As filed with the Securities and Exchange Commission on January 16, 2002.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
AMENDMENT No. 1 to CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
OCTOBER 31, 2001
FLOTEK INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 1-132170 77-0709256
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
7030 EMPIRE CENTRAL DRIVE, HOUSTON, TEXAS 77040
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (713) 849-9911
NOT APPLICABLE
(Former name or former address, if changed since last report)
FLOTEK INDUSTRIES, INC.
TABLE OF CONTENTS
FOR
AMENDMENT NO. 1 TO CURRENT REPORT ON FORM 8-K
Item 2. Acquisition and Disposition of Assets......... 3
Item 7. Financial Statements and Exhibits............. 4
Signature........................................................ 6
2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On October 31, 2001, Flotek Industries, Inc. (the "Company") completed the
closing of its previously announced merger with Chemical & Equipment
Specialties, Inc. ("CESI"). In connection with the merger, the Company issued
2,994,478 shares of common stock and assumed employee stock options and
contingent share issuance obligations totaling 117,524 shares. All such share
amounts reflect the 120 to 1 reverse stock split which was given effect at the
opening of trading on November 5, 2001. Also on that date, the Company began
trading with a new stock ticker symbol, "FLTK", to reflect its change in status
from a foreign-domiciled corporation to a Delaware corporation.
Simultaneously with the closing of the merger, all preferred shares of
Flotek Industries, Inc. were converted to common stock at the rate of $3.24 per
share (post-split). Subsequent to August 15, 2001 and prior to the closing of
the merger, warrants to purchase 536,141 shares of common stock at $3.60 per
share (post-split) were exercised, resulting in cash proceeds to the Company of
$1,930,106. Accordingly, the total outstanding common shares of the Company,
after giving effect to the shares issued in the CESI merger and the reverse
stock split (excluding adjustments for fractional shares to be paid in cash) is
4,850,696 shares.
CESI, headquartered in Duncan, Oklahoma, operates in two primary segments
of the oilfield service industry; specialty chemicals and well service equipment
manufacturing. The specialty chemical segment develops, manufactures and
packages innovative cementing and stimulation chemicals, including the
development of environmentally neutral chemicals. The well service equipment
manufacturing segment manufactures, to exacting specifications and ISO 9001
standards, specialized cementing equipment (pumping and bulk material transport)
and stimulation equipment (nitrogen, blending and pumping), as well as
proprietary automated monitoring and control systems. CESI also designs and
constructs automated bulk material handling and loading facilities for major
oilfield service companies.
For accounting purposes, the merger has been treated under the purchase
method of accounting as a "reverse" acquisition of Flotek Industries, Inc. by
CESI. Accordingly, the financial statements of the Company will reflect the
historical results of CESI and will incorporate the results of the current
Flotek Industries, Inc. only for periods subsequent to the merger. The
financial statements will also revalue the assets and liabilities of the current
Flotek Industries, Inc. on the date of the merger in accordance with purchase
accounting rules. The Company will report its results on a calendar year basis,
effective with the current year ending December 31, 2001.
3
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
Included in this Amendment No. 1 to Current Report on Form 8-K are the financial
statements of Chemical & Equipment Specialties, Inc. and the separate financial
statements of its recently acquired subsidiaries, Esses, Inc., Plainsman
Technology, Inc., Neal's Technology, Inc., Padko International, Inc. and
Material Translogistics, Inc.
Financial Statements of Chemical & Equipment Specialties, Inc.
Report of Independent Public Accountants................................... F-1
Balance Sheets as of December 31, 2000 and September 30, 2001 (Unaudited).. F-2
Statements of Operations for the Period from June 27, 2000 (Inception)
Through December 31, 2000 and the Unaudited Nine Month Period
Ended September 30, 2001............................................... F-3
Statements of Changes in Stockholders' Equity for the Period
from June 27, 2000 (Inception) Through December 31, 2000
and the Unaudited Nine Month Period Ended September 30, 2001........... F-4
Statements of Cash Flows for the Period from June 27, 2000 (Inception)
Through December 31, 2000 and the Unaudited Nine Month Period
Ended September 30, 2001............................................... F-5
Notes to Financial Statements............................................ F-6
Financial Statements of Esses, Inc.
Report of Independent Public Accountants................................ F-15
Balance Sheets as of December 31, 1999 and 2000......................... F-16
Statements of Earnings for the Years Ended
December 31, 1999 and 2000............................................ F-17
Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1999 and 2000............................................ F-18
Statements of Cash Flows for the Years Ended
December 31, 1999 and 2000............................................. F-19
Notes to Financial Statements............................................ F-20
Financial Statements of Plainsman Technology, Inc.
Report of Independent Public Accountants................................. F-25
Balance Sheets as of December 31, 1999 and 2000.......................... F-26
Statements of Operations and Comprehensive Loss for the
Years Ended December 31, 1999 and 2000.................................. F-27
Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1999 and 2000.............................................. F-28
Statements of Cash Flows for the Years Ended
December 31, 1999 and 2000.............................................. F-29
Notes to Financial Statements............................................. F-30
Financial Statements of Neal's Technology, Inc.
Report of Independent Public Accountants.................................. F-35
Balance Sheet as of December 31, 2000..................................... F-36
Notes to Financial Statement.............................................. F-37
4
Financial Statements of Padko International, Inc.
Report of Independent Public Accountant................................... F-40
Balance Sheets as of December 31, 1999 and 2000........................... F-41
Statements of Operations for the Years Ended
December 31, 1999 and 2000.............................................. F-42
Statements of Changes in Stockholders' Equity (Deficit) for the
Years Ended December 31, 1999 and 2000.................................. F-43
Statements of Cash Flows for the Years Ended
December 31, 1999 and 2000.............................................. F-44
Notes to Financial Statements............................................. F-45
Financial Statements of Material Translogistics, Inc.
Report of Independent Public Accountants.................................. F-49
Statement of Earnings for the Period From April 5, 2000 (Inception)
Through December 31, 2000............................................... F-50
Notes to Financial Statement.............................................. F-51
(b) Pro Forma Financial Information.
Unaudited Pro Forma Combined Financial Statements
Basis of Presentation..................................................... P-1
Unaudited Pro Forma Combined Balance Sheet as of September 30, 2001....... P-3
Unaudited Pro Forma Combined Statement of Operations for the
Year Ended December 31, 2000............................................ P-4
Unaudited Pro Forma Combined Statement of Operations for the
Year Ended December 31, 2000 for the CESI Entities...................... P-5
Unaudited Pro Forma Combined Statement of Operations for the
Nine Month Period Ended September 30, 2001.............................. P-6
Notes to Unaudited Pro Forma Combined Financial Statements................ P-7
(c) Exhibits.
The following exhibits are filed herewith or incorporated by reference.
Exhibit
Number Description of Exhibit
------- ----------------------
2.1 * Agreement and Plan of Reorganization by and between Flotek
Industries Inc. and Chemical & Equipment Specialties, Inc.
99.1 * Acquiror Shareholders Agreement
99.2 * Acquiror Shareholder Lock-up Agreement
* Previously Filed
5
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FLOTEK INDUSTRIES, INC.
Registrant
Date: January 16, 2002 By: /s/ Jerry D. Dumas, Sr.
-------------------------------------
Jerry D. Dumas, Sr.
Chairman and Chief Executive Officer
6
Independent Auditors' Report
Board of Directors and Shareholders
Chemical and Equipment Specialties, Inc.
Duncan, Oklahoma
We have audited the accompanying Consolidated Balance Sheet of Chemical and
Equipment Specialties, Inc. as of December 31, 2000, and the related
Consolidated Statements of Operations, Changes in Shareholders' Equity and Cash
Flows for the period June 27, 2000 (date of incorporation) through December 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Chemical and
Equipment Specialties, Inc. as of December 31, 2000, and the results of its
consolidated operations for the period June 27, 2000 (date of incorporation)
through December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
WEINSTEIN SPIRA & COMPANY, P.C.
Houston, Texas
July 19, 2001
F-1
CHEMICAL AND EQUIPMENT SPECIALTIES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2001 2000
-------------- --------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 124,765 $ 1,293,142
Accounts receivable - net of allowance for doubtful accounts of
$196,783 in 2001 1,410,116
Costs and estimated earnings in excess of billings on uncompleted
contracts 1,146,106
Inventories 1,204,082
Prepaid expenses 38,469
-------------- --------------
Total Current Assets 3,923,538 1,293,142
-------------- --------------
Property and Equipment
Land 120,000
Buildings and leasehold improvements 1,663,502 36,325
Machinery and equipment 1,075,171
Computer equipment 86,040 9,185
Furniture and fixtures 102,227 1,411
Transportation 304,614 70,000
-------------- --------------
3,351,554 116,921
Less: Accumulated depreciation 233,820 15,933
-------------- --------------
3,117,734 100,988
-------------- --------------
Other Assets
Goodwill, net of accumulated amortization of $270,036 in 2001 7,753,450 95,459
Loan fees, net of accumulated amortization of $5,008 in 2001 51,632
Patents 7,651
Deposits 11,029
-------------- --------------
7,823,762 95,459
-------------- --------------
$ 14,865,034 $ 1,489,589
============== ==============
LIABILITIES
Current Liabilities
Short-term debt $ 1,935,572
Capital lease obligations 631,825
Accounts payable:
Trade 1,574,924 $ 80,469
Shareholders 14,919 164,410
Accrued expenses 59,612 20,069
-------------- --------------
Total Current Liabilities 4,216,852 264,948
Long-Term Debt 3,593,586
-------------- --------------
7,810,438 264,948
-------------- --------------
SHAREHOLDERS' EQUITY
Preferred Stock, $.01 par value, 2,500,000 shares authorized, no
shares issued
Common Stock, $.01 par value, 5,000,000 shares authorized, 1,164,688
shares issued and outstanding 11,646 5,459
Additional Paid-in Capital 7,433,725 1,377,912
Accumulated Deficit (390,775) (158,730)
-------------- --------------
7,054,596 1,224,641
-------------- --------------
$ 14,865,034 $ 1,489,589
============== ==============
See notes to financial statements.
F-2
CHEMICAL AND EQUIPMENT SPECIALTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period
June 27, 2000
For the (Date of
Nine Month Incorporation)
Period Ended through
September 30, December 31,
2001 2000
---------------- ----------------
(Unaudited)
Revenues $ 10,100,060
Cost of Revenues 7,063,038
---------------- ----------------
Gross Margin 3,037,022
Expenses:
Selling, general and administrative 2,560,921 $ 153,462
Depreciation and amortization 493,173 15,933
---------------- ----------------
3,054,094 169,395
---------------- ----------------
Loss from Operations (17,072) (169,395)
Other Income (Expense)
Interest expense (282,955)
Interest income 47,547 10,665
Other, net 20,435
---------------- ----------------
(214,973) 10,665
---------------- ----------------
Net Loss $ (232,045) $ (158,730)
================ ================
See notes to financial statements.
F-3
CHEMICAL AND EQUIPMENT SPECIALTIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Nine Month Period Ended September 30, 2001 and
For the Period June 27, 2000 (Date of Incorporation) through December 31, 2000
(Information for the Nine Month Period Ended September 30, 2001 is unaudited)
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
---------- ------------- ----------- -------------
Issuance of Common Stock $ 5,459 $ 1,377,912 $ 1,383,371
Net Loss $ (158,730) (158,730)
---------- ------------- ----------- -------------
Balance - December 31, 2000 5,459 1,377,912 (158,730) 1,224,641
Stock issued for acquisitions 1,950 1,948,050 1,950,000
Stock issued for cash 4,237 4,107,763 4,112,000
Net Loss (232,045) (232,045)
---------- ------------- ----------- -------------
Balance - September 30, 2001 (Unaudited) $ 11,646 $ 7,433,725 $ (390,775) $ 7,054,596
========== ============= =========== =============
See notes to financial statements.
F-4
CHEMICAL AND EQUIPMENT SPECIALTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Period
June 27, 2000
For the (Date of
Nine Month Incorporation)
Period Ended through
September 30, December 31,
2001 2000
-------------------- ------------------
(Unaudited)
Cash Flows From Operating Activities
Net loss $ (232,045) $ (158,730)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 223,137 15,933
Amortization of intangibles 270,036
Imputed interest expense 22,031
Bad debt expense 216,302
Loss on sale of assets (18,528)
Gain on sale of securities 38,963
(Increase) Decrease in:
Accounts receivable (522,262)
Costs and earnings (579,815)
Inventory (491,561)
Prepaids (26,684)
Deposits and other (53,550)
Federal income tax receivable 2,303
Increase (Decrease) in:
Accounts payable 632,886 80,469
Billings in excess (38,505)
Accrued expenses (39,532) 20,069
---------------- --------------
Net Cash Used in Operating Activities (596,824) (42,259)
---------------- --------------
Cash Flows From Investing Activities
Acquisition of subsidiaries, net (6,963,016)
Capital expenditures (1,157,766) (116,921)
Proceeds from sales 230,888
Payment of deferred acquisition costs (256,497) (95,459)
---------------- --------------
Net Cash Used in Investing Activities (8,146,391) (212,380)
---------------- --------------
Cash Flows From Financing Activities
Payments of capital lease obligations (21,000)
Payments of debt (346,883)
Proceeds from debt 2,416,701
Issuance of stock 4,112,000 1,383,371
Proceeds from shareholder advances 164,410
Net line proceeds 1,414,020
---------------- --------------
Net Cash Provided by Financing Activities 7,574,838 1,547,781
---------------- --------------
Net Increase (Decrease) in Cash and Cash Equivalents (1,168,377) 1,293,142
Cash and Cash Equivalents - Beginning of Year 1,293,142
---------------- --------------
Cash and Cash Equivalents - End of Year $ 124,765 $ 1,293,142
================ ==============
Supplemental Schedule of Noncash Investing and Financing Activities
Land and building acquired under capital lease $ 630,794
================
Supplemental Disclosures of Cash Flow Information
Acquisition of Subsidiaries:
Assets Acquired:
Cash $ 224,584
Accounts receivable 1,104,156
Inventories 712,521
Costs and estimated earnings in excess of billings on uncompleted contracts 566,291
Prepaid expenses 6,777
Federal income tax receivable 2,303
Land 60,000
Property and equipment 1,438,073
Investments in marketable securities 204,573
Goodwill 7,671,530
Other assets 21,770
Debt (495,829)
Accounts payable (861,569)
Billings in excess of costs and estimated earnings on uncompleted contracts (38,505)
Accrued liabilities (79,075)
----------------
10,537,600
Common stock issued (1,950,000)
Promissory notes issued (1,400,000)
----------------
Net Cash Used in Acquisition of Subsidiaries $ 7,187,600
================
See notes to financial statements.
F-5
CHEMICAL AND EQUIPMENT SPECIALTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 and December 31, 2000
(Information for the Nine Months Ended September 30, 2001 is unaudited)
Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements consist of Chemical and Equipment
Specialties, Inc. and its wholly-owned subsidiaries which operate in two
primary segments of the oilfield service industry: specialty chemicals and
equipment manufacturing. The specialty chemical segment comprised of
Plainsman Technology, Inc.; Esses, Inc. and Padko International, Inc.
develop, manufacture and package innovative cementing and stimulation
chemicals, including the development of environmentally neutral chemicals.
The equipment manufacturing segment comprised of Neal's Technology, Inc. and
Material Translogistics, Inc. dba Gillespie Consulting Company manufacture
specialized cementing equipment (pumping and bulk material transport) and
stimulation equipment (nitrogen, blending and pumping) as well as proprietary
automated monitoring and control systems. This segment also designs and
constructs automated bulk material handling and loading facilities for major
oilfield service companies.
Chemical and Equipment Specialties, Inc. was incorporated June 27, 2000, and
the operations for the period ended September 30, 2000 were immaterial.
Revenue Recognition
The specialty chemical segment recognizes revenues at the date of delivery,
and accounts receivable are recorded at that time. Earnings are charged with
a provision for doubtful accounts based on a current review of collectibility
of accounts.
The equipment manufacturing segment recognizes revenues from manufacturing
contracts under the percentage-of-completion method of accounting, generally
in the ratio in which costs incurred bear to total estimated costs at
completion. All known or anticipated losses on contracts are recognized in
full when such amount becomes apparent. Contract costs include all direct
labor and material costs and those indirect costs related to job performance.
General and administrative costs are charged to expense as incurred. Changes
in job performance, job conditions and estimated profitability, including
those arising from contract penalty provisions and final contract
settlements, may result in revisions to costs and income and are recognized
in the period in which the revisions are determined.
The asset, costs and estimated earnings in excess of billings on uncompleted
contracts, represents revenues recognized in excess of amounts billed. The
liability, billings in excess of costs and estimated earnings on uncompleted
contracts, represents billings in excess of revenues recognized.
Billings are rendered under terms of customer contracts. Accounts receivable
are recorded at that time. Earnings are charged with a provision for doubtful
accounts receivable based on collection experience and current review of
collectibility of accounts. Accounts deemed uncollectible are applied against
the allowance for doubtful accounts.
F-6
CHEMICAL AND EQUIPMENT SPECIALTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2001 and December 31, 2000
(Information for the Nine Months Ended September 30, 2001 is unaudited)
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity of
three months or less to be cash equivalents. As of September 30, 2001, the
Company had deposits in excess of federally insured limits.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined
under the first-in, first-out or weighted average methods. Finished goods
inventory include raw materials, direct labor and production overhead.
Property and Equipment
Property and equipment are presented at cost. The cost of ordinary
maintenance and repairs is charged to operations, while replacements are
capitalized. Depreciation is computed at rates considered sufficient to
amortize the cost of the assets over their estimated useful lives using the
straight-line method. Depreciation is based upon the following estimated
useful lives:
Buildings and improvements 20 years
Machinery and equipment 3 - 5 years
Computer equipment 5 years
Furniture and fixtures 5 years
Transportation 3 years
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to
be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.
Goodwill
Goodwill arises from the acquisition of assets prior to June 30, 2001, at an
amount in excess of their fair market value. Amortization is computed by the
straight-line method over the estimated useful life of the asset of 20 years.
(See new accounting pronouncements.)
F-7
CHEMICAL AND EQUIPMENT SPECIALTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2001 and December 31, 2000
(Information for the Nine Months Ended September 30, 2001 is unaudited)
Income Taxes
The Company will file a consolidated federal income tax return. Income taxes
are computed based upon rates prevailing at year end.
The Company provides deferred income taxes for the expected future tax
consequences based upon differences between the financial reporting and tax
bases of assets and liabilities and are based on enacted tax laws and rates.
Start-Up Costs
Start-up costs are expensed as incurred.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and certain assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Interim Financial Statements (Unaudited)
In the opinion of management, the unaudited interim financial statements at
September 30, 2001, and for the nine months then ended, include all
adjustments, consisting only of normal recurring adjustments, necessary for
the fair presentation of the Company's financial position, results of
operations, shareholders' equity and cash flows for the interim period. The
combined results of operations and cash flows for the nine months ended
September 30, 2001 are not necessarily indicative of the results which would
be expected for a full year.
F-8
CHEMICAL AND EQUIPMENT SPECIALTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2001 and December 31, 2000
(Information for the Nine Months Ended September 30, 2001 is unaudited)
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. The Company does not
believe that the prospective adoption of this standard will have a material
impact on its consolidated financial statements. SFAS No. 142 changes the
accounting for goodwill and certain other intangible assets from an
amortization method to an impairment only approach. Due to the adoption of
SFAS No. 142, the Company will not amortize goodwill beginning in fiscal
2002. The goodwill amortization expense during the nine months ended
September 30, 2001, was $270,036. The Company will complete its initial
impairment assessment as required by SFAS No. 142 by December 31, 2002. The
Company does not anticipate this assessment will result in a material write
down during fiscal 2002.
Note 2 - Acquisitions
Effective January 1, 2001, the Company acquired the following entities in
purchase transactions:
Consideration Paid for Acquired Companies
------------------------------------------------------------------------------------------------------------------
Promissory Common Total
Company Cash Notes Stock Consideration
----------------------------------- ---------------- ---------------- ---------------- ------------------
Esses, Inc. $ 4,000,000 $ 1,000,000 $ 1,000,000 $ 6,000,000
Plainsman Technology, Inc. 1,850,000 250,000 2,100,000
Neal's Technology, Inc. 500,000 400,000 250,000 1,150,000
Padko International, Inc. 237,600 250,000 487,600
---------------- ---------------- ---------------- ------------------
$ 6,587,600 $ 1,400,000 $ 1,750,000 $ 9,737,600
================ ================ ================ ==================
In June, 2001, the Company entered into an agreement and plan of reorganization
(the Agreement) with Material Translogistics, Inc. dba Gillespie Consulting
Company (Gillespie). At the closing of the Agreement, all issued and outstanding
common stock of Gillespie was exchanged for 20,000 shares of common stock and
the right to receive an additional 20,000 shares upon the satisfaction of
certain contingencies.
F-9
CHEMICAL AND EQUIPMENT SPECIALTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2001 and December 31, 2000
(Information for the Nine Months Ended September 30, 2001 is unaudited)
As part of the Agreement, Gillespie also sold to the Company certain intangible
assets, including customer lists, business records and contract rights, in
consideration of $600,000. The Company did not purchase any other assets owned
or leased by Gillespie, and did not assume any liability of Gillespie.
The common stock in these transactions was valued at $10 per share.
The above transactions generated approximately $7,670,000 in goodwill.
The following unaudited proforma information represents the combined results of
operations as if the acquisitions had been combined as of January 1, 2000:
Revenues $ 8,704,000
============
Net income $ 383,000
============
The proforma information is not necessarily indicative of operating results that
would have occurred if the acquisition had been consummated as of January 1,
2000, nor is it necessarily indicative of future operating results. The actual
results of operations of an acquired company are included in these consolidated
financial statements only from the date of acquisition.
Note 3 - Inventories
Inventories consisted of the following at September 30, 2001:
Raw materials $ 537,418
Finished goods 666,664
------------
$ 1,204,082
============
Note 4 - Construction Contracts in Progress
Information regarding contracts in progress at September 30, 2001, is as
follows:
Costs incurred on uncompleted contracts $ 2,244,777
Estimated earnings on uncompleted contracts 138,059
------------
2,382,836
Less: Billings to date 1,236,730
------------
$ 1,146,106
============
F-10
CHEMICAL AND EQUIPMENT SPECIALTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2001 and December 31, 2000
(Information for the Nine Months Ended September 30, 2001 is unaudited)
The Company has a backlog of approximately $600,000 at September 30, 2001.
Note 5 - Capital Lease Obligations
Effective March 2001, the Company entered into a lease and purchase agreement
with a third party for the purchase of land and buildings. The purchase of the
property will occur upon completion of an initial lease term of 12 months. Lease
payments during the initial term are $3,000/month. The total purchase price of
the property is $675,000. Lease payments made during the initial lease term will
be applied towards the purchase price, which will be payable at the closing in
cash.
Future minimum lease payments under the capital lease, together with the present
value of the minimum lease payments at September 30, 2001, are as follows:
Total minimum lease payments year ending September 30, 2002 $654,000
Less: amount representing interest (22,175)
--------
Present value of minimum lease payments $631,825
========
Assets recorded under the capital lease consist of:
Land $ 60,000
Buildings 570,794
------------
$ 630,794
============
Note 6 - Short-Term Debt
Short-term debt at September 30, 2001, consists of the following:
$1,414,020 Legacy Bank revolving line-of-credit, bearing
interest at the prime rate plus 1%, due in May, 2002
(see Note 7) $ 1,414,020
Current portion of long-term debt 521,552
------------
$ 1,935,572
============
Note 7 - Long-Term Debt
Long-term debt at September 30, 2001, consists of the following:
Notes payable to shareholders, unsecured, interest at 9%,
payable quarterly beginning March, 2001, principal due
in five annual installments of $200,000 beginning January,
2002 until December, 2005 $ 1,000,000
Note payable to Legacy Bank, bearing interest at the prime
rate plus 1%, payable in monthly installments of $45,179
including interest, due in January, 2008 2,520,527
Notes payable to Duncan Area Economic Development Foundation,
unsecured, interest at 6%, payable in monthly installments
of $1,934 including interest, due in May, 2006 92,061
F-11
CHEMICAL AND EQUIPMENT SPECIALTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2001 and December 31, 2000
(Information for the Nine Months Ended September 30, 2001 is unaudited)
Note payable to Legacy Bank, interest at the prime rate plus
1%, due in September, 2004 502,550
-----------
4,115,138
Less: Current maturities 521,552
-----------
$ 3,593,586
===========
The notes payable to Legacy Bank are secured by all the assets of the Company.
The following is a schedule of future maturities of long-term debt:
Year Ending September 30,
-------------------------
2002 $ 521,552
2003 554,443
2004 1,093,280
2005 630,765
2006 664,476
Thereafter 650,622
----------
$4,115,138
==========
Note 8 - Federal Income Tax
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
September 30, December 31,
2001 2000
----------- ------------
Federal income tax (benefit) at 34% $ (71,405) $ (53,968)
Nondeductible items 8,610 1,132
Other (205) (164)
Change in valuation allowance 63,000 53,000
--------- ---------
$ 0 $ 0
========= =========
F-12
CHEMICAL AND EQUIPMENT SPECIALTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2001 and December 31, 2000
(Information for the Nine Months Ended September 30, 2001 is unaudited)
The components of deferred taxes are as follows:
Allowance for doubtful accounts $ 67,000
Net operating loss carryforward 39,000 $ 50,000
Book depreciation in excess of tax 10,000 3,000
------------- ----------
116,000 53,000
------------- ==========
Valuation allowance (116,000) 53,000)
------------- ----------
$ 0 $ 0
============= ==========
At December 31, 2000, the Company had net operating loss carryforwards available
to offset future taxable income of approximately $146,000, expiring in 2010.
Under federal tax law, the amount and availability of loss carryforwards are
subject to a variety of interpretations and restrictive tests applicable to the
Company. The utilization of such carryforwards could be limited or effectively
lost upon certain changes in ownership. Accordingly, while the Company believes
certain loss carryforwards are available to it, no assurance can be given
concerning such loss carryforwards or whether such loss carryforwards will be
available in the future. An allowance has been recorded to fully offset the net
deferred tax asset.
Note 9 - Related Party Transactions
The Company has accounts payable to shareholders totaling $14,919 and $164,410
at September 30, 2001 and 2000, respectively.
As further described in Note 7 to these financial statements, the Company has
notes payable to shareholders of $1,000,000 at September 30, 2001.
Note 10 - Operating Leases
The Company leases vehicles from a third party.
Future minimum lease payments on these leases are as follows:
Year Ending September 30,
-------------------------
2002 $ 15,460
2003 5,787
----------
$ 21,247
==========
Total rent expense for these vehicles was approximately $12,000 for the nine
months ended September 30, 2001.
F-13
NOTE 11 - SEGMENT INFORMATION
The Company has two reportable segments: specialty chemicals and equipment
manufacturing. The specialty chemical segment comprised of Plainsman
Technology, Inc.; Esses, Inc. and Padko International, Inc. develop, manufacture
and package innovative cementing and stimulation chemicals, including the
development of environmentally neutral chemicals. The equipment manufacturing
segment comprised of Neal's Technology, Inc. and Material Translogistics, Inc.
dba Gillespie Consulting Company manufacture specialized cementing equipment
(pumping and bulk material transport) and stimulation equipment (nitrogen,
blending and pumping) as well as proprietary automated monitoring and control
systems. This segment also designs and constructs automated bulk material
handling and loading facilities for major oilfield service companies.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately, because each
business requires different technology and marketing strategies.
The Company operates primarily in the United States. As of September 30, 2001,
and for the nine months then ended, segment information is as follows:
For the Nine Months Ended September 30, 2001
----------------------------------------------------------
Specialty Equipment
Chemicals Manufacturing Other TOTAL
----------- -------------- ----------- -------------
Net sales to external
customers $6,355,562 $3,744,498 $10,100,060
Income (Loss) from
Operations 1,087,724 (804,113) $ (300,683) (17,072)
Depreciation and
amortization 384,213 59,722 49,238 493,173
Total Assets 9,953,344 4,083,236 828,454 14,865,034
Capital expenditures 670,878 1,112,857 4,825 1,788,560
F-14
INDEPENDENT AUDITORS' REPORT
Board of Directors
Esses, Inc.
Duncan, Oklahoma
We have audited the accompanying Balance Sheets of Esses, Inc. as of December
31, 2000 and 1999, and the related Statements of Earnings, Changes in
Shareholders' Equity and Cash Flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Esses, Inc. as of December 31,
2000 and 1999, and the results of their operations and cash flows for the years
then ended, in conformity with accounting principles generally accepted in the
United States of America.
WEINSTEIN SPIRA & COMPANY, P.C.
Houston, Texas
June 28, 2001
F-15
ESSES, INC.
BALANCE SHEETS
DECEMBER 31,
-------------------------------
2000 1999
---------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 14,310 $ 69,082
Accounts receivable 651,245 349,305
Inventory 356,812 188,300
Prepaid expenses 452 5,337
---------- --------
Total Current Assets 1,022,819 612,024
---------- --------
PROPERTY AND EQUIPMENT
Land 23,878 12,878
Buildings and leasehold improvements 69,360 53,887
Machinery and equipment 305,540 148,784
Furniture and fixtures 44,886 38,643
Transportation 34,804 34,208
---------- --------
478,468 288,400
Less: Accumulated depreciation 240,344 177,829
---------- --------
238,124 110,571
---------- --------
DEPOSITS 13,721 11,927
---------- --------
$1,274,664 $734,522
========== ========
LIABILITIES
CURRENT LIABILITIES
Current portion of long-term debt $ 32,985 $ 50,920
Line-of-credit 189,411 172,578
Accounts payable 283,063 185,450
Accrued expenses 8,127 80,132
---------- --------
Total Current Liabilities 513,586 489,080
---------- --------
LONG-TERM DEBT 27,406 60,655
---------- --------
540,992 549,735
---------- --------
SHAREHOLDERS' EQUITY
COMMON STOCK, $1 par value, 50,000 shares authorized,
30,000 shares issued and outstanding 30,000 30,000
RETAINED EARNINGS 703,672 154,787
---------- --------
733,672 184,787
---------- --------
$1,274,664 $734,522
========== ========
See notes to financial statements.
F-16
ESSES, INC.
STATEMENTS OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
2000 1999
---------- ----------
PERCENT TO PERCENT TO
AMOUNT REVENUES AMOUNT REVENUES
------------- -------------- ----------------- --------------
REVENUES $3,755,748 100.0% $1,921,661 100.0%
Cost of Revenues 2,153,039 57.3 1,237,304 64.4
---------- ----- ---------- -----
GROSS MARGIN 1,602,709 42.7 684,357 35.6
Operating Expenses 701,673 18.7 450,173 23.4
---------- ----- ---------- -----
OPERATING INCOME 901,036 24.0 234,184 12.2
---------- ----- ---------- -----
OTHER INCOME (EXPENSE)
Interest expense (22,195) (.6) (18,169) (.9)
Interest income 44 43
(22,151) (.6) (18,126) (.9)
---------- ----- ---------- -----
NET EARNINGS $ 878,885 23.4% $ 216,058 11.3%
========== ===== ========== =====
See notes to financial statements.
F-17
ESSES, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Common Retained
Stock Earnings Total
--------------- ---------------- ----------------
Balance - December 31, 1998 $30,000 $ 67,208 $ 97,208
Distributions (128,479) (128,479)
Net Earnings 216,058 216,058
------- --------- ---------
Balance - December 31, 1999 30,000 154,787 184,787
Distributions (330,000) (330,000)
Net Earnings 878,885 878,885
------- --------- ---------
Balance - December 31, 2000 $30,000 $ 703,672 $ 733,672
======= ========= =========
See notes to financial statements.
F-18
ESSES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------------------
2000 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 878,885 $ 216,058
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation 62,515 18,880
(Increase) Decrease in:
Accounts receivable (301,940) (162,978)
Inventory (168,512) (64,536)
Prepaid expenses 4,885 121
Deposits (1,794) (8,293)
Increase (Decrease) in:
Accounts payable 97,613 67,003
Accrued expenses (72,005) 79,654
--------- ---------
Net Cash Provided By Operating Activities 499,647 145,909
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (190,068) (53,997)
--------- ---------
Net Cash Used in Investing Activities (190,068) (53,997)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (330,000) (128,479)
Proceeds from debt 25,174 47,080
Payments on debt (76,358) (24,922)
Net line-of-credit proceeds 16,833 63,996
--------- ---------
Net Cash Used in Financing Activities (364,351) (42,325)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (54,772) 49,587
Cash and Cash Equivalents - Beginning of Year 69,082 19,495
--------- ---------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 14,310 $ 69,082
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 20,744 $ 17,847
========= =========
See notes to financial statements.
F-19
ESSES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE 1 - ACCOUNTING POLICIES
Esses, Inc. (the Company) maintains its accounts on the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States of America. Accounting principles followed by the Company and the
methods of applying those principles which materially affect the determination
of financial position, results of operations, and cash flows are summarized
below:
DESCRIPTION OF BUSINESS
The Company is primarily engaged in purchasing, manufacturing and selling dry
and liquid stimulation additives. The Company distributes these additives to
the oil and gas service industry throughout the United States of America.
INCOME RECOGNITION
Revenues are recognized at the date of delivery, and accounts receivable are
recorded at that time. Earnings are charged with a provision for doubtful
accounts based on a current review of collectibility of accounts. There was no
allowance for doubtful accounts at December 31, 2000 and 1999.
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with an original maturity of
three months or less to be cash equivalents. As of December 31, 2000, the
Company had deposits in excess of federally insured limits.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
under the weighted average method. Finished goods inventory include raw
materials, direct labor and production overhead.
PROPERTY AND EQUIPMENT
Property and equipment are presented at cost. The cost of ordinary maintenance
and repairs is charged to operations, while replacements are capitalized.
Depreciation is computed at rates considered sufficient to amortize the cost of
the assets over their estimated useful lives using the straight-line method for
building and improvements and double declining method for the remainder.
Depreciation is based upon the following estimated useful lives:
Building and improvements 20 years
Machinery and equipment 3-5 years
Furniture and fixtures 5 years
Transportation 3 years
F-20
ESSES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
FEDERAL INCOME TAX
The Company has elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. Under those provisions, net income or losses are
reportable for tax purposes by the shareholders. Accordingly, no federal
income taxes are included in the accompanying financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and certain assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
NOTE 2 - INVENTORY
Inventory as of December 31, 2000 and 1999, consisted of the following:
2000 1999
---- ----
Raw materials $243,363 $121,471
Finished goods 113,449 66,829
-------- --------
$356,812 $188,300
======== ========
NOTE 3 - LINE-OF-CREDIT
The line-of-credit at December 31, 2000 and 1999, is as follows:
2000 1999
---- ----
$250,035 Line-of-credit, secured
by accounts receivable,
inventory, contract rights,
general intangibles and
property and equipment, bearing
interest at prime plus 1.00%,
due November, 2001 $189,411 $172,578
======== ========
In connection with the revolving line-of-credit, the Company has entered into a
loan agreement which contains certain restrictive covenants. As of December 31,
2000, the Company was in compliance with these covenants.
F-21
ESSES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
NOTE 4 - LONG-TERM DEBT
Long-term debt as of December 31, 2000 and 1999, is as follows:
2000 1999
------- --------
Note payable to bank, secured by real estate, payable in
monthly installments of $795, including interest at
8.75%, due June, 2003 $21,367
Note payable to bank, secured by vehicle, payable in
monthly installments of $655, including interest at 7.5%,
due November, 2003 20,533 $ 26,514
Note payable to bank, secured by substantially all assets
of the Company, bearing interest at 9.25%, principle due
at maturity in November, 2000 20,000
Note payable to bank, secured by substantially all assets
of the Company, payable in monthly installments of
$1,360, including interest at 10%, due December, 2001 15,241 28,366
Unsecured promissory note payable, due in monthly
installments of $472, including interest at 10%, due
September, 2001 3,250 8,606
Note payable to related party, secured by real estate,
payable in monthly principal installments of $685,
including interest at 7%, due November, 2003, principal
paid in entirety in 2000 28,089
------- --------
60,391 111,575
Less: Current maturities 32,985 50,920
------- --------
$27,406 $ 60,655
======= ========
F-22
ESSES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
Future maturities of long-term debt are as follows:
Year Ending December 31,
---------------------------------
2001 $32,985
2002 15,745
2003 11,661
-------
$60,391
=======
NOTE 5 - OPERATING LEASES
The Company leases vehicles from a third party.
Future minimum lease payments on these leases are as follows:
Year Ending December 31,
---------------------------------
2001 $15,460
2002 7,604
2003 1,267
-------
$24,331
=======
Auto lease expense for the years ended December 31, 2000 and 1999, totaled
$15,474 and $7,048, respectively.
NOTE 6 - SIGNIFICANT CUSTOMERS
During the year ended December 31, 2000, the Company sold chemicals to three
customers during the normal course of business representing 34%, 29% and 11%,
respectively, of the Company's sales revenue for the year. At December 31,
2000, the Company had receivables from these customers representing
approximately 50%, 23% and 11%, respectively, of the Company's trade accounts
receivable.
During the year ended December 31, 1999, the Company sold chemicals to three
customers during the normal course of business representing 29%, 27% and 19%,
respectively, of the Company's sales revenue for the year. At December 31,
1999, the Company had receivables from these three customers representing
approximately 49%, 19% and 0%, respectively, of the Company's trade accounts
receivable.
F-23
ESSES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
NOTE 7 - EMPLOYEE BENEFIT PLAN
The Company has a simplified employee pension plan for all eligible employees.
The Company may elect to make contributions to individual retirement accounts
for eligible employees up to a maximum of 15% of their income. Company
contributions to the plan for the year ended December 31, 2000 were $29,625.
NOTE 8 - SUBSEQUENT EVENT
The shareholders of the Company entered into a stock purchase agreement with
Chemical & Equipment Specialties, Inc. (CESI), an Oklahoma corporation, to sell
all of the Company's common stock to CESI, effective January 2001. The
purchase price of the stock consisted of $1,000,000 in notes payable to the
shareholders, and 100,000 shares of CESI's common stock. In addition, the
Company agreed to sell all of its intangible assets for $4,000,000.
F-24
INDEPENDENT AUDITORS' REPORT
Board of Directors
Plainsman Technology, Inc.
Marlow, Oklahoma
We have audited the accompanying Balance Sheets of Plainsman Technology, Inc. as
of December 31, 2000 and 1999, and the related Statements of Operations and
Comprehensive Loss, Changes in Shareholders' Equity and Cash Flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Plainsman Technology, Inc. as
of December 31, 2000 and 1999, and the results of its operations and cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
WEINSTEIN SPIRA & COMPANY, P.C.
Houston, Texas
June 29, 2001
F-25
PLAINSMAN TECHNOLOGY, INC.
BALANCE SHEETS
DECEMBER 31,
---------------------------------------
2000 1999
---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 86,120 $ 18,001
Accounts receivable 429,257 328,664
Inventories 342,104 367,029
Prepaid expenses 500 6,754
---------- ----------
Total Current Assets 857,981 720,448
---------- ----------
PROPERTY, PLANT AND EQUIPMENT
Land 25,769 25,769
Buildings and improvements 406,418 406,418
Plant equipment 209,618 204,781
Laboratory equipment 128,971 127,245
Furniture and fixtures 165,710 165,710
Transportation equipment 238,645 238,645
---------- ----------
1,175,131 1,168,568
Less: Accumulated depreciation 931,841 876,200
---------- ----------
243,290 292,368
INVESTMENTS IN MARKETABLE SECURITIES 204,573 269,526
OTHER ASSETS 8,049 8,624
---------- ----------
$1,313,893 $1,290,966
========== ==========
LIABILITIES
CURRENT LIABILITIES
Current portion of long-term debt $ 53,429 $ 87,277
Accounts payable 300,578 230,990
Accrued liabilities 40,832 10,728
---------- ----------
Total Current Liabilities 394,839 328,995
LONG-TERM DEBT 7,609
---------- ----------
394,839 336,604
SHAREHOLDERS' EQUITY
COMMON STOCK, par value $1 per share, 100,000 shares authorized
and issued 100,000 100,000
PAID-IN CAPITAL 136,146 136,146
RETAINED EARNINGS 1,061,862 1,097,930
ACCUMULATED OTHER COMPREHENSIVE INCOME 38,594 37,834
Less: Treasury stock - at cost, 54,569 shares (417,548) (417,548)
---------- ----------
919,054 954,362
---------- ----------
$1,313,893 $1,290,966
========== ==========
See notes to financial statements.
F-26
PLAINSMAN TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEAR ENDED
December 31,
-----------------------------------------
2000 1999
---------- ----------
SALES $2,768,478 $1,681,005
Cost of Goods Sold 1,619,863 995,612
---------- ----------
GROSS PROFIT 1,148,615 685,393
Operating Expenses 1,177,741 1,016,683
---------- ----------
LOSS FROM OPERATIONS (29,126) (331,290)
---------- ----------
OTHER INCOME (EXPENSE)
Dividend income 5,000
Interest expense (6,755) (11,410)
Gain (Loss) on sale of assets (187) 55,585
---------- ----------
(6,942) 49,175
---------- ----------
NET LOSS (36,068) (282,115)
OTHER COMPREHENSIVE INCOME
Unrealized holding gains arising during period 1,556 16,990
Less: Reclassification adjustment for gains included in net
income (796) 16,205
---------- ----------
760 785
---------- ----------
COMPREHENSIVE LOSS $ (35,308) $ (281,330)
========== ==========
See notes to financial statements.
F-27
PLAINSMAN TECHNOLOGY, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
ACCUMULATED
OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS'
STOCK CAPITAL EARNINGS INCOME STOCK EQUITY
--------- --------- ------------ ------------- ---------- -------------
Balance - December 31, 1998 $100,000 $136,146 $1,380,045 $37,049 $(417,548) $1,235,692
Net Loss (282,115) (282,115)
Change in Unrealized Net Gains on Marketable
Securities 785 785
--------- --------- ----------- ------------- ---------- -----------
Balance - December 31, 1999 100,000 136,146 1,097,930 37,834 (417,548) 954,362
Net Loss (36,068) (36,068)
Change in Unrealized Net Gains on Marketable
Securities 760 760
--------- --------- ----------- ------------- ---------- -----------
Balance - December 31, 2000 $100,000 $136,146 $1,061,862 $38,594 $(417,548) $ 919,054
========= ========= ========== ======= ========== ==========
See notes to financial statements.
F-28
PLAINSMAN TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------------------
2000 1999
--------- ---------
RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Net loss $ (36,068) $(282,115)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 56,216 82,995
Bad debt expense 17,450
(Gain) Loss on sale of assets 187 (55,585)
(Increase) Decrease in:
Accounts receivable (100,593) (15,176)
Inventory 24,925 90,727
Prepaids 6,254 (6,254)
Increase in:
Accounts payable 69,588 22,968
Accrued expenses 30,104 7,333
Other assets 15,300
--------- ---------
Net Cash Provided by (Used in) Operating Activities 50,613 (122,357)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (6,563) (40,371)
Proceeds from sale of assets 66,891 159,104
Purchases of marketable securities (1,365)
--------- ---------
Net Cash Provided by Investing Activities 58,963 118,733
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt (61,457) (56,612)
Payments of debt 20,000 61,835
--------- ---------
Net Cash Provided by (Used in) Financing Activities (41,457) 5,223
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (68,119) 1,599
Cash and Cash Equivalents - Beginning of Year 18,001 16,402
--------- ---------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 86,120 $ 18,001
========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES
Unrealized gain on marketable securities $ 760 $ 785
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid for Interest $ 6,755 $ 11,411
========= =========
See notes to financial statements.
F-29
PLAINSMAN TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE 1 - ACCOUNTING POLICIES
Plainsman Technology, Inc. (the Company) maintains its accounts on the accrual
method of accounting in accordance with accounting principles generally accepted
in the United States of America. Accounting principles followed by the Company
and the methods of applying those principles which materially affect the
determination of financial position, results of operations and cash flows are
summarized as follows:
DESCRIPTION OF BUSINESS
The Company is primarily engaged in purchasing, manufacturing and selling dry
and liquid cementing and stimulation additives. The Company distributes these
additives to the oil and gas service industry throughout the United States of
America.
INCOME RECOGNITION
Revenues are recognized at the date of delivery and accounts receivable are
recorded at that time. Earnings are charged with a provision for doubtful
accounts based on a current review of collectibility of accounts. There was no
allowance for doubtful accounts at December 31, 2000 and 1999.
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with an original maturity of
three months or less to be cash equivalents. As of December 31, 2000 the
Company had deposits in excess of federally insured limits.
INVENTORIES
Inventories are valued at the lower of average cost or market. Cost is
determined under the weighted average method. Finished goods inventory include
raw materials, direct labor and production overhead.
INVESTMENTS IN MARKETABLE SECURITIES
The Company accounts for equity securities as available-for-sale securities and
reports them at fair value, principally determined by the closing price on
independent stock exchanges, with unrealized gains and losses being reported as
a component of accumulated other comprehensive income.
F-30
PLAINSMAN TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
PROPERTY AND EQUIPMENT
Property and equipment are presented at cost. Depreciation is computed at
rates considered sufficient to amortize the cost of the assets over their
estimated useful lives, using the straight-line and declining-balance methods.
Depreciation is based upon the following estimated useful lives:
Buildings and improvements 20 years
Equipment 3-5 years
Furniture and fixtures 5 years
Transportation equipment 3 years
The cost of ordinary maintenance and repairs is charged to operations.
FEDERAL INCOME TAX
Federal income tax expense in these statements is computed at prevailing tax
rates.
The Company provides deferred income taxes for the expected future tax
consequences of temporary differences between tax bases and financial reporting
bases of assets and liabilities.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
NOTE 2 - INVENTORIES
Inventories consist of the following at December 31, 2000 and 1999:
2000 1999
---- ----
Raw materials $203,965 $169,522
Finished goods 138,139 197,507
-------- --------
$342,104 $367,029
======== ========
F-31
PLAINSMAN TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
NOTE 3 - MARKETABLE SECURITIES
The gross realized proceeds from the sale of investments were $66,891 and
$131,636 for the years ended December 31, 2000 and 1999, respectively.
The gross unrealized gains on available-for-sale securities were $26,544 and
$9,185 for the years ended December 31, 2000 and 1999, respectively.
The gross unrealized losses on available-for-sale securities were $25,784 and
$8,400 for the years ended December 31, 2000 and 1999, respectively.
NOTE 4 - LONG-TERM DEBT
Long-term debt as of December 31, 2000 and 1999, is as follows:
2000 1999
------- -------
$100,000 Bank revolving line-of-credit, secured by land,
accounts receivable, inventory and equipment, bearing
interest at 10.5%, interest payable quarterly, due September,
2001 $41,609 $44,089
Note payable to bank, secured by land, accounts receivable,
inventory and equipment, payable in monthly installments of
$1,351 including interest at 10.5%, due on demand or if no
demand is made, in September, 2001 11,820 26,227
Note payable to bank, secured by vehicle, payable in monthly
principal installments of $787 including interest at prime
plus 2%, due in September, 2000 7,028
Note payable to bank, secured by vehicle, payable in monthly
principal installments of $494 including interest at prime
plus 2%, due in October, 2000 6,252
Note payable to bank, secured by vehicle, payable in monthly
principal installments of $375 including interest at 8.5%,
due in October, 2002 11,290
------- -------
53,429 94,886
Less: Current portion 53,429 87,277
------- -------
$ 0 $ 7,609
======= =======
F-32
PLAINSMAN TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
NOTE 5 - RELATED PARTY TRANSACTIONS
The Company leases two warehouse facilities. One of the facilities is leased
from a majority shareholder. Both leases are on a month-to-month basis and have
been classified as operating leases. Total rent expense was $20,280 for the
years ended December 31, 2000 and 1999. Rent expense attributable to the
related party totaled $11,280 for the years ended December 31, 2000 and 1999.
NOTE 6 - FEDERAL INCOME TAXES
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
DECEMBER 31,
-------------------------------
2000 1999
--------- ---------
Federal income tax (benefit) at 34% $ (12,263) $ (95,919)
Nondeductible items 2,263 5,903
Nontaxable income (14,226)
Change in valuation allowance 10,000 104,242
--------- ---------
$ 0 $ 0
========= =========
The components of the deferred tax asset are as follows:
DECEMBER 31,
-------------------------------
2000 1999
--------- ---------
Net operating loss carryforward $ 150,000 $ 140,000
Valuation allowance (150,000) (140,000)
--------- ---------
$ 0 $ 0
========= =========
At December 31, 2000, the Company had net operating loss carryforwards available
to offset future taxable income of approximately $444,000. Under federal tax
law, the amount and availability of loss carryforwards (and certain other tax
attributes) are subject to a variety of interpretations and restrictive tests
applicable to the Company. The utilization of such carryforwards could be
limited, based upon certain changes in ownership. An allowance has been
recorded to properly value the deferred tax asset at December 31, 2000 and 1999.
NOTE 7 - SIGNIFICANT CUSTOMERS
During the year ended December 31, 2000, the Company had sales of approximately
$688,000 to two customers in the normal course of business, representing 25% of
the Company's sales revenue for the period. At December 31, 2000, the Company
had receivables from these two customers in the approximate amount of $105,000,
representing 24% of the Company's trade accounts receivable.
F-33
PLAINSMAN TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
During the year ended December 31, 1999, the Company had sales of approximately
$423,000 to two customers in the normal course of business, representing 25% of
the Company's sales revenue for the period. At December 31, 1999, the Company
had receivables from these two customers in the approximate amount of $85,000,
representing 26% of the Company's trade accounts receivable.
NOTE 8 - EMPLOYEE BENEFIT PLAN
The Company has an employee benefit plan under Section 401(k) of the Internal
Revenue Code for all eligible employees. All eligible employees are permitted
to defer compensation up to a maximum of 15% of their income, subject to
limitations imposed by the Internal Revenue Service. The Company makes
contributions which amount to 50% of employees' contributions, up to a maximum
of 5% of eligible compensation. The Company contributed $16,110 and $14,660 for
2000 and 1999, respectively.
NOTE 9 - SUBSEQUENT EVENT
In January 2001, the Company entered into a stock acquisition agreement (the
Agreement) with Chemical and Equipment Specialties, Inc. (CESI), an Oklahoma
corporation. At the closing of the Agreement, CESI acquired all of the common
stock of the Company in consideration of $1,850,000 cash and 25,000 shares of
CESI stock.
F-34
INDEPENDENT AUDITORS' REPORT
Board of Directors
Neal's Technology, Inc.
Duncan, Oklahoma
We have audited the accompanying Balance Sheet of Neal's Technology, Inc. as of
December 31, 2000. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statement is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit of the balance
sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Neal's Technology, Inc. as of
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America.
WEINSTEIN SPIRA & COMPANY, P.C.
Houston, Texas
September 28, 2001
F-35
NEAL'S TECHNOLOGY, INC.
BALANCE SHEET
DECEMBER 31, 2000
ASSETS
CURRENT ASSETS
Cash and cash equivalents $121,061
Accounts receivable 419
Inventories 13,605
Costs and estimated earnings in excess of billings on
uncompleted contracts 566,291
Prepaid expenses 5,825
--------
Total Current Assets 707,201
PROPERTY AND EQUIPMENT
Machinery and equipment $174,738
Furniture and office equipment 43,293
Leasehold improvements 53,652
--------
271,683
Less: Accumulated depreciation 156,872 114,811
-------- --------
$822,012
========
LIABILITIES
CURRENT LIABILITIES
Notes payable $174,839
Accounts payable 247,005
Billings in excess of costs and estimated earnings on
uncompleted contracts 38,505
Accrued expenses 4,940
--------
Total Current Liabilities 465,289
SHAREHOLDERS' EQUITY
COMMON STOCK - no par value, 50,000 shares authorized,
10,000 shares issued and outstanding $ 10,000
CONTRIBUTED CAPITAL 50,000
RETAINED EARNINGS 296,723 356,723
-------- --------
$822,012
========
See notes to financial statement.
F-36
NEAL'S TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENT
DECEMBER 31, 2000
NOTE 1 - ACCOUNTING POLICIES
Neal's Technology, Inc. (the Company) maintains its accounts on the accrual
basis of accounting in accordance with accounting principles generally accepted
in the United States of America. Accounting principles followed by the Company
and the methods of applying those principles which materially affect the
determination of financial position are summarized below:
DESCRIPTION OF BUSINESS
Neal's Technology, Inc. has contracts to manufacture, to exacting
specifications, specialized cementing equipment (pumping and bulk material
transport) and stimulation equipment (nitrogen, blending and pumping). Also
manufactured are proprietary automated monitoring and control systems, both
vehicle mounted and hand portable. Equipment design and automation are
performed in-house. Neal's Technology is an ISO 9001 certified shop.
REVENUE RECOGNITION FROM MANUFACTURING CONTRACTS
Revenues from manufacturing contracts are recognized under the percentage-of-
completion method of accounting, generally in the ratio in which costs incurred
bear to total estimated costs at completion. All known or anticipated losses
on contracts are recognized in full when such amount becomes apparent.
Contract costs include all direct labor and material costs and those indirect
costs related to job performance. General and administrative costs are charged
to expense as incurred.
Changes in job performance, job conditions and estimated profitability,
including those arising from contract penalty provisions and final contract
settlements, may result in revisions to costs and income and are recognized in
the period in which the revisions are determined.
The asset, costs and estimated earnings in excess of billings on uncompleted
contracts, represents revenues recognized in excess of amounts billed. The
liability, billings in excess of costs and estimated earnings on uncompleted
contracts, represents billings in excess of revenues recognized.
Billings are rendered under terms of customer contracts. Accounts receivable
are recorded at that time. Earnings are charged with a provision for doubtful
accounts receivable based on collection experience and current review of
collectibility of accounts. Accounts deemed uncollectible are applied against
the allowance for doubtful accounts. There was no such allowance recorded at
December 31, 2000.
INVENTORY
Inventory, which consists of raw materials and supplies used in the
manufacturing process, is carried at the lower of cost (as determined by the
first-in, first-out method) or market.
F-37
NEAL'S TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENT (CONTINUED)
DECEMBER 31, 2000
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed at rates
considered sufficient to amortize the costs of the assets over their estimated
useful lives using the straight-line method. Depreciation is based on the
following estimated useful lives:
Machinery and equipment 3-5 years
Furniture and office equipment 5 years
Leasehold improvements 20 years
FEDERAL INCOME TAX
The Company has elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. Under those provisions, net income or losses are
reportable for tax purposes by the shareholders. Accordingly, no federal
income taxes are included in the accompanying financial statements.
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with an original maturity of
three months or less to be cash equivalents. As of December 31, 2000, the
Company had deposits in excess of federally insured limits.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and certain assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
NOTE 2 - CONSTRUCTION CONTRACTS IN PROGRESS
Information regarding contracts in progress is as follows:
December 31,
2000
------------
Costs incurred on uncompleted contracts $ 656,243
Estimated earnings on uncompleted contracts 273,736
---------
929,979
Less: Billings to date (402,193)
---------
$ 527,786
=========
F-38
NEAL'S TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENT (CONTINUED)
DECEMBER 31, 2000
The net under billed revenues are included in the accompanying Balance Sheet as
follows:
December 31,
2000
------------
Costs and estimated earnings in excess of billings on
uncompleted contracts $566,291
Billings in excess of costs and estimated earnings on
uncompleted contracts 38,505
--------
$527,786
========
The Company has a backlog of approximately $900,000 at December 31, 2000.
NOTE 3 - NOTES PAYABLE
Notes payable as of December 31, 2000, are as follows:
Note payable to bank, secured by equipment, inventory and
accounts receivable, payable on demand or, if no demand
made, in monthly installments of $990 including interest
at 9.673%, due June, 2002 $ 43,038
Note payable to bank, secured by equipment, inventory and
accounts receivable, payable on demand or, if no demand
made, in one principal payment in January, 2001, interest
at 9.673% payable monthly 131,801
--------
$174,839
========
NOTE 4 - SUBSEQUENT EVENT
In January 2001, the Company entered into a stock acquisition agreement (the
Agreement) with Chemical and Equipment Specialties, Inc. (CESI), an Oklahoma
corporation. At the closing of the Agreement, CESI acquired all of the common
stock of the Company in consideration of $400,000 notes payable and 10,000
shares of CESI stock.
As part of the Agreement, the Company also sold to CESI certain intangible
assets, including customer lists, business records and contract rights, in
consideration of $500,000.
F-39
INDEPENDENT AUDITORS' REPORT
Board of Directors
Padko International Incorporated
Duncan, Oklahoma
We have audited the accompanying Balance Sheets of Padko International
Incorporated as of December 31, 2000 and 1999, and the related Statements of
Operations, Changes in Shareholders' Equity (Deficit), and Cash Flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Padko International
Incorporated as of December 31, 2000 and 1999, and the results of its operations
and cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
WEINSTEIN SPIRA & COMPANY, P.C.
Houston, Texas
June 29, 2001
F-40
PADKO INTERNATIONAL INCORPORATED
BALANCE SHEETS
DECEMBER 31,
--------------------------------------
2000 1999
-------- -------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,093 $ 9,270
Accounts receivable 23,235 37,605
Federal income tax receivable 2,303
-------- -------
Total Current Assets 28,631 46,875
-------- -------
PROPERTY AND EQUIPMENT
Furniture and office equipment 4,369 4,369
Computer equipment 12,699 12,699
Automobile 34,542 34,542
-------- -------
51,610 51,610
Less: Accumulated depreciation 48,122 41,233
-------- -------
3,488 10,377
-------- -------
$ 32,119 $57,252
======== =======
LIABILITIES
CURRENT LIABILITIES
Current maturities of long-term debt $ 17,759 $ 5,642
Accounts payable 30,923 9,258
Accrued expenses 21,607 1,318
Federal income tax payable 931
-------- -------
Total Current Liabilities 70,289 17,149
LONG-TERM DEBT 17,759
DEFERRED FEDERAL INCOME TAX 7,000
-------- -------
70,289 41,908
-------- -------
SHAREHOLDERS' EQUITY (DEFICIT)
COMMON STOCK - $.10 par value, 500,000 shares authorized;
150,000 shares issued 15,000 15,000
RETAINED EARNINGS (DEFICIT) (40,770) 344
Less: Treasury stock, 100,000 shares, at cost (12,400)
-------- -------
(38,170) 15,344
-------- -------
$ 32,119 $57,252
======== =======
See notes to financial statements.
F-41
PADKO INTERNATIONAL INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
2000 1999
-------- --------
REVENUES $377,772 $338,452
Cost of Revenues 300,490 276,710
-------- --------
GROSS MARGIN 77,282 61,742
EXPENSES:
Operating 76,886 13,047
Selling, general and administrative 51,333 56,667
-------- --------
128,219 69,714
-------- --------
OPERATING LOSS (50,937) (7,972)
OTHER INCOME (EXPENSE)
Interest expense (2,110) (3,191)
Other 2,630 6,557
-------- --------
520 3,366
-------- --------
LOSS BEFORE INCOME TAXES (50,417) (4,606)
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current (2,303) 931
Deferred (7,000) (3,000)
-------- --------
(9,303) (2,069)
-------- --------
NET LOSS $(41,114) $ (2,537)
======== ========
See notes to financial statements.
F-42
PADKO INTERNATIONAL INCORPORATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
COMMON STOCK RETAINED TREASURY STOCK
------------------ EARNINGS ----------------------
SHARES AMOUNT (DEFICIT) SHARES AMOUNT TOTAL
------- -------- ---------- --------- -------- ----------
Balance, December 31, 1998 150,000 $15,000 $ 2,881 $ 17,881
Net Loss (2,537) (2,537)
------- ------- -------- -------- -------- --------
Balance, December 31, 1999 150,000 15,000 344 15,344
Purchase of Treasury Stock (100,000) $(12,400) (12,400)
Net Loss (41,114) (41,114)
------- ------- -------- -------- -------- --------
Balance, December 31, 2000 150,000 $15,000 $(40,770) (100,000) $(12,400) $(38,170)
======= ======= ======== ======== ======== ========
See notes to financial statements.
F-43
PADKO INTERNATIONAL INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED
December 31,
---------------------------------------
2000 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(41,114) $ (2,537)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 6,889 14,264
Deferred federal income tax benefit (7,000) (3,000)
(Increase) Decrease in:
Accounts receivable 14,370 33,111
Prepaid expenses 72,248
Federal income tax receivable (2,303)
Increase (Decrease) in:
Accounts payable 21,665 (37,952)
Accrued expenses 20,289 1,478
Customer deposits (85,024)
Federal income tax payable (931) (436)
-------- --------
Net Cash Provided by (Used in) Operating Activities 11,865 (7,848)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (5,157)
-------- --------
Net Cash Used in Investing Activities (5,157)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 22,500
Payment of debt (5,642) (15,217)
Purchase of treasury stock (12,400)
-------- --------
Net Cash Provided by (Used in) Financing Activities (18,042) 7,283
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (6,177) (5,722)
Cash and Cash Equivalents - Beginning of Year 9,270 14,992
-------- --------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 3,093 $ 9,270
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 166 $ 2,007
======== ========
Cash paid for income taxes $ 931 $ 1,367
======== ========
See notes to financial statements.
F-44
PADKO INTERNATIONAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE 1 - ACCOUNTING POLICIES
The Company maintains its accounts on the accrual basis of accounting in
accordance with generally accepted accounting principles. Accounting principles
followed by the Company and the methods of applying those principles which
materially affect the determination of financial position, results of
operations, and cash flows are summarized below:
DESCRIPTION OF BUSINESS
The Company buys oilfield supplies and equipment (primarily from Plainsman
Technology, Inc. and Neal's Technology, Inc.) and sells the products
internationally.
INCOME RECOGNITION
Revenues are recognized at the date of delivery, and accounts receivable are
recorded at that time. Earnings are charged with a provision for doubtful
accounts based on current review of collectibility of accounts. Accounts deemed
uncollectible are applied against the allowance for doubtful accounts. There is
no allowance for doubtful accounts at December 31, 2000 and 1999.
PROPERTY AND EQUIPMENT
Property and equipment are presented at cost. Depreciation is computed at rates
considered sufficient to amortize the cost of the assets over their estimated
useful lives using straight-line and accelerated methods. Depreciation is based
upon the following estimated useful lives:
Furniture and office equipment 5 years
Computer equipment 3 years
Automobile 3 years
FEDERAL INCOME TAX
Federal income tax expense in these statements is computed at prevailing tax
rates.
The Company provides deferred income taxes for the expected future tax
consequences of temporary differences between tax bases and financial reporting
bases of assets and liabilities.
F-45
PADKO INTERNATIONAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with an original maturity of
three months or less to be cash equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and certain assumptions that affect the reported
amount of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
NOTE 2 - LONG-TERM DEBT
Long-term debt is as follows:
2000 1999
------- -------
Note payable to shareholder, unsecured,
interest at 10%, maturing February, 2001 $17,759 $17,759
Note payable to shareholder, secured by
automobile, interest at 10.0%, payable
in monthly installments of $960, including
interest, until June, 2000 5,642
------- -------
17,759 23,401
Less: Current maturities 17,759 5,642
------- -------
$ 0 $17,759
======= =======
F-46
PADKO INTERNATIONAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
NOTE 3 - FEDERAL INCOME TAX
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
DECEMBER 31,
-----------------------------------------
2000 1999
-------- -------
Federal income tax (benefit) at the statutory rate $(17,142) $(1,566)
Increase (Decrease) resulting from:
Nondeductible expenses 1,229 1,169
Surtax exemption 2,918 1,179
Change in valuation allowance 4,000
Other items, net (308) (2,851)
-------- -------
$ (9,303) $(2,069)
======== =======
The components of the net deferred tax asset and net deferred tax liability are
as follows:
DECEMBER 31,
---------------------------------------
2000 1999
------- -------
Deferred tax asset:
Net operating loss carryforward $ 5,000
Deferred tax liability:
Accelerated tax depreciation (1,000) $(7,000)
------- -------
Net deferred tax asset (liability) 4,000 (7,000)
Valuation allowance (4,000)
-------
$ 0 $(7,000)
======= =======
At December 31, 2000, the Company had net operating loss carryforwards available
to offset future taxable income of approximately $25,000, expiring in 2010.
Under federal tax law, the amount and availability of loss carryforwards are
subject to a variety of interpretations and restrictive tests applicable to the
company. The utilization of such carryforwards could be limited or effectively
lost upon certain changes in ownership. Accordingly, while the Company believes
certain loss carryforwards are available to it, no assurance can be given
concerning such loss carryforwards or whether such loss carryforwards will be
available in the future. An allowance has been recorded to properly value the
net deferred tax asset at December 31, 2000.
F-47
PADKO INTERNATIONAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
NOTE 4 - TRANSACTIONS WITH MAJOR CUSTOMERS
During the year ended December 31, 2000, the Company had sales of approximately
$310,000 to two customers in the ordinary course of business, representing 82%
of the Company's sales revenue for the period. All of the Company's accounts
receivable at December 31, 2000, were due from one of these two customers.
During the year ended December 31, 1999, the Company had sales of approximately
$244,000 to one customer in the normal course of business, representing 72% of
the Company's sales revenues for the period. There were no accounts receivable
from this customer at December 31, 1999.
NOTE 5 - TRANSACTIONS WITH MAJOR VENDORS
During the year ended December 31, 2000, the Company had purchases of
approximately $173,000 from Neal's Technology, Inc. and $121,000 from Plainsman
Technology, Inc. All of the Company's accounts payable were due to Plainsman
Technology, Inc. at December 31, 2000.
During the year ended December 31, 1999, the Company had purchases of
approximately $207,000 from Neal's Technology, Inc. and $59,000 from Plainsman
Technology, Inc. The Company had accounts payable totaling $7,602 due to
Plainsman Technology, Inc. at December 31, 1999. There were no accounts payable
due to Neal's Technology, Inc. at December 31, 1999.
NOTE 6 - RELATED PARTY TRANSACTIONS
The Company has notes payable to a shareholder totaling $17,759 and $23,401 at
December 31, 2000 and 1999, respectively.
NOTE 7 - SUBSEQUENT EVENT
In January 2001, the Company entered into a stock purchase agreement (the
Agreement) with Chemical and Equipment Specialties, Inc. (CESI), an Oklahoma
corporation. At the closing of the Agreement, all issued and outstanding common
stock of the Company was purchased by CESI for $237,600. In addition, 25,000
shares of CESI's common stock were issued to the Company's shareholders.
F-48
INDEPENDENT AUDITORS' REPORT
Board of Directors
Material Translogistics, Inc.
dba Gillespie Consulting Company
Duncan, Oklahoma
We have audited the accompanying Statement of Earnings of Material
Translogistics, Inc. dba Gillespie Consulting Company for the period April 5,
2000 (date operations commenced) to December 31, 2000. This financial statement
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statement is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statement. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the Statement of Earnings referred to above presents fairly, in
all material respects, the results of operations of Material Translogistics,
Inc. dba Gillespie Consulting Company for the period April 5, 2000 (date
operations commenced) to December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
WEINSTEIN SPIRA & COMPANY, P.C.
Houston, Texas
July 13, 2001
F-49
MATERIAL TRANSLOGISTICS, INC.
DBA GILLESPIE CONSULTING COMPANY
STATEMENT OF EARNINGS
FOR THE PERIOD APRIL 5, 2000 (DATE OPERATIONS
COMMENCED) TO DECEMBER 31, 2000
REVENUES $424,379
Operating Expenses 302,811
--------
OPERATING INCOME 121,568
--------
OTHER INCOME (EXPENSE):
Interest income 752
Interest expense (1,050)
--------
(298)
--------
NET EARNINGS $121,270
========
See notes to financial statements.
F-50
MATERIAL TRANSLOGISTICS, INC.
DBA GILLESPIE CONSULTING COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000
NOTE 1 - ACCOUNTING POLICIES
Material Translogistics, Inc. dba Gillespie Consulting Company (the Company)
maintains its accounts on the accrual basis of accounting in accordance with
accounting principles generally accepted in the United States of America.
Accounting principles followed by the Company and the methods of applying those
principles which materially affect the results of operations are summarized
below:
ORGANIZATION
Material Translogistics, Inc. was incorporated February 20, 2001, as a
successor to the operations of Gillespie Consulting Company, a sole
proprietorship owned by Michael Gillespie. As the assets and liabilities of
Gillespie Consulting Company were not transferred to the new corporation, no
balance sheet is presented.
DESCRIPTION OF BUSINESS
The Company designs and constructs bulk material handling facilities for the
oil and gas services industry in the United States of America. Additionally,
the Company offers design, construction, project management and maintenance
services for related facilities.
INCOME RECOGNITION
Revenues for services are recognized as they are performed. Earnings are
charged with a provision for doubtful accounts based on a current review of
collectibility of accounts. There was no provision for doubtful accounts for
the year ended December 31, 2000.
DEPRECIATION
Depreciation is computed at rates considered sufficient to amortize the cost of
the assets over their estimated useful lives using the straight-line method.
Depreciation expense totaled $15,991 for the year ended December 31, 2000.
FEDERAL INCOME TAX
No provision for federal income taxes has been made for the Company (a sole
proprietorship), as these taxes are the responsibility of the owners.
F-51
MATERIAL TRANSLOGISTICS, INC.
DBA GILLESPIE CONSULTING COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and certain assumptions that affect the amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NOTE 2 - SUBSEQUENT EVENT
Effective June 29, 2001, the Company entered into an agreement and plan of
reorganization (the Agreement) with Chemical and Equipment Specialties, Inc.
(CESI), an Oklahoma corporation. At the closing of the Agreement, all issued
and outstanding common stock of the Company was converted into the right to
receive up to 40,000 shares of CESI common stock. When so converted, the common
stock of the Company will be automatically cancelled and retired.
As part of the Agreement, the Company also sold to CESI certain intangible
assets, including customer lists, business records and contract rights, in
consideration of $600,000. CESI did not purchase any other assets owned or
leased by the Company, and did not assume any liability of the Company.
F-52
Flotek Industries, Inc. and Acquired Businesses
Unaudited Pro Forma Combined Financial Statements
Basis of Presentation
Flotek Industries, Inc. (the "Company") merged with Chemical & Equipment
Specialties, Inc. (CESI) on October 31, 2001 (the "Merger"). The Company is
accounting for the Merger as a "reverse" acquisition of Flotek Industries, Inc.
by CESI, in accordance with the purchase method of accounting. The purchase
price has been allocated first to the fair value of assets acquired and
liabilities assumed based on management's estimates of fair value, with the
excess purchase price recorded to goodwill.
CESI was incorporated on June 27, 2000 to acquire businesses in the
specialty chemical and well service equipment manufacturing segments of the
oilfield service industry. It had no revenues or operations prior to the
acquisitions of Esses, Inc., Plainsman Technology, Inc., Neal's Technology,
Inc., and Padko International, Inc. in January 2001. It subsequently acquired
Material Translogistics, Inc. in June 2001. These five companies are referred
to as the "CESI Acquired Businesses."
The Company is reporting its results on a calendar year basis, effective
with the current year ending December 31, 2001. CESI, which is treated as the
acquiring company, maintains its accounting on a calendar year basis. Prior to
the Merger, Flotek Industries, Inc. maintained its accounting on the basis of a
fiscal year ending the last day of February. Pursuant to regulations of the
Securities and Exchange Commission, the Company is permitted, for the purpose of
these pro forma financial statements, to combine statements of operations for
periods which have different ending dates so long as the periods combined are of
equal length and are not more than 93 days apart. The statements of operations
for Flotek Industries, Inc. are presented on the basis of its prior fiscal year,
as noted in the statements.
The unaudited pro forma combined financial statements give effect to (1)
the acquisition of the CESI Acquired Businesses by CESI, (2) the Merger, (3) the
120 to 1 reverse stock split which was given effect on November 5, 2001, (4) the
conversion of all preferred stock of Flotek Industries, Inc. to common stock and
(5) the exercise of warrants to purchase Flotek Industries, Inc. common stock in
connection with the Merger (collectively, the "Transactions"). The unaudited
pro forma combined statement of operations for the year ended December 31, 2000
presents the acquisition of the CESI Acquired Companies by CESI separately from
the other Transactions.
The unaudited pro forma combined balance sheet gives effect to the
Transactions which occurred subsequent to September 30, 2001 as if they had
occurred on that date. The unaudited pro forma combined statements of
operations give effect to the Transactions which are not reflected in the
respective historical financial statements as if they had occurred at the
beginning of each period presented. The unaudited pro forma combined financial
statements include pro forma adjustments to the results of operations as
follows: (1) pro forma increases in goodwill amortization attributable to the
CESI Acquired Businesses using a 20-year estimated life, (2) pro forma increases
in interest expense associated with borrowings used to finance the acquisition
of the CESI Acquired Businesses, (3) pro forma adjustments to depreciation
expense resulting from purchase price adjustments to the basis of fixed assets,
(4) adjustments to selling, general and administrative expenses to reflect (a)
decreases in salaries and benefits associated with certain owners and managers
of the CESI Acquired Businesses who were not employed by CESI after the
acquisition of their businesses and who will not be replaced, (b) increases in
salaries and
P-1
benefits associated with members of CESI executive management who were not
employed for the full period, (c) decreases in compensation expense attributable
to distributions of funds from Subchapter S corporations designated for the
payment of income taxes, (5) elimination of intercompany revenue transactions
between CESI Acquired Businesses, and (6) adjustments to federal and state
income tax provisions. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 141, there have been no pro forma adjustments for
amortization of goodwill attributable to the Merger as it was initiated after
June 30, 2001 and amortization of goodwill is not required for business
combination initiated after that date. Additionally, no pro forma adjustments
have been made for potential cost reductions which may result from consolidation
efforts or economies of scale of the combined companies nor have there been any
adjustments for potential incremental costs associated with increased corporate
management and administration and system integration. Such potential cost
reductions or incremental costs cannot be accurately quantified. The pro forma
adjustments are based on preliminary estimates, available information and
assumptions that management deems appropriate.
The unaudited pro forma combined financial statements presented herein do
not purport to represent what the Company's financial position or results of
operations actually would have been had such events occurred at the beginning of
the periods presented, as assumed, or to project the Company's financial
position or results of operations for any future period or the future results of
any of the acquired businesses.
P-2
Flotek Industries, Inc. and Subsidiaries
Unaudited Pro Forma Combined
Balance Sheet
September 30, 2001
Flotek
Industries, Pro Forma Pro Forma
CESI Inc. (1) Adjustments Combined
--------- ------------- ------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 124,765 $ 57,292 $ 1,778,466 (b) $ 1,734,738
(225,785)(c)
Accounts receivable, net 1,410,116 1,030,281 - 2,440,397
Inventories and work in
progress 2,350,188 999,404 - 3,349,592
Other current assets 38,469 - - 38,469
---------- ------------ ------------ -----------
Total current assets 3,923,538 2,086,977 1,552,681 7,563,196
Property and equipment, net 3,117,734 214,531 - 3,332,265
Goodwill 7,753,450 317,615 5,037,795 (c) 13,108,860
Other assets 70,312 200,288 - 270,600
---------- ------------ ------------ -----------
Total assets $14,865,034 $ 2,819,411 $ 6,590,476 $24,274,921
========== ============ ============ ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued expenses $ 1,649,455 $ 603,137 $ - $ 2,252,592
Short-term debt 1,414,020 199,409 - 1,613,429
Current maturities of
long-term debt 521,552 11,000 - 532,552
Other current liabilities 631,825 140,839 - 772,664
---------- ------------ ------------ -----------
Total current liabilities 4,216,852 954,385 - 5,171,237
Long-term debt, less current
maturities 3,593,586 177,502 - 3,771,088
Other liabilities - 294,216 (294,216)(a) -
Stockholders' equity:
Common stock 11,646 19,279,495 (23,452,410)(c) 485
2,383,288 (a)
1,778,466 (b)
Preferred stock - 2,089,072 (2,089,072)(a) -
Additional paid-in capital 7,433,725 160,879 8,128,282 (c) 15,722,886
Retained earnings (390,775) (19,841,397) 19,841,397 (c) (390,775)
Other comprehensive loss - (294,741) 294,741 (c) -
---------- ------------ ------------ -----------
Total stockholders' equity 7,054,596 1,393,308 6,884,692 15,332,596
---------- ------------ ------------ -----------
Total liabilities and
stockholders' equity $14,865,034 $ 2,819,411 $ 6,590,476 $24,474,921
========== ============ ============ ===========
(1) Amounts for Flotek Industries, Inc. are as of August 31, 2001.
See accompanying basis of presentation and notes to unaudited pro forma combined
financial statements.
P-3
Flotek Industries, Inc. and Subsidiaries
Unaudited Pro Forma Combined Statement of Operations
For the Year Ended December 31, 2000
CESI Flotek
Pro Forma Industries, Pro Forma Pro Forma
Combined (1) Inc. (2) Adjustments Combined
------------- ----------- ------------ -----------
REVENUES $8,703,612 $2,981,408 $ - $ 11,685,020
EXPENSES:
Cost of goods sold 4,524,063 1,394,284 - 5,918,347
Selling, general and administrative 2,407,299 1,454,731 - 3,862,030
Depreciation and amortization 683,454 90,547 - 774,001
---------- --------- ---------- ----------
Total expenses 7,614,816 2,939,562 - 10,554,378
Income from operations 1,088,796 41,846 - 1,130,642
Other income (expense), net:
Interest (430,440) (83,968) - (514,408)
Other 2,443 52,490 - 54,933
---------- --------- ---------- ----------
Income before income taxes 660,799 10,368 - 671,167
Income tax expense 277,536 - 4,354 (ee) 281,890
---------- --------- ----------- ----------
Net income $ 383,263 $ 10,368 $ (4,354) 389,277
========== ========= ========== ==========
Basic and Diluted Pro Forma Net Income per Share $ 0.08
==========
Shares Used in Computing Pro Forma Income per Share (ff)$ 4,850,696
==========
(1) See separate pro forma combined financial statement schedule attached.
(2) Amounts for Flotek Industries, Inc. are for the fiscal year ended
February 28, 2001.
See accompanying basis of presentation and notes to unaudited pro forma combined
financial statements.
P-4
Chemical & Equipment Specialties, Inc. and Subsidiaries
Unaudited Pro Forma Combined Statement of Operations
For the Year Ended December 31, 2000
Chemical &
Equipment Plainsman Neal's Padko Material
Specialties, Technology, Technology, International, Translogistics,
Inc. (CESI) Esses, Inc. Inc. Inc. Inc. Inc.
------------ ------------ ------------ ------------ ------------- ------------
REVENUES $ - $ 3,755,748 $ 2,768,478 $ 1,671,235 $ 377,772 $ 424,379
EXPENSES:
Cost of goods sold - 2,153,039 1,619,863 744,671 300,490 -
Selling, general and
administrative 153,462 639,158 1,121,525 566,463 121,330 302,811
Depreciation and
amortization 15,933 62,515 56,216 54,073 6,889 -
-------- --------- --------- --------- ------- -------
Total expenses 169,395 2,854,712 2,797,604 1,365,207 428,709 302,811
Income (loss) from
operations (169,395) 901,036 (29,126) 306,028 (50,937) 121,568
Other income
(expense), net:
Interest 10,665 (22,151) (6,755) (21,826) (2,110) (298)
Other - - (187) - 2,630 -
-------- --------- --------- --------- ------- -------
Income (loss) before
income taxes (158,730) 878,885 (36,068) 284,202 (50,417) 121,270
Income tax expense
(benefit)(1) - - - 119,365 (9,303) -
-------- --------- --------- --------- ------- -------
Net income (loss) $ (158,730) $ 878,885 $ (36,068) $ 164,837 $ (41,114) $ 121,270
======== ========= ========= ========= ======= =======
CESI CESI
Pro Forma Pro Forma
Adjustments Combined
------------ -----------
REVENUES $ (294,000)(aa) $ 8,703,612
EXPENSES:
Cost of goods sold (294,000)(aa) 4,524,063
Selling, general and
administrative (497,450)(bb) 2,407,299
Depreciation and
amortization 487,828 (cc) 683,454
-------- ---------
Total expenses (303,622) 7,614,816
Income (loss) from
operations 9,622 1,088,796
Other income
(expense), net:
Interest (387,965)(dd) (430,440)
Other - 2,443
-------- ---------
Income (loss) before
income taxes (378,343) 660,799
Income tax expense
(benefit)(1) 167,474 (ee) 277,536
-------- ---------
Net income (loss) $ (545,817) $ 383,263
======== =========
(1) No income tax expense was recorded on Esses, Inc. and Material
Translogistics, Inc. as these earnings were taxable to their shareholders.
See accompanying basis of presentation and notes to unaudited pro forma combined
financial statements.
P-5
Flotek Industries, Inc. and Subsidiaries
Unaudited Pro Forma Combined Statement of Operations
For the Nine Month Period Ended September 30, 2001
Material Flotek
Translogistics, Industries, Pro Forma Pro Forma
CESI Inc. (1) Inc. (2) Adjustments Combined
------------ -------------- ----------- ----------- ----------
REVENUES $10,100,060 $ 349,107 $ 2,985,176 $ - $13,434,343
EXPENSES:
Cost of goods sold 7,063,038 - 1,265,230 - 8,328,268
Selling, general and administrative 2,560,921 335,369 1,338,304 - 4,234,594
Depreciation and amortization 493,173 - 71,565 - 564,738
----------- --------- ---------- -------- ----------
Total expenses 10,117,132 335,369 2,675,099 - 13,127,600
Income from operations (17,072) 13,738 310,077 - 306,743
Other income (expense), net:
Interest (235,408) 872 (35,280) - (269,816)
Other 20,435 - 6,942 - 27,377
----------- --------- ---------- -------- ----------
Income (loss) before income taxes (232,045) 14,610 281,739 - 64,304
Income tax expense - - - 27,008(ee) 27,008
----------- --------- ---------- -------- ----------
Net income (loss) $ (232,045) $ 14,610 $ 281,739 $ (27,008) $ 37,296
=========== ========= ========== ======== ==========
Basic and Diluted Pro Forma Net Income per Share $ 0.01
==========
Shares Used in Computing Pro Forma Income per Share (ff) 4,850,696
==========
(1) Amounts for Material Translogistics, Inc. ("MTI") are for the six month
period ended June 30, 2001 prior to the acquisition by CESI.
No income tax expense was recorded for MTI as the earnings were taxable
directly to the shareholder.
(2) Amounts for Flotek Industries, Inc. are for the nine month period ended
August 31, 2001.
See accompanying basis of presentation and notes to unaudited pro forma combined
financial statements.
P-6
Flotek Industries, Inc. and Subsidiaries
Notes to Unaudited Pro Forma Combined Financial Statements
UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) Records the conversion of all preferred stock of Flotek Industries, Inc.
("Flotek"), including accrued dividends, to common stock effective with the
closing of the Merger.
(b) Records cash proceeds from the exercise, after August 31, 2001, of 494,018
warrants to purchase common stock at $3.60 per share (adjusted for the 120
to 1 reverse stock split which was given effect on November 5, 2001) for
total proceeds of $1,778,466 in connection with the Merger.
(c) Records the consideration deemed issued to the Flotek shareholders to
effect the "reverse" acquisition of Flotek by Chemical & Equipment
Specialties, Inc. ("CESI"). The total number of common shares attributable
to the Flotek shareholders was 1,856,216, (adjusted for the 120 to 1
reverse stock split which was given effect on November 5, 2001), with a
value of $8,278,000. In addition, the Company incurred $341,643 in
transaction costs associated with the Merger, of which $225,785 were
recorded after September 30, 2001.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS:
(aa) Eliminates revenue and cost of sales associated with transactions between
CESI Acquired Businesses prior to their acquisition by CESI.
(bb) Records adjustments to compensation expense, including (1) a reduction of
$467,450 for certain owners and managers of CESI Acquired Businesses who
were not employed by CESI after the acquisition of their businesses and who
will not be replaced, (2) an increase of $90,000 for salaries and benefits
of CESI executives who were not employed for the full period, and (3) a
reduction of $120,000 attributable to bonus payments from Subchapter S
corporations designated for the payment of income taxes on profits
distributed to employee shareholders.
(cc) Records amortization of goodwill of $383,477 arising from the acquisition
of the CESI Acquired Entities by CESI using an estimated life of 20 years,
plus a net increase in depreciation expense of $104,851 attributable to
purchase price adjustments to the basis of property and equipment of the
CESI Acquired Entities. In accordance with SFAS No. 141, no pro forma
adjustments to amortization expense relating to the Merger of CESI and
Flotek have been made as the Merger was initiated after June 30, 2001 and
amortization of goodwill is not required for business combinations
initiated after that date.
(dd) Records additional interest expense associated with borrowings to finance
the cash portion of the consideration paid by CESI to acquire the CESI
Acquired Entities.
(ee) Records the incremental provision for federal and state income taxes
relating to Subchapter S corporation income and other pro forma adjustments
to reflect an estimated effective tax rate of 42%.
(ff) The number of shares used to compute pro forma combined net income per
share includes shares issued to accomplish (1) the Merger of Flotek and
CESI, (2) the conversion of all Flotek preferred stock and accrued
dividends to common stock, (3) the issuance of 494,018 shares of Flotek
common stock resulting from the exercise of warrants in connection with the
Merger, and (4) the 120 to 1 reverse stock split which was given effect on
November 5, 2001. The common stock equivalents on the date of the Merger
were not dilutive.
P-7