247000 note payable seller mountain air drilling service company madsco note sellers madsco assets original amount 2200000 575 simple interest reduced 1469151 result settlement legal action sellers principal accrued interest due september 30 2007 amount 1863195 see note 15 information regarding modification terms agreement balance december 31 2003 1511000 jens note payable wells fargo credit inc term note term loan original amount 4042396 amended october 2003 5100000 floating interest rate 60 december 31 2003 monthly principal payments 85000 plus 25 jens receipt payment maytep maturity date loan january 31 2005 april 2004 extended january 31 2006 balance december 31 2003 4654000 note payable wells fargo credit inc real estate note real estate loan amount 532000 floating interest rate 60 december 31 2003 monthly principal payments 14778 plus accrued interest principal due janaury 31 2005 balance december 31 2003 207000 line credit wells fargo credit inc december 31 2003 jens 1000000 line credit wells fargo credit inc 26000 outstanding committed line credit due january 31 2005 april 2003 extended january 31 2006 interest accrues floating rate plus 3 70 december 31 2003 committed portion additionally jens pays 05 fee uncommitted portion subordinated note payable seller jens subordinated sellers note original amount 4000000 75 simple interest december 31 2003 533000 interest accrued included accrued interest principal interest due january 31 2006 note subordinated rights companys bank lenders note payable seller jens noncompete agreement conjunction purchase jens note 4 company agreed cause jens pay total 1234560 seller jens exchange noncompete agreement signed simultaneously jens make monthly payments 20576 period ended january 31 2007 december 31 2003 balance approximately 761000 including 247000 classified shortterm note payable texas state bank term note term loan original amount 397080 floating interest rate 60 december 31 2003 monthly principal payments 11000 plus interest maturity date loan september 17 2006 december 31 2003 outstanding balance 354000 strata vendor financing december 2003 strata entered shortterm vendor financing agreement original amount 1746000 major supplier drilling motors drilling motor rentals motor lease costs motor repair costs agreement provides repayment amounts due later december 30 2005 payment interest note due monthly three principal payments due october 2004 april 2005 december 2005 vendor financing incurs interest rate 80 december 31 2003 outstanding balance approximately 1746000 vendor financing october 2003 strata entered shortterm vendor financing agreement original amount 779000 major supplier drilling motors purchase fifty 50 drilling motors agreement provides repayment amounts due later october 31 2004 paymenton note due monthly amount 71000 plus interest vendor financing incurs interest rate 80 december 31 2003 outstanding balance approximately 637000 line credit wells fargo credit inc december 31 2003 strata 2500000 line credit wells fargo credit inc 2413000 outstanding committed line credit due january 31 2005 april 2004 extended january 31 2006 interest accrues floating interest rate plus 3 70 december 31 2003 committed portion additionally strata pays 05 annual fee uncommitted portion allischalmers notes payable wells fargo energy capital inc subordinated debt amortization redeemable warrant secured subordinated debt issued partially finance acquisitions jens strata original amount 3000000 12 interest payable monthly amount 2675000 outstanding december 31 2003 principal due january 31 2005 april 2004 extended february 1 2006 connection incurring debt company issued redeemable warrants valued 900000 recorded discount subordinated debt liability see reedemable warrants note 12 discount amortizable three years beginning february 6 2002 additional interest expense 300000 recognized year ended december 31 2003 debt recorded 2675000 net unamortized portion put obligation notes payable certain former directors allischalmers board established arrangement compensate former continuing board members served 1989 march 31 1999 without compensation pursuant arrangement 1999 allischalmers issued promissory notes totaling 325000 current former directors officers notes bear interest rate 5 compounded quarterly due march 28 2005 december 31 2003 notes recorded 386000 including accrued interest redeemable warrants company issued redeemable warrants exercisable 1165000 shares companys common stock exercise price 015 per share warrants b nonredeemable warrants exercisable maximum 335000 shares companys common stock 100 per share warrant c warrants issued connection issuance subordinated debt instrument mountain air 2001 subsequently repaid connection formation aircomp july 2003 related issuance 3 million subordinated debt discussed collectively subordinated debt warrants b subject cash redemption provisions puts amount 600000 900000 respectively discretion warrant holders beginning earlier final maturity date subordinated debt three years closing subordinated debt january 31 2005 warrant c contain puts provisions april 2004 maturity date debt extended february 1 2006 company recorded liability 600000 mountain air 900000 allischalmers total 1500000 amortizing effects puts interest expense life subordinated debt guarantee subsidiary obligations company guarantees many subsidiaries obligations addition companys chief executive officer chairman munawar h hidayatallah wife guarantee substantially companys obligations aircomp llc line credit wells fargo bank 1000000 line credit wells fargo bank 369000 outstanding december 31 2003 interest accrues floating interest rate plus 225 625 december 31 2003 committed portion payable quarterly starting september 2003 additionally aircomp pays 05 annual fee uncommitted portion line credit must repaid june 27 2007 notes payable wells fargo term note term loan original amount 8000000 variable interest rates related prime libor rates 409 december 31 2003 interest payable quarterly principal payments 286000 due last day quarter beginning july 2003 maturity date loan june 27 2007 balance december 31 2003 7429000 note payable wells fargo equipment term loan delayed draw term loan amount 1000000 interest rate equal libor rate plus 20 275 quarterly payments interest quarterly payments principal equal 5 outstanding balance commencing first quarter 2005 maturity date loan june 27 2007 aircomp yet drawn note outstanding balance december 31 2003 note payable mi llc subordinated debt subordinated debt amount 4818000 bearing annual interest rate 5 conjunction joint venture note due payable mi sells interest termination aircomp occurs december 31 2003 120000 interest accrued included accrued interest note 9 commitments contingencies company rents office space fiveyear lease expires february 5 2006 company subsidiaries also rent certain facilities shop yards equipment storage maintenance facility rent expense years ended december 31 2003 2002 2001 370000 303000 90000 respectively company lease obligations december 31 2003 future minimum rental commitments operating leases follows operating leases thousands year ended december 31 2004 318 december 31 2005 207 december 31 2006 116 december 31 2007 115 december 31 2008 thereafter 58 total 814 note 10 shareholders equity per share data financial statements december 31 2001 presented give effect recapitalization company occurred reverse acquisition allischalmers may 9 2001 recapitalization original number shares outstanding formerly private oilquip considered exchanged 10000000 shares allischalmers issued date reverse acquisition owners oilquip legal purposes allischalmers acquired oilquip parent company mountain air however accounting purposes oilquip treated acquiring company reverse acquisition allischalmers business combination accounted purchase result 2779000 value allischalmers common stock outstanding date acquisition added shareholders equity reflects recapitalization allischalmers reorganization combined company february 6 2002 connection acquisition 81 outstanding stock jens note 4 company issued 1397849 shares common stock seller jens individual presently employed president company business combination accounted purchase result 630000 fair value companys common stock issued date acquisition added shareholders equity february 6 2002 connection acquisition 95 outstanding stock strata note 4 company issued 6559863 shares common stock seller strata energy spectrum business combination accounted purchase result 2952000 fair value companys common stock issued date acquisition added shareholders equity may 31 2002 company acquired remaining 5 outstanding stock strata issued 87500 shares common stock seller energy spectrum result 153000 fair value companys common stock issued date purchase added shareholders equity connection strata purchase company authorized creation preferred stock preferred stock cumulative dividends ten percent per annum payable additional shares preferred stock elected declared company cash additionally preferred stock convertible common stock company preferred stock also subject mandatory redemption february 4 2004 earlier net proceeds new equity sales optional redemption company time redemption price preferred stock 100 per share plus accrued dividend rights preferred stock including accrued dividend rights converted 8590449 shares common stock april 2 2004 see recent developments year ended december 31 2003 company accrued 671000 dividends payable preferred stock holders dividends declared paid date april 2 2004 outstanding preferred stock including accrued dividends converted 8590449 shares common stock connection strata acquisition company issued energy spectrum warrant purchase 437500 shares companys common stock exercise price 015 per share february 19 2003 company issued additional warrant purchase 875000 shares companys common stock exercise price 015 per share warrant issued february 19 2003 valued accordance blackscholes valuation model approximately 306000 fair value warrant issuance recorded similar preferred share dividend note 11 stock options 2000 conjunction promissory notes issued certain current former directors note 8 allischalmers board directors also granted stock options individuals options purchase 24000 shares common stock granted exercise price 275 options vested immediately may exercised time prior march 28 2010 december 31 2003 none stock options exercised compensation expense recorded options issued exercise price approximately equal fair value common stock date grant may 31 2001 board granted leonard toboroff director allischalmers option purchase 500000 shares common stock 050 per share exercisable 10 years october 15 2001 option granted services provided mr toboroff oilquip prior merger including providing financial advisory services assisting oilquips capital structure assisting oilquip finding strategic acquisition opportunities company recorded compensation expense 500000 issuance option year ended december 31 2001 december 16 2003 board granted employees company options purchase 4272500 shares common stock issued options purchase 70000 shares common stock nonemployee directors energy spectrum partners lp compensation services rendered directors 2002 2003 options exercisable 10 years december 16 2003 055 per share december 31 2003 none stock options exercised summary companys stock option activity related information follows following table summarizes additional information companys stock options outstanding december 31 2003 weighted average remaining weighted average exercise price shares option contractual life fair value 050 500000 775 years 100 275 24000 625 years 197 055 4342500 1000 years 055 056 4866500 975 years 063 stock options issued employees directors year ended december 31 2002 note 12 stock purchase warrants conjunction mountain air purchase oilquip february 2001 mountain air issued common stock warrant 620000 shares thirdparty investment firm assisted company initial identification purchase mountain air assets warrant entitles holder acquire 620000 shares common stock mountain air exercise price 01 per share nineyear period commencing february 7 2001 stock purchase warrant recorded fair value 200000 year ended december 31 2001 fully described note 8 mountain air allischalmers issued two warrants b purchase 1165000 total shares companys common stock exercise price 015 per share one warrant purchase 335000 shares companys common stock exercise price 100 per share warrant c connection subordinated debt financing holders may redeem warrants b total 1500000 january 31 2005 fair value warrant c established accordance blackscholes valuation model result 47000 added shareholders equity following assumptions utilized determine fair value dividend yield expected volatility 6724 risk free interest rate 5 expected lives four years february 6 2002 connection acquisition substantially outstanding stock strata note 4 company issued warrant purchase 437500 shares companys common stock exercise price 100 per share term four years fair value warrant established accordance blackscholes valuation model result 267000 added shareholders equity following assumptions utilized determine fair value dividend yield expected volatility 6724 risk free interest rate 5 expected lives four years connection strata acquisition february 19 2003 company issued energy spectrum additional warrant purchase 875000 shares companys common stock exercise price 015 per share preferred stock including accrued dividend rights converted 8590449 shares common stock april 2 2004 see recent developments note 13 lease receivable june 2002 companys subsidiary strata sold measurement drilling mwd assets third party terms sale company receive least 15000 per month thirtysix months thirtysix months purchaser option pay remaining balance continue paying minimum 15000 per month twentyfour additional months expiration additional twentyfour months purchaser must repay remaining balance transaction accounted direct financing lease nominal residual gain asset sale deferred income life lease year ended december 31 2003 company received total 251000 payments third party related lease note 14 related party transactions december 31 2003 2002 company owed chief executive officer company 193000 related deferred compensation advances totaling 49000 respectively also company owed former executive vice president shareholder company advances totaling 70000 deferred compensation 42000 companys chief executive officer munawar h hidayatallah wife guaranteed substantially debt obligations company subsidiaries company agreed compensate chief executive officer annual fee equal 14 1 amount debts company subsidiaries guaranteed mr hidayatallah wife payable quarterly beginning march 31 2004 president company former owner jens currently holds 19 minority interest jens individual holder 4000000 subordinated note payable issued jens also owed 533000 accrued interest 761000 related obligation noncompete agreement note 8 president company formerly sole proprietor jens owns shop yard leases jens monthly basis annual lease payments president terms lease 28800 years ended december 31 2003 2002 addition president company members family 100 texmex rental supply co texas corporation sold approximately 173000 290000 equipment supplies jens years ended december 31 2003 2002 respectively management company believes transactions terms least favorable jens could obtained unrelated third parties explained note 8 former directors company provided promissory notes 2000 lieu compensation past services provided total 386000 included longterm debt company due former directors current shareholders company december 31 2003 december 31 2003 mountain air owes joint venture partner aircomp llc mi fluids llc total 73000 note 15 settlement lawsuit june 2003 mountain air filed lawsuit former owners mountain air drilling service company sellers breaches asset purchase agreement sellers stored hazardous materials property leased mountain air without consent mountain air violated noncompete clause asset purchase agreement july 15 2003 mountain air entered settlement agreement sellers date agreement mountain air owed sellers total 2563195 including 22 million principal 363195 accrued interest part settlement agreement note payable sellers reduced 22 million 15 million note payable longer accrues interest due date note payable extended february 6 2006 september 30 2007 lumpsum payment due sellers date 1863195 mountain air recorded onetime gain reduction note payable sellers 1034000 third quarter 2003 gain calculated discounting note payable 1469152 using present value calculation accreting note payable 1863195 amount due september 2007 company record interest expense totaling 394043 life note payable beginning july 2003 note 16 segment information company three operating segments including casing services jens directional drilling services strata compressed air drilling services aircomp segments provide services petroleum industry company operated one reporting segment year ended december 31 2001 revenues operating income loss depreciation amortization interest capital expenditures assets reporting segments plus corporate function reported years ended december 31 2003 2002 year ended december 31 2003 2002 thousands revenues casing services 10037 7796 directional drilling services 16008 6529 compressed air drilling services 6679 3665 total revenues 32724 17790 operating income loss casing services 3628 2495 directional drilling services 1103 576 compressed air drilling services 115 945 general corporate 2222 2144 total incomeloss operations 2624 1170 depreciation amortization expense casing services 1413 1265 directional drilling services 275 295 compressed air drilling services 1041 955 general corporate 109 65 total depreciation amortization expense 2838 2580 interest expense casing services 1044 643 directional drilling services 268 215 compressed air drilling services 839 761 general corporate 316 637 total interest expense 2467 2256 capital expenditures casing services 2176 137 directional drilling services 1066 83 compressed air drilling services 2093 288 general corporate 19 10 total capital expenditures 5354 518 assets casing services 18191 15681 directional drilling services 11529 8888 compressed air drilling services 17946 9138 general corporate 1207 1071 total assets 48873 34778 following table contains customers represent 10 revenues three operating segments december 31 2003 2002 note 17 supplemental cash flows information note 18 quarterly results unaudited first second third fourth quarter thousands except per share amounts year 2003 revenues 6999 7340 8089 10296 operating income loss 1023 910 727 36 net income loss 59 335 1131 307 preferred stock dividend 394 87 88 87 net income loss attributed common shares 335 422 1043 394 income loss per common share basic 002 005 002 income loss per common share diluted 002 005 002 year 2002 revenues 3253 4238 4775 5724 operating income loss 133 729 540 232 net income loss 640 869 1505 955 preferred stock dividend 58 87 89 net income loss attributed common shares 698 956 1592 1044 income loss per common share basic diluted 004 005 008 006 note 19 legal matters company involved various legal proceedings arose ordinary course various business legal proceedings different stages addition special trusts established connection companys reorganization see note 2 emergence chapter 11 responsible certain costs expenses related companys prebankruptcy obligations opinion management legal counsel ultimate gain loss company proceedings reasonably estimated time note 20 subsequent events march 15 2004 company filed application list common stock american stock exchange however approval listing common stock subject numerous conditions including companywe effect reverse stock split resulting increase per share price least 300 per share meet certain quantitative qualitative standards stockholders board directors approved future reverse stock split see item 4 submission matters vote security holders assurance company meet listing requirements american stock exchange april 2 2004 company entered following transactions exchange investment 2 million company issued 3100000 shares common stock purchase price equal 050 per share warrants purchase 4000000 shares common stock exercise price 050 per share expiring april 1 2006 investor group investor group consisting entities affiliated donald christopher engel directors robert nederlander leonard toboroff aggregate purchase price common stock 1550000 aggregate purchase price warrants 450000 energy spectrum converted 3500000 shares series 10 cumulative convertible preferred stock including accrued dividend rights 8590449 shares common stock company investor group energy spectrum director saeed sheikh officers directors munawar h hidayatallah jens h mortensen entered stockholders agreement pursuant parties agreed vote election board directors company three persons nominated energy spectrum two persons nominated investor group one person nominated messrs hidayatallah mortensen sheikh addition parties company agreed event company effected public offering shares prior september 30 2005 request energy spectrum company retain investment banking firm identify candidates transaction involving sale company assets wells fargo credit inc wells fargo energy capital inc extended maturity dates certain obligations december 31 2003 aggregated approximately 9768000 january february 2005 january february 2006 condition extension company make 400000 initial payment 24 monthly principal payments amount 25000 wells fargo energy capital inc part extension lenders waived certain defaults including defaults relating failure jens strata comply certain covenants relating amount capital expenditures amended certain covenants set forth loan agreements ongoing basis addition wells fargo credit inc increased stratas line credit 25 million 40 million item 9 item 8 financial statements report independent registered public accounting firm board directors stockholders allischalmers energy inc houston texas audited accompanying consolidated balance sheet allischalmers energy inc subsidiaries december 31 2004 related consolidated statements operations stockholders equity cash flows year ended consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position allischalmers energy inc subsidiaries december 31 2004 consolidated results operations cash flows year ended conformity accounting principles generally accepted united states america uhy mann frankfort stein lipp cpas llp houston texas april 8 2005 report independent registered public accounting firm board directors allischalmers energy inc houston texas audited accompanying consolidated balance sheets allischalmers energy inc december 31 2003 2002 related consolidated statements operations stockholders equity cash flows two years period ended december 31 2003 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position allischalmers energy inc december 31 2003 2002 results consolidated operations cash flows two years period ended december 31 2003 conformity accounting principles generally accepted united states america discussed note 2 consolidated financial statements company restated consolidated financial statements year ended december 31 2003 gordon hughes banks llp greenwood village colorado march 3 2004 except note 11 date june 10 2004 notes 2 17 date february 10 2005 allischalmers energy inc consolidated statements operations thousands except per share amounts allischalmers energy inc consolidated statement stockholders equity thousands except share amounts allischalmers energy inc consolidated statements cash flows thousands allischalmers energy inc notes consolidated financial statements years ended december 31 2004 2003 2002 note 1 nature business summary significant accounting policies organization business allischalmers energy inc allischalmers company incorporated delaware 1913 oilquip rentals inc oil gas rental company oilquip incorporated february 4 2000 find acquire acquisition targets operate subsidiaries february 6 2001 oilquip subsidiary mountain compressed air inc mountain air texas corporation acquired certain assets mountain air drilling service co inc madsco whose business consisted providing equipment trained personnel four corners area southwestern united states mountain air primarily provided compressed air equipment related products services trained operators companies business drilling natural gas may 9 2001 oilquip merged subsidiary allischalmers energy inc allischalmers company merger oilquips outstanding common stock converted 20 million shares allischalmers common stock legal purposes allischalmers acquired oilquip parent company mountain air however accounting purposes oilquip treated acquiring company reverse acquisition allischalmers february 6 2002 company acquired 81 outstanding stock jens oilfield service inc jens supplies highly specialized equipment operations install casing production tubing required drill complete oil gas wells february 2 2002 company also purchased substantially outstanding common stock preferred stock strata directional technology inc strata provides highend directional horizontal drilling services specific targeted reservoirs cannot reached vertically july 2003 subsidiary mountain air company entered limited liability company operating agreement division mi llc mi joint venture smith international schlumberger nv schlumberger limited form texas limited liability company named aircomp llc aircomp assets contributed mountain air recorded mountain airs historical cost 63 million assets contributed mi recorded fair market value 103 million company owns 55 mi owns 45 aircomp result companys controlling interest operating control company consolidated aircomp financial statements aircomp compressed air drilling services segment september 23 2004 company acquired 100 outstanding stock safco oil field products inc safco 10 million safco leases spiral drill pipe provides related oilfield services oil drilling industry september 30 2004 company acquired remaining 19 jens exchange 13 million shares common stock total value consideration paid seller jens mortensen 64 million equal number shares common stock issued mr mortensen multiplied last sale price 495 common stock reported american stock exchange date issuance november 10 2004 aircomp acquired substantially assets diamond air drilling services inc marquis bit co llc collectively diamond air 46 million cash assumption approximately 450000 accrued liabilities company contributed 25 million mi llc contributed 21 million aircomp llc order fund purchase diamond air provides air drilling technology products oil gas industry west texas new mexico oklahoma diamond air leading provider air hammers hammer bit products december 10 2004 company acquired downhole injection services llc downhole approximately 11 million cash 568466 shares common stock payment assumption 950000 debt downhole headquartered midland texas provides chemical treatments wells inserting small diameter stainless steel coiled tubing producing oil gas wells vulnerabilities concentrations company provides oilfield services several regions including states california texas utah louisiana colorado oklahoma new mexico gulf mexico southern portions mexico nature companys operations many regions operates subject changing economic regulatory political conditions company vulnerable nearterm longterm changes demand prices oil natural gas related demand oilfield service operations use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period future events effects cannot perceived certainty accordingly companys accounting estimates require exercise judgment management believes estimates assumptions used preparation consolidated financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts recoverability longlived assets intangibles useful lives used depreciation amortization income taxes valuation allowances accounting estimates used preparation consolidated financial statements may change new events occur experience acquired additional information obtained companys operating environment changes principles consolidation consolidated financial statements include accounts allischalmers subsidiaries companys subsidiaries december 31 2004 mountain air aircomp 55 owned jens strata safco downhole significant intercompany transactions eliminated revenue recognition company provides rental equipment drilling services customers per day per job contractual rates recognizes drilling related revenue work progresses collectibility reasonably assured securities exchange commissions sec staff accounting bulletin sab 104 revenue recognition financial statements sab 104 provides guidance sec staffs views application generally accepted accounting principles selected revenue recognition issues companys revenue recognition policy accordance generally accepted accounting principles sab 104 allowance doubtful accounts receivable customer obligations due normal trade terms company sells services oil natural gas drilling companies company performs continuing credit evaluations customers financial condition although company generally require collateral letters credit may required customers certain circumstances company records allowance doubtful accounts based specifically identified amounts uncollectible company limited number customers individually large amounts due given date unanticipated change one customers credit worthiness matters affecting collectibility amounts due customers could material effect results operations period changes events occur attempts collect receivable failed receivable written allowance december 31 2004 2003 company recorded allowance doubtful accounts 265000 168000 respectively bad debt expense 104000 136000 32000 years ended december 31 2004 2003 2002 respectively cash equivalents company considers highly liquid investments original maturity three months less time purchase cash equivalents inventories stated lower cost market cost determined using firstin firstout fifo method average cost method approximates fifo includes cost materials labor manufacturing overhead property equipment property equipment recorded cost less accumulated depreciation maintenance repairs charged operations incurred maintenance repairs expense 575803 568996 631939 years ended december 31 2004 2003 2002 respectively refurbishments renewals capitalized value equipment enhanced extended period property equipment sold otherwise disposed asset account related accumulated depreciation account relieved gain loss included operations cost property equipment currently service depreciated estimated useful lives related assets range three twenty years depreciation computed straightline method financial reporting purposes depreciation expense charged operations 27 million year ended december 31 2004 21 million year ended december 31 2003 18 million year ended december 31 2002 goodwill intangible assets amortization january 1 2002 company adopted statement financial accounting standards sfas 142 goodwill intangible assets goodwill including goodwill associated equity method investments intangible assets infinite lives amortized tested impairment annually frequently circumstances indicate impairment may exist intangible assets finite useful lives amortized either straightline basis assets estimated useful life basis reflects pattern economic benefits intangible assets realized company performs impairment tests carrying value goodwill annual basis december 31st mountain air strata operating subsidiaries respectively december 31 2004 2003 evidence impairment exists aircomp sale interest venture company adopted sec staff accounting bulletin sab no51 accounting sales stock subsidiary account investment aircomp accounted consolidated subsidiary sfas 141 business combinations pursuant sab 51 company recorded contribution assets liabilities historical cost basis since liabilities exceeded assets companys basis aircomp negative amount company accounted assets contributed mi fair market value determined outside appraiser company issued mi 45 interest aircomp exchange assets contributed aircomp result formation venture retention 55 interest venture company realized immediate gain extent negative basis 55 interest combined assets liabilities venture accordance sab 51 company recorded negative basis investment aircomp addition equity share combined assets liabilities realized mi assets nonoperating income impairment longlived assets longlived assets include property plant equipment intangible assets certain assets reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable impairment loss recorded period determined carrying amount recoverable determination recoverability made based upon estimated undiscounted future net cash flows excluding interest expense impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets financial instruments financial instruments consist cash equivalents accounts receivable payable debt carrying values cash equivalents accounts receivable payable approximate fair value due shortterm nature company believes fair values carrying value companys debt would materially different due instruments interest rates approximating market rates similar borrowings december 31 2004 2003 concentration credit customer risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents trade accounts receivable company transacts business several financial institutions however amount deposit two financial institutions exceeded 100000 federally insured limit december 31 2004 total 71 million management believes financial institutions financially sound risk loss minimal company sells services major independent domestic international oil gas companies company performs ongoing credit valuations customers provides allowances probable credit losses appropriate year ended december 31 2004 matyep mexico represented 108 burlington resources represented 101 consolidated revenues respectively year ended december 31 2003 matyep burlington resources inc el paso energy corporation represented 102 111 141 respectively consolidated revenues matyep represented 980 100 international revenues 2004 2003 debt issuance costs related issuance debt capitalized amortized interest expense using straightline method maturity periods related debt income taxes company adopted provisions sfas 109 accounting income taxes sfas 109 sfas 109 requires recognition deferred tax liabilities assets expected future tax consequences events included financial statements income tax returns method deferred tax assets liabilities determined based difference financial statement tax basis assets liabilities using enacted tax rates effect year differences expected reverse personnel restructuring costs company recorded classified separately recurring selling general administrative costs approximately 495000 incurred terminate relocate several members management september 2002 stockbased compensation company accounts stockbased compensation using accounting principle board opinion 25 apb 25 apb 25 compensation expense recognized stock options exercise price less market price grant date option stock options exercise prices market value stock grant date company adopted disclosureonly provisions sfas 123 accounting stockbased compensation sfas 123 company also adopted disclosureonly provisions sfas 123 stock options granted employees directors company accordingly compensation cost recognized apb 25 compensation expense options granted recorded based fair value grant date options consistent provisions sfas 123 companys net incomeloss net incomeloss per share years ended december 31 2004 2003 2002 would decreased pro forma amounts indicated year ended december 31 thousands except per share 2004 2003 2002 restated net income loss reported 764 2271 4290 less total stock based employee compensation expense determined fair value based method awards net tax related effects 1072 2314 proforma net income loss common stockholders 308 43 4290 net income loss per share basic reported 010 058 114 pro forma 004 001 114 diluted reported 007 039 114 pro forma 003 001 114 options granted 2004 2003 see note 12 disclosures regarding stock options following assumptions applied determining pro forma compensation costs year ended december 31 2004 2003 2002 expected dividend yield expected price volatility 8976 26508 riskfree interest rate 70 625 expected life options 7 years 7 years weighted average fair value options granted market value 319 278 segments enterprise related information company discloses results segments accordance sfas 131 disclosures segments enterprise related information sfas 131 company designates internal organization used management allocating resources assessing performance source companys reportable segments sfas 131 also requires disclosures products services geographic areas major customers december 31 2003 company operated three segments organized service line casing tubing services directional drilling services compressed air drilling services company acquired safco september 2004 downhole december 2004 companies engaged rental tools safco production services downhole operations two companies aggregated services segment december 31 2004 please see note 18 disclosure segment information accordance sfas 131 pension post retirement benefits sfas 132 employers disclosures pension post retirement benefits sfas 132 requires certain disclosures employers pension post retirement benefit plans specifies accounting measurement recognition plans sfas 132 requires disclosure information changes benefit obligations fair values plan assets facilitates financial analysis please see note 3 disclosure accordance sfas 132 income loss per common share company computes income loss per common share accordance provisions sfas 128 earnings per share sfas 128 sfas 128 requires companies complex capital structures present basic diluted earnings per share basic earnings per share computed basis weighted average number shares common stock outstanding period periods april 12 2004 preferred dividends see note 10 deducted net income loss considered calculation income available common stockholders computing basic earnings per share diluted earnings per share similar basic earnings per share presents dilutive effect per share basis potential common shares eg convertible preferred stock options etc converted potential dilutive common shares antidilutive effect eg increase income per share decrease loss per share excluded diluted earnings per share result companys net loss year ended december 31 2002 common stock equivalents excluded effect would antidilutive components basic diluted earnings per share follows year ended december 31 2004 2003 thousands except earnings per share numerator net income available common stockholders 764 2271 plus income impact assumed conversions preferred stock dividendsinterest 124 656 net income loss applicable common stockholders plus assumed conversions 888 2927 denominator basic earnings per share weighted average shares outstanding 7930 3927 effect potentially dilutive common shares convertible preferred stock employee director stock options 4029 1834 denominator diluted earnings per share weighted average shares outstanding assumed conversions 11959 5761 basic earnings loss per share 010 058 diluted earning loss per share 007 039 reclassification certain prior period balances reclassified conform current year presentation new accounting pronouncements november 2004 fasb issued sfas 151 inventory costs amendment arb 43 chapter 4 amends guidance arb 43 clarify accounting abnormal amounts idle facility expense freight handling costs wasted material sfas 151 requires items recognized current period charges addition sfas 151 requires allocation fixed production overheads inventory based normal capacity production facilities sfas 151 effective inventory costs incurred fiscal years beginning june 15 2005 currently evaluating provisions sfas 151 adopt sfas 151 january 1 2006 december 2004 fasb issued sfas 123r sharebased payment sfas 123r sfas 123r revises sfas 123 accounting stockbased compensation focuses accounting sharebased payments services employer employee statement requires companies expense fair value employee stock options equitybased compensation grant date statement require certain type valuation model either binomial blackscholes model may used provisions sfas 123r effective financial statements annual interim periods beginning june 15 2005 currently evaluating method adoption impact operating results future cash flows impacted adoption standard december 2004 fasb issued fasb staff position 1091 fsp 1091 application fasb statement 109 accounting income taxes sfas 109 tax deduction qualified production activities provided american jobs creation act 2004 provides guidance recently enacted american jobs creation act 2004 act provides tax deduction income qualified domestic production activities fsp 1091 provides treatment deduction special deduction described sfas 109 deduction effect existing deferred tax assets liabilities impact deduction reported period deduction claimed us tax return expect deduction material impact effective tax rate future years fsp 1091 effective prospectively january 1 2005 note 2 restatement connection formation aircomp 2003 company mi contributed assets exchange 55 interest 45 interest respectively aircomp company originally accounted formation aircomp joint venture february 2005 determined transaction accounted using purchase accounting pursuant sfas 141 business combinations accounting sale interest subsidiary accordance sab 51 consequently company restated financial statements year ended december 31 2003 three quarters ended september 30 2004 reflect following adjustments increase book value fixed assets joint venture accounting company originally recorded value assets contributed mi aircomp mis historical cost 69 million purchase accounting company increased recorded value assets contributed mi approximately 33 million 103 million reflect fair market value determined third party appraisal addition joint venture accounting company established negative goodwill reduced fixed assets amount 1550000 purchase accounting company increased fixed assets 16 million reverse negative goodwill previously recorded therefore fixed assets increased total 49 million increase minority interest paid capital purchase accounting minority interest capital excess par increased 15 million 955000 respectively recognition nonoperating gain joint venture accounting gain loss recognized connection formation aircomp purchase accounting recorded 24 million nonoperating gain third quarter 2003 reduction net income result increase fixed assets year ended december 31 2003 depreciation expense increased 98000 minority interest expense decreased 44000 resulting reduction net income attributable common stockholders 54000 however result recording nonoperating gain recording reduction income net income attributed common stockholders increased 24 million restated consolidated balance sheet december 31 2003 restated consolidated operations restated consolidated statement cash flows year ended december 31 2003 reflecting adjustments presented amounts thousands except share amounts addition 2004 financial statements restated previously filed interim financial statements included form 10q first second third quarters 2004 effect restatement individual quarterly financial statements follows addition accompanying 2003 financial statements restated previously filed interim financial statements included form 10q first second third quarters 2003 adjustment recorded fourth quarter 2003 reflect change estimate recoverability foreign taxes paid 2002 2003 effect significant fourth quarter adjustment individual quarterly financial statements follows certain amounts accompanying statement operations year ended december 31 2002 reclassified conform restatement including reclassification foreign income taxes cost goods sold foreign tax expense note 3 pension post retirement benefit obligations pension plan 1994 companys independent pension actuaries changed assumptions mortality administrative expenses used determine liabilities allischalmers consolidated pension plan consolidated plan result consolidated plan funded present value basis company unable fund obligations september 1997 obtained pension benefit guaranty corporation pbgc distress termination consolidated plan section 4041c employee retirement income security act 1974 amended erisa pbgc agreed plan termination date april 14 1997 pbgc became trustee terminated consolidated plan september 30 1997 upon termination consolidated plan company subsidiaries incurred liability pbgc estimated approximately 679 million pbgc liability september 1997 company pbgc entered agreement principle settlement pbgc liability required among things satisfactory resolution companys tax obligations respect consolidated plan section 4971 internal revenue code 1986 amended code august 1998 company internal revenue service irs settled companys tax liability code section 4971 75000 june 1999 company pbgc entered agreement settlement pbgc liability pbgc agreement pursuant terms pbgc agreement company issued 117020 shares common stock pbgc reducing pension liability estimated fair market value shares 669 million company right first refusal respect sale shares connection pbgc agreement company pbgc entered following agreements registration rights agreement registration rights agreement ii lockup agreement among allischalmers pbgc others connection merger oilquip described lockup agreement terminated registration rights agreement amended provide pbgc right shares common stock registered securities act 1933 form s3 12 month period following merger extent company eligible use form s3 currently thereafter shares registered form s1 s2 order satisfy discharge pbgc liability pbgc agreement provided company either receive single transaction series related transactions debt financing made available company least 10 million borrowings ii consummate acquisition single transaction series related transactions assets andor business purchase price including funded debt assumed least 100 million release event merger oilquip merger may 9 2001 described note 1 constituted release event satisfied discharged pbgc liability connection merger company pbgc agreed pbgc right appoint one member board directors company long holds least 23404 shares common stock connection merger lockup agreement terminated entirety december 31 2003 company longer liable obligations consolidated plan medical life pursuant plan reorganization company assumed contractual obligation simplicity manufacturing inc smi reimburse smi 50 actual cost medical life insurance claims select group retirees smi retirees prior simplicity manufacturing division allischalmers actuarial present value expected retiree benefit obligation determined actuary amount results applying actuarial assumptions 1 historical claimscost data 2 estimates time value money discounts interest 3 probability payment including decrements death disability withdrawal retirement today expected date benefit payments december 31 2004 2003 2002 company recorded postretirement benefit obligations 687000 545000 670000 respectively associated transaction 401k savings plan june 30 2003 company adopted 401k profit sharing plan defined contribution savings plan designed provide retirement income eligible employees company subsidiaries plan intended qualified section 401k internal revenue code 1986 amended funded voluntary pretax contributions eligible employees may contribute percentage eligible compensation limited subject statutory limits plan also funded discretionary matching employer contributions company eligible employees cannot participate plan attained age 21 completed sixmonths service company upon leaving company participant 100 vested respect participants contributions companys matching contributions vested threeyear period accordance plan document contributions invested directed participant investment funds available plan matching contributions approximately 35000 paid 2004 approximately 10000 paid 2003 note 4 acquisitions company completed two acquisitions related financing february 6 2002 company purchased 81 outstanding stock jens supplies highly specialized equipment operations install casing production tubing required drill complete oil gas wells company also purchased substantially outstanding common stock preferred stock strata provides highend directional horizontal drilling technology specific targeted reservoirs cannot reached vertically aggregate purchase price jens strata 103 million cash ii 40 million note payable due four years iii 12 million noncompete agreement payable five years iv 16 million shares common stock company v 35 million shares newly created series 10 cumulative convertible preferred stock company preferred stock vi additional postclosing payment approximately 983000 addition connection strata acquisition energy spectrum partners lp issued warrants purchase 87500 shares company common stock exercise price 075 per share acquisitions accounted using purchase method accounting goodwill 42 million identifiable intangible assets 20 million recorded consolidation acquisitions july 2003 subsidiary mountain air company entered limited liability company operating agreement division mi llc mi joint venture smith international schlumberger nv schlumberger limited form texas limited liability company named aircomp llc aircomp assets contributed mountain air recorded mountain airs historical cost 63 million assets contributed mi recorded fair market value 103 million company owns 55 mi owns 45 aircomp result companys controlling interest operating control company consolidated aircomp financial statements aircomp comprises compressed air drilling services segment september 2004 company acquired 100 outstanding stock safco oil field products inc 10 million safco leases spiral drill pipe provides related oilfield services oil drilling industry september 2004 company acquired remaining 19 jens exchange 13 million shares common stock total value consideration paid seller jens mortensen 64 million equal number shares common stock issued mr mortensen 13 million multiplied last sale price 495 common stock reported american stock exchange date issuance amount treated contribution stockholders equity balance sheet 19 million minority interest jens eliminated balance contribution 44 million allocated follows june 2004 company obtained appraisal fixed assets jens valued fixed assets 201 million book value fixed assets 158 million fixed assets appraised value 43 million book value company increased value fixed assets 19 amount excess appraised value book value 8 million remaining balance 36 million allocated goodwill november 2004 aircomp acquired substantially assets diamond air drilling services inc marquis bit co llc collectively diamond air 46 million cash assumption approximately 450000 accrued liabilities company contributed 25 million mi llc contributed 21 million aircomp llc order fund purchase diamond air provides air drilling technology products oil gas industry west texas new mexico oklahoma diamond air leading provider air hammers hammer bit products december 2004 company acquired downhole approximately 11 million cash 568466 shares common stock assumption approximately 950000 debt downhole headquartered midland texas provides economical chemical treatments wells inserting small diameter stainless steel coiled tubing producing oil gas wells following unaudited pro forma consolidated summary financial information illustrates effects acquisitions diamond air downhole companys results operations year ended december 31 2004 formation aircomp companys results operations year ended december 31 2003 acquisitions jens strata companys results operations year ended december 31 2002 based historical statements operations transactions occurred beginning periods presented year ended december 31 unaudited thousands except per share 2004 2003 2002 revenues 58103 34446 19142 operating income loss 5405 3008 401 net income loss 1367 411 4431 net income loss per common share basic 017 010 118 diluted 012 007 118 note 5 inventories comprised following december 31 2004 2003 hammer bit inventory finished goods 857 work process 385 raw materials 151 total hammer bit inventory 1393 hammer inventory 417 chemical inventory 254 coil tubing related inventory 309 total inventory 2373 note 6 property intangibles assets property equipment comprised following december 31 intangible assets follows december 31 amortization intangible assets december 31 follows intangible amortization period thousands year ended december 31 2009 2005 2006 2007 2008 thereafter intangible assets amortization intellectual property 56 546 noncompete agreements 484 481 275 234 349 patent 33 358 intangible assets 244 214 1057 total intangible amortization 817 814 578 537 2310 note 7 income taxes temporary differences tax basis assets liabilities reported amounts financial statements result differences income tax purposes income financial statement purposes future years valuation allowance established deferred tax assets management based upon available information considers likely benefit assets realized company recorded valuation allowance equal excess deferred tax assets deferred tax liabilities company unable determine likely deferred tax asset realized tax reform act 1986 contains provisions limit utilization net operating loss tax credit carry forwards change ownership described section 382 internal revenue code change ownership may limit companys utilization net operating loss tax credit carry forwards could triggered public offering subsequent sales securities company stockholders deferred income tax assets related allowance december 31 2004 2003 follows 2004 2003 deferred noncurrent income tax assets net future tax deductible items 533 500 net operating loss carry forwards 4894 2975 ac reorganization trust claims 30112 35000 total deferred noncurrent income tax assets 35539 38475 valuation allowance 35539 38475 net deferred noncurrent income taxes net operating loss carry forwards tax purposes december 31 2004 2003 estimated 145 million 85 million respectively expiring 2024 net future taxdeductible items relate primarily differences book tax depreciation amortization compensation expense related issuance stock options gross deferred tax liabilities december 31 2004 2003 material company subsidiaries required file consolidated us federal income tax return company current tax expense years ended december 31 2004 2003 2002 respectively company pays foreign income taxes mexico related jens earnings mexico revenues company paid 514000 370000 270000 foreign income taxes mexico years ended december 31 2004 2003 2002 respectively approximately 1154000 us foreign tax credits available company amount company determined approximately 205000 may recoverable future period applying credits back taxable income jens subsidiary 2001 2000 205000 recoverable foreign income taxes recorded current assets accompanying balance sheet company december 31 2004 remaining 949000 available us foreign tax credits may recoverable company depending upon availability taxable income future years therefore recorded asset december 31 2004 foreign tax credits available company begin expire year 2007 following table reconciles income taxes based us statutory tax rate companys income tax expense continuing operations companys 1988 plan reorganization established ac reorganization trust settle claims make distributions creditors certain stockholders company transferred cash certain property ac reorganization trust december 2 1988 payments made company ac reorganization trust generate tax deductions company upon transfer generate deductions company ac reorganization trust makes payments holders claims plan reorganization also created trust process liquidate product liability claims payments made ac reorganization trust product liability trust generate current tax deductions company deductions available company product liability trust makes payments liquidate claims incurs expenses company believes abovenamed trusts grantor trusts therefore includes income loss trusts companys income loss tax purposes resulting adjustment tax basis net operating capital loss carry forwards income loss trusts included companys results operations financial reporting purposes note 8 debt longterm debt company subsidiaries december 31 2004 december 31 2003 consists following december 31 thousands 2004 2003 debt allischalmers energy revolving line credit 2353 bank term loan 6335 notes payable former directors 402 386 120 subordinated note 2675 debt jens revolving line credit 26 bank term loan 4654 bank real estate note 207 subordinated seller note 4000 note payable noncompete agreement 514 761 bank term loan 263 354 equipment installment note 321 debt strata revolving line credit 2413 vendor financing 1164 2383 debt safco note payable noncompete agreement 150 debt downhole vehicle installment note 11 notes payable former shareholders 49 debt mountain air term loan 198 247 seller note 1600 1511 debt aircomp revolving line credit 1520 369 bank term loan 6775 7429 subordinated note payable mi llc 4818 total debt 30473 32233 less shortterm debt current maturities 5541 3992 longterm debt obligations 24932 28241 december 31 2004 2003 companys debt approximately 305 million 322 million respectively companys weighted average interest rate outstanding debt approximately 73 december 31 2004 634 december 31 2003 maturities debt obligations december 31 2004 follows maturities debt thousands year ending december 31 2005 5541 december 31 2006 7378 december 31 2007 10028 december 31 2008 2638 december 31 2009 4888 thereafter total 30473 december 7 2004 company entered amended restated credit agreement consolidated increased various credit facilities previously maintained company two subsidiaries jens strata credit agreement governing facilities entered jointly allischalmers jens strata safco downhole guaranteed mca oilquip subsidiaries amended credit facilities include 100 million revolving line credit borrowings subject borrowing base based 85 eligible accounts receivables defined outstanding borrowings line credit 24 million december 31 2004 term loan amount 63 million repaid monthly payments principal 105583 per month prepayments also required amount equal 20 collections matyep mexico proceeds term loan used prepay term loan owed jens subsidiary prepay 12 24 million subordinated note retire related warrants outstanding balance 63 million december 31 2004 60 million capital expenditure acquisition line credit borrowings facility repaid monthly four years beginning january 2006 availability capital expenditure term loan facility subject security acceptable lender form equipment acquired collateral outstanding borrowings december 31 2004 credit facilities mature december 31 2007 secured liens substantially companys assets agreement governing credit facilities contains customary events default financial covenants also limits companys ability incur additional indebtedness make capital expenditures pay dividends make distributions create liens sell assets interest accrues floating rate based prime rate interest rate 625 december 31 2004 05 per annum fee undrawn portion revolving line credit capital expenditure line connection acquisition jens strata 2002 company issued 12 secured subordinated note original amount 30 million connection subordinated note company issued redeemable warrants valued 15 million recorded discount subordinated debt liability discount amortized life subordinated note beginning february 6 2002 additional interest expense 350000 300000 recognized years ended december 31 2004 december 31 2003 respectively debt recorded 27 million december 31 2003 net unamortized portion put obligation december 7 2004 company prepaid 24 million balance 12 subordinated note retired 15 million warrants portion proceeds companys new 63 million bank term loan jens subordinated note payable jens mortensen seller jens director company amount 40 million fixed interest rate 75 interest payable quarterly final maturity note january 31 2006 connection purchase jens company agreed pay total 12 million mr mortensen exchange noncompete agreement monthly payments 20576 due agreement january 31 2007 december 31 2004 remaining balance approximately 514000 including 247000 classified shortterm subordinated note subordinated rights companys bank lenders jens two bank term loans remaining balance totaling 263000 december 31 2004 interest accruing floating interest rate based prime plus 20 interest rate 725 december 31 2004 monthly principal payments 13000 plus interest maturity date one loans balance 210000 september 17 2006 second loan balance 53000 final maturity january 12 2007 additionally october 2004 jens borrowed 326000 fiveyear equipment financing term loan repaid 60 installments principal interest equal 6449 per month beginning december 2004 ending december 2009 december 2003 strata companys directional drilling subsidiary entered financing agreement major supplier downhole motors repayment motor lease repair cost totaling 17 million agreement provides repayment amounts later december 30 2005 payment interest due monthly principal payments 582000 due april 2005 december 2005 interest rate fixed 80 december 31 2004 outstanding balance 12 million connection purchase safco company also agreed pay total 150000 sellers exchange noncompete agreement company required make annual payments 50000 september 30 2007 december 31 2004 balance due 150000 downhole notes payable two former shareholders totaling 49000 company required make monthly payments 8878 june 30 2005 company also vehicle installment note repaid 10 months 1137 per month without interest december 31 2004 balance due 11371 connection acquisition diamond air marquis bit described november 15 2004 company amended increased aircomps credit facilities provide following 35 million bank line credit 15 million outstanding december 31 2004 interest accrues floating rate based prime rate interest rate 750 december 31 2004 05 per annum fee undrawn portion facility borrowings line credit subject borrowing base consisting eligible accounts receivable 71 million term loan adjustable floating interest rate based either prime rate london interbank offered rate libor interest rate 625 december 31 2004 principal payments 286000 plus accrued interest due quarterly final maturity date june 27 2007 balance december 31 2004 68 million 15 million term loan facility used capital expenditures interest accrues floating interest rate based either prime rate libor quarterly principal payments commence march 31 2006 amount equal 50 outstanding balance december 31 2005 final maturity june 27 2007 borrowings outstanding facility december 31 2004 aircomp credit facilities secured liens substantially aircomps assets agreement governing credit facilities contains customary events default requires aircomp satisfy various financial covenants also limits aircomps ability incur additional indebtedness make capital expenditures pay dividends make distributions create liens sell assets mountain air guaranteed obligations aircomp facilities aircomp also subordinated note payable mi amount 48 million bearing interest annual rate 50 2007 party right cause aircomp sell assets party may buy partys interest event note including accrued interest due payable note also due payable mi sells interest aircomp upon termination aircomp december 31 2004 376000 interest included accrued interest company liable obligations aircomp note 2000 company compensated directors including current directors nederlander toboroff served board directors 1989 march 31 1999 without compensation issuing promissory notes totaling 325000 notes bear interest rate 50 december 31 2004 principal accrued interest notes totaled approximately 402000 march 31 2005 notes totaling 96300 including accrued interest remained outstanding part acquisition mountain air 2001 company issued note sellers mountain air original amount 22 million bearing interest rate 575 note reduced 15 million result settlement legal action sellers 2003 december 31 2004 outstanding amount due including accrued interest 16 million march 2005 company reached agreement sellers holders note result action brought company sellers terms agreement company agreed pay plaintiff 10 million cash agreed pay additional 350000 june 1 2006 additional 150000 june 1 2007 settlement claims see note 21 legal matters mountain air also term loan amount 198000 december 31 2004 interest rate 50 principal interest 5039 payable monthly final maturity date june 30 2008 december 2004 companys chief executive officer chairman munawar h hidayatallah wife personal guarantors substantially financing extended company december 2004 company refinanced outstanding bank debt obtained release certain guarantees mr hidayatallah continues guarantee approximately 56 million companys debt consisting jens 40 million subordinated seller note 16 million mountain air seller note company pays mr hidayatallah annual guarantee fee equal onequarter one percent total amount debt guaranteed mr hidayatallah see note 22 subsequent events connection 16 million mountain air seller note 9 commitments contingencies company rents office space fiveyear lease expires november 2009 company subsidiaries also rent certain facilities shop yards equipment storage maintenance facility rent expense years ended december 31 2004 2003 2002 577000 370000 303000 respectively company lease obligations december 31 2004 future minimum rental commitments operating leases follows operating leases thousands year ending december 31 2005 550 december 31 2006 425 december 31 2007 388 december 31 2008 265 december 31 2009 206 thereafter total 1834 note 10 stockholders equity february 6 2002 connection acquisition 81 outstanding stock jens note 4 company issued 265591 shares common stock jens mortensen director company business combination accounted purchase result 630000 fair value companys common stock issued date acquisition added stockholders equity february 6 2002 connection acquisition 95 outstanding stock strata note 4 company issued 1311973 shares common stock seller strata energy spectrum business combination accounted purchase result 30 million fair value companys common stock issued date acquisition added stockholders equity may 31 2002 company acquired remaining 5 outstanding stock strata issued 17500 shares common stock seller result 153000 fair value companys common stock issued date acquisition added stockholders equity connection strata purchase company authorized creation preferred stock preferred stock cumulative dividends ten percent per annum payable additional shares preferred stock elected declared company cash additionally preferred stock convertible common stock company preferred stock also subject mandatory redemption february 4 2004 earlier net proceeds new equity sales optional redemption company time redemption price preferred stock 100 per share plus accrued unpaid dividends april 2004 energy spectrum holder companys preferred stock converted 3500000 shares series 10 cumulative convertible preferred stock including accrued dividend rights 1718090 shares common stock connection strata acquisition company issued energy spectrum warrant purchase 87500 shares companys common stock exercise price 075 per share february 19 2003 company issued additional warrant purchase 175000 shares companys common stock exercise price 075 per share warrant issued february 19 2003 valued accordance blackscholes valuation model approximately 306000 fair value warrant issuance recorded similar preferred share dividend connection formation aircomp july 2003 company eliminated 955000 negative investment assets contributed aircomp purchase accounting company recognized 955000 increase stockholders equity march 3 2004 company entered agreement investment banking firm whereby would provide underwriting fundraising activities behalf company exchange services investment banking firm received stock purchase warrant purchase 340000 shares common stock exercise price 250 per share warrant expires february 2009 purposes calculating fair value sfas 123 fair value warrant grant estimated date grant using blackscholes optionpricing model following weighted average assumptions dividend yield expected volatility rate 897 riskfree interest rate 700 average life 5 years april 2 2004 company completed following transactions exchange investment 20 million company issued 620000 shares common stock purchase price equal 250 per share issued warrants purchase 800000 shares common stock exercise price 250 per share expiring april 1 2006 investor group investor group consisting entities affiliated donald christopher engel directors robert nederlander leonard toboroff aggregate purchase price common stock 155 million aggregate purchase price warrants 450000 energy spectrum converted 3500000 shares series 10 cumulative convertible preferred stock including accrued dividend rights 1718090 shares common stock conversion preferred stock impact earnings per share future periods since company record dividends company investor group energy spectrum former director saeed sheikh officers directors munawar h hidayatallah jens h mortensen entered stockholders agreement pursuant parties agreed vote election board directors company three persons nominated energy spectrum two persons nominated investor group one person nominated messrs hidayatallah mortensen sheikh addition parties company agreed event company effected public offering shares prior september 30 2005 request energy spectrum company retain investment banking firm identify candidates transaction involving sale company assets energy spectrum agreed enter amendment stockholders agreement eliminate requirement investment bank retained sell company two energy spectrums three designated directors board resigned january 14 2005 energy spectrum agreed utilize right appoint one director unless parties stockholders company determination reassert right august 10 2004 company completed private placement 3504667 shares companys common stock price 300 per share net proceeds company selling commissions expenses approximately 94 million company issued shares pursuant exemption securities act 1933 agreed subsequently register common stock securities act 1933 allow investors resell common stock public markets september 30 2004 company completed private placement 1956668 shares companys common stock price 300 per share net proceeds company selling commission expenses approximately 53 million company issued shares pursuant exemption securities act 1933 agreed subsequently register common stock securities act 1933 allow investors resell common stock public markets september 30 2004 company issued 13 million shares common stock jens mortensen director exchange 19 interest jens result transaction company owns 100 jens total value consideration paid jens 64 million equal number shares common stock issued mr mortensen multiplied last sale price 495 common stock reported american stock exchange date issuance amount treated contribution stockholders equity balance sheet company eliminated amount recorded value jens minority interest 20 million balance contribution 45 million allocated follows june 2004 thirdparty appraisal fixed assets obtained valued fixed assets 201 million book value fixed assets 158 million excess appraised value book value 43 million value jens fixed assets increased 19 amount 813511 remaining balance 37 million allocated goodwill december 10 2004 company acquired downhole approximately 11 million cash 568466 shares common stock payment assumption 950000 debt approximately 22 million value common stock issued downholes sellers based closing price companys common stock issued date acquisition added stockholders equity note 11 reverse stock split company effected reverse stock split june 10 2004 result reverse stock split every five shares companys common stock combined one share common stock reverse stock split reduced number shares outstanding common stock 31393789 approximately 6265000 reduced number stockholders company 6070 approximately 2140 share related amounts presented retroactively adjusted stock split note 12 stock options 2000 company issued stock options promissory notes certain current former directors compensation services directors note 8 companys board directors granted stock options individuals options purchase 4800 shares common stock granted exercise price 1375 per share options vested immediately may exercised time prior march 28 2010 december 31 2004 none stock options exercised compensation expense recorded options issued exercise price equal fair value common stock date grant may 31 2001 board granted leonard toboroff director company option purchase 100000 shares common stock 250 per share exercisable 10 years october 15 2001 option granted services provided mr toboroff oilquip prior merger including providing financial advisory services assisting oilquips capital structure assisting oilquip finding strategic acquisition opportunities company recorded compensation expense 500000 issuance option year ended december 31 2001 december 16 2003 board granted employees company options purchase 854500 shares common stock issued options purchase 14000 shares common stock nonemployee directors energy spectrum partners lp compensation services rendered directors 2002 2003 options exercisable 10 years december 16 2003 275 per share october 11 2004 board granted certain employees company option purchase 248000 shares common stock options exercisable 10 years october 11 2004 485 per share disclosed note 1 company accounts stockbased compensation using apb 25 company adopted disclosureonly provisions sfas 123 stock options granted employees directors company accordingly compensation cost recognized options december 31 2004 none stock options issued exercised summary companys stock option activity related information follows following table summarizes additional information companys stock options outstanding december 31 2004 stock options issued employees directors year ended december 31 2002 note 13 stock purchase warrants conjunction mountain air purchase oilquip february 2001 mountain air issued common stock warrant 620000 shares thirdparty investment firm assisted company initial identification purchase mountain air assets warrant entitles holder acquire 620000 shares common stock mountain air exercise price 01 per share nineyear period commencing february 7 2001 stock purchase warrant recorded fair value 200000 year ended december 31 2001 fully described note 8 mountain air allischalmers issued two warrants b purchase 233000 total shares companys common stock exercise price 075 per share one warrant purchase 67000 shares companys common stock exercise price 500 per share warrant c connection subordinated debt financing holders may redeem warrants b total 1500000 january 31 2005 however warrents paid december 7 2004 fair value warrant c established accordance blackscholes valuation model result 47000 added stockholders equity following assumptions utilized determine fair value dividend yield expected volatility 6724 risk free interest rate 5 expected life four years february 6 2002 connection acquisition substantially outstanding stock strata see note 4 company issued warrant purchase 87500 shares companys common stock exercise price 075 per share term four years fair value warrant established accordance blackscholes valuation model result 267000 added stockholders equity following assumptions utilized determine fair value dividend yield expected volatility 6724 risk free interest rate 5 expected lives four years connection strata acquisition february 19 2003 company issued energy spectrum additional warrant purchase 175000 shares companys common stock exercise price 075 per share march 2004 issued warrant purchase 340000 shares common stock exercise price 250 per share morgan joseph co consideration financial advisory services provided morgan joseph pursuant consulting agreement warrants expire february 2009 april 2004 issued warrants purchase 20000 shares common stock wells fargo credit inc connection extension credit wells fargo credit inc connection extension credit wells fargo credit inc warrants exercisable 075 per share expire april 2014 april 2004 completed private placement 620000 shares common stock warrants purchase 800000 shares common stock following investors christopher engel donald engel defined benefit plan rer corp corporation whollyowned director robert nederlander leonard toboroff director investors invested 1550000 exchange 620000 shares common stock purchase price equal 250 per share invested 450000 exchange warrants purchase 800000 shares common stock exercise 250 per share expiring april 1 2006 may 2004 issued warrant purchase 3000 shares common stock exercise price 475 per share jeffrey r freedman consideration financial advisory services provided mr freedman pursuant consulting agreement warrants expire may 2009 exercised may 2004 preferred stock including accrued dividends converted 1718090 shares common stock april 2 2004 note 14 lease receivable june 2002 strata companys subsidiary sold measurement drilling mwd assets third party 13 million terms sale company receive least 15000 per month thirtysix months thirtysix months purchaser option pay remaining balance continue paying minimum 15000 per month twentyfour additional months expiration additional twentyfour months purchaser must repay remaining balance transaction accounted direct financing lease nominal residual gain asset sale deferred income life lease year ended december 31 2004 company received total 229000 payments third party related lease note 15 related party transactions december 31 2004 2003 company owed chief executive officer company munawar h hidayatallah 175000 193000 respectively related deferred compensation mr hidayatallah owes company 7000 classified employee receivable march april 2005 company paid amounts due mr hidayatallah december 2004 companys chief executive officer chairman munawar h hidayatallah wife personal guarantors substantially financing extended company commercial banks december 2004 company refinanced outstanding bank debt obtained release certain guarantees december 31 2004 mr hidayatallah guaranteed approximately 56 million companys debt consisting jens 40 million subordinated seller note 16 million mountain air seller note see note 22 subsequent events regarding modification note company agreed pay mr hidayatallah annual guarantee fee equal onequarter one percent total amount debt guaranteed mr hidayatallah fee payable quarterly arrears based upon average amount debt outstanding prior quarter jens mortensen director company former owner jens held 19 minority interest jens september 30 2004 also holder 40 million subordinated note payable issued jens december 31 2004 owed 517000 accrued interest 514000 related noncompete agreement see note 8 accrued interest paid january 2005 mr mortensen formerly sole proprietor jens owns shop yard leases jens monthly basis annual lease payments terms lease 28800 years ended december 31 2004 december 31 2003 addition mr mortensen members family 100 texmex rental supply co texas corporation sold approximately 166669 173000 equipment supplies jens years ended december 31 2004 2003 respectively descripted note 8 former directors company issued promissory notes 2000 lieu compensation services total 402000 included shortterm debt company due former directors company december 31 2004 three notes paid maturity date march 28 2005 approximately 96300 remains outstanding including accrued interest december 31 204 2003 mountain air owed joint venture partner aircomp llc mi llc 74000 73000 respectively note 16 settlement lawsuit june 2003 mountain air filed lawsuit former owners mountain air drilling service company breach asset purchase agreement pursuant mountain air acquired mountain air drilling services company alleging sellers stored hazardous materials property leased mountain air without consent mountain air violated noncompete clause asset purchase agreement july 15 2003 mountain air entered settlement agreement sellers date agreement mountain air owed sellers total 26 million including 22 million principal 363195 accrued interest part settlement agreement note payable sellers reduced 22 million 15 million due date note payable extended february 6 2006 september 30 2007 lumpsum payment due sellers date 19 million mountain air recorded onetime gain reduction note payable sellers 10 million third quarter 2003 gain calculated discounting note payable 15 million using present value calculation accreting note payable 19 million amount due september 2007 see note 22 subsequent events note 17 gain sale interest subsidiary july 2003 subsidiary mountain air company entered limited liability company operating agreement division mi form texas limited liability company named aircomp companies contributed assets combined value 166 million aircomp contributed assets mountain air contributed historical book value approximately 63 million assets contributed mi contributed fair market value approximately 103 million prior formation aircomp company owned 100 mountain air formation aircomp company owns 55 mi owns 45 business combination business combination accounted purchase recorded onetime nonoperating gain sale 45 interest subsidiary approximately 2433000 gain calculated recording assets contributed mi approximately 103 million less subordinated note issued mi amount approximately 48 million recording minority interest approximately 2049000 increase equity 955000 accordance staff accounting bulletin 51 sab 51 company recorded deferred income taxes increase assets gain permanent timing difference company adopted policy gain loss future incurred sale stock interest subsidiary would recognized income statement note 18 segment information december 31 2004 company four operating segments including casing tubing services jens directional drilling services strata compressed air drilling services aircomp services safco downhole segments provide services energy industry revenues operating income loss depreciation amortization interest capital expenditures assets reporting segments plus corporate function reported years ended december 31 2004 2003 thousands note 19 supplemental cash flows information note 20 quarterly results unaudited first second third fourth quarter thousands except per share amounts year 2004 revenues 9661 11422 11888 14755 operating income 1030 1150 1239 808 net income loss 472 413 519 516 preferred stock dividend 88 36 net income loss attributed common shares 384 377 519 516 income loss per common share basic 02 06 04 007 income loss per common share diluted 01 04 004 first second third fourth quarter restated thousands except per share amounts year 2003 revenues 6999 7340 8089 10296 operating income 1023 910 475 118 net income loss 53 335 2974 235 preferred stock dividend 394 87 88 87 net income loss attributed common shares 341 422 2886 148 income loss per common share basic 009 011 073 004 income loss per common share diluted 009 011 067 003 note 21 legal matters company named time legal proceedings related companys activities prior bankruptcy 1988 however company believes discharged liability claims bankruptcy believes likelihood material loss relating legal proceeding remote december 31 2004 mountain compressed air inc defendant action brought april 2004 district court mesa county colorado former owner mountain air drilling service company inc mountain compressed air inc acquired assets 2001 plaintiff sought accelerate payment note issued connection acquisition sought 19 million damages representing principal interest due note basis mountain compressed air failed provide financial statements required note company raised several defenses plaintiffs claim march 2005 company reached agreement plaintiff settle action agreed pay plaintiff 10 million cash pay plaintiff additional 350000 june 1 2006 additional 150000 june 1 2007 settlement amounts due promissory note claims company involved various legal proceedings ordinary course business legal proceedings different stages however company believes likelihood material loss relating legal proceeding remote note 22 subsequent events january 2005 jens obtained real estate term loan amount 556000 loan repaid 59 equal monthly installments 4344 remaining outstanding balance due january 1 2010 interest rate floats based prime rate 725 time funding proceeds used pay accrued interest jens 40 million subordinated seller note january 1 2005 company executed business development agreement cttv investments llc cttv affiliate chevrontexaco inc whereby company issued 20000 shares common stock cttv agreed issue additional 60000 shares cttv contingent upon subsidiaries company receiving certain levels revenues 2005 chevrontexaco affiliates cttv minority owner downhole mountain compressed air inc defendant action brought april 2004 district court mesa county colorado former owner mountain air drilling service company inc mountain compressed air inc acquired assets 2001 see note 21 legal proceedings march 2005 company reached agreement plaintiff settle action terms agreement company april 1 2005 paid plaintiff 10 million cash agreed pay additional 350000 june 1 2006 additional 150000 june 1 2007 settlement claims april 1 2005 company acquired 100 outstanding stock delta rental service inc delta 46 million cash 223114 shares companys common stock two promissory notes totaling 350000 delta located lafayette louisiana rental tool company providing specialty rental items oil gas industry spiral heavy weight drill pipe test plugs used test blowout preventors well head retrieval tools spacer spools assorted handling tools year ended december 31 2004 delta revenues 33 million april 4 2005 company amended december 7 2004 credit agreement lender extend final maturity credit facilities one year december 31 2008 include companys delta downhole subsidiaries parties credit agreement provide increased availability 100 million revolving line credit 60 million acquisition line credit based receivables assets delta downhole additionally amendment documented lenders consent 15 million settlement former owners mountain air drilling service mentioned prepayment 40 million jens subordinated seller note amount exceed 397000 item 9 item 8 financial statements supplementary data index consolidated financial statements page financial statements report independent accountants 18 statement operations three years ended december 31 1999 19 statement accumulated deficit three years ended december 31 1999 19 statement financial condition december 31 1999 1998 20 statement cash flows three years ended december 31 1999 21 notes consolidated financial statements 22 financial statement schedule ii valuation qualifying accounts 44 report independent accountants board directors shareholders allischalmers corporation opinion accompanying consolidated balance sheets related consolidated statements income accumulated deficit cash flows present fairly material respects financial position allischalmers corporation subsidiaries december 31 1999 1998 results operations cash flows three years period ended december 31 1999 conformity accounting principles generally accepted united states addition opinion financial statement schedule listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance auditing standards generally accepted united states require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed accompanying consolidated financial statements prepared assuming company continue going concern companys application distress termination allischalmers consolidated pension plan consolidated plan approved pension benefit guaranty corporation pbgc september 30 1997 date pbgc became trustee consolidated plan company subsidiaries incurred estimated liability pbgc unfunded benefit liabilities accumulated funding deficiencies totaling approximately 68 million effective march 31 1999 company issued 585100 shares pbgc reducing pension liability estimated fair market value shares 67 million company financial resources fund liability pbgc matter raises substantial doubt companys ability continue going concern managements plans regard matter described note 9 consolidated financial statements consolidated financial statements include adjustments might result outcome uncertainty pricewaterhousecoopers llp milwaukee wisconsin march 24 2000 statement operations year ended december 31 1999 1998 1997 thousands except per share sales 4370 5021 4062 cost sales 3312 3530 3048 gross margin 1058 1491 1014 marketing administrative expense 1546 1689 1660 loss operations 488 198 646 income expense interest income 7 33 54 interest expense 34 50 45 pension expense note 9 65926 note 11 9 402 833 18 net income loss 113 618 66545 net income loss per common share basic diluted 08 62 6634 statement accumulated deficit year ended december 31 1999 1998 1997 thousands accumulated deficit beginning year 75673 76291 9746 net income loss 113 618 66545 accumulated deficit end year 75786 75673 76291 accompanying notes integral part financial statements statement financial condition december 31 1999 1998 thousands assets cash equivalents 501 223 trade receivables net note 3 570 796 inventories net 157 127 current assets 66 112 total current assets 1294 1258 net property plant equipment note 4 1170 1308 total assets 2464 2566 liabilities shareholders deficit current maturities longterm debt 60 trade accounts payable 461 291 accrued employee benefits 120 155 accrued pension liability note 9 66877 67901 current liabilities 281 312 total current liabilities 67799 68719 accrued postretirement benefit obligations note 9 927 981 longterm debt note 6 193 232 commitments contingent liabilities note 10 shareholders deficit note 7 common stock 15 par value authorized 2000000 shares outstanding 1588128 december 31 1999 1003028 december 31 1998 238 152 capital excess par value 9093 8155 accumulated deficit accumulated deficit 424208 eliminated december 2 1988 75786 75673 total shareholders deficit 66455 67366 total liabilities shareholders deficit 2464 2566 accompanying notes integral part financial statements accompanying notes integral part financial statements notes consolidated financial statements note 1 emergence chapter 11 allischalmers corporation allischalmers company emerged chapter 11 proceedings october 31 1988 plan reorganization consummated december 2 1988 company thereby discharged debts arose confirmation first amended restated joint plan reorganization plan reorganization capital stock cancelled made eligible exchange shares common stock reorganized company common stock claims asserted company allowed bankruptcy court beyond recorded prior consummation date amounted approximately 483 million amounts subsequently recorded company 1988 total recorded liabilities discharged consummation exceeded book value assets common stock distributed creditors various trusts date extraordinary income 3881 million recorded see plan reorganization first amended disclosure statement dated september 14 1988 additional information regarding distributions holders claims interests note 2 summary significant accounting policies description business allischalmers whollyowned subsidiary houston dynamic service inc services repairs various types mechanical equipment including compressors pumps turbines engines heat exchangers centrifuges rollers gears valves blowers kilns crushers mills principles consolidation consolidated financial statements include accounts allischalmers subsidiaries significant intercompany transactions eliminated cash equivalents company considers highly liquid investments maturity three months less time purchase cash equivalents fair value financial instruments carrying amounts statement financial condition cash equivalents trade receivables longterm debt approximate fair market value inventories stated lower cost determined firstin firstout method market properties depreciation plant equipment used business stated cost depreciated straightline basis estimated useful lives assets generally range 40 years buildings 3 12 years machinery equipment 3 12 years tools patterns furniture fixtures maintenance repairs expensed incurred expenditures significantly increase asset values extend useful lives capitalized income taxes deferred income taxes determined liability method accordance statement financial accounting standards sfas 109 see note 5 income taxes statements cash flows purposes statements cash flows company considers highly liquid debt instruments maturity three months less date purchase cash equivalents use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates major customers entergy customer 10 total sales accounted 13 1999 sales 1998 1997 amoco chemical customer accounted 10 total sales 24 1998 sales 12 1997 sales note 3 receivables december 31 1999 1998 thousands trade accounts receivable 692 817 allowance doubtful receivables 122 21 570 796 note 4 property plant equipment december 31 1999 1998 thousands land buildings 545 machinery equipment 1550 1606 tools patterns furniture fixtures leasehold improvements 721 752 2816 2903 accumulated depreciation 1646 1595 1170 1308 note 5 income taxes temporary differences tax basis assets liabilities reported amounts financial statements result differences income tax purposes income financial statement purposes future years valuation allowance established deferred tax assets management based upon available information considers likely benefit assets realized following table depicts temporary differences december 31 1999 1998 1999 1998 millions net future tax deductible items 35 net operating loss carryforwards tax credits 123 156 valuation allowance 158 191 net deferred taxes net future tax deductible items relate primarily estimated future bankruptcy claim payments made companys two grantor trusts gross deferred tax liabilities december 31 1999 1998 material plan reorganization established ac reorganization trust settle claims make distributions creditors certain shareholders company transferred cash certain property ac reorganization trust december 2 1988 payments made company ac reorganization trust generate tax deductions company upon transfer generate deductions company payments made ac reorganization trust holders claims plan reorganization also created trust process liquidate product liability claims payments made ac reorganization trust product liability trust generate current tax deductions company future deductions available company product liability trust makes payments liquidate claims company believes abovenamed trusts grantor trusts therefore includes income loss trusts companys income loss tax purposes resulting adjustment tax basis net operating capital loss carryforwards income loss trusts included companys results operations financial reporting purposes tax carryforwards december 31 1999 estimated consist net operating losses 3490 million expiring 2000 2019 investment tax credits 376000 expiring 2000 2001 energy tax credits 282000 expiring 2000 2002 1990 company initiated litigation internal revenue service irs united states bankruptcy court southern district new york challenging validity retroactive applicability proposed regulations issued irs august 13 1990 january 2 1992 irs issued final regulations sections 269 382 internal revenue code 1986 relating use net operating loss carryforwards following corporate reorganizations bankruptcy code following issuance final regulations company withdrew retroactivity challenge final regulations made retroactive august 14 1990 applicable plan reorganization completed companys plan reorganization consummated december 2 1988 company however continued challenge validity provisions regulations june 8 1992 bankruptcy court issued decision denying companys motion judgment irs respect application section 269 irs code company court also granted irss motion dismiss companys complaint challenging regulations court entered judgment pursuant decision june 29 1992 consistent advice counsel company decided appeal judgment although company unable obtain judgment would prevented irs applying section 269 company courts ruling leaves company substantially position prior issuance final regulations possibility irs challenge section 269 internal revenue code companys use prepetition net operating loss carryforwards always existed light courts ruling possibility continues exist court however stated irs ever seek use new section 269 regulations limit companys use net operating loss carryforwards nothing opinion would prejudice companys right defend using courts confirmation finding primary purpose companys plan reorganization tax avoidance companys common stock subject trading restrictions designed maximize likelihood preserving net operating loss carryforwards change ownership company could also limit use net operating loss carryforwards note 6 longterm debt december 31 1999 1998 thousands real estate loan 203 226 50 66 253 292 less amounts classified current 60 193 232 real estate loan relates 1990 purchase land building houston texas previously leased hds august 1996 hds refinanced loan required repaid monthly installments 3278 august 20 2001 remaining unpaid balance shall due december 31 1999 1998 interest rate note 105 rate adjusted term note accordance increases decreases prime rate note collateralized hds facility net book value 432000 december 31 1999 companys guaranty note 7 shareholders deficit 1999 company issued 585100 shares common stock pbgc see note 9 result 86000 reclassified capital excess par value common stock 938000 credited capital excess par value representing excess fair market value shares issued par value note 8 longterm stock incentive plan companys longterm stock incentive plan 1989 provides grant stock options stock appreciation rights performance shares restricted stock restricted stock units stockbased awards plan maximum number shares may granted respect stockbased awards 50000 options may granted prices equal less fair market value date grant except options purchase 13333 shares may granted price less fair market value october 25 1989 date plan approved shareholders options exercisable within period exceed 10 years date grant plan also provides discretionary grant stock appreciation rights allow holder receive cash shares common stock difference exercise price fair market value stock date exercise grants plan note 9 postretirement benefit obligations pensions date chapter 11 filings june 1987 company sponsored 19 defined benefit plans providing pensions substantially us employees pension plan us salaried employees capped frozen effective march 31 1987 benefit accruals date result divestitures chapter 11 proceedings eight active plans transferred buyers businesses leaving company sponsor 11 plans none permitted additional benefit accruals effective january 1 1989 11 remaining plans consolidated single plan allischalmers consolidated pension plan consolidated plan accordance plan reorganization 11 plans received company contribution 538 million december 1988 result actions taken connection contribution thenexisting securities pension plans assets consolidated plan invested dedicated bond portfolio consisted highgrade fixed income securities market value assets matched present value anticipated pension benefits administrative expenses consolidated plan way intended make pension fund immune interest rate fluctuations plan reorganization future contributions consolidated plan required mortality assumptions used calculating present value pension benefits expected paid assumptions used calculating future administrative expenses proved inaccurate years 1989 1993 retirees eligible benefits consolidated plan group outlived projections mortality assumptions used plan reorganization funding consolidated plan five years actual administrative expenses slightly excess assumed levels effective january 1 1994 companys independent actuaries reflected decreased mortality funding calculation purposes years 1994 1996 mortality experience negative compared revised assumptions amount excess 19891993 average actuarial loss mortality loss partially offset however gains asset portfolio underfunded condition consolidated plan required company make significant cash contributions consolidated plan pursuant employment retirement income security act 1974 amended erisa funding requirements starting 1996 company failed make required quarterly contributions starting april 1996 resulting filing lien pension benefit guaranty corporation pbgc company given inability company fund obligations lack financial resources february 1997 allischalmers applied pbgc distress termination consolidated plan section 4041c erisa pbgc approved distress termination application september 1997 agreed termination date april 14 1997 pbgc became trustee terminated consolidated plan september 30 1997 upon termination consolidated plan allischalmers subsidiaries incurred liability pbgc amount equal consolidated plans unfunded benefit liabilities allischalmers subsidiaries also liability pbgc trustee terminated consolidated plan outstanding balance consolidated plans accumulated funding deficiencies pbgc estimated unfunded benefit liabilities accumulated funding deficiencies together pbgc liability total approximately 679 million effective march 31 1999 company issued 585100 shares reducing pension liability estimated fair market value shares 669 million september 1997 allischalmers pbgc entered agreement principle settlement pbgc liability required among things satisfactory resolution companys tax obligations respect consolidated plan section 4971 internal revenue code 1986 amended code section 4971a code imposes taxable year firsttier tax 10 amount accumulated funding deficiency plan like consolidated plan section 4971b code imposes additional secondtier tax equal 100 accumulated funding deficiency corrected within specified period liability taxes imposed section 4971 extends jointly severally company commonlycontrolled subsidiary corporations prior termination consolidated plan accumulated funding deficiency taxable years 1995 1996 1997 deficiencies resulted estimated firsttier taxes code section 4971a approximately 900000 july 16 1998 company internal revenue service irs reached agreement principal settle companys tax liability code section 4971 75000 following final irs approval payment amount made august 11 1998 june 1999 effective march 31 1999 company pbgc entered agreement settlement pbgc liability pbgc agreement pursuant terms pbgc agreement company issued 585100 shares common stock pbgc 35 total number shares issued outstanding fullydiluted basis company right first refusal respect sale shares common stock owned pbgc conjunction share issuance company reduced pension liability pbgc based estimated fair market value shares issued effective date march 31 1999 accordance terms pbgc agreement company required decreased size board directors company board seven members ii caused sufficient number current directors company resign board committees thereof iii caused thomas barnhart ii alexander p sammarco david groshoff designees pbgc elected board pbgc caused company amend bylaws conform terms pbgc agreement furthermore company agreed pay pbgcs reasonable professional fees 90th day release event hereinafter defined currently evidenced company promissory note favor pbgc amount 75000 term pbgc agreement company agreed issue agree issue common stock company common stock equivalent less fair value determined majority board company also agreed merge consolidate entity sell transfer convey 50 property assets without majority board approval agreed amend amended restated certificate incorporation certificate bylaws order satisfy discharge pbgc liability pbgc agreement provides company must either receive single transaction series related transactions debt financing makes available company least 10 million borrowings ii consummate acquisition single transaction series related transactions assets andor business purchase price including funded debt assumed least 10 million release event 585100 shares disposed pbgc prior release event final satisfaction discharge pbgc liability accreted estimated fair market value 1024000 shares issued pbgc connection pbgc agreement additional consideration settling pbgc liability following agreements dated march 31 1999 also entered registration rights agreement company pbgc registration rights agreement ii lockup agreement among company pbgc alch company lp delaware limited partnership alch wells fargo bank trustee certain amended restated retiree health trust agreement uaw retired employees allischalmers corporation uaw trust firstar trust company trustee certain amended restated retiree health trust agreement nonuaw retired employees allischalmers corporation nonuaw trust lockup agreement registration rights agreement grants holder registrable shares defined registration rights agreement basically mean shares common stock issued pbgc agreement right shares registered pursuant securities act 1933 amended demand incidental registration statement filed company order demand registration registrable shares request registration holders less 20 registrable shares necessary company may deny request registration shares company contemplates filing registration statement within 90 days receipt notice holders registration rights agreement also contains provisions allow company postpone filing registration statement 180 days registration rights agreement contains indemnification language similar usually contained agreements kind lockup agreement governs transfer disposition shares companys common stock voting shares well grants pbgc right sale shares prior alch uaw trust nonuaw trust pursuant lockup agreement unless board terminated common stock transfer restrictions set forth article xiii companys certificate alch uaw trust nonuaw trust agreed period commencing march 31 1999 ending third anniversary release event directly indirectly sell transfer assign dispose shares company stock beneficially owns commencing third anniversary release event continuing fifth anniversary release event alch uaw trust nonuaw trust agreed sell transfer dispose shares company stock without first giving pbgc opportunity sell portion shares company stock pbgc owns foregoing right pbgc applies sale company stock public offering otherwise lockup agreement also contains voting component term lockup agreement party agreement agreed vote meeting company stockholders written consent shares company stock owned favor election directors company persons nominated nominating committee board refrain taking action contrary inconsistent obligation term lockup agreement party agreement agreed vote shares company stock take action amend companys certificate bylaws manner inconsistent breach pbgc agreement party agreed vote shares favor certain specified amendments companys certificate ii election persons designated pbgc director serve board iii favor election company directors committed cause one pbgc director appointed nominating committee board one pbgc director appointed chairman compensation committee board medical life pursuant plan reorganization company assumed contractual obligation simplicity manufacturing inc smi reimburse smi 50 actual cost medical life insurance claims select group retirees smi retirees prior simplicity manufacturing division allischalmers net postretirement benefit expense years ended december 31 1999 1998 1997 included following components thousands change benefit obligation plan assets reconciliation funded status years ended december 31 1999 1998 follows thousands change apbo 1999 1998 benefit obligation beginning year 606 733 interest cost 41 53 actuarial gain 125 140 benefits paid 58 40 benefit obligation end year 464 606 change plan assets fair value plan assets beginning year employer contribution 58 40 benefits paid 58 40 fair value plan assets end year reconciliation funded status benefit obligation end year 464 606 fair value plan assets end year funded status 464 606 unrecognized net actuarial gain 463 375 accrued benefit cost 927 981 assumed health care cost trend rate used measuring accumulated postretirement benefit obligation 62 december 31 1999 65 december 31 1998 assumed rate decreases year ultimate rate 50 reached december 31 2004 health care cost trend rate significant effect amounts reported example one percentage point increase health care cost trend rate would increase accumulated postretirement benefit obligation approximately 26000 december 31 1999 discount rate used determining accumulated postretirement benefit obligation 725 december 31 1999 75 december 31 1998 note 10 commitments contingent liabilities substantially litigation proceedings pending company resolved pursuant emergence chapter 11 proceedings 1988 various loans lease agreements commitments contractual obligations company also satisfied pursuant plan reorganization company knows significant preplan reorganization lawsuits presently pending subsidiaries assumed various trusts entities company party litigation matters claims normal course operations results litigation claims cannot predicted certainty management believes final outcome matters material adverse effect companys consolidated financial position environmental matters environmental protection agency epa certain state environmental protection agencies requested information connection eleven potential hazardous waste disposal sites products manufactured allischalmers consummation plan reorganization disposed epa claimed allischalmers liable cleanup costs associated several additional sites epas claims respect one site withdrawn 1994 based upon settlements reached epa bankruptcy proceeding addition certain third parties asserted allischalmers liable cleanup costs associated epa fines connection additional sites one instances former site operator joined allischalmers 47 potentially responsible parties third party defendant lawsuit involving cleanup one sites instance environmental claims asserted company involve prebankruptcy operations accordingly allischalmers taken position cleanup costs liabilities related sites discharged bankruptcy one particular site epas region iii concurred companys position claims environmental cleanup discharged pursuant bankruptcy site unique different circumstances company notified regional offices epa determination associated region iii site company received responses regional offices environmental claims asserted company involving postbankruptcy operations allischalmers consolidated pension plan contributions consolidated plan required starting 1996 due change mortality assumptions used calculating present value pension benefits expected paid assumptions used calculating future administrative expenses compared projections mortality administrative expense assumptions used plan reorganization funding consolidated plan contributions projected 25 million 1996 increasing 31 million 1997 81 million 1998 making one installment 205000 january 15 1996 company failed make subsequent installments companys failure make required quarterly contributions starting april 1996 resulted filing lien pbgc company given inability company fund obligations current financial resources february 1997 allischalmers applied pbgc distress termination consolidated plan section 4041c erisa pbgc approved distress termination application september 1997 agreed plan termination date april 14 1997 pbgc became trustee terminated consolidated plan september 30 1997 additional information regarding consolidated plan see note 9 note 11 related party transactions h sean mathis chairman board chief executive officer leonard toboroff vice chairman board executive vice president john grigsby jr vice chairman board executive vice president chief financial officer receive compensation services executive officers company three years ended december 31 1999 allischalmers received payments totaling 400000 reimbursement expenditures incurred prior years behalf ac reorganization trust payments included income accompanying statement operations note 12 quarterly financial data item 9 item 8 financial statements allischalmers energy inc subsidiaries management’s report stockholders allischalmers energy inc management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting allischalmers energy inc subsidiaries allischalmers order evaluate effectiveness internal control financial reporting required section 404 sarbanesoxley act 2002 conducted assessment including testing using criteria internal controlintegral framework issued committee sponsoring organization treadway commission coso allischalmers’ system internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance accounting principles generally accepted united states america inherent limitation internal control financial reporting may prevent detect misstatements based assessment concluded allischalmers maintained effective internal control financial reporting december 31 2007 based criteria internal controlintegrated framework issued coso effectiveness allischalmers internal control financial reporting december 31 2007 audited uhy llp independent registered public accounting firm stated report included herein management’s certifications allischalmers’ chief executive officer chief financial officer required sarbanesoxley act 2002 included exhibits 31 32 allischalmers’ form 10k allischalmers energy inc report independent registered public accounting firm board directors stockholders allischalmers energy inc houston texas audited accompanying consolidated balance sheets allischalmers energy inc subsidiaries “company” december 31 2007 2006 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2007 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position allischalmers energy inc subsidiaries december 31 2007 2006 consolidated results operations cash flows three years period ended december 31 2007 conformity accounting principles generally accepted united states america also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 6 consolidated financial statements effective january 1 2007 company adopted fasb interpretations 48 accounting uncertainty income taxes interpretation fasb statement 109 discussed note 1 effective january 1 2006 company adopted statement financial accounting standards 123 revised 2004 share based payment also audited accordance standards public company accounting oversight board united states allischalmers energy inc’s internal control financial reporting december 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated march 6 2008 expressed unqualified opinion thereon uhy llp houston texas march 6 2008 report independent registered public accounting firm board directors stockholders allischalmers energy inc audited allischalmers energy inc’s internal control financial reporting december 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria allischalmers energy inc’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion allischalmers energy inc subsidiaries maintained material respects effective internal control financial reporting december 31 2007 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets allischalmers energy inc subsidiaries december 31 2007 2006 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2007 report dated march 6 2008 expressed unqualified opinion thereon uhy llp houston texas march 6 2008 allischalmers energy inc consolidated balance sheets accompanying notes integral part consolidated financial statements allischalmers energy inc consolidated statements operations accompanying notes integral part consolidated financial statements allischalmers energy inc consolidated statement stockholders’ equity accompanying notes integral part consolidated financial statements allischalmers energy inc consolidated statements cash flows accompanying notes integral part consolidated financial statements allischalmers energy inc notes consolidated financial statements note 1 nature business summary significant accounting policies organization business allischalmers energy inc “allischalmers” “we” “our” “us” incorporated delaware 1913 provide services equipment oil natural gas exploration production companies throughout united states including texas louisiana new mexico colorado oklahoma mississippi wyoming arkansas west virginia offshore gulf mexico internationally primarily argentina mexico operate six sectors oil natural gas service industry rental services international drilling directional drilling tubular services underbalanced drilling production services nature operations many regions operate subject us changing economic regulatory political conditions vulnerable nearterm longterm changes demand prices oil natural gas related demand oilfield service operations use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period future events effects cannot perceived certainty accordingly accounting estimates require exercise judgment management believes estimates assumptions used preparation consolidated financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts recoverability longlived assets intangibles useful lives used depreciation amortization income taxes valuation allowances accounting estimates used preparation consolidated financial statements may change new events occur experience acquired additional information obtained operating environment changes principles consolidation consolidated financial statements include accounts allischalmers subsidiaries december 31 2007 aircomp llc “aircomp” allischalmers tubular services llc “tubular” strata directional technology llc “strata” allischalmers rental services llc “rental” allischalmers production services llc “production” allischalmers management llc allischalmers holdings inc dls drilling logistics services corporation “dls” dls argentina limited tanus argentina sa “tanus” petrorentals llc “petrorental” rebel rentals llc “rebel” significant intercompany transactions eliminated revenue recognition provide rental equipment drilling services customers per day daywork per job contractual rates recognize drilling related revenue work progresses collectibility reasonably assured revenue daywork contracts recognized realized realizable earned daywork contracts revenue recognized based number days completed fixed rates stipulated contract certain contracts receive lumpsum fees equipment mobilization costs mobilization fees related costs deferred amortized contract terms material recognize reimbursements received outofpocket expenses incurred revenues account outofpocket expenses direct costs payments customers cost oilfield rental equipment damaged lostinhole reflected revenues recognized revenue damaged lostinhole equipment 126 million 24 million 970000 years ended december 31 2007 2006 2005 respectively securities exchange commission’s sec staff accounting bulletin sab 104 revenue recognition financial statements “sab 104” provides guidance sec staff’s views application generally accepted accounting principles selected revenue allischalmers energy inc notes consolidated financial statements continued recognition issues revenue recognition policy accordance generally accepted accounting principles sab 104 allowance doubtful accounts receivable customer obligations due normal trade terms sell services oil natural gas exploration production companies perform continuing credit evaluations customers’ financial condition although generally require collateral letters credit may required customers certain circumstances allowance doubtful accounts represents estimate amount probable credit losses existing accounts receivable significant individual accounts receivable balances outstanding greater 90 days reviewed individually collectibility limited number customers individually large amounts due given date unanticipated change one customer’s credit worthiness matters affecting collectibility amounts due customers could material effect results operations period changes events occur attempts collect receivable failed receivable written allowance december 31 2007 2006 recorded allowance doubtful accounts 19 million 826000 respectively bad debt expense 13 million 781000 219000 years ended december 31 2007 2006 2005 respectively cash equivalents consider highly liquid investments original maturity three months less time purchase cash equivalents inventories stated lower cost market cost determined using first “fifo” method average cost method approximates fifo includes cost materials labor manufacturing overhead property equipment property equipment recorded cost less accumulated depreciation certain equipment held capital leases classified equipment related obligations recorded liabilities maintenance repairs improve extend life related assets charged operations incurred refurbishments renewals capitalized value equipment enhanced extended period property equipment sold otherwise disposed asset account related accumulated depreciation account relieved gain loss included operations cost property equipment currently service depreciated estimated useful lives related assets range three twenty years depreciation computed straightline method financial reporting purposes capital leases amortized using straightline method estimated useful lives assets lease amortization included depreciation expense depreciation expense charged operations 509 million 203 million 49 million years ended december 31 2007 2006 2005 respectively goodwill intangible assets amortization goodwill including goodwill associated equity method investments intangible assets infinite lives amortized tested impairment annually frequently circumstances indicate impairment may exist intangible assets finite useful lives amortized either straight allischalmers energy inc notes consolidated financial statements continued line basis asset’s estimated useful life basis reflects pattern economic benefits intangible assets realized impairment test requires allocation goodwill assets liabilities reporting units fair value reporting unit less book value including goodwill reduced implied fair value amount writedown charged earnings perform impairment tests carrying value goodwill annual basis december 31st reportable segments december 31 2007 2006 impairment deemed necessary increases estimated future costs decreases projected revenues could lead impairment portion goodwill future period impairment longlived assets longlived assets include property plant equipment intangible assets certain assets reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable impairment loss recorded period determined carrying amount recoverable determination recoverability made based upon estimated undiscounted future net cash flows excluding interest expense impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets financial instruments financial instruments consist cash equivalents accounts receivable payable debt carrying value cash equivalents accounts receivable payable approximate fair value due shortterm nature believe fair values carrying value debt would materially different due instruments’ interest rates approximating market rates similar borrowings december 31 2007 2006 concentration credit customer risk financial instruments potentially subject us concentrations credit risk consist principally cash equivalents trade accounts receivable december 31 2007 approximately 25 million cash equivalents residing argentina transact business several financial institutions however amount deposit six financial institutions exceeded 100000 federally insured limit december 31 2007 total 132 million management believes financial institutions financially sound risk loss minimal sell services major independent domestic international oil natural gas companies perform ongoing credit valuations customers provide allowances probable credit losses appropriate 2007 2006 one customers pan american energy llc sucursal argentina pan american energy represented 207 117 consolidated revenues respectively 2005 none customers accounted 10 consolidated revenues materiales equipo petroleo matyep represented 34 83 945 international revenues 2007 2006 2005 respectively revenues pan american energy represented 510 456 international revenues 2007 2006 respectively debt issuance costs related issuance debt capitalized amortized interest expense using straightline method approximates interest method maturity periods related debt income taxes income tax expense based income statutory tax rates tax planning opportunities available us various jurisdictions operate provide income taxes based tax allischalmers energy inc notes consolidated financial statements continued laws rates effect countries operations conducted income earned income tax expense expected fluctuate year operations conducted different taxing jurisdictions amount pretax income fluctuates determination evaluation annual income tax provision involves interpretation tax laws various jurisdictions operate requires significant judgment use estimates assumptions regarding significant future events amount timing character income deductions tax credits changes tax laws regulations level operations profitability jurisdiction may impact tax liability given year annual tax provision based information available us time number years may elapse ultimate tax liabilities certain tax jurisdictions determined current income tax expense reflects estimate income tax liability current year withholding taxes changes tax rates changes prior year tax estimates returns filed deferred tax assets liabilities recognized anticipated future tax effects temporary differences financial statement basis tax basis assets liabilities using enacted tax rates effect year end valuation allowance deferred tax assets recorded morelikelythannot benefit deferred tax asset realized provide uncertain tax positions pursuant fasb interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 “fin 48” policy recognize interest penalties accrued unrecognized tax benefits component income tax expense date adoption fin 48 accrued interest penalties associated unrecognized tax benefits united states federal tax purposes tax returns tax years 2001 2006 remain open examination tax authorities foreign tax returns remain open examination tax years 2001 2006 generally state tax purposes 2002 2006 tax years remain open examination tax authorities four year statute limitations however certain states may keep statute open six ten years intention permanently reinvest undistributed earnings nonus subsidiaries accordingly provided us deferred taxes undistributed earnings nonus subsidiaries distribution made us undistributed earnings subsidiaries could required record additional taxes cannot predict make distribution undistributed earnings unable make determination amount unrecognized deferred tax liability stockbased compensation adopted sfas 123r sharebased payment “sfas 123r” effective january 1 2006 statement requires sharebased payments employees including grants employee stock options recognized financial statements based grantdate fair values compensation cost awards granted prior vested january 1 2006 would based grant date attributes originally used value awards pro forma purposes sfas 123 accounting stockbased compensation “sfas 123” adopted sfas 123r using modified prospective transition method utilizing blackscholes option pricing model calculation fair value employee stock options modified prospective method record compensation cost related unvested stock awards december 31 2005 recognizing unamortized grant date fair value awards remaining vesting periods awards change historical reported earnings estimated forfeiture rates 2007 2006 based historical experience blackscholes model incorporates assumptions value stockbased awards riskfree rate interest related us treasury yield curve periods within expected term option time grant dividend yield common stock assumed zero historically paid dividends current plans future expected volatility based historical volatility common stock allischalmers energy inc notes consolidated financial statements continued prior january 1 2006 accounted stockbased compensation using accounting principle board opinion 25 “apb 25” apb 25 compensation expense recognized stock options exercise price less market price grant date option stock options exercise prices market value stock grant date adopted disclosureonly provisions sfas 123 also adopted disclosureonly provisions sfas 123 stock options granted employees directors accordingly compensation cost recognized apb 25 net income years ended december 31 2007 2006 includes approximately 49 million 34 million compensation costs related sharebased payments respectively tax benefit recorded association sharebased payments 17 million 64 million yearsended december 31 2007 2006 respectively december 31 2007 163 million unrecognized compensation expense related nonvested stock based compensation grants compensation expense options granted recorded based fair value grant date options consistent provisions sfas 123 net income net income per common share year ended december 31 2005 would decreased pro forma amounts indicated thousands except per share amounts options granted 2007 2006 2005 see note 10 disclosures regarding stock options following assumptions applied determining compensation costs segments enterprise related information disclose results segments accordance sfas 131 disclosures segments enterprise related information “sfas 131” designate internal organization used management allocating resources assessing performance source reportable segments sfas 131 also requires disclosures products services geographic areas major customers please see note 14 disclosure segment information accordance sfas 131 income per common share compute income per common share accordance provisions sfas 128 earnings per share “sfas 128” sfas 128 requires companies complex capital structures present allischalmers energy inc notes consolidated financial statements continued basic diluted earnings per share basic earnings per share computed basis weighted average number shares common stock outstanding period diluted earnings per share similar basic earnings per share presents dilutive effect per share basis potential common shares eg convertible preferred stock options etc converted restricted stock grants legally considered issued outstanding included basic diluted earnings per share extent vested unvested restricted stock included computation diluted earnings per share using treasury stock method potential dilutive common shares antidilutive effect eg increase income per share excluded diluted earnings per share components basic diluted earnings per share follows thousands except per share amounts reclassification certain prior period balances reclassified conform current year presentation new accounting pronouncements september 2006 fasb issued sfas 157 fair value measurements “sfas 157” sfas 157 clarifies principle fair value based assumptions market participants would use pricing asset liability establishes fair value hierarchy prioritizes information used develop assumptions standard fair value measurements would separately disclosed level within fair value hierarchy sfas 157 effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years early adoption permitted subsequently fasb provided oneyear deferral provisions sfas 157 nonfinancial assets liabilities recognized disclosed fair value consolidated financial statements nonrecurring basis believe adoption sfas 157 material impact financial position results operations cash flows december 2007 fasb issued sfas 141r business combinations “sfas 141r” statement retains fundamental requirements sfas 141 “business combinations” acquisition method accounting used business combinations expands method accounting transactions events one entity obtains control one businesses assets allischalmers energy inc notes consolidated financial statements continued acquisition date subsequent periods statement replaces sfas 141 requiring measurement acquisition date fair value assets acquired liabilities assumed noncontrolling interest additionally sfas 141r requires acquisitionrelated costs including restructuring costs recognized expense separately acquisition sfas 141r applies prospectively business combinations fiscal years beginning december 15 2008 adopt sfas 141r beginning january 1 2009 apply future acquisitions february 2007 fasb issued statement 159 fair value option financial assets financial liabilities “sfas 159” permits entities elect measure many financial instruments certain items fair value upon adoption sfas 159 entity may elect fair value option eligible items exist adoption date subsequent initial adoption election fair value option made initial recognition asset liability upon remeasurement event gives rise newbasis accounting subsequent changes fair value instrument reported earnings sfas 159 affect existing accounting literature requires certain assets liabilities recorded fair value eliminate disclosure requirements included accounting standards sfas 159 effective beginning reporting entity’s first fiscal year begins november 15 2007 currently evaluating provisions sfas 159 yet determined impact financial statements december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statements amendment arb 51” “sfas 160” sfas 160 requires noncontrolling minority interests reported component shareholders’ equity ii net income attributable parent noncontrolling interest separately identified consolidated statement operations iii changes parent’s ownership interest parent retains controlling interest accounted equity transactions iv retained noncontrolling equity investment upon deconsolidation subsidiary initially measured fair value v sufficient disclosures provided clearly identify distinguish interests parent interests noncontrolling owners sfas 160 effective annual periods beginning december 15 2008 applied prospectively presentation disclosure requirements statement shall applied retrospectively periods presented believe adoption sfas 160 material impact financial position results operations note 2 post retirement benefit obligations medical life pursuant plan reorganization confirmed bankruptcy court acceptances creditors stockholders consummated december 2 1988 assumed contractual obligation simplicity manufacturing inc smi reimburse smi 50 actual cost medical life insurance claims select group retirees smi retirees prior simplicity manufacturing division allischalmers actuarial present value expected retiree benefit obligation determined actuary amount results applying actuarial assumptions 1 historical claimscost data 2 estimates time value money discounts interest 3 probability payment including decrements death disability withdrawal retirement today expected date benefit payments december 31 2007 2006 postretirement benefit obligations 31000 304000 respectively 401k savings plan june 30 2003 adopted 401k profit sharing plan “plan” plan defined contribution savings plan designed provide retirement income eligible employees plan intended qualified section 401k internal revenue code 1986 amended funded voluntary pretax contributions eligible employees may contribute percentage eligible allischalmers energy inc notes consolidated financial statements continued compensation limited subject statutory limits plan also funded discretionary matching employer contributions us eligible employees cannot participate plan attained age 21 completed threemonths service us participant 100 vested respect participants’ contributions matching contributions vested threeyear period accordance plan document contributions invested directed participant investment funds available plan matching contributions approximately 18 million 735000 114000 paid 2007 2006 2005 respectively note 3 acquisitions sale capillary assets april 1 2005 acquired 100 outstanding stock delta rental service inc delta approximately 46 million cash 223114 shares common stock two promissory notes totaling 350000 purchase price allocated fixed assets inventory delta located lafayette louisiana rental tool company providing specialty rental items oil gas industry spiral heavy weight drill pipe test plugs used test blowout preventors well head retrieval tools spacer spools assorted handling tools results delta since acquisition included rental services segment may 1 2005 acquired 100 outstanding capital stock capcoil tubing services inc capcoil approximately 27 million cash 168161 shares common stock payment assumption approximately 13 million debt capcoil located kilgore texas engaged downhole well servicing providing coil tubing services enhance production existing wells goodwill 184000 identifiable intangible assets 14 million recorded connection acquisition results capcoil since acquisition included production services segment july 11 2005 acquired compressed air drilling assets wt enterprises inc wt based south texas 60 million cash equipment includes compressors boosters mist pumps vehicles goodwill 82000 identifiable intangible assets 15 million recorded connection acquisition results wt assets since acquisition included underbalanced drilling segment july 11 2005 acquired mi llc “mi” 45 interest aircomp subordinated note principal amount 48 million issued aircomp paid mi 71 million cash issued mi 40 million subordinated note bearing interest 5 per annum result 100 aircomp results aircomp included underbalanced drilling segment effective august 1 2005 acquired 100 outstanding capital stock target energy inc target approximately 13 million cash forgiveness lease receivable approximately 06 million purchase price allocated fixed assets target results target included directional horizontal drilling segment measure drilling equipment utilized segment september 1 2005 acquired casing tubing service assets patterson services inc approximately 156 million assets located corpus christi texas kilgore texas lafayette louisiana houma louisiana results assets since acquisition included tubular services segment effective january 1 2006 acquired 100 outstanding stock specialty rental tools inc specialty approximately 953 million cash addition approximately 588000 costs incurred relation specialty acquisition specialty located lafayette louisiana engaged rental high quality drill pipe heavy weight spiral drill pipe tubing work strings blowout preventors choke manifolds various valves handling tools oil natural gas drilling following table allischalmers energy inc notes consolidated financial statements continued summarizes allocation purchase price related acquisition costs estimated fair value assets acquired liabilities assumed date acquisition thousands specialty’s historical property equipment values increased approximately 716 million based thirdparty valuations results specialty since acquisition included rental services segment effective april 1 2006 acquired 100 outstanding stock rogers oil tools inc rogers based lafayette louisiana total consideration approximately 137 million includes approximately 113 million cash 16 million common stock 750000 threeyear promissory note addition approximately 380000 costs incurred relation rogers acquisition rogers sells services rents power drill pipe tongs accessories rental tongs snubbing well control applications rogers also provides specialized tong operators rental jobs following table summarizes allocation purchase price related acquisition costs estimated fair value assets acquired liabilities assumed date acquisition thousands rogers’ historical property equipment values increased approximately 84 million based thirdparty valuations intangible assets include approximately 24 million assigned goodwill 12 million assigned patents 11 million assigned customer list 150000 assigned noncompete based thirdparty valuations employment contracts amortizable intangibles weightedaverage useful life 105 years results rogers since acquisition included tubular services segment effective august 14 2006 acquired 100 outstanding stock dls based argentina total consideration approximately 1145 million includes approximately 937 million cash 381 million common stock less approximately 173 million debt assigned us addition approximately 34 million costs incurred relation dls acquisition dls operates fleet 51 rigs including 20 drilling rigs 18 workover rigs 12 pulling rigs argentina one drilling rig allischalmers energy inc notes consolidated financial statements continued bolivia following table summarizes allocation purchase price related acquisition costs estimated fair value assets acquired liabilities assumed date acquisition thousands dls’ historical property equipment values increased approximately 227 million based thirdparty valuations results dls since acquisition included international drilling segment october 16 2006 acquired 100 outstanding stock petro rental based lafayette louisiana total consideration approximately 336 million includes approximately 202 million cash 38 million common stock repaid 96 million existing petro rental debt addition approximately 82000 costs incurred relation petrorental acquisition petrorental provides variety productionrelated rental tools equipment services including wire line services equipment land offshore pumping services coiled tubing following table summarizes allocation purchase price related acquisition costs estimated fair value assets acquired liabilities assumed date acquisition thousands petro rental’s historical property equipment values increased approximately 134 million based thirdparty valuations intangible assets include approximately 36 million assigned goodwill 22 million assigned customer relationships based thirdparty valuations amortizable intangibles weightedaverage useful life 10 years results petrorental since acquisition included production services segment effective december 1 2006 acquired 100 outstanding stock tanus based argentina total consideration 25 million addition approximately 17000 costs incurred relation tanus acquisition tanus engaged research manufacturing additives oil natural gas water well drilling completion fluids argentina following table summarizes allocation allischalmers energy inc notes consolidated financial statements continued purchase price related acquisition costs estimated fair value assets acquired liabilities assumed date acquisition thousands results tanus reported dls international drilling segment december 18 2006 acquired substantially assets oil gas rental services inc ogr based morgan city louisiana total consideration approximately 3424 million includes approximately 2910 million cash 514 million common stock addition approximately 30 million costs incurred relation acquisition assets ogr following table summarizes allocation purchase price related acquisition costs estimated fair value assets acquired date acquisition thousands ogr’s historical property equipment values increased approximately 1689 million based thirdparty valuations intangible assets include approximately 1061 million assigned goodwill 220 million customer relations 831000 patents 35000 assigned employment agreements based thirdparty valuations amortizable intangibles weightedaverage useful life 101 years results ogr assets since acquisition included rental services segment june 29 2007 acquired coker directional inc coker total consideration approximately 39 million includes approximately 36 million cash promissory note 350000 addition approximately 5000 costs incurred relation coker acquisition following table summarizes preliminary allocation purchase price related acquisition costs estimated fair value assets acquired liabilities assumed date acquisition thousands intangible assets include approximately 18 million assigned goodwill 21 million assigned customer relationships noncompete amortizable intangibles weightedaverage useful life 94 years results coker since acquisition included directional drilling segment expect material differences preliminary allocation purchase price final purchase price allocations july 26 2007 acquired diggar tools llc diggar total consideration approximately 103 million includes approximately 67 million cash promissory note 750000 payment approximately 28 million existing diggar debt addition approximately 29000 costs incurred relation diggar acquisition following table summarizes preliminary allocation allischalmers energy inc notes consolidated financial statements continued purchase price related acquisition costs estimated fair value assets acquired date acquisition thousands diggar’s historical property equipment values increased approximately 34 million based thirdparty valuations intangible assets include approximately 27 million assigned goodwill results diggar since acquisition included directional drilling segment expect material differences preliminary allocation purchase price final purchase price allocations october 23 2007 acquired rebel total consideration approximately 73 million includes approximately 50 million cash promissory notes aggregate 500000 payment approximately 15 million existing rebel debt deposit 305000 escrow cover distributions owed rebel defined benefit pension plan trust addition approximately 214000 costs incurred relation rebel acquisition following table summarizes preliminary allocation purchase price related acquisition costs estimated fair value assets acquired date acquisition thousands rebel’s historical property equipment values increased approximately 85 million based thirdparty valuations intangible assets include approximately 461000 assigned goodwill 683000 assigned customer relations amortizable intangibles useful life 15 years results rebel since acquisition included tubular services segment expect material differences preliminary allocation purchase price final purchase price allocations november 1 2007 acquired substantially assets diamondback oilfield services inc diamondback total consideration approximately 231 million cash approximately 89000 costs incurred relation diamondback acquisition following table summarizes allischalmers energy inc notes consolidated financial statements continued preliminary allocation purchase price related acquisition costs estimated fair value assets acquired date acquisition thousands diamondback’s historical property equipment values increased approximately 20 million based thirdparty valuations intangible assets include approximately 76 million assigned goodwill 650000 assigned noncompete 620000 assigned trade name 34 million assigned customer relations based thirdparty valuations amortizable intangibles weightedaverage useful life 133 years sellers entitled future cash earnout payment upon business attaining certain earning objectives results diamondback assets since acquisition included directional drilling segment expect material differences preliminary allocation purchase price final purchase price allocations acquisitions accounted using purchase method accounting results operations acquired entities since date acquisition included consolidated income statement june 29 2007 sold capillary tubing units related equipment approximately 163 million reported gain approximately 89 million assets sold represented small portion production services segment following unaudited pro forma consolidated summary financial information year ended december 31 2006 illustrates effects acquisitions related public offerings debt equity rogers dls petrorental ogr acquisitions occurred january 1 2006 based historical results acquisitions following unaudited pro forma consolidated summary financial information year ended december 31 2005 illustrates effects acquisitions related public offerings debt equity delta capcoil wt minority interest aircomp specialty rogers dls petrorental ogr acquisitions occurred january 1 2005 based historical results acquisitions historical results ogr based historical year end october 31 thousands except per share amounts allischalmers energy inc notes consolidated financial statements continued note 4 inventories comprised following december 31 thousands note 5 property intangible assets property equipment comprised following december 31 thousands net book value equipment recorded capital leases 285000 10 million december 31 2007 2006 respectively allischalmers energy inc notes consolidated financial statements continued intangible assets follows december 31 thousands amortization expense related intangibles 41 million 19 million 15 million years ended december 31 2007 2006 2005 respectively future amortization intangible assets december 31 2007 follows thousands note 6 income taxes income taxes 417 million 359 million 85 million us tax purposes years ended december 31 2007 2006 2005 respectively also income taxes 376 million 111 million reported nonus countries years ended december 31 2007 2006 respectively treat withholding taxes incurred us subsidiaries foreign countries foreign tax anticipate using tax payments offset us tax allischalmers energy inc notes consolidated financial statements continued income tax provision consists following thousands required file consolidated us federal income tax return pay foreign income taxes argentina related international drilling’s operations mexico related tubular’s revenues matyep following table reconciles us statutory tax rate actual tax rate significant components deferred income tax assets december 31 follows thousands allischalmers energy inc notes consolidated financial statements continued net future taxdeductible items relate primarily timing differences timing differences tax basis assets liabilities reported amounts financial statements result differences income tax purposes income financial statement purposes future years tax reform act 1986 contains provisions limit utilization net operating loss tax credit carry forwards “change ownership” described section 382 internal revenue code change ownership may limit utilization net operating loss tax credit carryforwards could triggered public offering subsequent sales securities us stockholders provision limited amount net operating losses available us currently net operating loss carryforwards tax purposes december 31 2007 2006 77 million 49 million respectively expiring 2024 prior 2006 record asset us foreign tax credits believed would recoverable based taxable income project us foreign tax credits utilized us income tax 1988 plan reorganization established ac reorganization trust settle claims make distributions creditors certain stockholders transferred cash certain property ac reorganization trust december 2 1988 payments made us ac reorganization trust generate tax deductions us upon transfer generate deductions us ac reorganization trust makes payments holders claims administrative expenses plan reorganization also created trust process liquidate product liability claims payments made ac reorganization trust product liability trust generate current tax deductions us upon payment generates deductions us product liability trust makes payments liquidate claims incurs administrative expenses believe aforementioned trusts grantor trusts therefore include income loss trusts income loss tax purposes income loss trusts included results operations financial reporting purposes valuation allowance established deferred tax assets management based upon available information considers likely benefit assets realized december 31 2007 2006 valuation allowance zero approximately 97 million 55 million ad valorem franchise income sales tax accruals included accrued expense balances 205 million 170 million december 31 2007 2006 respectively adopted provisions fin 48 january 1 2007 interpretation clarifies accounting uncertain tax positions requires companies recognize impact tax position financial statements position likely sustained audit based technical merits position adoption fin 48 impact total liabilities stockholders’ equity allischalmers energy inc notes consolidated financial statements continued note 7 debt longterm debt consists following december 31 thousands weighted average interest rate outstanding debt approximately 87 december 31 2007 98 december 31 2006 maturities debt obligations december 31 2007 follows thousands senior notes bank loans line credit agreements january 18 2006 august 14 2006 closed private offerings qualified institutional buyers pursuant rule 144a securities act 1933 1600 950 million aggregate principal amount senior notes respectively senior notes due january 15 2014 bear interest 90 proceeds used fund acquisitions specialty dls repay existing debt general corporate purposes january 2007 closed private offering qualified institutional buyers pursuant rule 144a securities act 2500 million principal amount 85 senior notes due 2017 proceeds senior notes offering together portion proceeds concurrent common stock offering used repay debt outstanding 3000 million bridge loan facility incurred finance acquisition substantially assets ogr allischalmers energy inc notes consolidated financial statements continued december 18 2006 closed 3000 million senior unsecured bridge loan bridge loan due 18 months closing weighted average interest rate 106 bridge loan repaid january 29 2007 used fund acquisition ogr january 18 2006 also executed amended restated credit agreement provided 250 million revolving line credit maturity january 2010 january 2006 amended restated credit agreement contained customary events default financial covenants limits ability incur additional indebtedness make capital expenditures pay dividends make distributions create liens sell assets obligations january 2006 amended restated credit agreement secured substantially assets excluding dls assets including 23 shares dls april 26 2007 entered second amended restated credit agreement increased revolving line credit 620 million final maturity date april 26 2012 december 3 2007 entered first amendment second amended restated credit agreement increased revolving line credit 900 million amended restated credit agreement contains customary events default financial covenants limits ability incur additional indebtedness make capital expenditures pay dividends make distributions create liens sell assets obligations amended restated credit agreement secured substantially assets located united states december 31 2007 2006 amounts borrowed facility availability reduced outstanding letters credit 84 million 97 million respectively part acquisition dls assumed various bank loans floating interest rates based libor plus margin terms ranging 2 5 years weighted average interest rates loans 67 70 december 31 2007 2006 respectively bank loans denominated us dollars outstanding amount due december 31 2007 2006 49 million 73 million respectively notes payable part acquisition mountain compressed air inc mca 2001 issued note sellers mca original amount 22 million accruing interest rate 575 per annum note reduced 15 million result settlement legal action sellers 2003 march 2005 reached agreement sellers holders note result action brought us sellers terms agreement paid holders note 10 million cash agreed pay additional 350000 june 1 2006 additional 150000 june 1 2007 settlement claims december 31 2007 2006 outstanding amounts due 0 150000 respectively connection acquisition rogers issued seller note amount 750000 note bears interest 50 due april 3 2009 connection purchase coker issued seller note amount 350000 note bears interest 825 due june 29 2008 connection purchase diggar issued seller note amount 750000 note bears interest 60 due july 26 2008 connection purchase rebel issued sellers notes amount 500000 notes bear interest 50 due october 23 2008 2000 compensated directors including current directors nederlander toboroff served board directors 1989 march 31 1999 without compensation issuing promissory notes totaling 325000 notes bear interest rate 50 december 31 2007 2006 principal accrued interest notes totaled approximately 32000 various rig equipment financing loans interest rates ranging 78 87 terms 2 5 years december 31 2007 2006 outstanding balances rig equipment financing loans 595000 35 million respectively allischalmers energy inc notes consolidated financial statements continued april 2006 august 2006 obtained insurance premium financings amount 19 million 896000 fixed interest rates 56 60 respectively terms agreements amounts outstanding paid 10 month 11 month repayment schedules outstanding balance notes approximately 10 million december 31 2006 april 2007 august 2007 obtained insurance premium financings amount 32 million 13 fixed interest rates 59 57 respectively terms agreements amounts outstanding paid 11 month repayment schedules outstanding balance notes approximately 17 million december 31 2007 debt connection purchase tubular agreed pay total 12 million seller exchange noncompete agreement monthly payments 20576 due agreement january 31 2007 connection purchase safcooil field products inc safco also agreed pay total 150000 sellers exchange noncompete agreement required make annual payments 50000 september 30 2007 connection purchase capcoil agreed pay total 500000 two management employees exchange noncompete agreements required make annual payments 110000 may 2008 total amounts due noncompete agreements december 31 2007 2006 110000 270000 respectively also various capital leases terms expire 2008 december 31 2007 2006 amounts outstanding capital leases 14000 414000 respectively note 8 commitments contingencies placed orders capital equipment totaling 827 million received paid 2008 approximately 462 million drilling service rigs international drilling segment 260 million six new coiled tubing units related equipment production services segment 53 million rental equipment principally drill pipe rental services segment 52 million casing tubing tools equipment orders subject cancellation minimal loss prior cash deposits rent office space certain facilities shop yards equipment storage maintenance facility rent expense years ended december 31 2007 2006 2005 27 million 16 million 987000 respectively december 31 2007 future minimum rental commitments operating leases follows thousands note 9 stockholders’ equity january 1 2005 relation acquisition downhole injection services llc downhole executed business development agreement cttv investments llc affiliate chevrontexaco inc whereby issued 20000 shares common stock cttv agreed issue allischalmers energy inc notes consolidated financial statements continued additional 60000 shares cttv contingent upon subsidiaries receiving certain levels revenues 2005 chevrontexaco affiliates cttv minority owner downhole acquired 2004 based terms agreement additional shares issued 2005 issued 223114 168161 shares common stock relation delta capcoil acquisitions respectively see note 3 august 2005 stockholders approved amendment certificate incorporation increase authorized number shares common stock 20 million 100 million increase authorized preferred stock 10 million shares 25 million shares completed secondary public offering sold 1761034 shares approximately 155 million net expenses also options warrants exercised 2005 exercises resulted 1076154 shares common stock issued approximately 14 million 2006 issued 125285 25 million 246761 32 million shares common stock relation rogers dls petro rental ogr asset acquisitions respectively see note 3 august 14 2006 closed public offering 3450000 shares common stock public offering price 1450 per share net proceeds public offering approximately 463 million used fund portion acquisition dls 2006 options warrants exercised 2006 resulted 1851377 shares common stock issued approximately 63 million recognized approximately 34 million compensation expense related stock options 2006 recorded capital excess par value see note 1 also recorded approximately 64 million tax benefit related stock compensation plans january 2007 closed public offering 60 million shares common stock public offering price 1765 per share net proceeds public offering together proceeds concurrent senior notes offering used repay debt outstanding 3000 million bridge loan facility incurred finance ogr acquisition general corporate purposes also restricted stock award grants options warrants exercised 2007 resulted 882624 shares common stock issued approximately 33 million recognized approximately 49 million compensation expense related share based payments recorded capital excess par value see note 1 also recorded approximately 17 million tax benefit related stock compensation plans note 10 stock options 2000 issued stock options promissory notes certain current former directors compensation services directors see note 7 board directors granted stock options individuals options purchase 4800 shares common stock granted exercise price 1375 per share options vested immediately may exercised time prior march 28 2010 december 31 2007 4000 stock options remain outstanding compensation expense recorded options issued exercise price equal fair value common stock date grant may 31 2001 board granted leonard toboroff one directors option purchase 100000 shares common stock 250 per share exercisable 10 years october 15 2001 option granted services provided mr toboroff oil quip rentals inc oil quip prior merger including providing financial advisory services assisting oil quip’s capital structure assisting oil quip finding strategic acquisition opportunities recorded compensation expense 500000 issuance option year ended december 31 2001 december 31 2007 stock options exercised allischalmers energy inc notes consolidated financial statements continued 2003 incentive stock plan “2003 plan” amended permits us grant key employees outside directors various forms stock incentives including among others incentive nonqualified stock options restricted stock 2003 plan administered compensation committee board consists two directors appointed board following benefits may granted 2003 plan stock appreciation rights b restricted stock c performance awards incentive stock options e nonqualified stock options f stockbased awards stock incentive terms excess ten years maximum number shares may issued 2003 plan shall lesser 3000000 shares 15 total number shares common stock outstanding 2006 incentive plan “2006 plan” approved stockholders november 2006 plan administered compensation committee board consists two directors appointed board maximum number shares company’s common stock par value 001 per share “common stock” may issued 2006 plan equal 1500000 shares subject adjustment event stock splits certain corporate events 2006 plan provides grant following types awards stock options including incentive stock options nonqualified stock options ii bonus stock iii restricted stock awards iv performance awards v stockbased awards except respect awards incentive stock options employees consultants nonemployee directors company affiliates eligible participate 2006 plan term award shall period may determined committee provided event shall term award exceed period ten 10 years date grant summary stock option activity related information follows total intrinsic value stock options amount market price underlying stock date exercise exceeds exercise price option exercised approximately 66 million 188 million 343000 years ended december 31 2007 2006 2005 respectively december 31 2007 approximately 24 million total unrecognized compensation cost related stock option 939000 918000 532000 recognized years ended december 31 2008 2009 2010 respectively following table summarizes additional information stock options outstanding december 31 2007 allischalmers energy inc notes consolidated financial statements continued aggregate pretax intrinsic value stock options outstanding exercisable approximately 55 million december 31 2007 amount represents value would received option holders respective options exercised december 31 2007 restricted stock awards addition stock options 2003 2006 plans allow grant restricted stock awards “rsa” timelapse rsa award common stock unit represents right receive end stipulated period one unrestricted share stock exercise price timelapse rsa restrictions lapse periodically extended period time exceeding 10 years determine fair value rsas based market price common stock date grant compensation cost rsas primarily recognized straightline basis vesting service period net forfeitures performancebased rsa award common stock unit represents right receive one unrestricted share stock exercise price attainment established performance criteria 2007 granted 710000 performance based rsas market conditions performancebased rsas granted earned issued certain annual total shareholder return criteria attained next 3 years fair value performancebased rsas based thirdparty valuations following table summarizes activity nonvested restricted stock awards total fair value rsa shares vested 2007 approximately 577000 december 31 2007 approximately 139 million total unrecognized compensation cost related nonvested rsas 66 million 50 million 18 million 278000 208000 recognized years ended december 31 2008 2009 2010 2011 2012 respectively note 11 stock purchase warrants conjunction mca purchase oil quip february 2001 mca issued common stock warrant 620000 shares thirdparty investment firm assisted us initial identification purchase mca assets warrant entitles holder acquire 620000 shares common stock mca exercise price 01 per share nineyear period commencing february 7 2001 issued two warrants “warrants b” purchase 233000 total shares common stock exercise price 075 per share one warrant purchase 67000 shares common stock exercise price 500 per share “warrant c” connection subordinated debt financing mca 2001 warrants b paid december 7 2004 warrant c exercised november 2006 february 6 2002 connection acquisition substantially outstanding stock strata issued warrant purchase 87500 shares common stock exercise price 075 per share term four years warrants exercised august 2005 connection strata acquisition february 19 2003 issued energy spectrum additional warrant purchase 175000 shares common stock exercise price 075 per share warrants exercised august 2005 allischalmers energy inc notes consolidated financial statements continued march 2004 issued warrant purchase 340000 shares common stock exercise price 250 per share morgan joseph co consideration financial advisory services provided morgan joseph pursuant consulting agreement warrants exercised august 2005 april 2004 issued warrants purchase 20000 shares common stock exercise price 075 per share wells fargo credit inc connection extension credit wells fargo credit inc warrants exercised august 2005 april 2004 completed private placement 620000 shares common stock warrants purchase 800000 shares common stock following investors christopher engel donald engel defined benefit plan rer corp corporation whollyowned director robert nederlander leonard toboroff director investors invested 1550000 exchange 620000 shares common stock purchase price equal 250 per share invested 450000 exchange warrants purchase 800000 shares common stock exercise 250 per share expiring april 1 2006 total 486557 warrants exercised 2005 remaining portion exercised 2006 may 2004 issued warrant purchase 3000 shares common stock exercise price 475 per share consultant consideration financial advisory services provided pursuant consulting agreement warrants exercised may 2004 consultant also granted 16000 warrants may 2004 exercisable 465 per share warrants exercised november 2005 warrants 4000 shares common stock exercise price 465 also issued consultant may 2004 exercised january 2007 note 12 condensed consolidated financial information set forth following pages condensed consolidating financial statements allischalmers energy inc ii subsidiaries guarantors senior notes revolving credit facility iii subsidiaries guarantors senior notes revolving credit facility thousands prior acquisition dls subsidiaries guarantors senior notes revolving credit facility parent company independent assets operations guarantees full unconditional joint several allischalmers energy inc notes consolidated financial statements continued condensed consolidating balance sheets december 31 2007 allischalmers energy inc notes consolidated financial statements continued condensed consolidating income statements year ended december 31 2007 allischalmers energy inc notes consolidated financial statements continued condensed consolidating statements cash flow year ended december 31 2007 allischalmers energy inc notes consolidated financial statements continued allischalmers energy inc notes consolidated financial statements continued condensed consolidating balance sheets december 31 2006 allischalmers energy inc notes consolidated financial statements continued condensed consolidating income statements year ended december 31 2006 allischalmers energy inc notes consolidated financial statements continued condensed consolidating statements cash flow year ended december 31 2006 unaudited allischalmers energy inc notes consolidated financial statements continued note 13 related party transactions dls acquired three british virgin island corporations two directors alejandro p bulgheroni carlos bulgheroni indirectly beneficially substantially shares dls sellers dls’ largest customer pan american energy joint venture british petroleum bridas corporation alejandro p bulgheroni carlos bulgheroni indirectly beneficially substantially shares bridas corporation purchased approximately 35 million general oilfield supplies materials ralow services inc ralow 2007 rental services segment ralow owned brad adams bruce adams brothers burt adams one directors former president chief operating officer addition brad adams bruce adams employed officers rental 2007 allischalmers energy inc notes consolidated financial statements continued note 14 segment information december 31 2007 six operating segments including rental services international drilling directional drilling tubular services underbalanced drilling production services segments provide services energy industry revenues operating income loss depreciation amortization capital expenditures assets reporting segments plus corporate function reported thousands allischalmers energy inc notes consolidated financial statements continued allischalmers energy inc notes consolidated financial statements continued note 15 supplemental cash flows information thousands note 16 legal matters named time legal proceedings related activities prior bankruptcy 1988 however believe discharged liability claims bankruptcy believe likelihood material loss relating legal proceeding remote involved various legal proceedings ordinary course business legal proceedings different stages however believe likelihood material loss relating legal proceeding remote note 17 subsequent events january 23 2008 entered agreement plan merger bronco drilling company inc bronco whereby bronco become whollyowned subsidiary allischalmers merger agreement approved board directors board directors bronco provides bronco stockholders receive aggregate merger consideration value approximately 4378 million consisting 2800 million cash b shares common stock par value 001 per share aggregate value approximately 1578 million number shares common stock issued based average closing price common stock tentrading day period ending two days prior closing completion merger conditioned upon among things adoption merger agreement bronco’s stockholders approval stockholders issuance shares common stock used merger consideration order finance cash component merger consideration repayment outstanding bronco debt transaction expenses expect incur debt 3500 million intend obtain 3500 million either 1 permanent debt financing 3500 million 2 permanent debt financing cannot consummated prior closing date merger draw senior unsecured bridge loan facility aggregate principal amount 3500 million arranged rbc capital markets corporation goldman sachs credit partners lp acting joint lead arrangers joint bookrunners executed commitment letter dated january 28 2008 royal bank canada goldman sachs subject certain conditions severally committed provide allischalmers energy inc notes consolidated financial statements continued 50 loans senior unsecured bridge facility us commitment bridge loan facility terminate july 31 2008 drawn bridge facility date merger consummated date commitment may also terminate prior july 31 2008 merger abandoned material condition merger satisfied breach obligations commitment letter may use proceeds bridge facility finance cash component merger consideration repay outstanding bronco debt pay transaction expenses january 29 2008 burt adams resigned president chief operating officer effective february 28 2008 mr adams remain member board directors january 29 2008 mark c patterson elected senior vicepresident rental services january 29 2008 terrence p keane elected senior vicepresident oilfield services january 31 2008 entered agreement bch ltd bch invest 400 million cash bch form 15 convertible subordinated secured debenture convertible time option 49 common equity bch end two years option acquire remaining 51 bch parent brazalta resources corp brazalta based independent valuation mutually acceptable investment bank bch canadianbased oilfield services company engaged contract drilling operations exclusively brazil february 15 2008 dls subsidiary argentina entered 250 million import finance facility bank borrowings facility used fund portion purchase price new drilling service rigs ordered international drilling operation facility available borrowings december 31 2008 drawdown shall repaid four years equal semiannual instalments beginning one year disbursement final principal payment due later march 15 2013 interest payable every six months import finance facility unsecured contains customary events default financial covenants limits dls’ ability incur additional indebtedness make capital expenditures create liens sell assets note 18 summarized quarterly financial data unaudited thousands except per share amounts item 9 item 8 financial statements supplementary data allischalmers energy inc subsidiaries management’s report stockholders allischalmers energy inc management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting allischalmers energy inc subsidiaries allischalmers order evaluate effectiveness internal control financial reporting required section 404 sarbanesoxley act 2002 conducted assessment including testing using criteria internal controlintegral framework issued committee sponsoring organization treadway commission coso allischalmers’ system internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance accounting principles generally accepted united states america inherent limitation internal control financial reporting may prevent detect misstatements based assessment concluded allischalmers maintained effective internal control financial reporting december 31 2008 based criteria internal controlintegrated framework issued coso effectiveness allischalmers internal control financial reporting december 31 2008 audited uhy llp independent registered public accounting firm stated report included herein management’s certifications allischalmers’ chief executive officer chief financial officer required sarbanesoxley act 2002 included exhibits 31 32 allischalmers’ form 10k allischalmers energy inc report independent registered public accounting firm board directors stockholders allischalmers energy inc audited accompanying consolidated balance sheets allischalmers energy inc subsidiaries “company” december 31 2008 2007 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2008 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position allischalmers energy inc subsidiaries december 31 2008 2007 consolidated results operations cash flows three years period ended december 31 2008 conformity accounting principles generally accepted united states america also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states allischalmers energy inc’s internal control financial reporting december 31 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated march 9 2009 expressed unqualified opinion thereon uhy llp houston texas march 9 2009 report independent registered public accounting firm board directors stockholders allischalmers energy inc audited allischalmers energy inc’s internal control financial reporting december 31 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria allischalmers energy inc’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion allischalmers energy inc subsidiaries maintained material respects effective internal control financial reporting december 31 2008 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets allischalmers energy inc subsidiaries december 31 2008 2007 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2008 report dated march 9 2009 expressed unqualified opinion thereon uhy llp houston texas march 9 2009 allischalmers energy inc consolidated balance sheets accompanying notes integral part consolidated financial statements allischalmers energy inc consolidated statements operations accompanying notes integral part consolidated financial statements allischalmers energy inc consolidated statement stockholders’ equity accompanying notes integral part consolidated financial statements allischalmers energy inc consolidated statements cash flows accompanying notes integral part consolidated financial statements allischalmers energy inc notes consolidated financial statements note 1 nature business summary significant accounting policies organization business allischalmers energy inc “allischalmers” “we” “our” “us” incorporated delaware 1913 provide services equipment oil natural gas exploration production companies throughout us including texas louisiana oklahoma new mexico colorado pennsylvania arkansas offshore gulf mexico internationally primarily argentina brazil mexico operate three sectors oil natural gas service industry oilfield services drilling completion rental services nature operations many regions operate subject us changing economic regulatory political conditions vulnerable nearterm longterm changes demand prices oil natural gas related demand oilfield service operations use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period future events effects cannot perceived certainty accordingly accounting estimates require exercise judgment management believes estimates assumptions used preparation consolidated financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts recoverability longlived assets intangibles useful lives used depreciation amortization income taxes valuation allowances accounting estimates used preparation consolidated financial statements may change new events occur experience acquired additional information obtained operating environment changes principles consolidation consolidated financial statements include accounts allischalmers subsidiaries december 31 2008 aircomp llc “aircomp” allischalmers tubular services llc “tubular” strata directional technology llc “strata” allischalmers rental services llc “rental” allischalmers production services llc “production” allischalmers management llc allischalmers holdings inc dls drilling logistics services company “dls” dls argentina limited tanus argentina sa “tanus” petrorentals llc “petrorental” rebel rentals llc “rebel” allischalmers drilling llc bch ltd “bch” bch energy brasil servicos de petroleo ltda significant intercompany transactions eliminated revenue recognition provide rental equipment drilling services customers per day daywork per job contractual rates recognize drilling related revenue work progresses collectibility reasonably assured revenue daywork contracts recognized realized realizable earned daywork contracts revenue recognized based number days completed fixed rates stipulated contract certain contracts receive lumpsum fees equipment mobilization costs mobilization fees related costs deferred amortized contract terms material recognize reimbursements received outofpocket expenses incurred revenues account outofpocket expenses direct costs payments customers cost oilfield rental equipment damaged lostinhole reflected revenues recognized revenue damaged allischalmers energy inc notes consolidated financial statements continued lostinhole equipment 106 million 126 million 24 million years ended december 31 2008 2007 2006 respectively allowance doubtful accounts receivable customer obligations due normal trade terms sell services oil natural gas exploration production companies perform continuing credit evaluations customers’ financial condition although generally require collateral letters credit may required customers certain circumstances allowance doubtful accounts represents estimate amount probable credit losses existing accounts receivable significant individual accounts receivable balances outstanding greater 90 days reviewed individually collectibility limited number customers individually large amounts due given date unanticipated change one customer’s credit worthiness matters affecting collectibility amounts due customers could material effect results operations period changes events occur attempts collect receivable failed receivable written allowance december 31 2008 2007 recorded allowance doubtful accounts 42 million 19 million respectively bad debt expense 33 million 13 million 781000 years ended december 31 2008 2007 2006 respectively cash equivalents consider highly liquid investments original maturity three months less time purchase cash equivalents inventories stated lower cost market cost determined using first “fifo” method average cost method approximates fifo includes cost materials labor manufacturing overhead property equipment property equipment recorded cost less accumulated depreciation certain equipment held capital leases classified equipment related obligations recorded liabilities maintenance repairs improve extend life related assets charged operations incurred refurbishments renewals capitalized value equipment enhanced extended period property equipment sold otherwise disposed asset account related accumulated depreciation account relieved gain loss included operations interest capitalized construction progress weighted average cost debt outstanding construction period interest rate debt incurred construction cost property equipment currently service depreciated estimated useful lives related assets range three twenty years depreciation computed straightline method financial reporting purposes capital leases amortized using straightline method estimated useful lives assets lease amortization included depreciation expense depreciation expense charged operations 635 million 509 million 203 million years ended december 31 2008 2007 2006 respectively allischalmers energy inc notes consolidated financial statements continued goodwill intangible assets amortization goodwill intangible assets infinite lives amortized tested impairment annually frequently circumstances indicate impairment may exist intangible assets finite useful lives amortized either straightline basis asset’s estimated useful life basis reflects pattern economic benefits intangible assets realized impairment test requires allocation goodwill assets liabilities reporting units reporting units business unit level one level operating segments fair value reporting unit less book value including goodwill reduced implied fair value amount writedown charged earnings perform impairment tests carrying value goodwill annual basis december 31st reportable segments historically used discounted cash flow method focuses expected cash flow applying approach cash flow available distribution projected finite period years use five years cash flow available distribution terminal value estimate value end five years discounted present value derive indication value business unit annual assessment impairment 2008 due economic conditions affecting industry also utilized guideline company method make comparison projections reasonably similar publicly traded companies result recorded impairment 1158 million december 31 2008 december 31 2007 impairment deemed necessary increases estimated future costs decreases projected revenues could lead impairment portion goodwill future period impairment longlived assets longlived assets include property plant equipment intangible assets certain assets reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable impairment loss recorded period determined carrying amount recoverable determination recoverability made based upon estimated undiscounted future net cash flows excluding interest expense impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets financial instruments financial instruments consist cash equivalents accounts receivable payable debt carrying value cash equivalents accounts receivable payable approximate fair value due shortterm nature believe fair values carrying value debt excluding senior notes would materially different due instruments’ interest rates approximating market rates similar borrowings december 31 2008 2007 senior notes aggregate amount 505 million trade “over counter” limited amounts infrequent basis based trades estimate fair value senior notes approximately 284 million 490 million december 31 2008 2007 respectively price senior notes trade based many factors level interest rates economic environment outlook oilfield services industry perceived credit risk additionally due turmoil financial markets 2008 2009 impact investors senior notes price senior notes trade may affected investors’ financial distress need liquidity allischalmers energy inc notes consolidated financial statements continued concentration credit customer risk financial instruments potentially subject us concentrations credit risk consist principally cash equivalents trade accounts receivable december 31 2008 approximately 782000 32 million cash equivalents residing argentina brazil respectively cash equivalents 18 million restricted conjunction financial institution obligations brazil transact business several financial institutions however amount deposit two financial institutions exceeded 250000 federally insured limit december 31 2008 total 70 million management believes financial institutions financially sound risk loss minimal sell services major independent domestic international oil natural gas companies perform ongoing credit valuations customers provide allowances probable credit losses appropriate 2008 2007 2006 one customers pan american energy llc sucursal argentina pan american energy represented 285 207 117 consolidated revenues respectively revenues pan american energy represented 620 510 456 international revenues 2008 2007 2006 respectively see note 13 debt issuance costs related issuance debt capitalized amortized interest expense using straightline method approximates interest method maturity periods related debt interest expense related debt issuance costs 21 million 19 million 15 million years ended december 31 2008 2007 2006 respectively income taxes income tax expense based income statutory tax rates tax planning opportunities available us various jurisdictions operate provide income taxes based tax laws rates effect countries operations conducted income earned income tax expense expected fluctuate year operations conducted different taxing jurisdictions amount pretax income fluctuates determination evaluation annual income tax provision involves interpretation tax laws various jurisdictions operate requires significant judgment use estimates assumptions regarding significant future events amount timing character income deductions tax credits changes tax laws regulations level operations profitability jurisdiction may impact tax liability given year annual tax provision based information available us time number years may elapse ultimate tax liabilities certain tax jurisdictions determined current income tax expense reflects estimate income tax liability current year withholding taxes changes tax rates changes prior year tax estimates returns filed deferred tax assets liabilities recognized anticipated future tax effects temporary differences financial statement basis tax basis assets liabilities using enacted tax rates effect year end valuation allowance deferred tax assets recorded morelikelythannot benefit deferred tax asset realized provide uncertain tax positions pursuant financial accounting standards board fasb interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 “fin 48” policy recognize interest penalties accrued unrecognized tax benefits component income tax expense date adoption fin 48 accrued interest penalties associated unrecognized tax benefits us federal tax purposes tax returns tax years 2001 2007 remain open allischalmers energy inc notes consolidated financial statements continued examination tax authorities foreign tax returns remain open examination tax years 2001 2007 generally state tax purposes 2003 2007 tax years remain open examination tax authorities four year statute limitations however certain states may keep statute open six ten years intention permanently reinvest undistributed earnings nonus subsidiaries accordingly provided us deferred taxes 578 million undistributed earnings nonus subsidiaries december 31 2008 distribution made us undistributed earnings subsidiaries could required record additional taxes cannot predict make distribution undistributed earnings unable make determination amount unrecognized deferred tax liability stockbased compensation adopted statement financial accounting standards 123r sharebased payment “sfas 123r” effective january 1 2006 statement requires sharebased payments employees including grants employee stock options recognized financial statements based grantdate fair values adopted sfas 123r using modified prospective transition method utilizing blackscholes option pricing model calculation fair value employee stock options modified prospective method record compensation cost related unvested stock awards december 31 2005 recognizing unamortized grant date fair value awards remaining vesting periods awards change historical reported earnings estimated forfeiture rates 2008 2007 2006 based historical experience blackscholes model incorporates assumptions value stockbased awards riskfree rate interest related us treasury yield curve periods within expected term option time grant dividend yield common stock assumed zero historically paid dividends current plans future expected volatility based historical volatility common stock net income loss years ended december 31 2008 2007 2006 includes approximately 79 million 49 million 34 million compensation costs related sharebased payments respectively tax benefit recorded association sharebased payments 9000 17 million 64 million yearsended december 31 2008 2007 2006 respectively december 31 2008 108 million unrecognized compensation expense related nonvested stock based compensation grants options granted 2008 see note 10 disclosures regarding stock options following assumptions applied determining compensation costs options granted 2007 2006 allischalmers energy inc notes consolidated financial statements continued income loss per common share compute income loss per common share accordance provisions statement financial accounting standards 128 earnings per share “sfas 128” sfas 128 requires companies complex capital structures present basic diluted earnings per share basic earnings per share computed basis weighted average number shares common stock outstanding period diluted earnings per share similar basic earnings per share presents dilutive effect per share basis potential common shares eg convertible preferred stock options etc converted restricted stock grants legally considered issued outstanding included basic diluted earnings per share extent vested unvested restricted stock included computation diluted earnings per share using treasury stock method potential dilutive common shares antidilutive effect eg increase income per share excluded diluted earnings per share components basic diluted earnings deficit per share follows thousands except per share amounts warrants share based compensation shares approximately 332000 excluded computation diluted earnings per share 2008 effect would antidilutive due net loss year segments enterprise related information disclose results segments accordance statement financial accounting standards 131 disclosures segments enterprise related information “sfas 131” designate internal organization used management allocating resources assessing performance source reportable segments sfas 131 also requires disclosures products services geographic areas major customers please see note 14 disclosure segment information accordance sfas 131 reclassification certain prior period balances reclassified conform current year presentation allischalmers energy inc notes consolidated financial statements continued new accounting pronouncements september 2006 fasb issued statement financial accounting standards 157 fair value measurements sfas 157 sfas 157 clarifies principle fair value based assumptions market participants would use pricing asset liability establishes fair value hierarchy prioritizes information used develop assumptions standard fair value measurements would separately disclosed level within fair value hierarchy sfas 157 effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years early adoption permitted subsequently fasb provided oneyear deferral provisions sfas 157 nonfinancial assets liabilities recognized disclosed fair value consolidated financial statements nonrecurring basis allowed sfas 157 adopted requirements sfas 157 january 1 2008 except relate nonfinancial assets liabilities adopted january 1 2009 neither adoption impact financial statements february 2007 fasb issued statement financial accounting standards 159 fair value option financial assets financial liabilities sfas 159 permits entities elect measure many financial instruments certain items fair value upon adoption sfas 159 entity may elect fair value option eligible items exist adoption date subsequent initial adoption election fair value option made initial recognition asset liability upon remeasurement event gives rise newbasis accounting subsequent changes fair value instrument reported earnings sfas 159 affect existing accounting literature requires certain assets liabilities recorded fair value eliminate disclosure requirements included accounting standards sfas 159 effective beginning reporting entity’s first fiscal year begins november 15 2007 adopted sfas 159 january 1 2008 impact financial statements december 2007 fasb issued statement financial accounting standards 141 revised 2007 business combinations sfas 141r sfas 141r changes requirements acquirer’s recognition measurement assets acquired liabilities assumed business combination additionally sfas 141r requires acquisitionrelated costs including restructuring costs recognized expense separately acquisition adopted sfas 141r january 1 2009 impact financial statements december 2007 fasb issued statement financial accounting standards 160 noncontrolling interests consolidated financial statements amendment arb 51 sfas 160 sfas 160 requires noncontrolling minority interests reported component shareholders’ equity ii net income attributable parent noncontrolling interest separately identified consolidated statement operations iii changes parent’s ownership interest parent retains controlling interest accounted equity transactions iv retained noncontrolling equity investment upon deconsolidation subsidiary initially measured fair value v sufficient disclosures provided clearly identify distinguish interests parent interests noncontrolling owners sfas 160 effective annual periods beginning december 15 2008 applied prospectively presentation disclosure requirements statement shall applied retrospectively periods presented adopted sfas 160 january 1 2009 impact financial statements march 2008 fasb issued statement financial accounting standards 161 disclosures derivative instruments hedging activities amendment fasb statement 133 sfas 161 sfas 161 requires qualitative disclosures objectives strategies using derivatives quantitative data fair value gains losses derivative contracts details creditriskrelated contingent features hedged positions statement also requires enhanced disclosures allischalmers energy inc notes consolidated financial statements continued regarding entities use derivative instruments derivative instruments related hedged items accounted derivative instruments related hedged items affect entities’ financial position financial performance cash flows sfas 161 effective fiscal years beginning november 15 2008 adopted sfas 161 january 1 2009 material impact financial statements april 2008 fasb issued fasb staff position sfas 1423 determination useful life intangible assets fsp sfas 1423 fsp sfas 1423 amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset fasb statement financial accounting standards 142 goodwill intangible assets sfas 142 objective fsp sfas 1423 improve consistency useful life recognized intangible asset sfas 142 period expected cash flows used measure fair value asset sfas 141r business combinations us gaap principles fsp sfas 1423 effective fiscal years beginning december 15 2008 adopted fsp sfas 1423 january 1 2009 impact financial statements see also note 6 income taxes discussion fasb’s interpretation 48 accounting uncertainty income taxes note 2 post retirement benefit obligations medical life pursuant plan reorganization confirmed bankruptcy court acceptances creditors stockholders consummated december 2 1988 assumed contractual obligation simplicity manufacturing inc smi reimburse smi 50 actual cost medical life insurance claims select group retirees smi retirees prior simplicity manufacturing division allischalmers actuarial present value expected retiree benefit obligation determined actuary amount results applying actuarial assumptions 1 historical claimscost data 2 estimates time value money discounts interest 3 probability payment including decrements death disability withdrawal retirement today expected date benefit payments december 31 2008 2007 postretirement benefit obligations 0 31000 respectively 401k savings plan june 30 2003 adopted 401k profit sharing plan “plan” plan defined contribution savings plan designed provide retirement income eligible employees plan intended qualified section 401k internal revenue code 1986 amended funded voluntary pretax contributions eligible employees may contribute percentage eligible compensation limited subject statutory limits plan also funded discretionary matching employer contributions eligible employees cannot participate plan attained age 21 completed threemonths service us participant 100 vested respect participants’ contributions matching contributions vested threeyear period accordance plan document contributions invested directed participant investment funds available plan matching contributions approximately 15 million 18 million 735000 paid 2008 2007 2006 respectively allischalmers energy inc notes consolidated financial statements continued note 3 acquisitions asset dispositions effective january 1 2006 acquired 100 outstanding stock specialty rental tools inc specialty approximately 953 million cash addition approximately 588000 costs incurred relation specialty acquisition specialty located lafayette louisiana engaged rental high quality drill pipe heavy weight spiral drill pipe tubing work strings blowout preventors choke manifolds various valves handling tools oil natural gas drilling following table summarizes allocation purchase price related acquisition costs estimated fair value assets acquired liabilities assumed date acquisition thousands specialty’s historical property equipment values increased approximately 716 million based thirdparty valuations results specialty since acquisition included rental services segment effective april 1 2006 acquired 100 outstanding stock rogers oil tools inc rogers based lafayette louisiana total consideration approximately 137 million includes approximately 113 million cash 16 million common stock 750000 threeyear promissory note addition approximately 380000 costs incurred relation rogers acquisition rogers sells services rents power drill pipe tongs accessories rental tongs snubbing well control applications rogers also provides specialized tong operators rental jobs following table summarizes allocation purchase price related acquisition costs estimated fair value assets acquired liabilities assumed date acquisition thousands rogers’ historical property equipment values increased approximately 84 million based thirdparty valuations intangible assets include approximately 24 million assigned goodwill 12 million assigned patents 11 million assigned customer list 150000 assigned noncompete based thirdparty valuations employment contracts amortizable intangibles weightedaverage useful life 105 years results rogers since acquisition included oilfield services segment allischalmers energy inc notes consolidated financial statements continued effective august 14 2006 acquired 100 outstanding stock dls based argentina total consideration approximately 1145 million includes approximately 937 million cash 381 million common stock less approximately 173 million debt assigned us addition approximately 34 million costs incurred relation dls acquisition dls operated fleet 51 rigs including 20 drilling rigs 18 workover rigs 12 pulling rigs argentina one drilling rig bolivia following table summarizes allocation purchase price related acquisition costs estimated fair value assets acquired liabilities assumed date acquisition thousands dls’ historical property equipment values increased approximately 227 million based thirdparty valuations results dls since acquisition included drilling completion segment october 16 2006 acquired 100 outstanding stock petro rental based lafayette louisiana total consideration approximately 336 million includes approximately 202 million cash 38 million common stock repaid 96 million existing petro rental debt addition approximately 82000 costs incurred relation petrorental acquisition petrorental provides variety productionrelated rental tools equipment services including wire line services equipment land offshore pumping services coiled tubing following table summarizes allocation purchase price related acquisition costs estimated fair value assets acquired liabilities assumed date acquisition thousands petro rental’s historical property equipment values increased approximately 134 million based thirdparty valuations intangible assets include approximately 36 million assigned goodwill 22 million assigned customer relationships based thirdparty valuations amortizable intangibles allischalmers energy inc notes consolidated financial statements continued weightedaverage useful life 10 years results petrorental since acquisition included oilfield services segment effective december 1 2006 acquired 100 outstanding stock tanus based argentina total consideration 25 million addition approximately 17000 costs incurred relation tanus acquisition tanus engaged research manufacturing additives oil natural gas water well drilling completion fluids argentina following table summarizes allocation purchase price related acquisition costs estimated fair value assets acquired liabilities assumed date acquisition thousands results tanus since acquisition included drilling completion segment december 18 2006 acquired substantially assets oil gas rental services inc ogr based morgan city louisiana total consideration approximately 3424 million includes approximately 2910 million cash 514 million common stock addition approximately 30 million costs incurred relation acquisition assets ogr following table summarizes allocation purchase price related acquisition costs estimated fair value assets acquired date acquisition thousands ogr’s historical property equipment values increased approximately 1689 million based thirdparty valuations intangible assets include approximately 1061 million assigned goodwill 220 million customer relations 831000 patents 35000 assigned employment agreements based thirdparty valuations amortizable intangibles weightedaverage useful life 101 years results ogr assets since acquisition included rental services segment june 29 2007 acquired coker directional inc coker total consideration approximately 39 million includes approximately 36 million cash promissory note 350000 addition approximately 5000 costs incurred relation coker acquisition coker directional drilling company operating gulf coast central texas regions following table summarizes allocation purchase price related acquisition costs estimated fair value assets acquired liabilities assumed date acquisition thousands allischalmers energy inc notes consolidated financial statements continued intangible assets include approximately 18 million assigned goodwill 21 million assigned customer relationships noncompete amortizable intangibles weightedaverage useful life 94 years results coker since acquisition included oilfield services segment july 26 2007 acquired diggar tools llc diggar total consideration approximately 103 million includes approximately 67 million cash promissory note 750000 payment approximately 28 million existing diggar debt addition approximately 29000 costs incurred relation diggar acquisition diggar directional drilling company operating rocky mountains inventory 115 downhole motors following table summarizes allocation purchase price related acquisition costs estimated fair value assets acquired date acquisition thousands diggar’s historical property equipment values increased approximately 34 million based thirdparty valuations intangible assets include approximately 27 million assigned goodwill results diggar since acquisition included oilfield services segment october 23 2007 acquired rebel total consideration approximately 73 million includes approximately 50 million cash promissory notes aggregate 500000 payment approximately 15 million existing rebel debt deposit 305000 escrow cover distributions owed rebel defined benefit pension plan trust addition approximately 214000 costs incurred relation rebel acquisition rebel based lafayette louisiana extensive inventory tubular services equipment primarily provided tubing installation services following table summarizes allocation purchase price related acquisition costs estimated fair value assets acquired date acquisition thousands rebel’s historical property equipment values increased approximately 85 million based thirdparty valuations intangible assets include approximately 461000 assigned goodwill 683000 assigned customer relations amortizable intangibles useful life 15 years results rebel since acquisition included oilfield services segment november 1 2007 acquired substantially assets diamondback oilfield services inc diamondback total consideration approximately 231 million cash approximately 89000 costs incurred relation diamondback acquisition diamondback directional drilling allischalmers energy inc notes consolidated financial statements continued company based conroe texas operations focused texas panhandle oklahoma diamondback assets included 30 downhole motors five measurement drilling kits eight wireline steering vehicles following table summarizes allocation purchase price related acquisition costs estimated fair value assets acquired date acquisition thousands diamondback’s historical property equipment values increased approximately 20 million based thirdparty valuations intangible assets include approximately 76 million assigned goodwill 650000 assigned noncompete 620000 assigned trade name 34 million assigned customer relations based thirdparty valuations amortizable intangibles weightedaverage useful life 133 years subsequent date acquisition sellers earned additional 30 million cash earnout payment business achieved certain earning objectives earnout increased goodwill accrued december 31 2008 paid 2009 results diamondback assets since acquisition included oilfield services segment december 31 2008 completed acquisition outstanding stock bch total consideration approximately 561 million approximately 251000 costs incurred relation bch acquisition bch land drilling contractor operating brazil following table summarizes preliminary allocation purchase price related acquisition costs estimated fair value assets acquired date acquisition thousands bch’s historical property equipment values decreased approximately 28 million based thirdparty valuations intangible assets include approximately 185 million assigned goodwill 49 million customer contracts 22 million assigned trade name 600000 noncompetes based thirdparty valuations amortizable intangibles weightedaverage useful life 126 years expect material differences preliminary allocation purchase price final purchase price allocations acquisitions accounted using purchase method accounting june 29 2007 sold capillary tubing units related equipment approximately 163 million reported gain approximately 89 million assets sold represented small portion oilfield services segment allischalmers energy inc notes consolidated financial statements continued effective august 1 2008 sold drill pipe tong manufacturing assets approximately 75 million received cash approximately 20 million time sale 90day note 10 million 10year noninterest bearing note 45 million repayment 10year note tied various performance targets assigned fair value approximately 31 million note reported gain approximately 166000 transaction assets sold represented small portion oilfield services segment following unaudited pro forma consolidated summary financial information year ended december 31 2006 illustrates effects acquisitions related public offerings debt equity rogers dls petrorental ogr acquisitions occurred january 1 2006 based historical results acquisitions historical results ogr based historical year end october 31 thousands except per share amounts note 4 inventories comprised following december 31 thousands allischalmers energy inc notes consolidated financial statements continued note 5 property intangible assets property equipment comprised following december 31 thousands net book value equipment recorded capital leases 17 million 285000 december 31 2008 2007 respectively interest expense capitalized property equipment 19 million 0 years ended december 31 2008 2007 respectively intangible assets follows december 31 thousands allischalmers energy inc notes consolidated financial statements continued amortization expense related intangibles 42 million 41 million 19 million years ended december 31 2008 2007 2006 respectively future amortization intangible assets december 31 2008 follows thousands note 6 income taxes loss income taxes 953 million us tax purposes year ended december 31 2008 income taxes 417 million 359 million us tax purposes years ended december 31 2007 2006 respectively also income taxes 384 million 376 million 111 million reported nonus countries years ended december 31 2008 2007 2006 respectively treat withholding taxes incurred us subsidiaries foreign countries foreign tax anticipate using tax payments offset us tax income tax provision consists following thousands required file consolidated us federal income tax return pay foreign income taxes argentina related drilling completion operations mexico related oilfield services’ revenues matyep allischalmers energy inc notes consolidated financial statements continued following table reconciles statutory tax rates actual tax rate significant components deferred income tax assets december 31 follows thousands net future taxdeductible items relate primarily timing differences timing differences tax basis assets liabilities reported amounts financial statements result differences income tax purposes income financial statement purposes future years example goodwill impairment recorded 2008 financial statement purposes related rental services segment created deferred tax asset realized next 13 years tax reform act 1986 contains provisions limit utilization net operating loss tax credit carry forwards “change ownership” described section 382 internal revenue code change ownership may limit utilization net operating loss tax credit carryforwards could triggered public offering subsequent sales securities us stockholders provision limited amount net operating losses available us currently net operating loss carryforwards tax purposes december 31 2008 2007 67 million 77 million respectively expiring 2024 1988 plan reorganization established ac reorganization trust settle claims make distributions creditors certain stockholders transferred cash certain property ac reorganization trust december 2 1988 payments made us ac reorganization trust allischalmers energy inc notes consolidated financial statements continued generate tax deductions us upon transfer generate deductions us ac reorganization trust makes payments holders claims administrative expenses plan reorganization also created trust process liquidate product liability claims payments made ac reorganization trust product liability trust generate current tax deductions us upon payment generates deductions us product liability trust makes payments liquidate claims incurs administrative expenses believe aforementioned trusts grantor trusts therefore include income loss trusts income loss tax purposes income loss trusts included results operations financial reporting purposes valuation allowance established deferred tax assets management based upon available information considers likely benefit assets realized december 31 2008 2007 valuation allowance zero approximately 47 million 97 million ad valorem franchise income sales tax accruals included accrued expense balances 266 million 205 million december 31 2008 2007 respectively adopted provisions fin 48 january 1 2007 interpretation clarifies accounting uncertain tax positions requires companies recognize impact tax position financial statements position likely sustained audit based technical merits position adoption fin 48 impact total liabilities stockholders’ equity note 7 debt longterm debt consists following december 31 thousands weighted average interest rate current total debt approximately 64 83 december 31 2008 63 87 december 31 2007 respectively allischalmers energy inc notes consolidated financial statements continued maturities debt obligations december 31 2008 follows thousands senior notes bank loans line credit agreements january 18 2006 august 14 2006 closed private offerings qualified institutional buyers pursuant rule 144a securities act 1933 1600 950 million aggregate principal amount senior notes respectively senior notes due january 15 2014 bear interest 90 proceeds used fund acquisitions specialty dls repay existing debt general corporate purposes december 18 2006 closed 3000 million senior unsecured bridge loan bridge loan due 18 months closing weighted average interest rate 106 bridge loan repaid january 29 2007 used fund acquisition substantially assets ogr january 2007 closed private offering qualified institutional buyers pursuant rule 144a securities act 2500 million principal amount 85 senior notes due 2017 proceeds senior notes offering together portion proceeds concurrent common stock offering used repay debt outstanding 3000 million bridge loan facility incurred finance acquisition substantially assets ogr january 18 2006 also executed amended restated credit agreement provided 250 million revolving line credit maturity january 2010 april 26 2007 entered second amended restated credit agreement increased revolving line credit 620 million final maturity date april 26 2012 december 3 2007 entered first amendment second amended restated credit agreement increased revolving line credit 900 million amended restated credit agreement contains customary events default financial covenants limits ability incur additional indebtedness make capital expenditures pay dividends make distributions create liens sell assets obligations amended restated credit agreement secured substantially assets located us compliance debt covenants december 31 2008 2007 credit agreement loan rates based prime libor plus margin weighted average interest rate 46 december 31 2008 december 31 2008 2007 amounts borrowed facility 365 million 0 availability reduced outstanding letters credit 58 million 84 million respectively part acquisition dls assumed various bank loans floating interest rates based libor plus margin terms ranging 2 5 years weighted average interest rates loans 51 67 december 31 2008 2007 respectively bank loans denominated us dollars outstanding amount due december 31 2008 2007 25 million 49 million respectively allischalmers energy inc notes consolidated financial statements continued february 15 2008 dls subsidiary argentina entered 250 million import finance facility bank borrowings facility used fund portion purchase price new drilling service rigs ordered drilling completion segment facility available borrowings december 31 2008 drawdown shall repaid four years equal semiannual installments beginning one year disbursement final principal payment due later march 15 2013 import finance facility unsecured contains customary events default financial covenants limits dls’ ability incur additional indebtedness make capital expenditures create liens sell assets compliance debt covenants december 31 2008 bank loan rates based libor plus margin weighted average interest rate 69 december 31 2008 bank loans denominated us dollars outstanding amount december 31 2008 250 million part acquisition bch assumed 236 million term loan credit facility bank credit agreement dated june 2007 contains customary events default financial covenants obligations facility secured substantially bch assets facility repayable quarterly principal installments plus interest final payment due later august 2012 compliance debt covenants december 31 2008 credit facility loan denominated us dollars interest rates based libor plus margin december 31 2008 outstanding amount loan 221 million interest rate 60 notes payable connection acquisition rogers issued seller note amount 750000 note bears interest 50 due april 2009 connection purchase coker issued seller note amount 350000 note bore interest 825 repaid june 2008 connection purchase diggar issued seller note amount 750000 note bore interest 60 repaid july 2008 connection purchase rebel issued sellers notes amount 500000 notes bore interest 50 repaid october 2008 2000 compensated directors including current directors nederlander toboroff served board directors 1989 march 31 1999 without compensation issuing promissory notes totaling 325000 notes bear interest rate 50 december 31 2008 2007 principal accrued interest notes totaled approximately 32000 various rig equipment financing loans interest rates ranging 83 87 terms 2 5 years december 31 2008 2007 outstanding balances rig equipment financing loans 0 595000 respectively april 2007 august 2007 obtained insurance premium financings aggregate amount 44 million fixed weighted average interest rate 59 terms agreements amounts outstanding paid 10 11 month repayment schedules outstanding balance notes approximately 0 17 million december 31 2008 2007 respectively april 2008 august 2008 obtained insurance premium financings aggregate amount 30 million fixed average weighted interest rate 49 terms agreements amounts outstanding paid 10 11 month repayment schedules outstanding balance notes approximately 991000 december 31 2008 debt connection purchase capcoil tubing services inc agreed pay total 500000 two management employees exchange noncompete agreements required make annual allischalmers energy inc notes consolidated financial statements continued payments 110000 may 2008 total amounts due noncompete agreements december 31 2008 2007 0 110000 respectively part acquisition bch assumed various capital leases terms two three years outstanding balance capital leases 779000 december 31 2008 also capital leases terms expired 2008 december 31 2007 amounts outstanding capital leases 14000 note 8 commitments contingencies placed orders capital equipment totaling 414 million received paid 2009 approximately 226 million drilling service rigs drilling completion segment 100 million drilling equipment drilling completion segment 55 million rental equipment principally drill pipe rental services segment 33 million various equipment utilized oilfield services segment rent office space certain facilities shop yards equipment storage maintenance facility rent expense years ended december 31 2008 2007 2006 28 million 27 million 16 million respectively december 31 2008 future minimum rental commitments operating leases follows thousands note 9 stockholders’ equity 2006 issued 125285 shares 25 million shares 246761 shares 32 million shares common stock relation rogers dls petro rental ogr asset acquisitions respectively see note 3 august 14 2006 closed public offering 3450000 shares common stock public offering price 1450 per share net proceeds public offering approximately 463 million used fund portion acquisition dls 2006 options warrants exercised resulted 1851377 shares common stock issued approximately 63 million recognized approximately 34 million compensation expense related stock options 2006 recorded capital excess par value see note 1 also recorded approximately 64 million tax benefit related stock compensation plans january 2007 closed public offering 60 million shares common stock public offering price 1765 per share net proceeds public offering together proceeds concurrent senior notes offering used repay debt outstanding 3000 million bridge loan facility incurred finance ogr acquisition general corporate purposes allischalmers energy inc notes consolidated financial statements continued 2007 also restricted stock award grants options warrants exercised resulted 882624 shares common stock issued approximately 33 million recognized approximately 49 million compensation expense related share based payments recorded capital excess par value see note 1 also recorded approximately 17 million tax benefit related stock compensation plans 2008 restricted stock award grants options exercised resulted 558707 shares common stock issued approximately 633000 recognized approximately 79 million compensation expense related share based payments recorded capital excess par value see note 1 also recorded approximately 9000 tax benefit related stock compensation plans note 10 stock options 2000 issued stock options promissory notes certain directors compensation services directors see note 7 board directors granted stock options individuals options purchase 4800 shares common stock granted exercise price 1375 per share options vested immediately may exercised time prior march 28 2010 december 31 2008 4000 stock options remain outstanding compensation expense recorded options issued exercise price equal fair value common stock date grant may 31 2001 board granted leonard toboroff one directors option purchase 100000 shares common stock 250 per share exercisable 10 years october 15 2001 option granted services provided mr toboroff oil quip rentals inc oil quip prior merger including providing financial advisory services assisting oil quip’s capital structure assisting oil quip finding strategic acquisition opportunities recorded compensation expense 500000 issuance option year ended december 31 2001 stock options exercised may 2006 2003 incentive stock plan “2003 plan” amended permits us grant key employees outside directors various forms stock incentives including among others incentive nonqualified stock options restricted stock 2003 plan administered compensation committee board consists two directors appointed board following benefits may granted 2003 plan stock appreciation rights b restricted stock c performance awards incentive stock options e nonqualified stock options f stockbased awards stock incentive terms excess ten years maximum number shares common stock may issued 2003 plan shall lesser 3000000 shares 15 total number shares common stock outstanding 2006 incentive plan “2006 plan” approved stockholders november 2006 plan administered compensation committee board maximum number shares common stock may issued 2006 plan equal 1500000 shares subject adjustment event stock splits certain corporate events 2006 plan provides grant following types awards stock options including incentive stock options nonqualified stock options ii bonus stock iii restricted stock awards iv performance awards v stockbased awards except respect awards incentive stock options employees consultants nonemployee directors eligible participate 2006 plan term award shall period may determined committee provided event shall term award exceed period ten years date grant allischalmers energy inc notes consolidated financial statements continued summary stock option activity related information follows total intrinsic value stock options amount market price underlying stock date exercise exceeds exercise price option exercised approximately 542000 66 million 188 million years ended december 31 2008 2007 2006 respectively december 31 2008 approximately 15 million total unrecognized compensation cost related stock options 918000 532000 recognized years ended december 31 2009 2010 respectively following table summarizes additional information stock options outstanding december 31 2008 aggregate pretax intrinsic value stock options outstanding exercisable approximately 490000 december 31 2008 amount represents value would received option holders respective options exercised december 31 2008 restricted stock awards addition stock options 2003 2006 plans allow grant restricted stock awards “rsa” timelapse rsa award common stock unit represents right receive end stipulated period one unrestricted share stock exercise price timelapse rsa restrictions lapse periodically extended period time exceeding 10 years determine fair value rsas based market price common stock date grant compensation cost rsas primarily recognized straightline basis vesting service period net forfeitures performancebased rsa award common stock unit represents right receive one unrestricted share stock exercise price attainment established performance criteria 2007 granted 710000 performance based rsas market conditions performancebased rsas granted earned issued certain annual total shareholder return criteria attained next 3 years fair value performancebased rsas based thirdparty valuations allischalmers energy inc notes consolidated financial statements continued following table summarizes activity nonvested restricted stock awards total fair value rsa shares vested 2008 approximately 47 million december 31 2008 approximately 94 million total unrecognized compensation cost related nonvested rsas 60 million 25 million 709000 208000 recognized years ended december 31 2009 2010 2011 2012 respectively note 11 stock purchase warrants conjunction oil quip’s purchase mountain compressed air inc mca february 2001 mca issued common stock warrant 620000 shares thirdparty investment firm assisted us initial identification purchase mca assets warrant entitles holder acquire 620000 shares common stock mca exercise price 01 per share nineyear period commencing february 7 2001 issued two warrants “warrants b” purchase 233000 total shares common stock exercise price 075 per share one warrant purchase 67000 shares common stock exercise price 500 per share “warrant c” connection subordinated debt financing mca 2001 warrants b paid december 7 2004 warrant c exercised november 2006 may 2004 issued warrant purchase 3000 shares common stock exercise price 475 per share consultant consideration financial advisory services provided pursuant consulting agreement warrants exercised may 2004 consultant also granted 16000 warrants may 2004 exercisable 465 per share warrants exercised november 2005 warrants 4000 shares common stock exercise price 465 also issued consultant may 2004 exercised january 2007 conjunction bch debt financing january 2007 bch issued common stock warrant 250000 shares financial institution warrant entitles holder acquire 250000 shares common stock bch exercise price 1000 per share fiveyear period allischalmers energy inc notes consolidated financial statements continued note 12 condensed consolidated financial information set forth following pages condensed consolidating financial statements allischalmers energy inc ii subsidiaries guarantors senior notes revolving credit facility iii subsidiaries guarantors senior notes revolving credit facility thousands condensed consolidating balance sheets december 31 2008 allischalmers energy inc notes consolidated financial statements continued condensed consolidating income statements year ended december 31 2008 allischalmers energy inc notes consolidated financial statements continued condensed consolidating statements cash flow year ended december 31 2008 allischalmers energy inc notes consolidated financial statements continued allischalmers energy inc notes consolidated financial statements continued condensed consolidating balance sheets december 31 2007 allischalmers energy inc notes consolidated financial statements continued condensed consolidating income statements year ended december 31 2007 allischalmers energy inc notes consolidated financial statements continued condensed consolidating statements cash flow year ended december 31 2007 allischalmers energy inc notes consolidated financial statements continued allischalmers energy inc notes consolidated financial statements continued condensed consolidating income statements year ended december 31 2006 allischalmers energy inc notes consolidated financial statements continued condensed consolidating statements cash flow year ended december 31 2006 allischalmers energy inc notes consolidated financial statements continued note 13 related party transactions dls’ largest customer pan american energy joint venture british petroleum bridas corporation two directors alejandro p bulgheroni carlos bulgheroni indirectly beneficially substantially shares bridas corporation 2008 2007 2006 pan american energy represented 285 207 117 consolidated revenues respectively december 31 2008 2007 trade receivables pan american energy 400 million 231 million respectively 2008 2007 derived revenue approximately 10 million 17 million beusa energy inc beusa company controlled alejandro p bulgheroni december 31 2008 2007 trade receivables beusa approximately 558000 16 million respectively purchase general oilfield supplies materials ralow services inc ralow owned brad adams bruce adams brothers burt adams former member board directors former president chief operating officer purchased supplies materials ralow aggregate amount approximately 747000 35 million years ended december 31 2008 2007 respectively allischalmers energy inc notes consolidated financial statements continued note 14 segment information january 31 2008 created positions senior vice president oilfield services senior vice president rental services conjunction organizational change reviewed presentation reporting segments first quarter 2008 based review determined operational performance would segmented reviewed oilfield services drilling completion rental services segments oilfield services segment includes underbalanced drilling directional drilling tubular services production services operations drilling completion segment includes international drilling operations result realigned financial reporting segments report following operations separate distinct reporting segments 1 oilfield services 2 drilling completion 3 rental services historical segment data previously reported years ended december 31 2007 2006 restated conform new presentation segments provide services energy industry revenues operating income loss depreciation amortization capital expenditures assets reporting segments plus corporate function reported thousands allischalmers energy inc notes consolidated financial statements continued allischalmers energy inc notes consolidated financial statements continued note 15 supplemental cash flows information thousands note 16 legal matters named time legal proceedings related activities prior bankruptcy 1988 however believe discharged liability claims bankruptcy believe likelihood material loss relating legal proceeding remote named defendant two lawsuits connection proposed merger bronco drilling inc terminated august 2008 believe suits merit involved various legal proceedings ordinary course business legal proceedings different stages however believe likelihood material loss relating legal proceeding remote note 17 subsequent events february 2009 entered new credit agreement amount 290 million credit agreement subject customary closing conditions proceeds used fund 80 purchase price two land drilling rigs related equipment scheduled delivery second quarter 2009 loan secured equipment repaid quarterly installments six years funding date allischalmers energy inc notes consolidated financial statements continued february 2009 executed joint venture agreement rawabi holding company ltd rawabi laws kingdom saudi arabia purpose joint venture provide oilfield services rental equipment kingdom saudi arabia 50 joint venture note 18 summarized quarterly financial data unaudited thousands except per share amounts item 9 item 8 financial statements supplementary data index consolidated financial statements page financial statements report independent accountants 16 statement operations three years ended december 31 1998 17 statement accumulated deficit three years ended december 31 1998 17 statement financial condition december 31 1998 1997 18 statement cash flows three years ended december 31 1998 19 notes consolidated financial statements 20 financial statement schedule ii valuation qualifying accounts 40 report independent accountants board directors shareholders allischalmers corporation opinion consolidated financial statements listed accompanying index present fairly material respects financial position allischalmers corporation subsidiaries december 31 1998 1997 results operations cash flows three years period ended december 31 1998 conformity generally accepted accounting principles addition opinion financial statement schedule listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed accompanying consolidated financial statements prepared assuming company continue going concern companys application distress termination allischalmers consolidated pension plan consolidated plan approved pension benefit guaranty corporation pbgc september 30 1997 date pbgc became trustee consolidated plan company subsidiaries incurred estimated liability pbgc unfunded benefit liabilities accumulated funding deficiencies totaling approximately 68 million company financial resources fund liability pbgc matter raises substantial doubt companys ability continue going concern managements plans regard matter described note 9 consolidated financial statements consolidated financial statements include adjustments might result outcome uncertainty pricewaterhousecoopers llp milwaukee wisconsin march 24 1999 statement operations statement cash flows notes consolidated financial statements note 1 emergence chapter 11 allischalmers corporation allischalmers company emerged chapter 11 proceedings october 31 1988 plan reorganization consummated december 2 1988 company thereby discharged debts arose confirmation first amended restated joint plan reorganization plan reorganization capital stock cancelled made eligible exchange shares common stock reorganized company common stock claims asserted company allowed bankruptcy court beyond recorded prior consummation date amounted approximately 483 million amounts subsequently recorded company 1988 total recorded liabilities discharged consummation exceeded book value assets common stock distributed creditors various trusts date extraordinary income 3881 million recorded see plan reorganization first amended disclosure statement dated september 14 1988 additional information regarding distributions holders claims interests note 2 summary significant accounting policies description business allischalmers whollyowned subsidiary houston dynamic service inc services repairs various types mechanical equipment including compressors pumps turbines engines heat exchangers centrifuges rollers gears valves blowers kilns crushers mills principles consolidation consolidated financial statements include accounts allischalmers subsidiaries significant intercompany transactions eliminated shortterm investments shortterm investments consist primarily government repurchase agreements commercial paper original maturities date purchase less three months fair value financial instruments carrying amounts statement financial condition cash shortterm investments trade receivables longterm debt approximate fair market value inventories stated lower cost determined firstin firstout method market properties depreciation plant equipment used business stated cost depreciated straightline basis estimated useful lives assets generally range 40 years buildings 3 12 years machinery equipment 3 12 years tools patterns furniture fixtures maintenance repairs expensed incurred expenditures significantly increase asset values extend useful lives capitalized income taxes deferred income taxes determined liability method accordance statement financial accounting standards sfas 109 see note 5 income taxes income loss per common share february 1997 financial accounting standards board fasb issued sfas 128 earnings per share statement establishes revised standards computing presenting earnings per share adopted company fourth quarter 1997 given fact company common stock equivalents past several years income loss per common share remain unchanged basic diluted per share amounts identical adoption statement impact historically reported income loss per common share amounts statement cash flows purposes statement cash flows company considers highly liquid debt instruments maturity three months less date purchase cash equivalents use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates major customers 1998 1997 1996 amoco chemical customer accounted 10 total sales 24 1998 sales 12 1997 sales 16 1996 note 5 income taxes temporary differences tax basis assets liabilities reported amounts financial statements result differences income tax purposes income financial statement purposes future years valuation allowance established deferred tax assets management based upon available information considers likely benefit assets realized following table depicts temporary differences december 31 1998 1997 net future tax deductible items relate primarily estimated future bankruptcy claim payments made companys two grantor trusts gross deferred tax liabilities december 31 1998 1997 material plan reorganization established ac reorganization trust settle claims make distributions creditors certain shareholders company transferred cash certain property ac reorganization trust december 2 1988 payments made company ac reorganization trust generate tax deductions company upon transfer generate deductions company payments made ac reorganization trust holders claims plan reorganization also created trust process liquidate product liability claims payments made ac reorganization trust product liability trust generate current tax deductions company future deductions available company product liability trust makes payments liquidate claims company believes abovenamed trusts grantor trusts therefore includes income loss trusts companys income loss tax purposes resulting adjustment tax basis net operating capital loss carryforwards income loss trusts included companys results operations financial reporting purposes tax carryforwards december 31 1998 estimated consist net operating losses 4390 million expiring 1999 2013 investment tax credits 10 million expiring 1999 2001 energy tax credits 10 million expiring 1999 2001 1990 company initiated litigation internal revenue service irs united states bankruptcy court southern district new york challenging validity retroactive applicability proposed regulations issued irs august 13 1990 january 2 1992 irs issued final regulations sections 269 382 internal revenue code 1986 relating use net operating loss carryforwards following corporate reorganizations bankruptcy code following issuance final regulations company withdrew retroactivity challenge final regulations made retroactive august 14 1990 applicable plan reorganization completed companys plan reorganization consummated december 2 1988 company however continued challenge validity provisions regulations june 8 1992 bankruptcy court issued decision denying companys motion judgment irs respect application section 269 irs code company court also granted irss motion dismiss companys complaint challenging regulations court entered judgment pursuant decision june 29 1992 consistent advice counsel company decided appeal judgment although company unable obtain judgment would prevented irs applying section 269 company courts ruling leaves company substantially position prior issuance final regulations possibility irs challenge section 269 internal revenue code companys use prepetition net operating loss carryforwards always existed light courts ruling possibility continues exist court however stated irs ever seek use new section 269 regulations limit companys use net operating loss carryforwards nothing opinion would prejudice companys right defend using courts confirmation finding primary purpose companys plan reorganization tax avoidance companys common stock subject trading restrictions designed maximize likelihood preserving net operating loss carryforwards change ownership company could also limit use net operating loss carryforwards note 6 longterm debt sfas 87 employers accounting pensions requires recognition statement financial condition minimum pension liability minimum pension liability must recognized equal excess accumulated benefit obligation plan assets reduction shareholders investment amount 122 million 1996 recorded unfunded amount recognized expense 1997 connection distress termination consolidated plan recognition companys liability pbgc note 8 longterm stock incentive plan companys longterm stock incentive plan 1989 provides grant stock options stock appreciation rights performance shares restricted stock restricted stock units stockbased awards plan maximum number shares may granted respect stockbased awards 50000 options may granted prices equal less fair market value date grant except options purchase 13333 shares may granted price less fair market value october 25 1989 date plan approved shareholders options exercisable within period exceed 10 years date grant plan also provides discretionary grant stock appreciation rights allow holder receive cash shares common stock difference exercise price fair market value stock date exercise grants plan note 9 postretirement benefit obligations pensions date chapter 11 filings june 1987 company sponsored 19 defined benefit plans providing pensions substantially us employees pension plan us salaried employees capped frozen effective march 31 1987 benefit accruals date result divestitures chapter 11 proceedings eight active plans transferred buyers businesses leaving company sponsor 11 plans none permitted additional benefit accruals effective january 1 1989 11 remaining plans consolidated single plan allischalmers consolidated pension plan consolidated plan accordance plan reorganization 11 plans received company contribution 538 million december 1988 result actions taken connection contribution thenexisting securities pension plans assets consolidated plan invested dedicated bond portfolio consisted highgrade fixed income securities market value assets matched present value anticipated pension benefits administrative expenses consolidated plan way intended make pension fund immune interest rate fluctuations plan reorganization future contributions consolidated plan required mortality assumptions used calculating present value pension benefits expected paid assumptions used calculating future administrative expenses proved inaccurate years 1989 1993 retirees eligible benefits consolidated plan group outlived projections mortality assumptions used plan reorganization funding consolidated plan five years actual administrative expenses slightly excess assumed levels effective january 1 1994 companys independent actuaries reflected decreased mortality funding calculation purposes years 1994 1996 mortality experience negative compared revised assumptions amount excess 19891993 average actuarial loss mortality loss partially offset however gains asset portfolio underfunded condition consolidated plan required company make significant cash contributions consolidated plan pursuant employment retirement income security act 1974 amended erisa funding requirements starting 1996 company failed make required quarterly contributions starting april 1996 resulting filing lien pension benefit guaranty corporation pbgc company given inability company fund obligations lack financial resources february 1997 allischalmers applied pbgc distress termination consolidated plan section 4041c erisa pbgc approved distress termination application september 1997 agreed termination date april 14 1997 pbgc became trustee terminated consolidated plan september 30 1997 upon termination consolidated plan allischalmers subsidiaries incurred liability pbgc amount equal consolidated plans unfunded benefit liabilities allischalmers subsidiaries also liability pbgc trustee terminated consolidated plan outstanding balance consolidated plans accumulated funding deficiencies pbgc estimated unfunded benefit liabilities accumulated funding deficiencies together pbgc liability total approximately 679 million september 1997 allischalmers pbgc entered agreement principle settlement pbgc liability pbgc agreement pbgc agreement calls pbgc release allischalmers subsidiaries pbgc liability return number shares allischalmers common stock represents 35 total number shares issued outstanding fullydiluted basis pbgc agreement subject negotiation definitive documentation discussions regarding definitive documentation continue pbgc certain issues contained proposed agreement company pbgc company close resolving issues pbgc agreement company pbgc signed near future however satisfactory agreement cannot finalized pbgc allischalmers evaluate alternatives including bankruptcy filing pbgc agreement also subject satisfactory resolution companys tax obligations respect consolidated plan section 4971 internal revenue code 1986 amended code section 4971a code imposes taxable year firsttier tax 10 percent amount accumulated funding deficiency plan like consolidated plan section 4971b code imposes additional secondtier tax equal 100 percent accumulated funding deficiency corrected within specified period liability taxes imposed section 4971 extends jointly severally allischalmers commonlycontrolled subsidiary corporations prior termination consolidated plan accumulated funding deficiency taxable years 1995 1996 1997 deficiencies resulted estimated firsttier taxes code section 4971a approximately 900000 amount accrued company december 31 1997 march 2 1998 allischalmers sent irs formal offer compromise companys tax liability code section 4971 july 16 1998 parties reached settlement agreement principle amount 75000 following final irs approval payment amount made august 11 1998 medical life pursuant plan reorganization company assumed contractual obligation simplicity manufacturing inc smi reimburse smi 50 actual cost medical life insurance claims select group retirees smi retirees prior simplicity manufacturing division allischalmers net postretirement benefit expense years ended december 31 1998 1997 1996 included following components thousands presently companys postretirement benefit obligations funded status reconciliation companys postretirement benefit obligations december 31 1998 1997 follows thousands assumed health care cost trend rate used measuring accumulated postretirement benefit obligation 65 december 31 1998 70 december 31 1997 assumed rate decreases year ultimate rate 50 reached december 31 2004 health care cost trend rate significant effect amounts reported example one percentage point increase health care cost trend rate would increase accumulated postretirement benefit obligation approximately 40000 december 31 1998 discount rate used determining accumulated postretirement benefit obligation 750 december 31 1998 december 31 1997 note 10 commitments contingent liabilities substantially litigation proceedings pending company resolved pursuant emergence chapter 11 proceedings 1988 various loans lease agreements commitments contractual obligations company also satisfied pursuant plan reorganization company knows significant preplan reorganization lawsuits presently pending subsidiaries assumed various trusts entities company party litigation matters claims normal course operations results litigation claims cannot predicted certainty management believes final outcome matters material adverse effect companys consolidated financial position environmental matters environmental protection agency epa certain state environmental protection agencies requested information connection eleven potential hazardous waste disposal sites products manufactured allischalmers consummation plan reorganization disposed epa claimed allischalmers liable cleanup costs associated several additional sites epas claims respect one site withdrawn 1994 based upon settlements reached epa bankruptcy proceeding addition certain third parties asserted allischalmers liable cleanup costs associated epa fines connection additional sites one instances former site operator joined allischalmers 47 potentially responsible parties third party defendant lawsuit involving cleanup one sites instance environmental claims asserted company involve prebankruptcy operations accordingly allischalmers taken position cleanup costs liabilities related sites discharged bankruptcy one particular site epas region iii concurred companys position claims environmental cleanup discharged pursuant bankruptcy site unique different circumstances company notified regional offices epa determination associated region iii site company received responses regional offices environmental claims asserted company involving postbankruptcy operations allischalmers consolidated pension plan contributions consolidated plan required starting 1996 due change mortality assumptions used calculating present value pension benefits expected paid assumptions used calculating future administrative expenses compared projections mortality administrative expense assumptions used plan reorganization funding consolidated plan contributions projected 25 million 1996 increasing 31 million 1997 81 million 1998 making one installment 205000 january 15 1996 company failed make subsequent installments companys failure make required quarterly contributions starting april 1996 resulted filing lien pbgc company given inability company fund obligations current financial resources february 1997 allischalmers applied pbgc distress termination consolidated plan section 4041c erisa pbgc approved distress termination application september 1997 agreed plan termination date april 14 1997 pbgc became trustee terminated consolidated plan september 30 1997 additional information regarding consolidated plan see note 9 note 11 related party transactions h sean mathis chairman board chief executive officer leonard toboroff vice chairman board executive vice president john grigsby jr vice chairman board executive vice president chief financial officer receive compensation services executive officers company three years ended december 31 1998 note 12 quarterly financial data item 9 item 8 financial statements supplementary data pages 12 28 1995 annual report shareholders item 9 item 8 financial statements index consolidated financial statements page financial statements independent auditors report 31 consolidated statements operations years ended december 31 2002 december 31 2001 period february 4 2000 inception december 31 2000 32 consolidated balance sheets december 31 2002 2001 33 consolidated statement stockholders equity years ended december 31 2002 december 31 2001 period february 4 2000 inception december 31 2000 34 consolidated statements cash flows years ended december 31 2002 december 31 2001 period february 4 2000 inception december 31 2000 35 notes consolidated financial statements 36 independent auditors report board directors allischalmers corporation houston texas audited accompanying consolidated balance sheets allischalmers corporation december 31 2002 2001 related consolidated statements operations stockholders equity cash flows two years ended period february 4 2000 inception december 31 2000 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position allischalmers corporation december 31 2002 2001 results consolidated operations cash flows years ended december 31 2002 2001 period february 4 2000 inception december 31 2000 conformity accounting principles generally accepted united states america accompanying financial statements prepared assuming company continue going concern shown financial statements company incurred net loss 3969000 year ended december 31 2002 date working capital deficiency 13016000 net worth 1009000 described fully notes 1 8 financial statements company obtained waivers loan covenant violations june 30 2003 date approximately 4882000 current debt becomes due june 30 2003 company continues default loan covenants lenders may demand repayment loans negotiations presently way obtain revised loan agreements permit realization assets liquidation liabilities ordinary course business company cannot predict outcome negotiations conditions raise substantial doubt companys ability continue going concern financial statements include adjustments might result outcome uncertainty gordon hughes banks llp greenwood village colorado march 7 2003 notes financial statements note 1 nature business summary significant accounting policies organization business oilquip rentals inc oil gas rental company oilquip incorporated february 4 2000 find acquire acquisition targets operate subsidiaries january 25 2001 oilquip formed subsidiary mountain air note 1 texas corporation february 6 2001 oilquip subsidiary mountain air acquired certain assets mountain air drilling service co inc madsco whose business consists providing equipment trained personnel four corner areas southwestern united states mountain air primarily provides compressed air equipment trained operators companies business drilling natural gas acquisition madsco assets oilquip ceased development stage may 9 2001 oilquip merged subsidiary allischalmers corporation allischalmers company merger oilquips outstanding common stock converted 400000 shares allischalmers common stock right receive additional 9600000 shares allischalmers common stock upon filing amendment amended restated certificate incorporation certificate authorize issuance shares authorization issuance occurred october 15 2001 legal purposes allischalmers acquired oilquip parent company mountain compressed air inc mountain air however accounting purposes oilquip treated acquiring company reverse acquisition allischalmers financial statements prior merger including period 2000 financial statements oilquip result merger fixed assets goodwill intangibles allischalmers increased 2691000 november 30 2001 company entered agreement sell wholly owned subsidiary houston dynamic service inc hds general manager hds management buyout sale hds finalized december 12 2001 conjunction sale hds company formally discontinued operations related precision machining rotating equipment principal hds business february 6 2002 allischalmers acquired 81 outstanding stock jens oilfield service inc jens supplies highly specialized equipment operations install casing production tubing required drill complete oil gas wells company also purchased substantially outstanding common stock preferred stock strata directional technology inc strata provides highend directional horizontal drilling services specific targeted reservoirs cannot reached vertically vulnerabilities concentrations company provides oilfield services several regions including states texas new mexico utah new mexico southern portions mexico nature companys operations many regions operates subject changing economic regulatory political conditions company believes vulnerable risk nearterm longterm severe changes demand subsequent price oil natural gas basis presentation liquidity accompanying financial statements prepared basis accounting principles applicable going concern contemplates realization assets extinguishment liabilities normal course business shown accompanying financial statements december 31 2002 company negative working capital 13016000 including approximately 4882000 debt principal payments due june 30 2003 net worth 1009000 discussed note 8 july 16 2002 companys lenders declared company subsidiaries default numerous credit agreements wells fargo bank affiliates bank lenders effective january 1 2003 company entered amendment forbearance agreements amended certain operating covenants addition bank lenders agreed forbear taking action waive underlying defaults respect alleged defaults period six months ending june 30 2003 result 8757829 classified noncurrent current liabilities companys longterm capital needs refinance existing debt provide funds existing operations redeem series preferred stock secure funds acquisitions oil gas equipment rental services industry order pay debts become due including amounts due bank lenders described additional financing required may include issuance subsequent exercise new warrants equity debt securities well secured unsecured loans new issuance equity securities would dilute existing shareholders factors indicate company may unable continue existence companys financial statements include adjustments related carrying value assets amount classification liabilities might necessary company unable continue existence companys ability establish going concern dependent upon ability refinance existing debt use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period future events effects cannot perceived certainty accordingly companys accounting estimates require exercise judgment management believes estimates assumptions used preparation consolidated financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts recoverability longlived assets useful lives used depreciation amortization income taxes related valuation allowances accounting estimates used preparation consolidated financial statements may change new events occur experience acquired additional information obtained companys operating environment changes principles consolidation consolidated financial statements include accounts allischalmers subsidiaries companys subsidiaries mountain air jens strata significant intercompany transactions eliminated revenue recognition companys revenue recognition policy significant revenue key component results operations addition revenue recognition determines timing certain expenses commissions royalties company follows specific detailed guidelines measuring revenue however certain judgments affect application revenue policy revenue results difficult predict shortfall revenue delay recognizing revenue could cause operating results vary significantly quarter could result future operating losses revenues recognized company subsidiaries services provided allowance doubtful accounts company established allowance uncollectible trade accounts receivable based historical collection experience managements evaluation collectibility outstanding accounts receivable december 31 2002 2001 company recorded allowance doubtful accounts 31000 0 respectively bad debt expense 31000 0 years ended december 31 2002 2001 0 period february 4 2000 inception thru december 31 2000 cash equivalents company considers highly liquid investments original maturity three months less time purchase cash equivalents property equipment property equipment represents cost equipment use operations company maintenance repairs charged operations incurred refurbishments renewals capitalized value equipment enhanced extended period property equipment sold otherwise disposed asset account related accumulated depreciation account relieved gain loss included operations cost property equipment currently service depreciated estimated useful lives related assets range three fifteen years depreciation computed straightline method financial reporting purposes depreciation expense charged operations 1837000 year ended december 31 2002 621000 year ended december 31 2001 0 period february 4 2000 inception december 31 2000 goodwill intangible assets amortization january 1 2002 company adopted statement financial accounting standardssfas 142 goodwill intangible assets sfas 142 goodwill including goodwill associated equity method investments intangible assets infinite lives longer amortized tested impairment annually frequently circumstances indicate impairment may exist intangible assets finite useful lives amortized either straightline basis assets estimated useful life basis reflects pattern economic benefits intangible assets realized effects adopting sfas no142 company approximately 7829000 goodwill longer amortized company performs impairment test carrying value goodwill reporting unit december 31 2002 evidence impairment exists 2001 2000 goodwill amortized using straightline method expected useful life impairment longlived assets longlived assets include property plant equipment goodwill intangibles certain assets reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable impairment loss recorded period determined carrying amount recoverable determination recoverability made based upon estimated undiscounted future net cash flows excluding interest expense impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets january 1 2002 company adopted sfas 144 accounting impairment disposal longlived assets sfas 144 sfas 144 addresses financial accounting reporting impairment disposal longlived assets replaces sfas 121 accounting impairment longlived assets longlived assets disposed sfas 144 provides updated guidance concerning recognition measurement impairment loss certain types longlived assets modifies accounting reporting discontinued operations adoption companys operations financial instruments financial instruments consist cash equivalents accounts receivable payable debt carrying values cash equivalents accounts receivable payable approximate fair value company believes fair values carrying value debt would materially different due instruments interest rates approximating market rates similar borrowings december 31 2002 2001 concentrations credit risk major customers sfas 105 disclosure information financial instruments offbalancesheet risk financial instruments concentrations credit risk requires disclosure significant concentration credit risk regardless degree risk financial instruments potentially subject company concentrations credit risk consist principally cash equivalents trade accounts receivable company concentrations credit risk within cash equivalents deposits several financial institutions approximately 20 companys revenues year ended december 31 2002 derived two customers compared approximately 79 companys revenues year ended december 31 2001 including one customer accounted 65 companys revenues 2001 revenues period february 4 2000 december 31 2000 accounts receivable december 31 2002 includes 706000 compared 550000 december 31 2001 two customers debt issuance costs related issuance debt capitalized amortized interest expense using straightline interest methods depending upon principal payment stream notes lives related debt advertising company expenses advertising costs incurred advertising expenses year ended december 31 2002 2001 period february 4 2000 december 31 2000 totaled 96500 31400 0 respectively income taxes company adopted provisions sfas 109 accounting income taxes sfas 109 sfas 109 requires recognition deferred tax liabilities assets expected future tax consequences events included financial statements income tax returns method deferred tax liabilities assets determined based difference financial statement tax basis assets liabilities using enacted tax rates effect year differences expected reverse comprehensive income adjustments necessary net loss presented accompanying statements operations derive comprehensive income accordance sfas 130 reporting comprehensive income reclassifications certain prior period balances reclassified conform current year presentation personnel restructuring costs company recorded classified separately recurring selling general administrative costs incurred terminate relocate several members management occurred september 2002 business acquisition costs company capitalizes direct costs associated successful business acquisitions expenses acquisition costs unsuccessful acquisition efforts capital structure company utilizes sfas 129 disclosure information capital structure requires companies disclose relevant information regarding capital structure stockbased compensation company accounts stockbased compensation using accounting principle board opinion 25 apb 25 apb 25 compensation expense recognized stock options exercise price less market price grant date option stock options exercise prices market value stock grant date company adopted disclosureonly provisions sfas 123 accounting stockbased compensation sfas 123 company also adopted disclosureonly provisions sfas 123 stock options granted employees directors company accordingly compensation cost recognized options 500000 recognized 2001 apb 25 compensation expense options granted recorded based fair value grant date options consistent provisions sfas 123 companys net loss net loss per share years ended december 31 2002 2001 would increased pro forma amounts indicated options issued employees directors either years ended december 31 2002 2001 except 500000 options issued accounted apb 25 note 11 thousands except per share year ended december 31 2002 2001 net loss reported 3969 4577 pro forma 3969 4717 net loss per share reported 023 115 pro forma 023 119 options granted 2002 fair value common stock options granted 2001 disclosure purposes estimated grant dates using black scholes pricing model following assumptions year ended december 31 2002 2001 expected dividend yield expected price volatility 100 riskfree interest rate 5 expected life options 4 years segments enterprise related information sfas 131 disclosures segments enterprise related information sfas 131 replaces industry segment approach previously issued pronouncements management approach management approach designates internal organization used management allocating resources assessing performance source companys reportable segments sfas 131 also requires disclosures products services geographic areas major customers december 31 2002 company operates three segments organized service line including casing services directional drilling services compressed air drilling services december 31 2001 company operated one segment please see note 15 disclosure accordance sfas 131 pension post retirement benefits sfas 132 employers disclosures pension post retirement benefits sfas 132 requires certain disclosures employers pension post retirement benefit plans specifies accounting measurement recognition plans sfas 132 requires disclosure information changes benefit obligations fair values plan assets facilitates financial analysis derivative instruments hedging activities sfas 133 accounting derivative instruments hedging activities sfas 133 establishes accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities sfas 133 effective fiscal quarters fiscal years beginning june 15 1999 currently company derivative instruments adoption sfas 133 impact companys financial condition results operations income loss per common share company computes loss per common share accordance provisions sfas 128 earnings per share sfas 128 sfas 128 requires companies complex capital structures present basic diluted earnings per share basic earnings per share measured income loss available common stockholders divided weighted average outstanding common shares period diluted earnings per share similar basic earnings per share presents dilutive effect per share basis potential common shares eg convertible securities stock options etc converted beginning periods presented potential common shares antidilutive effect eg increase income per share decrease loss per share excluded diluted earnings per share basic diluted loss per common share periods presented herein computed dividing net loss attributable common shares weighted average outstanding common shares period potential common shares included computation weighted average shares outstanding inclusion would antidilutive new accounting pronouncements june 2001 fasb issued sfas 143 accounting asset retirement obligations sfas 143 sfas 143 addresses financial accounting reporting obligations associated retirement longlived assets associated asset retirement costs sfas 143 requires fair value liability associated asset retirement recognized period incurred reasonable estimate fair value made associated retirement costs capitalized part carrying amount longlived asset subsequently depreciated life asset company completed analysis impact adoption sfas 143 consolidated financial statements company adopt sfas 143 fiscal year beginning january 1 2003 july 2002 fasb issued sfas 146 accounting costs associated exit disposal activities sfas 146 sfas 146 requires companies recognize costs associated exit disposal activities incurred rather date commitment exit disposal plan provisions sfas 146 apply exit disposal activities initiated company december 31 2002 sfas 146 expected material effect results operations financial position company sfas 147 acquisitions certain financial institutions issued december 2002 expected apply companys current planned activities december 2002 fasb approved sfas 148 accounting stockbased compensation transition disclosure amendment fasb statement 123 sfas 148 sfas 148 amends sfas 123 provide alternative methods transition voluntary change fair value based method accounting stockbased employee compensation addition sfas 148 amends disclosure requirements sfas 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results sfas 148 effective financial statements fiscal years ending december 15 2002 company continue account stock based compensation using methods detailed stockbased compensation accounting policy note 2 emergence chapter 11 allischalmers corporation emerged chapter 11 proceedings october 31 1988 plan reorganization consummated december 2 1988 company thereby discharged debts arose confirmation first amended restated joint plan reorganization plan reorganization capital stock cancelled made eligible exchange shares common stock reorganized company common stock may 9 2001 reverse merger oilquip described note 1 constituted event whereby exchange shares common stock reorganized company occurred note 3 pension postretirement benefit obligations pension plan 1994 companys independent pension actuaries changed assumptions mortality administrative expenses used determine liabilities allischalmers consolidated pension plan consolidated plan result consolidated plan funded present value basis company unable fund obligations september 1997 obtained pension benefit guaranty corporation pbgc distress termination consolidated plan section 4041c employee retirement income security act 1974 amended erisa pbgc agreed plan termination date april 14 1997 pbgc became trustee terminated consolidated plan september 30 1997 upon termination consolidated plan company subsidiaries incurred liability pbgc estimated approximately 679 million pbgc liability september 1997 company pbgc entered agreement principle settlement pbgc liability required among things satisfactory resolution companys tax obligations respect consolidated plan section 4971 internal revenue code 1986 amended code august 1998 company internal revenue service irs settled companys tax liability code section 4971 75000 june 1999 company pbgc entered agreement settlement pbgc liability pbgc agreement pursuant terms pbgc agreement company issued 585100 shares common stock pbgc reducing pension liability estimated fair market value shares 669 million company right first refusal respect sale shares connection pbgc agreement company pbgc entered following agreements registration rights agreement registration rights agreement ii lockup agreement among allischalmers pbgc others connection merger oilquip described lockup agreement terminated registration rights agreement amended provide pbgc right shares common stock registered securities act 1933 form s3 12 month period following merger extent company eligible use form s3 currently thereafter shares registered form s1 s2 order satisfy discharge pbgc liability pbgc agreement provided company either receive single transaction series related transactions debt financing made available company least 10 million borrowings ii consummate acquisition single transaction series related transactions assets andor business purchase price including funded debt assumed least 10 million release event merger oilquip merger may 9 2001 described note 1 constituted release event satisfied discharged pbgc liability connection merger company pbgc agreed pbgc right appoint one member board directors company long holds least 117020 shares common stock connection merger lockup agreement terminated entirety december 31 2002 2001 company longer liable obligations consolidated plan medical life pursuant plan reorganization company assumed contractual obligation simplicity manufacturing inc smi reimburse smi 50 actual cost medical life insurance claims select group retirees smi retirees prior simplicity manufacturing division allischalmers actuarial present value expected retiree benefit obligation determined actuary amount results applying actuarial assumptions 1 historical claimscost data 2 estimates time value money discounts interest 3 probability payment including decrements death disability withdrawal retirement today expected date benefit payments december 31 2002 2001 company recorded postretirement benefit obligations 670000 824000 respectively associated transaction note 4 acquisitions february 6 2001 mountain air acquired business certain assets madsco private company 10000000 including 200000 deposit paid 2000 cash 2200000 promissory note sellers interest 5 34 percent principal interest due february 6 2006 acquisition accounted using purchase method accounting goodwill 3661000 identifiable intangible assets 800000 recorded acquisition may 9 2001 oilquip merged subsidiary allischalmers merger oilquips outstanding common stock converted initially 400000 shares allischalmers common stock plus 9600000 shares allischalmers common stock issued october 15 2001 acquisition accounted using purchase method accounting reverse acquisition goodwill 290000 identifiable intangible assets 719000 recorded connection merger effective date merger oilquip retroactively became reporting company result financial statements prior merger oilquip company completed two acquisitions related financing february 6 2002 company purchased 81 outstanding stock jens supplies highly specialized equipment operations install casing production tubing required drill complete oil gas wells company also purchased substantially outstanding common stock preferred stock strata provides highend directional horizontal drilling technology specific targeted reservoirs cannot reached vertically purchase price jens strata 10250000 cash ii 4000000 note payable due four years iii 1234560 noncompete agreement payable five years iv 7957712 shares common stock company v 3500000 shares newly created series 10 cumulative convertible preferred stock company series preferred stock vi additional payment estimated 1000000 1250000 based upon jens working capital february 1 2002 actual working capital adjustment approximately 983000 addition connection strata acquisition energy spectrum partners lp issued warrants purchase 437500 shares company common stock exercise price 015 per share connection acquisition strata jens companys bank provided financing 12728396 consisting revolving credit facilities amount 3500000 term facilities amount 5696396 real estate term loan amount 532000 subordinated loan amount 3000000 acquisitions accounted using purchase method accounting goodwill 4168000 identifiable intangible assets 2035000 recorded acquisitions following unaudited pro forma consolidated summary financial information illustrates effects acquisitions jens strata mountain air merger oilquip companys results operations based historical statements operations transactions occurred beginning periods presented discontinued hds operations included pro forma information thousands except per share year ended december 31 unaudited 2002 2001 2000 revenues 19142 28224 24653 operating income loss 401 4089 2678 net income loss 4431 71 269 loss per common share 024 002 067 note 5 discontinued operations discussed note 1 december 12 2001 company consummated sale wholly owned subsidiary hds general manager hds buyer management buyout effective date november 30 2001 terms sale company received promissory note buyer amount 790500 due november 30 2007 secured certain hds equipment note accrue interest rate 7 payment date september 30 2002 company received cash amount 600000 recorded 191000 factoring costs related early termination promissory note buyer hds loss sale approximately 20 million recorded year ended december 31 2001 conjunction sale hds company formally discontinued operations related precision machining rotating equipment principal hds business operating results business sold reported separately discontinued operations accompanying statement operations consists following period may 9 2001 november 30 2001 thousands revenues 1925 cost sales 1486 gross profit 439 operating expenses 594 depreciation amortization 124 loss operations 279 expense income interest expense 12 loss discontinued operations 291 loss sale discontinued operations 2013 note 6 property intangibles assets property equipment comprised following december 31 intangible assets follows december 31 amortization period 2002 2001 thousands intellectual property 20 years 1009 719 noncompete agreements 3 5 years 1535 intangible assets 3 20 years 1000 800 total 3254 1519 less accumulated amortization 894 403 intangible assets net 2360 1116 note 7 income taxes temporary differences tax basis assets liabilities reported amounts financial statements result differences income tax purposes income financial statement purposes future years valuation allowance established deferred tax assets management based upon available information considers likely benefit assets realized company recorded valuation allowance equal excess deferred tax assets deferred tax liabilities company unable determine likely deferred tax asset realized tax reform act 1986 contains provisions limit utilization net operating loss tax credit carry forwards change ownership described section 382 internal revenue code change ownership may limit companys utilization net operating loss tax credit carry forwards could triggered initial public offering subsequent sales securities company stockholders deferred income tax assts related allowance december 31 2002 2001 follows 2002 2001 thousands deferred noncurrent income tax assets net future tax deductible items 500 498 net operating loss carry forwards 2030 1170 ac reorganization trust claims 35000 total deferred noncurrent income tax assets 37530 36668 valuation allowance 37530 36668 net deferred noncurrent income taxes net operating loss carry forwards tax purposes december 31 2002 2001 estimated 59 million 3 million respectively expiring 2022 net future taxdeductible items relate primarily differences book tax depreciation amortization compensation expense related issuance stock options gross deferred tax liabilities december 31 2002 2001 material plan reorganization established ac reorganization trust settle claims make distributions creditors certain shareholders company transferred cash certain property ac reorganization trust december 2 1988 payments made company ac reorganization trust generate tax deductions company upon transfer generate deductions company ac reorganization trust makes payments holders claims plan reorganization also created trust process liquidate product liability claims payments made ac reorganization trust product liability trust generate current tax deductions company future deductions available company product liability trust makes payments liquidate claims company believes abovenamed trusts grantor trusts therefore includes income loss trusts companys income loss tax purposes resulting adjustment tax basis net operating capital loss carry forwards income loss trusts included companys results operations financial reporting purposes note 8 debt follows december 31 debt stated december 31 2002 2001 net remaining put obligations totaling approximately 842000 417000 respectively disclosed redeemable warrants december 31 2002 2001 gross debt equal approximately 22063000 8273000 respectively substantially companys assets pledged collateral outstanding debt agreements december 31 2002 companys weighted average interest rate outstanding debt approximately 85 maturities debt obligations december 31 2002 follows 2003 13890000 2004 2447000 2005 617000 2006 4247000 2007 20000 debt agreements follows mountain air line credit wells fargo december 31 2002 mountain air 500000 line credit wells fargo bank 330000 outstanding committed line credit due june 30 2003 interest accrues rate equal prime rate plus 05 125 475 december 31 2002 committed portion additionally company pays 05 fee uncommitted portion notes payable wells fargo term note term loan original amount 3550000 variable interest rates related prime libor rates 525 december 31 2002 interest payable quarterly principal payments 147917 due last day april july october january maturity date loan june 30 2003 balance december 31 2002 2392000 note payable wells fargo subordinated debt amortization redeemable warrant subordinated debt amount 2000000 12 interest payable quarterly commencing april 1 2001 principal due june 30 2003 connection incurring debt company issued redeemable warrants valued 600000 recorded discount subordinated debt liability see reedemable warrants note 12 discount amortizable three years additional interest expense 200000 183000 amortized 2002 2001 respectively note payable wells fargo equipment term loan delayed draw term loan amount 282291 libor plus 05 interest payable quarterly commencing november 30 2001 interest rate 475 december 31 2002 principal due june 30 2003 balance december 31 2002 160000 note payable seller madsco note seller madsco assets amount 2200000 575 simple interest principal interest due february 6 2006 jens note payable wells fargo term note term loan amount 4042396 floating interest rate 875 december 31 2002 monthly principal payments 67373 maturity date loan february 1 2007 balance december 31 2002 3369000 debt classified current accompanying consolidated balance sheet due defaults certain loan covenants described note 1 note payable wells fargo real estate note real estate loan amount 532000 floating interest rate 875 december 31 2002 monthly principal payments 14778 principal due february 1 2005 balance december 31 2002 384000 debt classified current accompanying consolidated balance sheet due defaults certain loan covenants described note 1 line credit wells fargo december 31 2002 jens 1000000 line credit wells fargo bank 67000 outstanding committed line credit due january 31 2005 interest accrues floating rate plus 3 875 december 31 2002 committed portion additionally company pays 05 fee uncommitted portion debt classified current accompanying consolidated balance sheet due defaults certain loan covenants described note 1 subordinated note payable seller jens subordinated sellers note amount 4000000 75 simple interest december 31 2002 275000 interest accrued included accrued interest principal interest due january 31 2006 note subordinated rights wells fargo note payable seller jens noncompete agreement conjunction purchase jens note 4 company agreed pay total 1234560 seller jens exchange noncompete agreement signed simultaneously company make monthly payments 20576 period ended january 31 2007 december 31 2002 balance approximately 1008000 including 247000 classified shortterm strata notes payable wells fargo term note term loan amount 1654000 floating interest rate 925 december 31 2002 monthly principal payments 27567 maturity date loan february 1 2005 addition monthly principal payments june 2002 company entered direct financing lease third party whereby portion assets sold strata payments third party expected exceed 15000 month directly applied principal note see note 13 information terms direct financing lease note payable balance december 31 2002 1041000 debt classified current accompanying balance sheet due circumstances surrounding defaults certain loan covenants described note 1 vendor financing 1996 amended 2000 2002 strata entered shortterm vendor financing agreement major supplier drilling motors drilling motor rentals motor lease costs motor repair costs agreement amended provides repayment amounts due later september 30 2003 payment interest note due monthly however company may make payments respect principal interest time without bonus penalty vendor financing incurs interest rate 80 december 31 2002 outstanding balance including accrued interest approximately 455000 line credit wells fargo december 31 2002 strata 2500000 line credit wells fargo bank 1275000 outstanding committed line credit due january 31 2005 interest accrues floating interest rate plus 3 925 december 31 2002 committed portion additionally company pays 05 fee uncommitted portion debt classified current accompanying balance sheet due circumstances surrounding defaults certain loan covenants described note 1 note payable former shareholder note payable dated june 30 1998 former shareholder strata directional technology inc bearing interest 8 payable 60 equal monthly installments 2030 note matures paid full prior june 30 2003 balance december 31 2002 approximately 12000 allischalmers notes payable wells fargo subordinated debt amortization redeemable warrant subordinated debt secured partially finance acquisitions jens strata amount 3000000 12 interest payable monthly principal due january 31 2005 connection incurring debt company issued redeemable warrants valued 900000 recorded discount subordinated debt liability see reedemable warrants note 12 discount amortizable three years beginning february 6 2002 additional interest expense 275000 recognized year ended december 31 2002 debt classified current accompanying balance sheet due defaults certain loan covenants described note 1 notes payable certain former directors allischalmers board established arrangement compensate former continuing board members served 1989 march 31 1999 without compensation pursuant arrangement 1999 allischalmers issued promissory notes totaling 325000 current former directors officers notes bear interest rate 5 compounded quarterly due march 28 2005 december 31 2002 notes recorded 370000 including accrued interest redeemable warrants associated issuance 2 million subordinated debt recorded mountain air 3 million subordinated debt recorded allischalmers collectively subordinated debt company issued redeemable warrants exercisable maximum 1165000 shares companys common stock exercise price 015 per share warrants b nonredeemable warrants exercisable maximum 335000 shares companys common stock 100 per share warrant c warrants b subject cash redemption provisions puts 600000 900000 respectively discretion warrant holders beginning earlier final maturity date subordinated debt three years closing subordinated debt january 31 2004 january 31 2005 respectively warrant c contain puts provisions addition previously issued warrants purchase common stock mountain air cancelled company recorded liability 600000 mountain air 900000 allischalmers total 1500000 amortizing effects puts interest expense life related subordinated debt instruments forbearance agreements july 16 2002 companys lenders declared company subsidiaries default numerous credit agreements wells fargo bank affiliates bank lenders defaults resulted primarily failures meet financial covenants result decreased revenues result defaults bank lenders imposed default interest rates retroactive april 1 2002 resulting increase approximately 15000 monthly interest payments additionally bank lenders suspended interest payments aggregating 275000 december 31 2002 40 million subordinated seller note issued bank lenders connection jens acquisition resulted jens default terms subordinated seller note suspended interest payments aggregating 150000 december 31 2002 30 million subordinated bank note issued connection jens acquisition resulted jens default terms note pursuant terms intercreditor agreements lenders holders obligations precluded taking action enforce obligations without consent bank lenders effective january 1 2003 company entered amendment forbearance agreements forbearance agreements amended certain operating covenants addition bank lenders agreed forbear taking action waive underlying defaults respect alleged defaults period six months ending june 30 2003 forbearance period pursuant forbearance agreements mountain airs obligations modified follows principal payments senior debt term note wells fargo reduced forbearance period 57000 45000 per month interest payments subordinated debt agreement wells fargo reduced forbearance period 12 6 balance accrued mountain air allowed apply security deposit offset payments due equipment lease lowering additional payments 58574 35000 per month forbearance period lease payments return 58574 per month february 15 2006 date final payment 58574 due note 9 mountain airs senior subordinated debt approximately 4882000 due payable june 30 2003 jens obligations amended follows forbearance period jens allowed resume payments 30000 per month subordinated debts wells fargo energy capital interest rate jens senior debt increased prime plus 3 jens allowed distribute 300000 allischalmers corporation allow allischalmers corporation pay legal accounting expenses connection preparation financial statements year ended december 31 2002 securities exchange commission filing shareholder communications stratas obligations amended follows interest rate stratas term debt revolving debt increased prime plus 312 company made outstanding principal interest payments senior debt bank lenders june 30 2003 4882000 debt owed mountain air become due forbearance respect jens stratas debts bank lenders expire company unable renegotiate refinance company debt bank lenders right accelerate amounts due totaled 14264000 march 31 2003 foreclose assets securing loans constitute substantially assets company accordingly bank debt subordinated seller note recorded current liabilities companys financial statements note 9 commitments contingencies february 6 2001 conjunction mountain airs purchase certain assets including rental equipment madsco portion purchased equipment sold leasing company leased back equipment lease accounted operating lease payments totaling 3480000 made period six years lease expense years ended december 31 2002 2001 703000 586000 respectively january 2003 company entered forbearance agreement leasing company mountain air apply 525000 security deposit offset payments equipment lease lowering additional payments 58574 35000 per month forbearance period lease payments return 58574 per month though february 15 2006 525000 security deposit recorded current asset accompanying consolidated balance sheet company rents office space fiveyear lease expires february 5 2006 company subsidiaries also rent certain facilities shop yards equipment storage maintenance facility rent expense years ended december 31 2002 2001 303000 90000 respectively company lease obligations december 31 2002 future minimum rental commitments operating leases follows operating leases thousands year ended december 31 2003 1232 december 31 2004 804 december 31 2005 785 december 31 2006 142 december 31 2007 thereafter 27 total 2990 note 10 shareholders equity period february 4 2000 inception december 31 2000 oilquip entered several equity transactions various investors subscribed 4250 shares common stock 400000 94 per share 307 shares common stock 100000 326 per share 3068 shares common stock 1000000 326 per share 1250 shares common stock 437500 350 per share december 31 2000 1837500 subscriptions receivable outstanding entire amount received investors cash january february 2001 2000 oilquip also issued 1000 shares common stock 250000 250 per share oilquip also recorded 250000 compensation expense services contributed companys chief executive officer majority stockholder chief executive officer majority stockholder also advanced aggregate 537000 company paying corporate expenses companys behalf contributed amounts recorded contribution companys capital equity per share data financial statements 2000 presented give effect recapitalization company occurred reverse acquisition allischalmers may 9 2001 recapitalization original number shares outstanding formerly private oilquip considered exchanged 400000 shares allischalmers issued date reverse acquisition owners oilquip result 390125 shares presented issued 2000 increase outstanding shares oilquip december 31 2000 400000 october 15 2001 additional 9600000 shares allischalmers issued former owners oilquip shareholder approval increase maximum authorized number shares allischalmers legal purposes allischalmers acquired oilquip parent company mountain air however accounting purposes oilquip treated acquiring company reverse acquisition allischalmers business combination accounted purchase result 2779000 value allischalmers common stock outstanding date acquisition added shareholders equity reflects recapitalization allischalmers reorganization combined company february 6 2002 connection acquisition 81 outstanding stock jens note 4 company issued 1397849 shares common stock seller jens individual presently employed president company business combination accounted purchase result 630000 fair value companys common stock issued date acquisition added shareholders equity february 6 2002 connection acquisition 95 outstanding stock strata note 4 company issued 6559863 shares common stock seller strata energy spectrum business combination accounted purchase result 2952000 fair value companys common stock issued date acquisition added shareholders equity may 31 2002 company acquired remaining 5 outstanding stock strata issued 87500 shares common stock seller energy spectrum result 153000 fair value companys common stock issued date purchase added shareholders equity connection strata purchase company authorized creation series preferred stock series preferred stock cumulative dividends ten percent per annum payable additional shares series preferred stock elected declared company cash additionally series preferred stock convertible common stock company series preferred stock also subject mandatory redemption february 4 2004 earlier proceeds net proceeds new equity sales optional redemption company time redemption price series preferred stock 100 per share plus accrued dividend rights year ended december 31 2002 company accrued 321000 dividends payable series preferred stock holders dividends declared paid date note 11 stock options 2000 conjunction promissory notes issued certain current former directors note 8 allischalmers board directors also granted stock options individuals options purchase 24000 shares common stock granted exercise price 275 options vested immediately may exercised time prior march 28 2010 2000 2001 none stock options exercised compensation expense recorded options issued exercise price approximately equal fair value common stock date grant may 31 2001 board granted leonard toboroff former director allischalmers option purchase 500000 shares common stock 050 per share exercisable 10 years october 15 2001 option granted services provided mr toboroff oilquip prior merger including providing financial advisory services assisting oilquips capital structure assisting oilquip finding strategic acquisition opportunities company recorded compensation expense 500000 issuance option year ended december 31 2001 summary companys stock option activity related information follows following table summarizes additional information companys stock options outstanding december 31 2002 compensation expense options granted 2000 determined based option fair value grant date prescribed sfas 123 accounting stock based compensation effect allischalmers net loss 2000 would material stock options issued employees directors either years ended december 31 2002 2001 granted may 31 2001 leonard toboroff note 12 stock purchase warrants conjunction mountain air purchase oilquip february 2001 company issued common stock warrant 620000 shares thirdparty investment firm assisted company initial identification purchase mountain air assets warrant entitles holder acquire 620000 shares common stock mountain air exercise price 01 per share nineyear period commencing february 7 2001 stock purchase warrant recorded fair value 200000 year ended december 31 2001 fully described note 8 mountain air allischalmers issued two warrants b purchase 1165000 total shares companys common stock exercise price 015 per share one warrant purchase 335000 shares companys common stock exercise price 100 per share warrant c connection subordinated debt financing holders may redeem warrants b total 1500000 january 31 2004 january 31 2005 respectively fair value warrant c established accordance blackscholes valuation model result 47000 added shareholders equity following assumptions utilized determine fair value dividend yield expected volatility 6724 risk free interest rate 5 expected lives four years february 6 2002 connection acquisition substantially outstanding stock strata note 4 company issued warrant purchase 437500 shares companys common stock exercise price 100 per share term four years fair value warrant established accordance blackscholes valuation model result 267000 added shareholders equity following assumptions utilized determine fair value dividend yield expected volatility 6724 risk free interest rate 5 expected lives four years note 13 lease receivable june 2002 companys subsidiary strata sold measurement drilling mwd assets third party terms sale company receive least 15000 per month thirtysix months payments directly applied term note strata note 8 reduction principal obligations thirtysix months purchaser option pay remaining balance continue paying minimum 15000 per month twentyfour additional months expiration additional twentyfour months purchaser must repay remaining balance transaction accounted direct financing lease nominal residual gain asset sale deferred income life lease year ended december 31 2002 company received total 106000 payments third party related lease note 14 related party transactions december 31 2002 company owed chief executive officer majority stockholder company 78000 related deferred compensation advances company totaling 49000 also company owed former executive vice president shareholder company 42000 related deferred compensation advances totaling 50000 december 31 2001 company owed chief executive officer majority stockholder company 318000 related deferred compensation time individual owed company 61000 amounts settled first quarter 2002 december 31 2002 loan amounts obligations due company officers members management president company former owner jens currently holds 19 minority interest jens individual holder 4000000 subordinated note payable held company also owed 275000 accrued interest note 8 president company formerly sole proprietor jens owns shop yard leases company monthly basis total lease payments president terms lease 28800 year ended december 31 2002 addition president company members family 100 texmex rental supply co texas corporation sold approximately 290000 equipment supplies company 2002 management company believes transactions terms least favorable company could obtained unrelated third parties note 15 segment information company three operating segments including casing services jens directional drilling services strata compressed air drilling services mountain air segments provide services petroleum industry company operated one reporting segment year ended december 31 2001 operating segments period february 4 2000 inception december 31 2000 revenues operating income loss depreciation amortization interest capital expenditures assets reporting segments plus corporate function reported year ended december 31 2002 thousands year ended december 31 2002 revenues casing services 7796 directional drilling services 6529 compressed air drilling services 3665 total revenues 17790 operating income loss casing services 2225 directional drilling services 576 compressed air drilling services 945 general corporate 2174 total loss operations 1440 depreciation amortization expense casing services 1265 directional drilling services 295 compressed air drilling services 955 general corporate 65 total depreciation amortization expense 2580 interest expense casing services 643 directional drilling services 215 compressed air drilling services 761 general corporate 637 total interest expense 2256 capital expenditures casing services 137 directional drilling services 83 compressed air drilling services 288 general corporate 10 total capital expenditures 518 assets casing services 15681 directional drilling services 8888 compressed air drilling services 9138 general corporate 1071 total assets 37778 following table contains customers represent 10 revenues f three operating segments december 31 2002 casing services el paso production oil gas materiales 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 lp devon energy production co texaco exploration production note 17 quarterly results unaudited first second third fourth quarter thousands except per share amounts year 2002 revenues 3253 4238 4775 5724 operating income loss 201 796 608 165 net income loss continuing operations 640 869 1505 955 discontinued operations net income loss 640 869 1505 954 preferred stock dividend 58 87 89 net income loss attributed common shares 698 956 1592 1044 income loss per common share basic diluted continuing operations 004 005 008 006 discontinued operations income loss per common share 004 005 008 006 year 2001 revenues 606 1341 1521 1328 operating income loss 150 549 35 769 net income loss continuing operations 270 775 80 1148 discontinued operations 4 108 2200 net income loss continuing operations 270 771 188 3348 preferred stock dividend net income loss attributed common shares 270 771 188 3348 income loss per common share basic diluted continuing operations 006 019 002 030 discontinued operations 003 055 income loss per common share 006 019 005 085 note 18 legal matters company involved various legal proceedings arose ordinary course business legal proceedings different stages special trusts established connection companys reorganization see note 2 emergence chapter 11 counsel vigorously defending company opinion management legal counsel ultimate gain loss company proceedings reasonably estimated time note 19 subsequent events disclosed detail note 8 company bank lenders entered series forbearance agreements became effective january 1 2003 forbearance agreements expire june 30 2003 financial effect company acceleration amortization debt issuance costs debt discount amounts approximately remaining one year periods first six months 2003 february 19 2003 company entered agreement shareholders series preferred stock establishing new price conversions series preferred stock shares common stock company agreed upon parties conversion price established 050 per share agreement reduces number shares common stock series preferred stock convertible 18421053 7000000 shares additionally company issued stock purchase warrant energy spectrum partners lp addition stock purchase warrant issued energy spectrum partners lp time acquisition strata february 2002 notes 4 12 additional warrant provides energy spectrum partners lp option purchase 875000 shares common stock exercise price 015 per share item 9 item 8 financial statements supplementary data allischalmers energy inc subsidiaries page management’s report stockholders allischalmers energy inc reports independent registered public accounting firm consolidated balance sheets consolidated statements operations consolidated statement stockholders’ equity consolidated statements cash flows notes consolidated financial statements supplemental information consolidated financial statementssummarized quarterly financial data 34 index financial statements management’s report stockholders allischalmers energy inc management’s report internal control financial reporting management responsible establishing maintaining adequate internal control financial reporting allischalmers energy inc subsidiaries allischalmers order evaluate effectiveness internal control financial reporting required section 404 sarbanesoxley act 2002 conducted assessment including testing using criteria internal controlintegral framework issued committee sponsoring organization treadway commission coso allischalmers’ system internal control financial reporting designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance accounting principles generally accepted united states america inherent limitation internal control financial reporting may prevent detect misstatements based assessment concluded allischalmers maintained effective internal control financial reporting december 31 2010 based criteria internal controlintegrated framework issued coso effectiveness allischalmers internal control financial reporting december 31 2010 audited uhy llp independent registered public accounting firm stated report included herein management’s certifications allischalmers’ chief executive officer chief financial officer required sarbanesoxley act 2002 included exhibits 31 32 allischalmers’ form 10k 35 index financial statements report independent registered public accounting firm board directors stockholders allischalmers energy inc audited accompanying consolidated balance sheets allischalmers energy inc subsidiaries “company” december 31 2010 2009 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2010 audits also included financial statement schedule listed index item 15 consolidated financial statements financial statement schedule responsibility company’s management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether consolidated financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position allischalmers energy inc subsidiaries december 31 2010 2009 consolidated results operations cash flows three years period ended december 31 2010 conformity accounting principles generally accepted united states america also opinion related financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states allischalmers energy inc’s internal control financial reporting december 31 2010 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated march 15 2011 expressed unqualified opinion thereon uhy llp houston texas march 15 2011 36 index financial statements report independent registered public accounting firm board directors stockholders allischalmers energy inc audited allischalmers energy inc’s internal control financial reporting december 31 2010 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria allischalmers energy inc’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion allischalmers energy inc subsidiaries maintained material respects effective internal control financial reporting december 31 2010 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets allischalmers energy inc subsidiaries december 31 2010 2009 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2010 report dated march 15 2011 expressed unqualified opinion thereon uhy llp houston texas march 15 2011 37 index financial statements allischalmers energy inc consolidated balance sheets accompanying notes integral part consolidated financial statements 38 index financial statements allischalmers energy inc consolidated statements operations accompanying notes integral part consolidated financial statements 39 index financial statements allischalmers energy inc consolidated statement stockholders’ equity accompanying notes integral part consolidated financial statements 40 index financial statements allischalmers energy inc consolidated statements cash flows accompanying notes integral part consolidated financial statements 41 index financial statements allischalmers energy inc notes consolidated financial statements note 1 nature business summary significant accounting policies organization business allischalmers energy inc “allischalmers” “we” “our” “us” incorporated delaware 1913 provide services equipment oil natural gas exploration production companies throughout united states including texas louisiana pennsylvania west virginia wyoming oklahoma offshore gulf mexico internationally primarily argentina brazil bolivia mexico operate three sectors oil natural gas service industry oilfield services drilling completion rental services nature operations many regions operate subject us changing economic regulatory political conditions vulnerable nearterm longterm changes demand prices oil natural gas related demand oilfield service operations use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period future events effects cannot perceived certainty accordingly accounting estimates require exercise judgment management believes estimates assumptions used preparation consolidated financial statements appropriate actual results could differ estimates used limited determining following allowance doubtful accounts recoverability longlived assets intangibles useful lives used depreciation amortization income taxes valuation allowances accounting estimates used preparation consolidated financial statements may change new events occur experience acquired additional information obtained operating environment changes principles consolidation consolidated financial statements include accounts allischalmers subsidiaries december 31 2010 aircomp llc allischalmers tubular services llc allischalmers directional drilling services llc allischalmers rental services llc allischalmers production services llc allischalmers management llc allischalmers holdings inc american well control llc “awc” dls drilling logistics services company “dls” dls argentina limited tanus argentina sa petrorentals llc rebel rentals llc allischalmers drilling llc bch ltd “bch” aly brasil servicos petroleo ltda drilling logistics services de mexico bch energy brasil servicos de petroleo ltda significant intercompany transactions eliminated revenue recognition provide rental equipment oilfield services drilling services customers per day daywork per job contractual rates recognize drilling related revenue work progresses collectibility reasonably assured revenue daywork contracts recognized realized realizable earned daywork contracts revenue recognized based number days completed fixed rates stipulated contract certain contracts receive lumpsum fees equipment mobilization costs mobilization fees related costs deferred amortized contract terms material recognize reimbursements received outofpocket expenses incurred revenues account outofpocket expenses direct costs payments customers cost oilfield rental equipment damaged lostinhole reflected revenues recognized revenue damaged lostinhole equipment 59 million 43 million 106 million years ended december 31 2010 2009 2008 respectively 42 index financial statements allischalmers energy inc notes consolidated financial statementscontinued allowance doubtful accounts receivable customer obligations due normal trade terms sell services oil natural gas exploration production companies perform continuing credit evaluations customers’ financial condition although generally require collateral letters credit may required customers certain circumstances allowance doubtful accounts represents estimate amount probable credit losses existing accounts receivable significant individual accounts receivable balances outstanding greater 90 days reviewed individually collectibility limited number customers individually large amounts due given date unanticipated change one customer’s credit worthiness matters affecting collectibility amounts due customers could material effect results operations period changes events occur attempts collect receivable failed receivable written allowance december 31 2010 2009 recorded allowance doubtful accounts 44 million 49 million respectively bad debt expense 368000 28 million 33 million years ended december 31 2010 2009 2008 respectively cash equivalents consider highly liquid investments original maturity three months less time purchase cash equivalents inventories stated lower cost market cost determined using first “fifo” method average cost method approximates fifo includes cost materials labor manufacturing overhead property equipment property equipment recorded cost less accumulated depreciation certain equipment held capital leases classified equipment related obligations recorded liabilities maintenance repairs improve extend life related assets charged operations incurred refurbishments renewals capitalized value equipment enhanced extended period property equipment sold otherwise disposed asset account related accumulated depreciation account relieved gain loss included operations interest capitalized construction progress weighted average cost debt outstanding construction period interest rate debt incurred construction cost property equipment currently service depreciated estimated useful lives related assets range two twenty years depreciation computed straightline method financial reporting purposes capital leases amortized using straightline method estimated useful lives assets lease amortization included depreciation expense depreciation expense charged operations 841 million 783 million 635 million years ended december 31 2010 2009 2008 respectively goodwill intangible assets amortization goodwill intangible assets infinite lives amortized tested impairment annually frequently circumstances indicate impairment may exist intangible assets finite useful lives amortized either straightline basis asset’s estimated useful life basis reflects pattern economic benefits intangible assets realized impairment test requires allocation goodwill assets liabilities reporting units reporting units business unit level one level operating segments perform impairment tests carrying value goodwill annual basis december 31st reportable segments annual impairment tests involve use different valuation techniques including income approach andor market approach determine fair value reporting units determining fair value reporting unit matter judgment often involves use significant estimates assumptions fair value reporting unit less carrying value impairment loss recorded extent implied fair value reporting unit’s goodwill less carrying value result recorded impairment 1158 million december 31 2008 december 31 2010 2009 impairment deemed necessary significant unanticipated changes assumptions could require additional provision impairment future period 43 index financial statements allischalmers energy inc notes consolidated financial statementscontinued impairment longlived assets longlived assets include property plant equipment intangible assets certain assets reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable impairment loss recorded period determined carrying amount recoverable determination recoverability made based upon estimated undiscounted future net cash flows excluding interest expense impairment loss determined comparing fair value determined discounted cash flow analysis carrying value related assets financial instruments financial instruments consist cash equivalents accounts receivable accounts payable debt carrying value cash equivalents accounts receivable payable approximate fair value due shortterm nature believe fair values carrying value debt excluding senior notes would materially different due instruments’ interest rates approximating market rates similar borrowings december 31 2010 2009 senior notes aggregate amount 4302 million december 31 2010 2009 trade “over counter” limited amounts infrequent basis based trades estimate fair value senior notes approximately 4361 million 3942 million december 31 2010 2009 respectively price senior notes trade based many factors level interest rates economic environment outlook oilfield services industry perceived credit risk additionally due turmoil financial markets 2008 2009 impact investors senior notes price senior notes trade may affected investors’ financial distress need liquidity concentration credit customer risk financial instruments potentially subject us concentrations credit risk consist principally cash equivalents trade accounts receivable december 31 2010 approximately 19 million 27 million cash equivalents residing argentina brazil respectively cash equivalents 16 million restricted conjunction financial institution obligations brazil transact business several financial institutions however amount deposit one financial institution exceeded 250000 federally insured limit december 31 2010 total 167 million management believes financial institutions financially sound risk loss minimal sell services major independent domestic international oil natural gas companies perform ongoing credit valuations customers provide allowances probable credit losses appropriate 2010 2009 2008 one customers pan american energy llc sucursal argentina pan american energy represented 311 355 285 consolidated revenues respectively revenues pan american energy represented 525 566 620 international revenues 2010 2009 2008 respectively see note 14 debt issuance costs related issuance debt capitalized amortized interest expense using straightline method approximates interest method maturity periods related debt interest expense related debt issuance costs 22 million 22 million 21 million years ended december 31 2010 2009 2008 respectively income taxes income tax expense based income statutory tax rates tax planning opportunities available us various jurisdictions operate provide income taxes based tax laws rates effect countries operations conducted income earned income tax expense expected fluctuate year operations conducted different taxing jurisdictions amount pretax income fluctuates determination evaluation annual income tax provision involves interpretation tax laws various jurisdictions operate requires significant judgment use estimates assumptions regarding significant future events amount timing character income deductions tax credits changes tax laws regulations level operations profitability jurisdiction may impact tax liability given year annual tax provision based information available us time number years may elapse ultimate tax liabilities certain tax jurisdictions determined 44 index financial statements allischalmers energy inc notes consolidated financial statementscontinued current income tax expense reflects estimate income tax liability current year withholding taxes changes tax rates changes prior year tax estimates returns filed deferred tax assets liabilities recognized anticipated future tax effects temporary differences financial statement basis tax basis assets liabilities using enacted tax rates effect year end valuation allowance deferred tax assets recorded morelikelythannot benefit deferred tax asset realized united states federal tax purposes tax returns tax years 2007 2009 remain open examination tax authorities foreign tax returns remain open examination tax years 2002 2009 generally state tax purposes 2004 2009 tax years remain open examination tax authorities four year statute limitations however certain states may keep statute open six ten years intention permanently reinvest undistributed earnings nonunited states subsidiaries accordingly provided united states deferred taxes 1002 million undistributed earnings nonunited states subsidiaries december 31 2010 distribution made us undistributed earnings subsidiaries could required record additional taxes cannot predict make distribution undistributed earnings unable make determination amount unrecognized deferred tax liability stockbased compensation recognize sharebased payments employees including grants employee stock options financial statements based grantdate fair values utilize blackscholes model determine fair value incorporates assumptions value stockbased awards dividend yield common stock assumed zero historically paid dividends current plans future expected volatility based historical volatility common stock riskfree interest rate related united states treasury yield curve periods within expected term option time grant estimate forfeiture rates based historical experience net income loss years ended december 31 2010 2009 2008 includes approximately 80 million 48 million 79 million compensation costs related sharebased payments respectively tax benefit recorded association sharebased payments 9000 yearended december 31 2008 due expired unexercised nonqualified stock options restricted stock vesting market prices lower grant price adjusted 12 million 23 million excess tax asset additional paid capital years ended december 31 2010 2009 respectively december 31 2010 65 million unrecognized compensation expense related nonvested stock based compensation grants options granted 2008 see note 10 disclosures regarding stock options following assumptions applied determining compensation costs options granted 2010 2009 income loss per common share basic earnings per share computed basis weighted average number shares common stock outstanding period diluted earnings per share similar basic earnings per share presents dilutive effect per share basis potential common shares eg convertible preferred stock options etc converted restricted stock grants legally considered issued outstanding included basic diluted earnings per share extent vested unvested restricted stock included computation diluted earnings per share using treasury stock method potential dilutive common shares antidilutive effect eg increase income per share excluded diluted earnings deficit per share 45 index financial statements allischalmers energy inc notes consolidated financial statementscontinued components basic diluted earnings deficit per share follows thousands except per share amounts convertible preferred stock share based compensation shares approximately 135 million 75 million 332000 excluded computation diluted earnings per share 2010 2009 2008 respectively effect would antidilutive due net loss year segments enterprise related information designate internal organization used management allocating resources assessing performance source reportable segments please see note 15 disclosure segment information disclosures geographic region new accounting pronouncements june 2009 financial accounting standards board fasb issued authoritative guidance eliminates qualifying special purpose entity concept changes requirements derecognizing financial assets requires enhanced disclosures transfers financial assets guidance also revises earlier guidance determining whether entity variable interest entity requires new approach determining consolidate variable interest entity changes necessary reassess consolidate variable interest entity requires enhanced disclosures related enterprise’s involvement variable interest entities adopted guidance effective january 1 2010 material effect financial statements october 2009 fasb issued authoritative guidance amends earlier guidance addressing accounting contractual arrangements entity provides multiple products services deliverables customer amendments address unit accounting arrangements involving multiple deliverables arrangement consideration allocated separate units accounting applicable establishing selling price hierarchy determining selling price deliverable selling price used deliverable based vendorspecific objective evidence available thirdparty evidence vendorspecific objective evidence available estimated selling price neither vendorspecific thirdparty evidence available amendments also require arrangement consideration allocated inception arrangement deliverables using relative selling price method guidance effective fiscal years beginning june 15 2010 earlier application permitted adopted guidance effective january 1 2011 material effect financial statements 46 index financial statements allischalmers energy inc notes consolidated financial statementscontinued january 2010 fasb issued authoritative guidance changes disclosure requirements fair value measurements specifically changes require reporting entity disclose separately amounts significant transfers level 1 level 2 fair value measurements describe reasons transfers changes also clarify existing disclosure requirements related assets liabilities grouped class valuation techniques used recurring nonrecurring fair value measurements adopted guidance first quarter 2010 material effect financial position results operations cash flows february 2010 fasb amended guidance subsequent events alleviate potential conflicts fasb guidance sec requirements amended guidance sec filers longer required disclose date subsequent events evaluated originally issued revised financial statements guidance effective immediately adopted new requirements first quarter 2010 adoption guidance material effect financial statements note 2 employee benefit plans june 30 2003 adopted 401k profit sharing plan “plan” plan defined contribution savings plan designed provide retirement income eligible employees plan intended qualified section 401k internal revenue code 1986 amended funded voluntary pretax contributions eligible employees may contribute percentage eligible compensation limited subject statutory limits plan also funded discretionary matching employer contributions eligible employees cannot participate plan attained age 21 completed threemonths service us participant 100 vested respect participants’ contributions matching contributions invested directed participant investment funds available plan matching contributions approximately 97000 349000 15 million paid 2010 2009 2008 respectively note 3 acquisitions asset dispositions december 31 2008 completed acquisition outstanding stock bch total consideration approximately 561 million approximately 251000 costs incurred relation bch acquisition bch land drilling contractor operating brazil following table summarizes allocation purchase price related acquisition costs estimated fair value assets acquired date acquisition thousands bch’s historical property equipment values decreased approximately 28 million based thirdparty valuations intangible assets included approximately 185 million assigned goodwill 49 million customer contracts 22 million assigned trade name 600000 noncompetes based thirdparty valuations amortizable intangibles weightedaverage useful life 126 years goodwill subsequently reduced 2009 13 million insurance proceeds received rig loss occurred prior acquisition 13 million utilization pre acquisition tax asset results bch since acquisition included drilling completion segment 47 index financial statements allischalmers energy inc notes consolidated financial statementscontinued july 12 2010 acquired awc total consideration approximately 192 million included approximately 172 million cash 10 million shares common stock awc leading manufacturer premium highpressure valves used hydraulic fracturing unconventional gas shale plays following table summarizes allocation purchase price related acquisition costs estimated fair value assets acquired date acquisition thousands awc’s historical property equipment values increased approximately 27000 based thirdparty valuations goodwill 57 million recognized acquisition calculated excess consideration transferred fair value net assets acquired includes expected synergies benefits believe result combined operations intangible assets qualify separate recognition assembled workforce intangible assets included approximately 56 million assigned customer lists 400000 trade name 55000 noncompetes none intangibles tax deductible amortizable intangibles weightedaverage useful life 99 years awc’s financial results since acquisition included rental services segment aforementioned acquisitions accounted using purchase method accounting effective august 1 2008 sold drill pipe tong manufacturing assets approximately 75 million received cash approximately 20 million time sale 90day note 10 million 10year noninterest bearing note 45 million repayment 10year note tied various performance targets assigned fair value approximately 31 million note reported gain approximately 166000 transaction assets sold represented small portion oilfield services segment 2009 recorded 16 million loss asset disposition drilling completion segment insurance proceeds 39 million related damages incurred blowout destroyed one drilling rigs sufficient cover book value rig related assets 2010 recorded 106 million loss asset disposition drilling completion segment purchased two drilling rigs unable operate returned rigs manufacturer loss includes early repayment penalty 311000 underlying debt writeoff 115000 deferred financing fees note 4 inventories comprised following december 31 thousands 48 index financial statements allischalmers energy inc notes consolidated financial statementscontinued note 5 property intangible assets property equipment comprised following december 31 thousands net book value equipment recorded capital leases 00 10 million december 31 2010 2009 respectively interest expense capitalized property equipment 827000 22 million 19 million years ended december 31 2010 2009 2008 respectively intangible assets follows december 31 thousands amortization expense related intangibles 48 million 47 million 42 million years ended december 31 2010 2009 2008 respectively future amortization intangible assets december 31 2010 follows thousands 49 index financial statements allischalmers energy inc notes consolidated financial statementscontinued note 6 income taxes loss income taxes 582 million 439 million 953 million united states tax purposes years ended december 31 2010 2009 2008 respectively also income taxes 113 million 129 million 384 million reported nonunited states countries years ended december 31 2010 2009 2008 respectively treat withholding taxes incurred united states subsidiaries foreign countries foreign tax anticipate using tax payments offset united states tax required file consolidated united states federal income tax return file foreign income tax returns argentina brazil bolivia canada related drilling completion operations recognize impact uncertain tax positions financial statements tax position challenged taxing authority likely chance tax position disallowed based technical merits position recognize interest penalties related uncertain tax positions component income tax expense identified uncertain tax positions three years period ended december 31 2010 income tax provision consists following thousands significant components deferred income tax assets december 31 follows thousands net future taxdeductible items relate primarily timing differences timing differences tax basis assets liabilities reported amounts financial statements result differences income tax purposes income financial statement purposes future years 50 index financial statements allischalmers energy inc notes consolidated financial statementscontinued following table reconciles statutory tax rates actual tax rate tax reform act 1986 contains provisions limit utilization net operating loss tax credit carry forwards “change ownership” described section 382 internal revenue code change ownership may limit utilization net operating loss tax credit carryforwards could triggered public offering subsequent sales securities us stockholders provision limited amount net operating losses available us currently net operating loss carryforwards tax purposes december 31 2010 2009 1157 million 678 million respectively expiring 2030 valuation allowance established deferred tax assets management based upon available information considers likely benefit assets realized december 31 2010 2009 valuation allowance 210 million 140 million respectively valuation allowances relate net operating losses incurred bch pre post acquisition currently tax strategy utilize approximately 63 million 44 million ad valorem franchise income sales tax accruals included accrued expense balances 307 million 219 million december 31 2010 2009 respectively note 7 debt longterm debt consists following december 31 thousands weighted average interest rate current total debt approximately 42 85 december 31 2010 50 84 december 31 2009 respectively maturities debt obligations december 31 2010 follows thousands 51 index financial statements allischalmers energy inc notes consolidated financial statementscontinued senior notes term loans line credit agreements january 18 2006 august 14 2006 closed private offerings qualified institutional buyers pursuant rule 144a securities act 1933 1600 950 million aggregate principal amount senior notes respectively senior notes due january 15 2014 bear interest 90 proceeds used fund acquisitions specialty rental tools inc dls repay existing debt general corporate purposes june 29 2009 closed tender offer purchased 306 million aggregate principal 90 senior notes total consideration 650 per 1000 principal amount january 2007 closed private offering qualified institutional buyers pursuant rule 144a securities act 1933 2500 million principal amount 85 senior notes due 2017 proceeds senior notes offering together portion proceeds concurrent common stock offering used repay debt outstanding 3000 million bridge loan facility incurred finance acquisition substantially assets oil gas rental services inc june 29 2009 closed tender offer purchased 442 million aggregate principal 85 senior notes total consideration 600 per 1000 principal amount 900 million revolving line credit final maturity date april 26 2012 pursuant revolving credit agreement contains customary events default financial covenants limits ability incur additional indebtedness make capital expenditures pay dividends make distributions create liens sell assets april 9 2009 amended revolving credit agreement modify leverage interest coverage ratio covenants effective december 31 2009 amended leverage interest coverage ratio covenants revolving credit agreement amendment relaxed required financial ratios quarter ended december 31 2009 quarters 2010 obligations amended restated credit agreement secured substantially assets located united states compliance debt covenants december 31 2010 december 31 2009 december 31 2010 365 million borrowings outstanding 41 million outstanding letters credit revolving credit facility december 31 2009 usage revolving credit facility consisted 42 million outstanding letters credit interest rate revolving credit facility based prime libor plus margin weightedaverage interest rate 78 december 31 2010 part acquisition dls assumed various bank loans floating interest rates based libor plus margin terms ranging 2 5 years weighted average interest rates loans 20 21 december 31 2010 2009 respectively outstanding amount due bank loans december 31 2010 2009 350000 11 million respectively february 15 2008 dls subsidiary argentina entered 250 million import finance facility bank borrowings facility used fund portion purchase price new drilling service rigs ordered drilling completion segment loan repayable four years equal semiannual installments beginning one year disbursement final principal payment due later march 15 2013 import finance facility unsecured contains customary events default financial covenants limits dls’ ability incur additional indebtedness make capital expenditures create liens sell assets compliance debt covenants december 31 2010 2009 bank loan rates based libor plus margin weighted average interest rate 42 44 december 31 2010 2009 respectively outstanding amount import finance facility december 31 2010 2009 144 million 201 million respectively part acquisition bch assumed 236 million term loan credit facility bank credit agreement dated june 2007 contains customary events default financial covenants based bch’s standalone financial statements obligations facility secured substantially bch assets bch compliance debt covenants december 31 2009 bank waived certain financial ratio covenants september 30 2010 december 31 2010 measurement periods could certain bch would attain compliance covenants within one year classified entire outstanding balance loan current portion longterm debt december 31 2010 facility repayable quarterly principal installments plus interest final payment due later august 2012 interest rates based libor plus margin december 31 2010 2009 outstanding amount loan 70 million 162 million interest rate 35 may 22 2009 drew 250 million new term loan credit facility lending institution facility utilized fund portion purchase price two new drilling rigs loan secured equipment repaid november 2010 equipment returned manufacturer facility repayable quarterly installments approximately 14 million principal interest mature may 2015 loan bore interest fixed rate 90 december 31 2009 outstanding amount loan 234 million 52 index financial statements allischalmers energy inc notes consolidated financial statementscontinued february 9 2010 dls subsidiary entered 40 million term loan facility loan repayable semiannual installments beginning april 14 2011 bears interest 85 per annum final maturity date april 14 2014 loan unsecured notes payable 2010 obtained insurance premium financings aggregate amount 29 million fixed weightedaverage interest rate 48 terms agreements amounts outstanding paid eight 11 month repayment schedules outstanding balance notes approximately 10 million december 31 2010 2009 obtained insurance premium financings aggregate amount 32 million fixed weightedaverage interest rate 48 terms agreements amounts outstanding paid 10 11 month repayment schedules outstanding balance notes approximately 0 997000 december 31 2010 2009 respectively debt part acquisition bch assumed various capital leases terms two three years outstanding balance capital leases 0 254000 december 31 2010 2009 respectively note 8 commitments contingencies placed orders capital equipment totaling 210 million received paid 2011 approximately 45 million drilling equipment drilling completion segment 102 million drill pipe rental services segment 63 million various equipment utilized oilfield services segment rent office space certain facilities shop yards equipment storage maintenance facility rent expense years ended december 31 2010 2009 2008 37 million 33 million 28 million respectively december 31 2010 future minimum rental commitments operating leases follows thousands note 9 stockholders’ equity 2008 restricted stock award grants options exercised resulted 558707 shares common stock issued approximately 633000 recognized approximately 79 million compensation expense related share based payments recorded capital excess par value see note 1 also recorded approximately 9000 tax benefit related stock compensation plans june 2009 closed backstopped rights offering private placement convertible preferred stock received proceeds approximately 1202 million net 54 million offering expenses pursuant investment agreement lime rock partners v lp lime rock agreed backstop rights offering purchasing subscription price shares common stock purchased existing stockholders sold 15794644 shares common stock existing stockholders exercised rights offering 19889044 shares common stock lime rock price 250 per share issued 36393 shares 70 convertible perpetual preferred stock lime rock received proceeds approximately 342 million net 22 million offering expenses 53 index financial statements allischalmers energy inc notes consolidated financial statementscontinued preferred stock initial liquidation preference 1000 per share adjusted 3000 per share upon certain liquidation events dividends preferred stock declared quarterly approved board directors dividends accumulate paid preferred stock respect dividend rights upon liquidation windingup dissolution 1 senior common stock class series capital stock terms expressly provide class series ranks senior parity preferred stock 2 parity class series capital stock terms provide rank parity preferred stock 3 junior class series capital stock common stock established original issue date terms expressly provide rank senior preferred stock 4 junior existing future debt obligations liabilities including claims trade creditors year ended december 31 2009 declared 13 million dividends preferred stock accrued dividends approximately 637000 included accrued expense balance 219 million december 31 2009 accrued dividends paid february 2010 share preferred stock convertible holder’s option time 3902439 shares common stock certain conditions subject specified adjustments conversion rate represents equivalent conversion price approximately 256 per share conversion limited earlier june 26 2012 date transfer restrictions included investment agreement expire unless immediately giving effect conversion person group would beneficially number shares common stock exceeding 35 total number issued outstanding shares common stock unless given prior written consent conversion addition able cause preferred stock converted common stock five years issuance common stock trading premium 300 conversion price 30 consecutive trading days prior issuance press release announcing mandatory conversion generally holders preferred stock vote together common stock asconverted basis however preferred stock voting rights held person group aggregated common stock limited 35 votes cast stockholders including holders common stock 2009 restricted stock award grants options exercised resulted 20099 shares common stock issued approximately 43000 recognized approximately 48 million compensation expense related share based payments recorded capital excess par value see note 1 due expired unexercised nonqualified stock options restricted stock vesting market prices lower grant price adjusted 23 million excess tax asset additional paid capital issued 10 million shares common stock connection acquisition awc july 2010 see note 3 2010 restricted stock award grants vested performancebased restricted stock options exercised resulted 1343818 shares common stock issued due net exercise provisions grants paid 17 million payroll taxes net exercises recognized approximately 80 million compensation expense related sharebased payments recorded capital excess par value see note 1 due restricted stock vesting market prices lower grant price adjusted 12 million excess tax asset additional paid capital year ended december 31 2010 declared 25 million dividends preferred stock accrued dividends approximately 637000 included accrued expense balance 307 million december 31 2010 accrued dividends paid january 2011 note 10 stock options 2000 issued stock options promissory notes certain directors compensation services directors see note 7 options purchase 4800 shares common stock granted exercise price 1375 per share options vested immediately could exercised time prior march 28 2010 december 31 2010 none stock options remain outstanding compensation expense recorded options issued exercise price equal fair value common stock date grant 2003 incentive stock plan 2003 plan amended permits us grant key employees outside directors various forms stock incentives including among others incentive nonqualified stock options restricted stock 2003 plan administered compensation committee board consists two directors appointed board following benefits may granted 2003 plan stock appreciation rights b restricted stock c performance awards incentive stock options e nonqualified stock options f stockbased awards stock incentive terms excess ten years maximum number shares common stock may issued 2003 plan shall lesser 3000000 shares 15 total number shares common stock outstanding 54 index financial statements allischalmers energy inc notes consolidated financial statementscontinued 2006 incentive plan 2006 plan approved amended stockholders november 2006 2009 2006 plan administered compensation committee board maximum number shares common stock may issued 2006 plan equal 8500000 shares subject adjustment event stock splits certain corporate events 2006 plan provides grant following types awards stock options including incentive stock options nonqualified stock options ii bonus stock iii restricted stock awards iv performance awards v stockbased awards except respect awards incentive stock options employees consultants nonemployee directors eligible participate 2006 plan term award shall period may determined committee provided event shall term award exceed period ten years date grant summary stock option activity related information follows total intrinsic value stock options amount market price underlying stock date exercise exceeds exercise price option exercised approximately 5000 36000 542000 years ended december 31 2010 2009 2008 respectively december 31 2010 approximately 22 million total unrecognized compensation cost related stock options 535000 511000 506000 129000 recognized years ended december 31 2011 2015 respectively following table summarizes additional information stock options outstanding december 31 2010 aggregate pretax intrinsic value stock options outstanding exercisable approximately 51 million 10 million respectively december 31 2010 amount represents value would received option holders respective options exercised december 31 2010 55 index financial statements allischalmers energy inc notes consolidated financial statementscontinued restricted stock awards addition stock options 2003 2006 plans allow grant restricted stock awards rsa timelapse rsa award common stock unit represents right receive end stipulated period one unrestricted share stock exercise price timelapse rsa restrictions lapse periodically extended period time exceeding 10 years determine fair value rsas based market price common stock date grant compensation cost rsas primarily recognized straightline basis vesting service period net forfeitures performancebased rsa award common stock unit represents right receive one unrestricted share stock exercise price attainment established performance criteria connection performancebased rsas compensation cost based estimated number shares expected issued 2010 granted 1237750 performancebased rsas executive officers key employees vest upon meeting certain financial performance conditions next five years effective december 29 2010 accelerated vesting 244383 shares timebased restricted stock 544000 shares performancebased restricted stock previously granted employees fair value performancebased rsas based thirdparty valuations following table summarizes activity nonvested restricted stock awards total fair value rsa shares vested 2010 2009 approximately 68 million 371000 respectively december 31 2010 approximately 43 million total unrecognized compensation cost related nonvested rsas 17 million 10 million 769000 739000 71000 recognized years ended december 31 2011 2015 respectively note 11 stock purchase warrants conjunction bch debt financing january 2007 bch issued common stock warrant 250000 shares financial institution warrant entitles holder acquire 250000 shares common stock bch exercise price 1000 per share fiveyear period note 12 gain debt extinguishment recorded gain 264 million result tender offer completed june 29 2009 purchased 306 million aggregate principal 90 senior notes 442 million aggregate principal 85 senior notes approximately 464 million also wroteoff 15 million debt issuance costs related retired notes incurred approximately 466000 expenses related transactions 56 index financial statements allischalmers energy inc notes consolidated financial statementscontinued note 13 condensed consolidated financial information set forth following pages condensed consolidating financial statements allischalmers energy inc ii subsidiaries guarantors senior notes revolving credit facility iii subsidiaries guarantors senior notes revolving credit facility thousands condensed consolidating balance sheets december 31 2010 57 index financial statements allischalmers energy inc notes consolidated financial statementscontinued condensed consolidating income statements year ended december 31 2010 58 index financial statements allischalmers energy inc notes consolidated financial statementscontinued condensed consolidating statements cash flow year ended december 31 2010 59 index financial statements allischalmers energy inc notes consolidated financial statementscontinued condensed consolidating statements cash flow continued 60 index financial statements allischalmers energy inc notes consolidated financial statementscontinued condensed consolidating balance sheets december 31 2009 61 index financial statements allischalmers energy inc notes consolidated financial statementscontinued condensed consolidating income statements year ended december 31 2009 62 index financial statements allischalmers energy inc notes consolidated financial statementscontinued condensed consolidating statements cash flow year ended december 31 2009 63 index financial statements allischalmers energy inc notes consolidated financial statementscontinued condensed consolidating statements cash flow continued 64 index financial statements allischalmers energy inc notes consolidated financial statementscontinued condensed consolidating income statements year ended december 31 2008 65 index financial statements allischalmers energy inc notes consolidated financial statementscontinued condensed consolidating statements cash flow year ended december 31 2008 66 index financial statements allischalmers energy inc notes consolidated financial statementscontinued condensed consolidating statements cash flow continued 67 index financial statements allischalmers energy inc notes consolidated financial statementscontinued note 14 related party transactions largest customer pan american energy pae wholly owned bridas corporation bridas corporation owned 50 bridas energy holdings ltd 50 cnooc international limited alejandro p bulgheroni one directors parent company may deemed indirectly beneficially 50 outstanding capital stock bridas energy holdings ltd member management committee pae 2010 2009 2008 pae represented 311 355 285 consolidated revenues respectively december 31 2010 2009 trade receivables pae 220 million 110 million respectively 2010 2009 2008 derived revenue approximately 52 million 33 million 10 million beusa energy inc beusa company controlled alejandro p bulgheroni december 31 2010 2009 trade receivables beusa approximately 10 million 12 million respectively lime rock partners iii lp affiliated fund lime rock partners v lp owns majority stake parent company ges global energy services inc global energy houston based global supplier drilling rigs rig components 2008 ordered two drilling rigs global energy aggregate value approximately 347 million took delivery rigs 2010 saad bargach john reynolds managing director lime rock management lp manager lime rock partners iii lp lime rock partners v lp messrs bargach reynolds also directors parent company december 31 2010 lime rock partners v lp held 19889044 shares common stock representing approximately 270 issued outstanding shares addition december 31 2010 lime rock partners v lp owned 36393 shares preferred stock convertible 14202146 shares common stock december 31 2010 ownership common preferred stock lime rock partners v lp controlled aggregate 35 stockholders’ voting power note 15 segment information segments provide services energy industry revenues operating income loss depreciation amortization capital expenditures assets reporting segments plus corporate function reported thousands 68 index financial statements allischalmers energy inc notes consolidated financial statementscontinued 69 index financial statements allischalmers energy inc notes consolidated financial statementscontinued note 16 supplemental cash flows information thousands note 17 legal matters shortly following announcement merger agreement ten putative stockholder classaction petitions compliants filed various combinations us members board directors seawell wellco seven lawsuits filed district court harris county texas refer texas actions three lawsuits filed court chancery state delaware refer delaware actions lawsuits challenge proposed merger generally allege among things directors breached fiduciary duties owed public stockholders approving proposed merger failing take steps maximize value public stockholders seawell wellco aided abetted breaches fiduciary duties merger agreement unreasonably dissuades potential suitors making competing offers restricts us considering competing offers lawsuits generally seek among things compensatory damages attorneys’ experts’ fees declaratory injunctive relief concerning alleged breaches fiduciary duties injunctive relief prohibiting defendants consummating merger various plaintiffs texas actions filed competing motions consolidate suits appoint counsel interim class counsel compel expedited discovery september 16 2010 defendants filed joint motions stay texas actions favor firstfiled delaware lawsuit opposing motions expedited discovery hearing date set motions parties texas state court actions agreed various defendants need respond petitions lead counsel appointed consolidated amended petition filed served alternatively active petition designated lead counsel 70 index financial statements allischalmers energy inc notes consolidated financial statementscontinued september 21 2010 plaintiffs delaware actions wrote court seeking consolidation delaware cases defendants oppose consolidation took position regarding lead plaintiff september 29 2010 delaware court granted motion consolidate previously september 16 2010 seawell wellco answered firstfiled girard complaint operative complaint postconsolidation answered consolidated complaint october 4 2010 january 26 2011 plaintiffs delaware actions filed amended complaint included among claims allegations disclosures made defendants concerning merger incomplete misleading also january 26 2011 plaintiffs delaware actions filed motion expedite proceedings discovery briefing set date time hear application preliminary injunction enjoin merger following hearing february 3 2011 delaware court denied plaintiffs’ motion believe lawsuits without merit intend defend vigorously named time legal proceedings related activities prior bankruptcy 1988 however believe discharged liability claims bankruptcy believe likelihood material loss relating legal proceeding remote also involved various legal proceedings ordinary course business legal proceedings different stages however believe likelihood material loss relating legal proceeding remote note 18 subsequent event august 12 2010 entered merger agreement seawell limited seawell wellco sub company wholly owned subsidiary seawell february 23 2011 merger transactions closed merged wellco sub company becoming wholly owned subsidiary seawell name “allischalmers energy inc” following merger seawell subsidiaries including us begun operating name archer however legal name remain “allischalmers energy inc” notice connection merger repaid cancelled 900 million revolving credit facility well bch term loan vesting outstanding options restricted stock accelerated upon closing merger note 19 summarized quarterly financial data unaudited thousands except per share amounts 71 index financial statements item 9 item 15 exhibits financial statement schedules a1 financial statements financial statements registrant set forth item 8 annual report form 10k 2 financial statement schedules schedule ii valuation qualifying accounts 3 exhibits listed exhibit index located page 96 annual report filed part 10k 2 financial statement schedule ii valuation qualifying accounts allischalmers energy inc valuation qualifying accounts signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized march 14 2007 munawar h hidayatallah munawar h hidayatallah chief executive officer chairman pursuant requirements section 13 15d securities exchange act 1934 amended report signed date indicated following persons behalf registrant capacities indicated exhibit index compensation plan agreement item 15 exhibits financial statement schedules 1 financial statements financial statements registrant set forth item 8 annual report form 10k 2 financial statement schedules schedule ii valuation qualifying accounts 3 exhibits listed exhibit index located page 91 annual report filed part 10k signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized march 22 2006 munawar h hidayatallah munawar h hidayatallah chief executive officer chairman pursuant requirements section 13 15d securities exchange act 1934 amended report signed date indicated following persons behalf registrant capacities indicated 2 financial statement schedule ii valuation qualifying accounts allischalmers energy inc valuation qualifying accounts exhibit index compensation plan agreement item 15 exhibits financial statement schedules 1 financial statements following financial statements allischalmers energy inc subsidiaries included item 8 “financial statements supplementary data” consolidated balance sheets december 31 2009 2008 consolidated statements operations years ended december 31 2009 2008 2007 consolidated statement stockholders’ equity years ended december 31 2009 2008 2007 consolidated statements cash flows years ended december 31 2009 2008 2007 notes consolidated financial statements 2 financial statement schedules schedule ii valuation qualifying accounts schedules omitted applicable required information included financial statements notes thereto 3 exhibits listed accompanying exhibit index incorporated reference annual report form 10k 2 financial statement schedule ii valuation qualifying accounts allischalmers energy inc valuation qualifying accounts deferred tax asset valuation allowance established year ended december 31 2008 acquisition related allowance time acquisition bch expectation utilize net operating loss carryforwards foreign tax credit carryfowards subsequent 2008 determined would utilize 13 million deferred tax assets related acquisition bch signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized march 9 2010 allischalmers energy inc munawar h hidayatallah munawar h hidayatallah chief executive officer chairman pursuant requirements section 13 15d securities exchange act 1934 amended report signed date indicated following persons behalf registrant capacities indicated exhibit index compensation plan agreement  filed herewith item 15 exhibits financial statement schedules reports form 8k list documents filed index financial statements included page 28 report financial statements schedules included report omitted applicable required information included financial statements notes thereto exhibits listed exhibit index located page 56 annual report filed part form 10k b reports form 8k none c exhibits listed exhibit index located page 56 annual report filed part form 10k financial statement schedules none signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized april 14 2004 munawar h hidayatallah munawar h hidayatallah chief executive officer chairman pursuant requirements section 13 15d securities exchange act 1934 amended report signed date indicated following persons behalf registrant capacities indicated exhibit index 21 first amended disclosure statement pursuant section 1125 bankruptcy code includes first amended restated joint plan reorganization dated september 14 1988 incorporated reference companys report form 8k dated december 1 1988 22 agreement plan merger among allischalmers corporation allischalmers acquisition corp oilquip rentals inc dated may 9 2001incorporated reference companys report form 8k filed may 15 2001 23 stock purchase agreement dated november 30 2001 clayton lau mountain compressed air inc incorporated reference companys report form 8k dated december 27 2001 24 promissory note executed clayton lau dated november 30 2001 incorporated reference companys report form 8k dated december 27 2001 25 security agreement dated november 30 2001 clayton lau mountain compressed air inc incorporated reference companys report form 8k dated december 27 2001 26 stock purchase agreement dated february 1 2002 allischalmers corporation delaware corporation buyer jens h mortensen jr incorporated reference companys report form 8k filed february 21 2002 27 shareholders agreement among jens oilfield services inc texas corporation jens h mortensen jr allischalmers corporation incorporated reference companys report form 10k year ended december 31 2001 28 stock purchase agreement dated february 1 2002 allischalmers corporation energy spectrum partners lp strata directional technology inc incorporated reference companys report form 10k year ended december 31 2001 29 registration rights agreement dated among allischalmers corporation energy spectrum partners lp incorporated reference companys report form 10k year ended december 31 2001 210 shareholders agreement among allischalmers corporation shareholders warrant holder signatories thereto dated february 1 2002 incorporated reference companys report form 10k year ended december 31 2001 31 amended restated certificate incorporation allischalmers corporation incorporated reference companys report form 10k year ended december 31 2001 32 certificate designation preferences rights series 10 cumulative convertible preferred stock 01 par value allis chalmers corporation incorporated reference companys report form 8k filed february 21 2002 33 amended restated bylaws allischalmers corporation incorporated reference companys report form 10k year ended december 31 2001 101 amended restated retiree health trust agreement allischalmers corporation wells fargo bank incorporated reference exhibit c1 first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 102 amended restated retiree health trust agreement allischalmers corporation firstar trust company incorporated reference exhibit c2 first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 103 reorganization trust agreement allischalmers corporation john grigsby jr trustee incorporated reference exhibit first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 104 product liability trust agreement allischalmers corporation bruce w strausberg trustee incorporated reference exhibit e first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 105 allischalmers savings plan incorporated reference companys report form 10k year ended december 31 1988 106 allischalmers consolidated pension plan incorporated reference companys report form 10k year ended december 31 1988 107 agreement dated march 31 1999 allischalmers corporation pension benefit guaranty corporation incorporated reference companys report form 10q quarter ended june 30 1999 108 registration rights agreement dated march 31 1999 allischalmers corporation pension benefit guaranty corporation incorporated reference companys report form 10q quarter ended june 30 1999 109 letter agreement allischalmers corporation pension benefit guarantee corporation dated may 9 2001 incorporated reference companys report form 8k filed may 15 2002 1010 termination agreement allischalmers corporation pension benefit guarantee corporation others dated may 9 2001incorporated reference companys report form 8k filed may 15 2002 1011 employment agreement dated february 7 2001 oilquip rentals inc munawar h hidayatallah incorporated reference companys report form 10k year ended december 31 2001 1012 asset purchase agreement entered february 6 2001 among mountain compressed air inc mountain drilling service co inc rod linda huskey related promissory note 1013 option agreement dated october 15 2001 allischalmers corporation leonard toboroff incorporated reference companys report form 10q quarter ended september 30 2001 1014 credit security agreement dated february 1 2002 jens oil field service inc wells fargo credit inc incorporated reference companys report form 8k filed february 21 2002 1015 amended restated credit security agreement dated february 1 2002 strata directional technology inc wells fargo credit inc incorporated reference companys report form 8k filed february 21 2002 1016 credit agreement dated february 1 2002 allischalmers corporation wells fargo energy capital inc incorporated reference companys report form 8k filed february 21 2002 1017 warrant purchase agreement dated february 1 2002 allischalmers corporation wells fargo energy capital inc incorporated reference companys report form 8k filed february 21 2002 1018 employment agreement dated february 1 2002 jens oil field service inc jens h mortensen jr incorporated reference companys report form 8k filed february 21 2002 1019 credit agreement mountain compressed air inc wells fargo bank texas na including renewal term note renewed extended revolving line credit note renewal delayed draw term note dated february 6 2001 incorporated reference companys annual report form 10k period ended december 31 2002 1020 first amendment credit agreement mountain compressed air inc wells fargo bank texas na including renewal term note renewed extended revolving line credit note renewal delayed draw term note dated august 9 2001 incorporated reference companys annual report form 10k period ended december 31 2002 1021 second amendment credit agreement mountain compressed air inc wells fargo bank texas na including renewal term note renewed extended revolving line credit note renewal delayed draw term note dated november 30 2001 incorporated reference companys annual report form 10k period ended december 31 2002 1022 third amendment credit agreement mountain compressed air inc wells fargo bank texas na including renewal term note renewed extended revolving line credit note renewal delayed draw term note dated january 31 2002 incorporated reference companys annual report form 10k period ended december 31 2002 1023 fourth amendment credit agreement mountain compressed air inc wells fargo bank texas na including renewal term note renewed extended revolving line credit note renewal delayed draw term note dated april 30 2002 incorporated reference companys annual report form 10k period ended december 31 2002 1024 fifth amendment credit agreement mountain compressed air inc wells fargo bank texas na including renewal term note renewed extended revolving line credit note renewal delayed draw term note dated august 6 2002 incorporated reference companys annual report form 10k period ended december 31 2002 1025 sixth amendment credit agreement mountain compressed air inc wells fargo bank texas na including renewal term note renewed extended revolving line credit note renewal delayed draw term note dated january 1 2003 incorporated reference companys annual report form 10k period ended december 31 2002 1026 forbearance agreement second amendment amended restated credit agreement dated march 21 2003 strata directional technology inc wells fargo credit inc incorporated reference companys annual report form 10k period ended december 31 2002 1027 forbearance agreement first amendment credit agreement jens oilfield services inc wells fargo credit inc dated march 21 2003 incorporated reference companys annual report form 10k period ended december 31 2002 1028 forbearance agreement mountain compressed air inc wells fargo equipment finance inc dated january 17 2003 incorporated reference companys annual report form 10k period ended december 31 2002 1029 ratification previously executed security agreement dated august 9 2001 mountain compressed air inc wells fargo energy capital inc incorporated reference companys annual report form 10k period ended december 31 2002 1030 subordination intercreditor agreement among mountain compressed air inc wells fargo energy capital inc wells fargo equipment finance inc incorporated reference companys annual report form 10k period ended december 31 2002 1031 credit agreement dated february 6 2001 mountain compressed air inc wells fargo energy capital inc related term note warrant purchase agreement warrant incorporated reference companys annual report form 10k period ended december 31 2002 1032 first amendment credit agreement dated february 1 2002 mountain compressed air inc wells fargo energy capital inc incorporated reference companys annual report form 10k period ended december 31 2002 1033 joint venture agreement entered june 27 2003 mountain compressed air inc mi llc incorporated reference companys current report form 8k filed july 16 2003 1034 credit security agreement aircomp llc wells fargo bank texas na including term note revolving line credit delayed draw term note filed june 27 2003 incorporated reference companys current report form 8k filed july 16 2003 1035 security agreement aircomp llc wells fargo bank texas na filed june 27 2003 incorporated reference companys current report form 8k dated july 16 2003 1036 employment agreement dated july 1 2003 aircomp llc terry keane incorporated reference companys current report form 8k filed july 16 2003 1037 second amendment credit agreement dated february 1 2003 mountain compressed air inc wells fargo energy capital inc incorporated reference companys quarterly report form 10q period ended september 30 2003 1038 second amendment credit agreement dated september 30 2003 jens oilfield service inc wells fargo credit inc incorporated reference companys quarterly report form 10q period ended september 30 2003 1039 third amendment credit agreement dated september 2003 strata directional technology inc wells fargo credit inc incorporated reference companys quarterly report form 10q period ended september 30 2003 1040 first amendment credit agreement dated october 1 2003 allischalmers corporation wells fargo energy capital inc incorporated reference companys quarterly report form 10q period ended september 30 2003 1041 form option certificate issued pursuant 2003 stock incentive plan 1042 2003 stock incentive plan 141 code ethics 211 subsidiaries allischalmers corporation 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification president pursuant section 302 sarbanesoxley act 2002 313 certification chief accounting officer pursuant section 302 sarbanesoxley act 2002 321 certification chief executive officer president chief accounting officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 compensation plan agreement item 15 exhibits financial statement schedules reports form 8k 1 financial statements 2 financial statement schedules 3 exhibits listed exhibit index located page 65 annual report filed part 10k b reports form 8k company filed form 8ks october 6 2004 2 filings october 15 2004 november 16 2004 november 17 2004 november 19 2004 december 1 2004 december 13 2004 december 16 2004 c exhibits listed exhibit index located page 65 annual report filed part form 10k financial statement schedules none 63 signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized april 13 2005 munawar h hidayatallah munawar h hidayatallah chief executive officer chairman pursuant requirements section 13 15d securities exchange act 1934 amended report signed date indicated following persons behalf registrant capacities indicated exhibit index exhibit description 21 first amended disclosure statement pursuant section 1125 bankruptcy code dated september 14 1988 includes first amended restated joint plan reorganization dated september 14 1988 incorporated reference registrants current report form 8k dated december 1 1988 22 agreement plan merger dated may 9 2001 among registrant allischalmers acquisition corp oilquip rentals inc incorporated reference registrants current report form 8k filed may 15 2001 23 stock purchase agreement dated february 1 2002 registrant jens h mortensen jr incorporated reference registrants current report form 8k filed february 21 2002 24 shareholders agreement dated february 1 2002 among jens oilfield service inc texas corporation jens h mortensen jr registrant incorporated reference registrants annual report form 10k year ended december 31 2001 25 stock purchase agreement dated february 1 2002 among registrant energy spectrum partners lp strata directional technology inc incorporated reference registrants annual report form 10k year ended december 31 2001 26 joint venture agreement dated june 27 2003 mountain compressed air inc mi llc incorporated reference registrants current report form 8k filed july 16 2003 31 amended restated certificate incorporation registrant incorporated reference registrants annual report form 10k year ended december 31 2001 32 certificate designation preferences rights series 10 cumulative convertible preferred stock 01 par value registrant incorporated reference registrants current report form 8k filed february 21 2002 33 amended restated bylaws registrant 34 certificate amendment certificate incorporation filed delaware secretary state june 9 2004 incorporated reference registrants quarterly report form 10q quarter ended june 30 2004 35 certificate amendment certificate incorporation filed delaware secretary state january 5 2005 incorporated reference registrants current report form 8k filed january 11 2005 41 specimen stock certificate common stock registrant 42 registration rights agreement dated march 31 1999 allischalmers corporation pension benefit guaranty corporation incorporated reference registrants quarterly report form 10q quarter ended june 30 1999 43 option agreement dated october 15 2001 registrant leonard toboroff incorporated reference registrants quarterly report form 10q quarter ended september 302001 44 warrant purchase agreement dated february 1 2002 allischalmers corporation wells fargo energy capital inc including form warrant incorporated reference registrants current report form 8k filed february 21 2002 45 warrant purchase agreement dated february 1 2002 allischalmers corporation energy spectrum partners lp including form warrant incorporated reference registrants current report form 8k filed february 21 2002 46 2003 incentive stock plan incorporated reference registrants definitive proxy statement schedule 14a filed december 9 2004 47 form option certificate issued pursuant 2003 incentive stock plan incorporated reference registrants annual report form 10k year ended december 31 2002 48 warrant dated march 1 2004 issued morgan joseph co inc incorporated reference registration statement form s1 registration 118916 filed september 10 2004 49 form warrant issued investors pursuant stock warrant purchase agreement dated april 2 2004 among registrant donald engel christopher engel defined benefit plan rer corp leonard toboroff incorporated reference registrants quarterly report form 10q quarter ended june 30 2004 410 registration rights agreement dated april 2 2004 registrant stockholder signatories thereto incorporated reference registrants quarterly report form 10q quarter ended june 30 2004 411 warrant dated may 19 2004 issued jeffrey r freedman incorporated reference registration statement form s1 registration 118916 filed september 10 2004 51 consent greenberg glusker fields claman machtinger kinsella llp 91 shareholders agreement dated february 1 2002 among registrant stockholder warrant holder signatories thereto incorporated reference registrants annual report form 10k year ended december 31 2001 92 stockholders agreement dated april 2 2004 among registrant stockholder signatories thereto incorporated reference registrants annual report form 10k year ended december 31 2003 101 amended restated retiree health trust agreement dated september 14 1988 registrant wells fargo bank incorporated reference exhibit c1 first amended restated joint plan reorganization dated september 14 1988 included registrants current report form 8k dated december 1 1988 102 amended restated retiree health trust agreement dated september 18 1988 registrant firstar trust company incorporated reference exhibit c2 first amended restated joint plan reorganization dated september 14 1988 included registrants current report form 8k dated december 1 1988 103 reorganization trust agreement dated september 14 1988 registrant john grigsby jr trustee incorporated reference exhibit first amended restated joint plan reorganization dated september 14 1988 included registrants current report form 8k dated december 1 1988 104 product liability trust agreement dated september 14 1988 registrant bruce w strausberg trustee incorporated reference exhibit e first amended restated joint plan reorganization dated september 14 1988 included registrants current report form 8k dated december 1 1988 105 allischalmers savings plan incorporated reference registrants annual report form 10k year ended december 31 1988 106 allischalmers consolidated pension plan incorporated reference registrants annual report form 10k year ended december 31 1988 107 agreement dated march 31 1999 registrant pension benefit guaranty corporation incorporated reference registrants quarterly report form 10q quarter ended june 30 1999 108 letter agreement dated may 9 2001 registrant pension benefit guarantee corporation incorporated reference registrants quarterly report form 10q filed may 15 2002 109 termination agreement dated may 9 2001 registrant pension benefit guarantee corporation others incorporated reference registrants current report form 8k filed may 15 2002 1010 employment agreement dated february 7 2001 oilquip rentals inc munawar h hidayatallah incorporated reference companys report form 10k year ended december 31 2001 1011 option agreement dated october 15 2001 registrant leonard toboroff incorporated reference registrants quarterly report form 10q quarter ended september 30 2001 1012 credit security agreement dated february 1 2002 jens oilfield service inc wells fargo credit inc incorporated reference registrants current report form 8k filed february 21 2002 1013 amended restated credit security agreement dated february 1 2002 strata directional technology inc wells fargo credit inc incorporated reference registrants current report form 8k filed february 21 2002 1014 credit agreement dated february 1 2002 registrant wells fargo energy capital inc incorporated reference registrants current report form 8k filed february 21 2002 1015 warrant purchase agreement dated february 1 2002 registrant wells fargo energy capital inc incorporated reference registrants current report form 8k filed february 21 2002 1016 employment agreement dated february 1 2002 jens oilfield service inc jens h mortensen jr incorporated reference registrants current report form 8k filed february 21 2002 1017 forbearance agreement dated january 17 2003 mountain compressed air inc wells fargo equipment finance inc incorporated reference registrants annual report form 10k period ended december 31 2002 1018 forbearance agreement second amendment amended restated credit agreement dated march 21 2003 strata directional technology inc wells fargo credit inc incorporated reference registrants annual report form 10k period ended december 31 2002 1019 forbearance agreement first amendment credit agreement dated march 21 2003 jens oilfield service inc wells fargo credit inc incorporated reference registrants annual report form 10k period ended december 31 2002 1020 credit security agreement aircomp llc wells fargo bank texas na including term note revolving line credit delayed draw term note dated june 27 2003 incorporated reference registrants current report form 8k filed july 16 2003 1021 security agreement aircomp llc wells fargo bank texas na dated june 27 2003 incorporated reference registrants current report form 8k dated july 16 2003 1022 employment agreement dated july 1 2003 aircomp llc terry keane incorporated reference registrants current report form 8k filed july 16 2003 1023 second amendment credit agreement dated september 30 2003 jens oilfield service inc wells fargo credit inc incorporated reference registrants quarterly report form 10q period ended september 30 2003 1024 third amendment credit agreement dated september 2003 strata directional technology inc wells fargo credit inc incorporated reference registrants quarterly report form 10q period ended september 30 2003 1025 first amendment credit agreement dated october 1 2003 registrant wells fargo energy capital inc incorporated reference registrants quarterly report form 10q period ended september 30 2003 1026 first amendment credit agreement dated december 31 2003 aircomp llc wells fargo bank na incorporated reference registrants quarterly report form 10q quarter ended june 30 2004 1027 fourth amendment credit agreement dated january 30 2004 strata directional technology inc wells fargo credit inc incorporated reference registrants quarterly report form 10q quarter ended june 30 2004 1028 letter agreement dated february 13 2004 registrant morgan joseph co inc incorporated reference registration statement form s1 registration 118916 filed september 10 2004 1029 employment agreement dated april 1 2004 registrant munawar h hidayatallah incorporated reference registrants quarterly report form 10q quarter ended june 30 2004 1030 employment agreement dated april 1 2004 registrant david wilde incorporated reference registrants quarterly report form 10q quarter ended june 30 2004 1031 stock warrant purchase agreement dated april 2 2004 among registrant donald engel christopher engel defined benefit plan rer corp leonard toboroff incorporated reference registrants quarterly report form 10q quarter ended june 30 2004 1032 preferred stock conversion agreement dated april 2 2004 registrant energy spectrum partners lp incorporated reference registrants quarterly report form 10q quarter ended june 30 2004 1033 second amendment credit agreement dated april 2 2004 aircomp llc wells fargo bank na incorporated reference registrants quarterly report form 10q quarter ended june 30 2004 1034 amendment credit agreement registrant wells fargo energy capital dated april 2 2004 incorporated reference registrants quarterly report form 10q quarter ended june 30 2004 1035 fifth amendment credit agreement dated april 6 2004 strata directional technology inc wells fargo credit inc incorporated reference registrants quarterly report form 10q quarter ended june 30 2004 1036 third amendment credit agreement dated april 6 2004 jens oilfield service inc wells fargo credit inc incorporated reference registrants quarterly report form 10q quarter ended june 30 2004 1037 letter agreement dated june 8 2004 registrant morgan keegan company inc incorporated reference registration statement form s1 registration 118916 filed september 10 2004 1038 employment agreement dated july 26 2004 registrant victor perez incorporated reference registration statement form s1 registration 118916 filed september 10 2004 1039 stock purchase agreement dated august 10 2004 incorporated reference registration statement form s1 registration 118916 filed september 10 2004 1040 amendment stock purchase agreement dated august 10 2004 incorporated reference registration statement form s1 registration 118916 filed september 10 2004 1041 letter agreement relating stock purchase agreement dated august 5 2004 incorporated reference registration statement form s1 registration 118916 filed september 10 2004 1042 addendum stock purchase agreement dated september 24 2004 incorporated reference registrants current report form 8k filed september 30 2004 1043 stock purchase agreement dated september 24 2004 incorporated reference registrants current report form 8k filed september 30 2004 1044 amendment stock purchase agreement undated incorporated reference registrants current report form 8k filed september 30 2004 1045 side letter dated august 5 2004 related stock purchase agreement incorporated reference registrants current report form 8k filed september 30 2004 1046 agreement plan merger dated september 30 2004 incorporated reference registrants current report form 8k filed october 6 2004 1047 employment agreement dated october 11 2004 registrant theodore f pound iii incorporated reference registrants current report form 8k filed october 15 2004 1048 asset purchase agreement dated november 10 2004 among aircomp llc delaware limited liability company diamond air drilling services inc texas corporation marquis bit co llc new mexico limited liability company greg hawley tammy hawley residents texas clay wilson linda wilson residents new mexico incorporated reference current report form 8k filed november 15 2004 1049 amended restated credit agreement dated december 7 2004 aircomp llc wells fargo bank na incorporated reference registrants current report form 8k filed december 13 2004 1050 purchase agreement related agreements among allischalmers corporation chevron usa inc dale redman others dated december 10 2004 incorporated reference current report form 8k filed december 16 2004 141 code ethics incorporated reference form 8k filed december 1 2004 161 letter gordon hughes banks llp dated october 5 2004 securities exchange commission incorporated reference registrants current report form 8k filed october 6 2004 211 subsidiaries registrant 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 321 certification chief executive officer chief financial officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 compensation plan agreement item 15 exhibits financial statement schedules a1 financial statements consolidated balance sheets december 31 2007 2006 consolidated statements operations december 31 2007 2006 2005 consolidated statement stockholders’ equity december 31 2007 2006 2005 2004 consolidated statements cash flows december 31 2007 2006 2005 notes consolidated financial statements 2 financial statement schedules schedule ii valuation qualifying accounts 3 exhibits listed accompanying exhibit index incorporated reference annual report form 10k 2 financial statement schedule ii valuation qualifying accounts allischalmers energy inc valuation qualifying accounts signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized march 6 2008 munawar h hidayatallah munawar h hidayatallah chief executive officer chairman pursuant requirements section 13 15d securities exchange act 1934 amended report signed date indicated following persons behalf registrant capacities indicated exhibit index compensation plan agreement item 15 exhibits financial statement schedules a1 financial statements following financial statements allischalmers energy inc subsidiaries included item 8 “financial statements supplementary data” consolidated balance sheets december 31 2008 2007 consolidated statements operations years ended december 31 2008 2007 2006 consolidated statement stockholders’ equity years ended december 31 2008 2007 2006 consolidated statements cash flows years ended december 31 2008 2007 2006 notes consolidated financial statements 2 financial statement schedules schedule ii valuation qualifying accounts schedules omitted applicable required information included financial statements notes thereto 3 exhibits listed accompanying exhibit index incorporated reference annual report form 10k 2 financial statement schedule ii valuation qualifying accounts allischalmers energy inc valuation qualifying accounts signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized march 9 2009 allischalmers energy inc munawar h hidayatallah munawar h hidayatallah chief executive officer chairman pursuant requirements section 13 15d securities exchange act 1934 amended report signed date indicated following persons behalf registrant capacities indicated exhibit index compensation plan agreement  filed herewith item 15 exhibits financial statement schedules reports form 8k list documents filed index financial statements included page 30 report financial statements schedules included report omitted applicable required information included financial statements notes thereto b reports form 8k none c exhibits listed exhibit index located page 66 annual report filed part form 10k certifications munawar h hidayatallah chief executive officer company certify 1 reviewed annual report form 10k allischalmers corporation 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officer disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officer indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date april 11 2003 munawar h hidayatallah munawar h hidayatallah chief executive officer todd c seward chief accounting officer company certify 1 reviewed annual report form 10k allischalmers corporation 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officer disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officer indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date april 11 2003 todd c seward todd c seward chief accounting officer signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized april 11 2002 munawar h hidayatallah munawar h hidayatallah president chief executive officer chairman pursuant requirements section 13 15d securities exchange act 1934 amended report signed date indicated following persons behalf registrant capacities indicated exhibit index 21 first amended disclosure statement pursuant section 1125 bankruptcy code includes first amended restated joint plan reorganization dated september 14 1988 incorporated reference companys report form 8k dated december 1 1988 22 agreement plan merger among allischalmers corporation allischalmers acquisition corp oilquip rentals inc dated may 9 2001incorporated reference companys report form 8k filed may 15 2001 23 stock purchase agreement dated november 30 2001 clayton lau mountain compressed air inc incorporated reference companys report form 8k dated december 27 2001 24 promissory note executed clayton lau dated november 30 2001 incorporated reference companys report form 8k dated december 27 2001 25 security agreement dated november 30 2001 clayton lau mountain compressed air inc incorporated reference companys report form 8k dated december 27 2001 26 stock purchase agreement dated february 1 2002 allischalmers corporation delaware corporation buyer jens h mortensen jr incorporated reference companys report form 8k filed february 21 2002 27 shareholders agreement among jens oilfield services inc texas corporation jens h mortensen jr allischalmers corporation incorporated reference companys report form 10k year ended december 31 2001 28 stock purchase agreement dated february 1 2002 allischalmers corporation energy spectrum partners lp strata directional technology inc incorporated reference companys report form 10k year ended december 31 2001 29 registration rights agreement dated among allischalmers corporation energy spectrum partners lp incorporated reference companys report form 10k year ended december 31 2001 210 shareholders agreement among allischalmers corporation shareholders warrant holder signatories thereto dated february 1 2002 incorporated reference companys report form 10k year ended december 31 2001 31 amended restated certificate incorporation allischalmers corporation incorporated reference companys report form 10k year ended december 31 2001 32 certificate designation preferences rights series 10 cumulative convertible preferred stock 01 par value allis chalmers corporation incorporated reference companys report form 8k filed february 21 2002 33 amended restated bylaws allischalmers corporation incorporated reference companys report form 10k year ended december 31 2001 101 amended restated retiree health trust agreement allischalmers corporation wells fargo bank incorporated reference exhibit c1 first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 102 amended restated retiree health trust agreement allischalmers corporation firstar trust company incorporated reference exhibit c2 first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 103 reorganization trust agreement allischalmers corporation john grigsby jr trustee incorporated reference exhibit first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 104 product liability trust agreement allischalmers corporation bruce w strausberg trustee incorporated reference exhibit e first amended restated joint plan reorganization dated september 14 1988 included companys report form 8k dated december 1 1988 105 allischalmers savings plan incorporated reference companys report form 10k year ended december 31 1988 106 allischalmers consolidated pension plan incorporated reference companys report form 10k year ended december 31 1988 107 agreement dated march 31 1999 allischalmers corporation pension benefit guaranty corporation incorporated reference companys report form 10q quarter ended june 30 1999 108 registration rights agreement dated march 31 1999 allischalmers corporation pension benefit guaranty corporation incorporated reference companys report form 10q quarter ended june 30 1999 109 letter agreement allischalmers corporation pension benefit guarantee corporation dated may 9 2001 incorporated reference companys report form 8k filed may 15 2002 1010 termination agreement allischalmers corporation pension benefit guarantee corporation others dated may 9 2001incorporated reference companys report form 8k filed may 15 2002 1011 employment agreement dated february 7 2001 oil quip rentals inc munawar h hidayatallah incorporated reference companys report form 10k year ended december 31 2001 1012 asset purchase agreement entered february 6 2001 among mountain compressed air inc mountain drilling service co inc rod linda huskey related promissory note 1013 option agreement dated october 15 2001 allischalmers corporation leonard toboroff incorporated reference companys report form 10q quarter ended september 30 2001 1014 credit security agreement dated february 1 2002 jens oil field service inc wells fargo credit inc incorporated reference companys report form 8k filed february 21 2002 1015 amended restated credit security agreement dated february 1 2002 strata directional technology inc wells fargo credit inc incorporated reference companys report form 8k filed february 21 2002 1016 credit agreement dated february 1 2002 allischalmers corporation wells fargo energy capital inc incorporated reference companys report form 8k filed february 21 2002 1017 warrant purchase agreement dated february 1 2002 allischalmers corporation wells fargo energy capital inc incorporated reference companys report form 8k filed february 21 2002 1018 employment agreement dated february 1 2002 jens oil field service inc jens h mortensen jr incorporated reference companys report form 8k filed february 21 2002 1019 credit agreement mountain compressed air inc wells fargo bank texas na including renewal term note renewed extended revolving line credit note renewal delayed draw term note dated february 6 2001 1020 first amendment credit agreement mountain compressed air inc wells fargo bank texas na including renewal term note renewed extended revolving line credit note renewal delayed draw term note dated august 9 2001 1021 second amendment credit agreement mountain compressed air inc wells fargo bank texas na including renewal term note renewed extended revolving line credit note renewal delayed draw term note dated november 30 2001 1022 third amendment credit agreement mountain compressed air inc wells fargo bank texas na including renewal term note renewed extended revolving line credit note renewal delayed draw term note dated january 31 2002 1023 fourth amendment credit agreement mountain compressed air inc wells fargo bank texas na including renewal term note renewed extended revolving line credit note renewal delayed draw term note dated april 30 2002 1024 fifth amendment credit agreement mountain compressed air inc wells fargo bank texas na including renewal term note renewed extended revolving line credit note renewal delayed draw term note dated august 6 2002 1025 sixth amendment credit agreement mountain compressed air inc wells fargo bank texas na including renewal term note renewed extended revolving line credit note renewal delayed draw term note dated january 1 2003 1026 forbearance agreement second amendment amended restated credit agreement dated march 21 2003 strata directional technology inc wells fargo credit inc 1027 forbearance agreement first amendment credit agreement jens oilfield services inc wells fargo credit inc dated march 21 2003 1028 forbearance agreement mountain compressed air inc wells fargo equipment finance inc dated january 17 2003 1029 ratification previously executed security agreement dated august 9 2001 mountain compressed air inc wells fargo energy capital inc 1030 subordination intercreditor agreement among mountain compressed air inc wells fargo energy capital inc wells fargo equipment finance inc 1031 credit agreement dated february 6 2001 mountain compressed air inc wells fargo energy capital inc related term note warrant purchase agreement warrant 1032 first amendment credit agreement dated february 1 2002 mountain compressed air inc wells fargo energy capital inc 1033 second amendment credit agreement dated february 1 2003 mountain compressed air inc wells fargo energy capital inc 211 subsidiaries allischalmers corporation 991 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 992 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 compensation plan agreement item 15 exhibits financial statement schedules 1 financial statements following financial statements allischalmers energy inc subsidiaries included item 8 “financial statements supplementary data” consolidated balance sheets december 31 2010 2009 consolidated statements operations years ended december 31 2010 2009 2008 consolidated statement stockholders’ equity years ended december 31 2010 2009 2008 consolidated statements cash flows years ended december 31 2010 2009 2008 notes consolidated financial statements 2 financial statement schedules schedule ii valuation qualifying accounts schedules omitted applicable required information included financial statements notes thereto 3 exhibits listed accompanying exhibit index incorporated reference annual report form 10k 2 financial statement schedule ii valuation qualifying accounts allischalmers energy inc valuation qualifying accounts deferred tax asset valuation allowance established year ended december 31 2008 acquisition related allowance time acquisition bch expectation utilize net operating loss carryforwards foreign tax credit carryfowards subsequent 2008 determined would utilize 13 million deferred tax assets related acquisition bch 74 index financial statements signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized march 15 2011 allischalmers energy inc jorgen rasmussen jorgen rasmussen chief executive officer chairman pursuant requirements section 13 15d securities exchange act 1934 amended report signed date indicated following persons behalf registrant capacities indicated 75 index financial statements exhibit index 76 index financial statements 77 index financial statements 78 index financial statements 79 index financial statements 80 index financial statements 81 index financial statements compensation plan agreement  filed herewith 82