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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
For Annual and Transition Reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File No. 1-13270
FLOTEK INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0709256
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation)
7030 Empire Central Drive 77040
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (713) 849-9911
Securities registered pursuant to Section 12(b) of the Exchange Act:
(none)
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $0.0001 par value
(Title of Class)
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Revenues for the Company's 2001 fiscal year were $12,561,499.
The aggregate market value of the common stock held by non-affiliates of the
Registrant was approximately $8,593,000 on April 12, 2002 based upon the closing
sale price of common stock on such date of $1.75 per share on the OTC Bulletin
Board. As of April 12, 2002, the Registrant had 4,910,812 shares of common stock
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 2002 annual meeting of
shareholders, to be filed within 120 days of year end, have been incorporated by
reference into Part III of this Form 10-KSB.
Transitional small business disclosure format: Yes ( ) No ( X )
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TABLE OF CONTENTS
PART I
Item 1. Description of Business...........................................3
Item 2. Description of Properties.........................................7
Item 3. Legal Proceedings.................................................7
Item 4. Submission of Matters to a Vote of Security Holders...............7
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters .....................................8
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................9
Item 7. Financial Statements.............................................16
Item 8. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure...............33
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (a) of the Exchange Act ..............33
Item 10. Executive Compensation...........................................33
Item 11. Security Ownership of Certain Beneficial Owners and Management...33
Item 12. Certain Relationships and Related Transactions...................33
Item 13. Exhibits and Reports On Form 8-K.................................33
SIGNATURES....................................................................35
2
PART I
Item 1. Description of Business
Business
Flotek Industries, Inc. and subsidiaries (the "Company" or "Flotek") was
originally incorporated under the laws of the Province of British Columbia on
May 17, 1985. On October 23, 2001, the shareholders of the Company approved a
change in its corporate domicile to Delaware and a reverse stock split of 120 to
1. On October 31, 2001, the Company completed a reverse merger ("the Merger")
with Chemical & Equipment Specialties, Inc. ("CESI"). CESI is treated as the
acquirer for accounting purposes. In connection with the Merger, the Company
adopted a calendar year end, which had been the prior reporting basis of CESI.
The business of Flotek prior to the Merger consisted of the Downhole Equipment
segment, as described below. CESI's business was comprised of the Specialty
Chemical and Equipment Manufacturing segments. Flotek is headquartered in
Houston, Texas and its common shares are traded on the OTC Bulletin Board
market. Effective November 5, 2001, in connection with the Merger, 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.
The Company's product lines are divided into three segments within the oilfield
service industry:
o The Specialty Chemicals segment develops, manufactures, packages and
sells chemicals used in oil and gas well cementing, stimulation and
production.
o The Equipment Manufacturing segment designs and manufactures
specialized cementing and stimulation equipment, including heavy
vehicles used for pressure pumping, blending and bulk material
transport. This segment also designs, constructs and manages automated
bulk material handling and loading facilities for other oilfield
service companies.
o The Downhole Equipment segment manufactures and markets the Petrovalve
line of downhole pump components and the Turbeco line of casing
centralizers.
Specialty Chemicals
Stimulation of oil and gas wells is comprised of hydraulic fracturing of
sandstone reservoirs and acidizing of carbonate reservoirs. In the Specialty
Chemicals segment, the Company has a full spectrum of cementing, acidizing and
fracturing chemicals and fracturing additives and also markets certain specialty
production chemicals. The Company has a fully-equipped laboratory facility in
Oklahoma which is used to design and test new chemical formulations and enhance
existing products, often in partnership with our customers. The laboratory also
provides quality assurance to our manufacturing operations and expert technical
support to our customers on existing product lines. The customer base for this
division is primarily oil and gas well pumping service companies, including both
major and independent oilfield service companies. The segment manufactures and
packages its products in Oklahoma and has sales and warehousing locations in
Oklahoma and Texas. The Company also works through sales representatives and
agents in Canada, Mexico, South America, the Middle East and Far East. Business
in this segment is highly competitive. The Company attempts to distinguish
itself through the strength of its innovative and proprietary products,
dedication to product quality and superior customer service.
Equipment Manufacturing
In the Equipment Manufacturing segment, the Company designs, manufactures and
rebuilds cement mixing units, hydraulic fracturing blenders, acid pump vehicles
and state of the art control units. It also manufactures and rebuilds nitrogen
equipment units that are used for foam fracturing, coiled tubing cleanup
operations and industrial cleaning. The Company relies on suppliers for the
development and/or delivery of several major components such as diesel engines,
heat exchange units, pumps and compression equipment. These units typically
require several months to complete and deliver. Manufacturing operations are
based in Duncan, Oklahoma.
The Company also designs, constructs and manages automated bulk material
handling and loading facilities for other oilfield service companies, either as
the general contractor on these projects or as consulting engineers. Our
client's bulk facilities handle such oilfield products as sand and other
proppant materials for well fracturing operations, dry cement and additives for
oil and gas well cementing, and other supplies and materials used in oilfield
operations.
The customer base for this segment consists of major and large independent
oilfield service companies which specialize in cementing, pressure pumping and
fracturing and our products are sold both in both domestic and international
markets.
3
Downhole Equipment
The Company's Downhole Equipment segment manufactures and sells two primary
product lines, the Petrovalve line of downhole pump valves and the Turbeco line
of vaned centralizers used in cementing operations. Both product lines use
patented and/or proprietary product designs to achieve greater efficiency and
effectiveness than competing products.
The Petrovalve line of downhole pump valves was originally designed in the
mid-1980's and has undergone significant improvements in recent years. The
Petrovalve product line provides longer and more reliable downhole pump
performance than the traditional ball and seat valves which are the predominant
product in the industry. Additionally, our valves have been demonstrated to
provide more efficient flow characteristics and can increase our customer's
production volumes in many circumstances. The new "Gas Breaker" technology
allows us to provide a solution to gas lock problems often encountered on wells
with lower flow rates or high gas ratios. The Company outsources manufacturing
of most of the machined valve components, but assembles and performs final
quality assurance on all valves in Houston.
The Turbeco line of fixed vane centralizers are used in oil and gas well
cementing programs to increase the effectiveness of such operations. Our primary
products include the Cementing Turbulator, which Flotek acquired and began
distributing in 1994. The main purpose of this tool is to assure the pipe is
properly centered in the well bore and to improve displacement of cement to
obtain an effective bond with the formation. The Company was one of the first
companies to distribute spiral-vaned cementing turbulators. The Turbulator has
gained widespread acceptance through its ability to improve oil and gas well
cementing programs and is effective in deep, directional and horizontal well
applications.
New products that have been introduced in this segment are the Integral Pump
Centralizer, the Eccentric Turbulator (jointly patented with Marathon Oil), and
the Turbolock Centralizer. Recently, the Company completed design and testing of
its proprietary Pressure-Actuated Casing ("C-PAC") Centralizer. This
pressure-actuated tool is designed to accommodate "slim-hole" deviated well
completion programs. The C-PAC Centralizer is an integral part of the casing and
does not activate until it is in its final position in the well, thus reducing
drag during insertion of the casing in the well bore. It can also be used in
smaller well bore diameters which would prevent the use of traditional fixed
centralizers. Once in place, the vanes are pressure-activated to expand and
centralize the casing to maximize the integrity of the cementing process. Patent
applications are pending and marketing efforts are in progress.
The Company's competition in the Petrovalve product line is comprised of rod
pump manufacturers and pump maintenance and service shops using the industry
standard API ball and seat product, as well as other proprietary valve products.
In the cementing centralizer market, the Company competes with both large,
diversified oilfield service companies and smaller independent competitors.
Competition is high and is expected to continue for the foreseeable future.
The Company's customers in the Downhole Equipment segment are primarily oil and
gas exploration and production companies, including major oil companies, which
are involved in the drilling and cementing of oil wells and own producing oil
and gas wells. The Company's active customer base is distributed among major oil
companies and smaller independent operators. The Company's marketing area is
focused in the Gulf of Mexico region, although the Company has a significant
customer base in Venezuela for its Petrovalve products and is continuing to
expand its market both internationally and domestically.
4
Product Demand and Marketing
The demand for the Company's products and services is generally correlated to
the level of oil and gas drilling activity, both in the United States and
internationally. Drilling activity, in turn, is generally dependent on the price
levels of oil and gas. Certain of the Company's products, particularly the
Petrovalve line of downhole pump valves and certain of its specialty chemicals,
are more closely related to the production of oil and gas and demand for these
products is less dependent on drilling activity.
We market our products primarily through direct sales to our customers by
company managers and sales employees. We generally have established customer
relationships which provide for repeat sales. As a result of the significant
consolidation which has occurred in the industry over the past 15 years, our
sales have tended to be concentrated in larger customer relationships. Two
customers accounted for 17.1% and 14.2%, respectively, of our consolidated
revenues for the year ended December 31, 2001. Both of these customers were in
the Specialty Chemicals segment of our business and they collectively accounted
for 53.7% of the revenues in this segment.
Government Regulation, Operating Risks and Insurance
We are subject to federal, state and local environmental and occupational safety
and health laws and regulations in the United States and other countries in
which we do business. The Company has endeavored to fully comply with these
requirements and is not aware of any material instances of noncompliance.
However, these requirements are complex and assuring compliance is often
difficult. The enforcement of these laws and regulations may become more
stringent in the future and could have a material impact on our costs of
operations. Non-compliance could also subject us to material liabilities, such
as government fines, third-party lawsuits or even the suspension of operations.
Many of the products within our specialty chemicals segment are considered
hazardous or flammable. The majority of such products are reasonably stable and
generally require only ordinary care in handling and transportation. However, we
do have risks in handling the materials in this segment and if a leak or spill
occurs in connection with our operations, we could incur material costs to
remediate any resulting contamination.
In addition, our Company's products are used for the exploration and production
of oil and natural gas. Such operations are subject to hazards inherent in the
oil and gas industry, such as fires, explosions, blowouts and oil spills, which
can cause personal injury or loss of life, damage to or destruction of property,
equipment, the environment and marine life, and suspension of operations.
Litigation arising from an occurrence at a location where the Company's products
or services are used or provided could in the future result in the Company being
named as a defendant in lawsuits asserting potentially significant claims. The
Company maintains insurance coverage that it believes to be reasonable and
customary in the industry against these hazards.
The Company does not have any significant legal actions pending or to
its knowledge, threatened against it, nor have there been any significant losses
of this nature in the past. However, there can be no assurance that such a claim
might not be asserted against the Company in the future and in that event, the
consequences of such a claim could be material to the operating results or
financial position of the Company.
Research and Development and Intellectual Property
The Company is actively involved in developing proprietary products to expand
its existing product lines and in developing new technologies. The Company has
followed a policy of seeking patent protection both within and outside the
United States for products and methods that appear to have commercial
significance and qualify for patent protection. The decision to seek patent
protection considers whether such protection can be obtained on a cost-effective
basis and is likely to be effective in protecting the commercial interests of
the Company. The Company believes that its patents and trademarks, together with
its trade secrets and proprietary design, manufacturing and operational
expertise, are reasonably adequate to protect its intellectual property and
provide for the continued operation of its business. However, the Company's
competitors may attempt to circumvent these patent protections or develop new
technologies which compete with the Company's products.
5
International Operations
Substantially all of the Company's revenues and operations are currently
conducted within the United States. However, the Company has been expanding its
international sales efforts and expects international sales to increase in the
future. There are no current plans to locate any production operations or
maintain any significant amounts of inventory outside the U.S., but these plans
are subject to change in the future based on management's assessment of business
opportunities.
One of the Company's product lines, Petrovalve downhole pumps, is currently sold
into markets in South America, particularly Venezuela. This product line was
part of the prior operations of Flotek Industries, Inc. and the South American
revenues included in the accompanying financial statements for the period
subsequent to the Merger are not material. However, on a pro forma combined
basis, South American revenues in this segment amounted to approximately
$1,556,000, or 9.7% of pro forma consolidated revenues for the year ended
December 31, 2001. As discussed in Note 11 of the Notes to Consolidated
Financial Statements, we have recently experienced difficulties in collecting
accounts receivable from these sales on a timely basis due to political
instability and a work stoppage by the employees of the national oil company of
Venezuela. At December 31, 2001, we had approximately $828,000 in accounts
receivable from a customer in Venezuela, which is now past due and which has not
been collected as of the date this Form 10-KSB was filed.
International sales involve additional business and credit risks inherent in
doing business in countries with legal and political policies different from
those in the United States. Those risks can include war, boycotts, legal and
political changes, and fluctuations in currency exchange rates. Although it is
impossible to predict the probability of such occurrences or their effect on the
Company, management believes that these risks are outweighed by the commercial
opportunities of developing sales markets outside the United States.
Employees
As of December 31, 2001, the Company employed approximately 90 full-time
employees. None of the Company's employees are covered by collective bargaining
agreements. The Company believes that its relationship with its employees is
satisfactory.
Risk Factors
The Company faces various business risks specific to its industry, product
lines, financial resources and competitive position, as well as general economic
and financial risks. The following risk factors, among others, may cause the
Company's operating results and/or financial position to be adversely affected:
o The Company is dependent on the oil and gas industry, and
activity levels in the industry are volatile.
o Oil and gas prices are volatile and have a direct impact on the
spending levels of our customers.
o The oilfield service industry is highly competitive and we must
compete with many companies possessing greater financial
resources and better established market positions.
o The introduction of new products and technologies by competitors
may adversely affect the demand for our products and services.
o The Company's debt service obligations may limit our ability to
fund operations and capital spending or provide for future
growth.
o The Company may not be able to successfully manage its growth.
o Changes in political conditions, governmental regulations,
economic and financial market conditions, unexpected litigation
and other uncertainties may have an adverse effect on our
operations.
6
Item 2. Description of Properties
The following table sets forth certain information with respect to the Company's
principal properties:
Facility Size
Location (Sq. Feet) Tenure Utilization
---------------------------- --------------- --------------- ------------------------------------
Houston, Texas................ 9,000 Leased Corporate Office and Warehouse
Duncan, Oklahoma.............. 50,000 Leased Equipment Manufacturing
Duncan, Oklahoma.............. 4,000 Owned Distribution for Specialty Chemicals
Duncan, Oklahoma.............. 750 Leased Administrative Offices
Marlow, Oklahoma.............. 15,500 Owned Manufacturing Specialty Chemicals
Mason, Texas.................. 10,000 Owned Manufacturing Downhole Equipment
Midland, Texas................ 3,500 Leased Distribution for Specialty Chemicals
Lafayette, Louisiana.......... 5,000 Leased Warehouse for Downhole Equipment
Edmonton, Alberta............. 500 Leased Warehouse for Downhole Equipment
The Company considers its facilities to be in good condition and suitable for
the conduct of its business. All of our facilities are subject to mortgages or
security agreements as described in the Notes to the Consolidated Financial
Statements.
Item 3. Legal Proceedings
There are presently no pending lawsuits against the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Prior to the Merger, the Company held a Special Meeting of Stockholders on
October 23, 2001 to consider and vote upon a change in the Company's
jurisdiction of incorporation from Alberta, Canada to Delaware. There were
1,446,829 shares eligible to vote at the meeting, adjusted for the reverse stock
split. The resolution was approved with 934,627 shares voted in favor and 448
shares voted against or abstaining. The resolution was subsequently submitted to
the Court of Queen's Bench of Alberta for final approval of the Court, which was
received on October 30, 2001. In connection with this change in jurisdiction,
one share of common stock of the new Flotek (Delaware) was issued for each 120
outstanding common shares of the old Flotek (Alberta), accomplishing a reverse
stock split of 120 to 1. The Company redeemed fractional shares for cash. The
reverse stock split 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.
7
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is traded on the OTC Bulletin Board under the symbol
"FLTK". The following table sets forth, on a per share basis for the periods
indicated, the high and low sales prices reported by the OTC Bulletin Board, as
adjusted for the 120 to 1 reverse stock split which was given effect on November
5, 2001.
High Low
2001
Fourth quarter ended December 31, 2001...................... $ 10.00 $ 2.00
Third quarter ended September 30, 2001...................... $ 12.00 $ 5.40
Second quarter ended June 30, 2001.......................... $ 10.80 $ 4.20
First quarter ended March 31, 2001.......................... $ 6.00 $ 3.60
2000
Fourth quarter ended December 31, 2000..................... .$ 8.40 $ 3.60
Third quarter ended September 30, 2000...................... $ 12.00 $ 5.40
Second quarter ended June 30, 2000.......................... $ 26.40 $ 10.80
First quarter ended March 31, 2000.......................... $ 31.20 $ 6.00
As of April 12, 2002, the closing stock price, as quoted on the OTC Bulletin
Board, was $1.75. As of April 12, 2002 there were 4,910,812 common shares
outstanding held by approximately 200 holders of record and an estimated 1,000
beneficial holders.
Dividend Policy
The Company has never paid cash dividends on its common stock. The Company
intends to retain future earnings, if any, to meet its working capital
requirements and to finance the future operations of its business. Therefore,
the Company does not plan to declare or pay cash dividends to holders of its
common stock in the foreseeable future. In addition, certain of the Company's
credit agreements contain provisions that limit the Company's ability to pay
cash dividends on its common stock.
Recent Issuance of Unregistered Securities
In connection with the Merger with CESI on October 31, 2001, the Company issued
2,994,480 shares of common stock and assumed employee stock options and
contingent share issuance obligations totaling 117,523 shares. Additional
disclosure related to the issuance of these shares is included in Note 2 of the
Notes to Consolidated Financial Statements.
Prior to the Merger on October 31, 2001, Flotek issued 578,479 shares of common
stock, adjusted for the 120 to 1 reverse stock split, in exchange for cash
proceeds of $2,082,524, in connection with the exercise of warrants which were
outstanding as of February 28, 2001, the date of Flotek's prior Annual Report on
Form 10-KSB. Also in connection with the Merger, all of the outstanding
preferred shares of Flotek were converted to 747,857 shares of common stock.
These share issuances are not reported in the accompanying consolidated
financial statements as they occurred prior to the Merger.
The foregoing issuances of common stock were made in reliance upon the exemption
from registration set forth in Section 4(2) of the Securities Act of 1933 for
transactions not involving a public offering. No underwriters were engaged in
connection with the foregoing sale of securities. The sales were made without
general solicitation or advertising. Each purchaser was an "accredited investor"
or a sophisticated investor with access to all relevant information necessary to
evaluate the investment who represented to the Company that the sales were being
acquired for investment.
8
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Business Overview
Flotek was established in 1985 and is currently traded on the OTC Bulletin Board
market. On October 31, 2001, the Company completed the Merger with CESI. The
Merger has been accounted for as a reverse acquisition using the purchase method
of accounting. In the Merger, the shareholders of the acquired company, CESI,
received the majority of the voting interests in the surviving consolidated
company. Accordingly, CESI was deemed to be the acquiring company for financial
reporting purposes and the historical financial statements of the Company are
the historical financial statements of CESI. All of the assets and liabilities
of Flotek were recorded at fair value on October 31, 2001, the date of the
Merger, and the operations of Flotek have been reflected in the operations of
the combined company only for periods subsequent to the date of the Merger.
CESI was incorporated on June 27, 2000 to acquire businesses in the specialty
chemical and 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 collectively as the "CESI
Acquired Businesses".
The Company's product lines are divided into three segments within the oilfield
service industry:
o The Specialty Chemicals segment develops, manufactures, packages
and sells chemicals used in oil and gas well cementing,
stimulation and production.
o The Equipment Manufacturing segment designs and manufactures
specialized cementing and stimulation equipment, including heavy
vehicles used for pressure pumping, blending and bulk material
transport. This segment also designs, constructs and manages
automated bulk material handling and loading facilities for other
oilfield service companies.
o The Downhole Equipment segment manufactures and markets the
Petrovalve line of downhole pump components and the Turbeco line
of casing centralizers.
Our businesses serve the oil and gas industry. All of our businesses are
affected by changes in the worldwide demand for and price of oil and natural
gas. The majority of our products are dependent on the level of exploration and
development activity and the completion phase of oil and gas well drilling.
Other products and services, such as our Petrovalve downhole pump products and
certain of our specialty chemicals are more closely tied to the production of
oil and gas and are less dependent on drilling activity.
The oil and gas industry has been subject to significant volatility in recent
years due to changes in the demand, supply and pricing of oil and natural gas.
The rig count increased steadily during most of 2000 and the first half of 2001.
The U.S. rig count, as measured by Baker Hughes Incorporated, began 2000 at
around 800 active rigs and ended the year with a 38% increase to approximately
1,100 active rigs. The rig count continued to increase during 2001 and reached a
peak of almost 1,300 in July 2001. During the third quarter of 2001, the demand
for oil and natural gas began to weaken in response to slowing growth in
worldwide economies. This resulted in a slowdown in North American drilling rig
activity, with a steady decline in the rig count during the second half of 2001
until it had reached a level of just under 900 active rigs at December 31, 2001.
Subsequent to the end of 2001, the rig count has dropped further, with around
750 active rigs working at the end of March 2002. Natural gas prices have
declined from a near record high of almost $10.00 per Mcf in early 2001 to
recent lows of below $2.50 per Mcf. Crude oil prices experienced a similar
decline in 2001, from $30.00 per barrel at the beginning of the year to below
$20.00 at the end. However, prices for both commodities have recovered 20-30%
from their lows subsequent to December 31, 2001. Our businesses were affected by
this decline in drilling activity in the second half of 2001, with the effects
most pronounced in the fourth quarter of 2001. Many industry observers expect
drilling activity levels to increase in 2002 based on higher oil and gas prices
and an expected rebound in overall economic activity. However, we face a
challenging industry environment in the near term and there can be no assurance
that these expected improvements will occur.
9
The following is a discussion of our results of operations on both an historical
and an unaudited pro forma combined basis for the last two years. This
discussion should be read in conjunction with our consolidated financial
statements and notes thereto that are included in Item 7 of this filing. Due to
the limited operating history of CESI prior to January 2001, the discussion of
comparative results of operations will focus primarily on the unaudited pro
forma combined information. The unaudited pro forma combined statements of
operations and related pro forma segment information give effect to the
acquisition of the CESI Acquired Businesses by CESI and the Merger between
Flotek and CESI. The basis of presentation for the unaudited pro forma combined
statement of operations for the year ended December 31, 2000, together with the
pro forma adjustments thereto and the separate historical financial statements
of the CESI Acquired Businesses, are presented in the Company's Form 8-K/A which
was filed with the Commission on January 16, 2002 and the information presented
herein should be read in conjunction with the information in that filing. The
basis of presentation and pro forma adjustments for the statement of operations
for the year ended December 31, 2001 and the supporting pro forma segment
information for each of the years ended December 31, 2001 and 2000 are included
as Exhibits 99.1 and 99.2 to this filing and should be read in conjunction with
the information in those exhibits. The unaudited pro forma combined results of
operations presented herein do not purport to represent what the Company's
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
results of operations for any future period or the future results of any of the
acquired businesses. They are presented to allow for a more informative
discussion and comparative analysis of the Company's performance.
The Company is also subject to various Risk Factors as discussed in Item 1 of
this filing, and the following discussion should be read in light of those
factors, which could have a material effect on our business in the future.
Results of Operations
Pro Forma Combined
Historical (Unaudited)
--------------------------- ---------------------------
Years ended December 31, 2001 2000 (a) 2001 2000
----------- ----------- ----------- -----------
Revenues................................ $12,561,499 $ - $15,982,449 $11,685,020
Cost of revenues........................ 9,078,121 - 10,778,063 6,130,315
----------- ----------- ----------- -----------
Gross margin......................... 3,483,378 - 5,204,386 5,554,705
----------- ----------- ----------- -----------
Gross margin %....................... 27.7% - 32.6% 47.5%
Selling, general and administrative..... 3,767,873 153,462 5,306,193 3,628,983
Depreciation and amortization........... 744,305 15,933 853,061 774,001
Research and development................ 34,938 - 109,650 21,079
----------- ----------- ----------- -----------
Total expenses....................... 4,547,116 169,395 6,268,904 4,424,063
----------- ----------- ----------- -----------
Operating income (loss).............. (1,063,738) (169,395) (1,064,518) 1,130,642
----------- ----------- ----------- -----------
Operating income (loss) %............ (8.5)% - (6.7)% 9.7%
Interest expense........................ (415,431) - (457,391) (564,862)
Interest income......................... 43,819 - 43,819 50,454
Other, net.............................. 27,415 10,665 35,050 54,933
----------- ----------- ----------- -----------
Other income (expense), net......... (344,197) 10,665 (378,522) (459,475)
----------- ----------- ----------- -----------
Pre-tax income (loss)............... $(1,407,935) $ (158,730) $(1,443,040) $ 671,167
=========== =========== =========== ===========
Pre-tax income (loss) %............. (11.2)% - (9.0)% 5.7%
(a) for the period from June 27, 2000 (date of incorporation) through December 31, 2000
10
Total revenues on an unaudited pro forma combined basis increased by $4.3
million, or 36.8%, in 2001 compared to 2000. While all three of our segments
achieved higher revenues in 2001 compared to the prior year, the majority of the
increase in revenues is attributable to the Equipment Manufacturing segment,
which increased by $3.1 million. See discussion of the results of this segment
below.
On an aggregate basis, the gross margin as a percentage of revenues dropped
significantly from 47.5% in 2000 to 32.6% in 2001. While we experienced a slight
decline in the gross margin percentages in both the Specialty Chemicals and
Downhole Equipment segments, the vast majority of this decline is attributable
to the poor results of the Equipment Manufacturing segment discussed below.
Selling, general and administrative ("SG&A") costs represent the costs of
selling, operations and overhead expenses not directly attributable to products
sold or services rendered. The revenues from services are less than 10% of
consolidated revenues and the direct costs of providing these services are
included in cost of revenues. SG&A amounted to 33.2% of unaudited pro forma
combined revenues in 2001, an increase of 2.1% of revenues from the level of
31.1% in 2000. The costs of administration increased as a result of the Merger
and the increased size and complexity of the Company, and our selling and
operations costs increased based on higher activity levels. However, our
revenues also increased significantly, so the increase in SG&A as a percentage
of revenues was reduced.
Interest expense on an unaudited pro forma combined basis decreased $107.5
thousand from 2000 to 2001. While the average amount outstanding under the
Company's credit agreements was higher in 2001 as a result of the financing of
capital expenditures and increased working capital needs during the year,
interest rates were significantly lower in 2001 and the decline in rates more
than offset the additional interest expense associated with higher debt levels.
The majority of the Company's indebtedness carries a variable interest rate tied
to the prime rate and is adjusted on a quarterly basis.
Unaudited Pro Forma Combined Results by Segment:
Specialty Chemicals
The following table presents the operating results of our Specialty Chemicals
segment on an unaudited pro forma combined basis for 2001 and 2000:
Years ended
December 31,
--------------------------------
2001 2000
-------------- --------------
Revenues..................... $7,329,596 $6,607,998
Gross margin................. $3,032,815 $2,828,606
Gross margin %............... 41.4% 42.8%
Operating income............. $1,113,588 $1,165,268
Operating margin............. 15.2% 17.6%
Specialty Chemical revenues increased $721.6 thousand, or 10.9%, in the current
year from 2000 levels. Sales in this segment are heavily dependent on drilling
activity and the increase in revenue is primarily attributable to higher
drilling activity, on average, in 2001 versus 2000. Average product pricing
levels in this segment did not change materially from 2000 to 2001.
The gross margin percentage in this segment declined slightly from 42.8% in 2000
to 41.4% in 2001. In certain cases, in order to achieve increased sales levels,
we sold our products at a slightly lower gross margin. Despite the slight
decline in our gross margin percentage, we realized an overall increase of
$204.2 thousand, or 7.2%, in total gross margin in this segment.
11
Operating income fell $51.7 thousand, or 4.4%, in the current year from 2000
levels, primarily as a result of increased selling, general, and administrative
expenses associated with integrating the companies in this segment after their
acquisition by CESI. In addition, there was a small increase in depreciation
expense from capital expenditures to expand one of the facilities in this
segment. The above issues, together with the slight decrease in the gross margin
percentage, combined to result in a decrease in overall operating margin
percentage in this segment from 17.6% in 2000 to 15.2% in 2001.
Equipment Manufacturing
The following table presents the operating results of our Equipment
Manufacturing segment on an unaudited pro forma combined basis for 2001 and
2000:
Years ended
December 31,
--------------------------------
2001 2000
-------------- --------------
Revenues..................... $ 5,233,039 $2,095,614
Gross margin................. $412,983 $1,138,975
Gross margin %............... 7.9% 54.4%
Operating income............. $(1,177,139) $ $311,142
Operating margin............. (22.5)% 14.8%
Equipment Manufacturing revenues increased $3.1 million, or 150%, in 2001 over
2000 levels. This increase primarily resulted from the significant expansion of
capacity in 2001 which was undertaken by the management of CESI in response to
perceived market opportunities. In the second quarter of 2001, the Company more
than doubled the number of bays in its Duncan, Oklahoma manufacturing facility,
from 5 to 11. Unfortunately, the management of this segment was not able to
effectively manage the increase in business and the expansion, combined with
operational problems and delays in getting major components from suppliers,
resulted in significant cost overruns and operating losses.
The gross margin dropped dramatically from 2000 to 2001 and, when combined with
overhead costs and indirect costs of manufacturing in this segment, resulted in
a significant loss for the year of approximately $1.2 million.
Subsequent to the Merger, the Company replaced the management of this segment
and focused significant efforts and financial resources on improving the
performance of this segment, including the implementation of improved operating
procedures, better accounting controls and proper documentation of work
processes. The Company also initiated cost reduction measures in response to
lower revenue levels and reduced sales expectations. While significant
improvements have been made, based on preliminary financial results in early
2002 this segment continued to operate at a loss, although the magnitude of that
loss has been reduced.
The outlook for the equipment manufacturing operations in this segment is
uncertain. Orders for new equipment to be manufactured slowed significantly in
the second half of the year. Management is continuing to solicit new orders and
in the event it does not secure sufficient new orders, the Company is prepared
to take appropriate action to limit its financial exposure from further losses
in this segment.
The outlook for other operations within this segment, consisting of the design,
construction and management of bulk material handling and loading facilities, is
much more positive. These operations accounted for approximately $1.0 million in
pro forma revenues, or slightly less than 20% of unaudited pro forma combined
revenues in this segment and generated a positive operating margin of
approximately $58 thousand during 2001. Based on the current work in progress
and outstanding bids in response to requests for quotations, management believes
that the revenues and operating margin attributable to these operations will
increase significantly over 2001. However, there can be no assurance that the
Equipment Manufacturing segment as a whole will be profitable. As more fully
discussed in Note 1 of the Notes to Consolidated Financial Statements, there is
approximately $1.3 million of net goodwill attributable to this segment, all or
some portion of which may be subject to an impairment charge based on new
accounting requirements which take effect during 2002.
12
Downhole Equipment
The following table presents the operating results of our Downhole Equipment
segment on an unaudited pro forma combined basis for 2001 and 2000:
Years ended
December 31,
--------------------------------
2001 2000
-------------- --------------
Revenues..................... $3,419,814 $2,981,408
Gross margin................. $1,758,588 $1,587,124
Gross margin %............... 51.4% 53.2%
Operating income............. $367,537 $430,347
Operating margin............. 10.7% 14.4%
Downhole Equipment revenues increased $438.4 thousand, or 14.7%, in 2001
compared to 2000 levels. This incremental revenue is primarily due to increased
sales volumes, which resulted from improved sales efforts and increased market
penetration of our Petrovalve product line in South American sales markets,
primarily Venezuela. Net product pricing in 2001 did not change materially from
the levels in 2000.
The gross margin percentage in this segment decreased slightly from 53.2% in
2000 to 51.4% in 2001. In connection with the Merger, the Company recorded $87.4
thousand in inventory reserves to reflect additional impaired, excess or
obsolete inventory. With the exception of this charge, our cost of manufacturing
the products sold in this segment did not increase significantly. The total
gross margin increased by $171.5 thousand, or 10.8% from the prior year.
Operating income in 2001 fell $62.8 thousand, or 14.6%, from 2000, primarily as
a result of increased research and development expenditures incurred to develop
new products, including the C-PAC pressure actuated centralizer. The operating
margin declined from 14.4% in 2000 to 10.7% in 2001 as a result of the lower
gross margin percentage and increased research and development spending in this
segment.
Liquidity and Capital Resources
In 2001, the Company sustained a loss from operations of $1.4 million and had
negative cash flow from operations of approximately $1.1 million. These losses
resulted primarily from the poor operating results in the Equipment
Manufacturing segment. As discussed above, management has taken and will
continue to take appropriate steps to improve performance and attempt to limit
the losses in this segment.
Cash and cash equivalents decreased $1.1 million from 2000 to 2001. Prior to
January 2001, CESI had not commenced operations and the cash on hand of $1.3
million at December 31, 2000 was the result of sales of common stock to
investors for cash, reduced by certain start-up expenses. This cash was
specifically intended for the acquisition of the CESI Acquired Businesses in
January 2001. In order to complete the acquisition of the CESI Acquired
Businesses, CESI raised an additional $4.1 million of cash through sales of
common stock to investors and borrowed $2.7 million from a bank. These funds
were used to fund payments totaling $7.2 million to the sellers of the
businesses. CESI also assumed or incurred an additional $2.2 million in debt in
connection with the acquisitions. Subsequent to the acquisitions, but prior to
the Merger, CESI incurred an additional $1.0 million of debt to finance capital
expenditures and fund working capital needs.
13
At the time of the Merger with CESI, Flotek had cash on hand of approximately
$1.2 million, which represented the unexpended balance of the proceeds from the
exercise of warrants by the shareholders of Flotek prior to the Merger. The
majority of this cash was used after the Merger to fund the remaining capital
expenditures and working capital needs of the combined company and the Company
ended the year with a cash balance of approximately $240,000.
Capital expenditures paid in cash were $1.4 million. In addition, the Company
incurred additional capital expenditures of $0.9 million which had not been paid
in cash as of December 31, 2001. Of the total $2.3 million in capital
expenditures incurred, we used $0.6 million to expand facilities and add
equipment in the Specialty Chemicals segment, $1.6 million to significantly
expand facilities and manufacturing capacity in the Equipment Manufacturing
segment, and $0.1 million for vehicles and other equipment in the Downhole
Equipment segment.
As of December 31, 2001, net working capital was approximately $284,000,
resulting in a current ratio of 1.05 to 1. The accounts payable balance at
December 31, 2001 of $2.23 million included a substantial amount of past due
vendor invoices, most of which related to the Equipment Manufacturing segment.
Subsequent to the end of the year (as discussed in Note 12 of the Notes to
Consolidated Financial Statements), the Company secured an additional $1.6
million of short-term borrowing capacity from its primary lending bank, subject
to a borrowing base limitation of 50% of eligible accounts receivable and
inventory balances. The funding from this expanded line of credit has generally
allowed the Company to bring its vendor accounts to current status.
As disclosed in Note 11 of the Notes to Consolidated Financial Statements, at
December 31, 2001, the Company had approximately $828,000 of accounts receivable
from a customer in Venezuela which had not been paid within the customary
payment terms as a result of political instability and a work stoppage by the
employees of the national oil company. This amount had not been collected as of
the date this Form 10-KSB was filed. This amount is currently not included in
eligible accounts receivable for purposes of calculating the borrowing base
under our lines of credit. The Company has an established long-term relationship
with this customer and believes that it will ultimately collect the balance due,
but it cannot predict the timing of such payment. The Company has not provided a
reserve for doubtful accounts associated with this balance.
Also subsequent to December 31, 2001 (see Note 12 of the Notes to Consolidated
Financial Statements), the Company entered into a sale and leaseback transaction
regarding its commitment to complete the purchase of its Equipment Manufacturing
facility in Duncan, Oklahoma. This transaction resulted in net cash proceeds to
the Company of approximately $761,000 and the Company entered into an agreement
to lease back the facility over ten years. This transaction will be recorded as
a capital lease.
The Company has estimated minimum debt service obligations in 2002 of $1.8
million. This amount includes the estimated minimum principal and interest
payments on the new credit agreements and capital lease obligations incurred
subsequent to December 31, 2001. With the exception of the construction of the
bulk material transload facility in Raceland, Louisiana disclosed in Note 12 of
the Notes to Consolidated Financial Statements, which is expected to be
substantially financed by a new credit agreement in the amount of $854,350, the
Company does not expect to have any major requirements for capital expenditures
in 2002.
The Company believes its operations are capable of generating sufficient cash
flow to meet its debt service obligations and working capital needs during the
year ended December 31, 2002. However, we face a challenging near-term industry
environment and there are many factors involved in executing our business
strategy which are beyond our control. Accordingly, investors are advised that
the Company faces significant financial risks in the next year as we attempt to
meet these challenges.
14
Forward-Looking Statements
Except for the historical information contained herein, the discussion in this
Form 10-KSB includes "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended. The words "anticipate", "believe", "expect",
"plan", "intend", "project", "forecast", "could" and similar expressions are
intended to identify forward-looking statements. All statements other than
statements of historical facts included in this Form 10-KSB regarding the
Company's financial position, business strategy, budgets and plans and
objectives of management for future operations are forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, actual results may differ materially
from those in the forward-looking statements for various reasons including the
effect of competition, the level of petroleum industry exploration and
production expenditures, world economic conditions, prices of, and the demand
for crude oil and natural gas, weather, the legislative environment in the
United States and other countries, adverse changes in the capital and equity
markets, and other risk factors identified herein.
15
Item 7. Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants.........................................................................17
Consolidated Balance Sheets as of December 31, 2001 and 2000.....................................................18
Consolidated Statements of Operations for the Year Ended December 31, 2001 and for the Period from June 27,
2000 (Date of Incorporation) through December 31, 2000......................................................19
Consolidated Statements of Changes in Stockholders' Equity for the Year Ended
December 31, 2001 and for the Period from June 27, 2000 (Date of Incorporation) through December 31, 2000...20
Consolidated Statements of Cash Flows for the Year Ended December 31, 2001 and for the Period from June 27,
2000 (Date of Incorporation) through December 31, 2000......................................................21
Notes to Consolidated Financial Statements.......................................................................23
16
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Flotek Industries, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of Flotek
Industries, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year ended December 31, 2001 and the period from June 27, 2000
(date of incorporation) through December 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Flotek
Industries, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
consolidated results of its operations and its cash flows for the year ended
December 31, 2001 and the period from June 27, 2000 (date of incorporation)
through December 31, 2000, in conformity with generally accepted accounting
principles.
WEINSTEIN SPIRA & COMPANY, P.C.
Houston, Texas
March 18, 2002
17
FLOTEK INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
2001 2000
----------- ----------
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 240,438 $ 1,293,142
Accounts receivable, less reserve of $208,333 in 2001............... 2,189,566 -
Inventories and work in progress.................................... 3,704,153 -
Other current assets................................................ 24,735 -
----------- -----------
Total current assets........................................... 6,158,892 1,293,142
----------- -----------
Property and equipment, net............................................ 3,671,939 100,988
Goodwill, net.......................................................... 13,111,840 -
Patents, net........................................................... 191,333 -
Other assets........................................................... 87,253 95,459
----------- -----------
Total assets.................................................. $23,221,257 $ 1,489,589
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 2,225,219 $ 80,469
Accrued liabilities................................................ 722,910 20,069
Amounts due to related parties..................................... 132,855 164,410
Notes payable...................................................... 1,282,966 -
Current portion of long-term debt.................................. 876,737 -
Capital lease obligations.......................................... 633,894 -
----------- -----------
Total current liabilities..................................... 5,874,581 264,948
----------- -----------
Long-term debt........................................................ 3,339,970 -
----------- -----------
Stockholders' equity:
Preferred stock, $.0001 par value, 100,000 shares authorized, no
shares issued................................................. - -
Common stock, $.0001 par value, 20,000,000 shares authorized,
4,850,696 and 1,425,665 shares issued and outstanding for 2001
and 2000, respectively........................................ 485 143
Additional paid-in capital........................................ 15,572,886 1,383,228
Accumulated deficit............................................... (1,566,665) (158,730)
----------- -----------
Total stockholders' equity.................................... 14,006,706 1,224,641
----------- -----------
Total liabilities and stockholders' equity.................... $23,221,257 $ 1,489,589
=========== ===========
The accompanying notes are an integral part of these financial statements.
18
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31, 2001 and the Period from June 27, 2000
(Date of Incorporation) through December 31, 2000
2001 2000
----------- ----------
Revenues...................................................... $12,561,499 $ -
Cost of revenues.............................................. 9,078,121 -
----------- ----------
Gross margin.................................................. 3,483,378 -
----------- ----------
Expenses:
Selling, general and administrative....................... 3,767,873 153,462
Depreciation and amortization............................. 744,305 15,933
Research and development.................................. 34,938 -
----------- ----------
Total expenses......................................... 4,547,116 $ 169,395
----------- ----------
Loss from operations.......................................... (1,063,738) (169,395)
Other income (expense):
Interest expense.......................................... (415,431) -
Interest income........................................... 43,819 10,665
Other, net................................................ 27,415 -
----------- ----------
Total other income (expense)........................... (344,197) 10,665
----------- ----------
Net loss...................................................... $(1,407,935) $ (158,730)
=========== ==========
Basic and diluted net loss per common share................... $ (0.44) $ (0.27)
===== =====
Weighted average number of shares outstanding................. 3,175,449 596,526
=========== ==========
The accompanying notes are an integral part of these financial statements.
19
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Year Ended December 31,
2001 and the Period from June 27, 2000
(Date of Incorporation) through December 31, 2000
Additional
Common Stock Paid-in Accumulated
Shares Capital Deficit Total
-------------------- ----------- ----------- -----------
Common stock issued for cash............ 1,425,665 $143 $ 1,383,228 $ - $ 1,383,371
Net loss................................ - - - (158,730) (158,730)
---------- ---- ----------- ----------- ------------
Balance at December 31, 2000............ 1,425,665 143 1,383,228 (158,730) 1,224,641
Common stock issued in acquisitions..... 2,326,312 232 10,077,768 - 10,078,000
Common stock issued for cash............ 1,098,719 110 4,111,890 - 4,112,000
Net loss................................ - - - 1,407,935) (1,407,935)
---------- ---- ----------- ---------------- ------------
Balance at December 31, 2001............ 4,850,696 $485 $15,572,886 $(1,566,665) $ 14,006,706
========== ==== =========== =========== ============
The accompanying notes are an integral part of these financial statements.
20
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 2001 and the Period from June 27, 2000
(Date of Incorporation) through December 31, 2000
2001 2000
----------- ----------
Cash flows from operating activities:
Net loss.................................................. $(1,407,935) $ (158,730)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 744,305 15,933
Imputed interest expense.............................. 43,095 -
Allowance for doubtful accounts....................... 216,302 -
Gain on sale of assets................................ (20,435) -
(Increase) decrease in: -
Accounts receivable................................. (382,766) -
Inventories and work in progress.................... (1,439,324) -
Other current assets................................ (15,655) -
Accounts payable and accrued liabilities............ 1,177,823 100,538
----------- ----------
Net cash used in operating activities.............. (1,084,590) (42,259)
----------- ----------
Cash flows from investing activities:
Acquisition of subsidiaries, net.......................... (6,066,493) -
Capital expenditures...................................... (1,411,460) (116,921)
Proceeds from sales of assets............................. 246,536 -
Deposits and other........................................ (77,864) (95,459)
----------- ----------
Net cash used in investing activities.............. (7,309,281) (212,380)
----------- ----------
Cash flows from financing activities:
Issuance of stock for cash................................ 4,112,000 1,383,371
Proceeds from borrowings.................................. 3,737,316 -
Repayments of indebtedness................................ (325,755) -
Proceeds from (payments to) related parties............... (152,394) 164,410
Principal payments on capital leases...................... (30,000) -
----------- ----------
Net cash provided by financing activities.............. 7,341,167 1,547,781
----------- ----------
Net increase (decrease) in cash and cash equivalents........... (1,052,704) 1,293,142
Cash and cash equivalents at beginning of year................. 1,293,142 -
----------- ----------
Cash and cash equivalents at end of year....................... $ 240,438 $1,293,142
=========== ==========
The accompanying notes are an integral part of these financial statements.
21
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 2001 and the Period from June 27, 2000
(Date of Incorporation) through December 31, 2000
(Continued)
2001 2000
----------- --------
Supplemental schedule of noncash investing and financing activities:
Land and building acquired under capital lease................ $ 630,794 $ -
=========== ==
Capital expenditures incurred but not paid at year end......... $ 275,000 $ -
=========== ==
Supplemental disclosures of cash flow information:
Acquisition of subsidiaries:
Assets (liabilities) acquired:
Cash....................................................... $ 1,433,381 $ -
Accounts receivable........................................ 2,023,102 -
Inventories and work in progress........................... 2,264,829 -
Other current assets....................................... 9,080 -
Property and equipment..................................... 1,637,897 -
Marketable securities...................................... 204,573 -
Patents.................................................... 192,541 -
Goodwill................................................... 13,394,420 -
Other assets............................................... 21,770 -
Debt....................................................... (808,951) -
Accounts payable and accrued liabilities................... (1,394,768) -
----------- -
18,977,874 -
Common stock issued......................................... (10,078,000) -
Promissory notes issued..................................... (1,400,000) -
Transaction costs paid in cash.............................. (312,274) -
----------- -
Net cash paid to sellers.................................. $ 7,187,600 $ -
=========== ==
Cash paid for interest........................................ $ 415,431 $ -
=========== ==
The accompanying notes are an integral part of these financial statements.
22
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and Summary of Significant Accounting Policies
Flotek Industries, Inc. and subsidiaries (the "Company" or "Flotek") was
originally incorporated under the laws of the Province of British Columbia on
May 17, 1985. On October 23, 2001, the Company moved its corporate domicile to
Delaware and completed a reverse stock split of 120 to 1. On October 31, 2001,
the Company completed a merger ("the Merger") with Chemical & Equipment
Specialties, Inc. ("CESI"). The Merger has been accounted for as a reverse
acquisition using the purchase method of accounting. In the Merger, the
shareholders of the acquired company, CESI, received the majority of the voting
interests in the surviving consolidated company. Accordingly, CESI was deemed to
be the acquiring company for financial reporting purposes and the historical
financial statements of the Company are the historical financial statements of
CESI. All of the assets and liabilities of Flotek were recorded at fair value on
the date of the Merger, and the operations of Flotek have been reflected in the
operations of the combined company only for periods subsequent to the date of
the Merger.
The Company's product lines are divided into three segments within the oilfield
service industry:
o The Specialty Chemicals segment develops, manufactures, packages and
sells chemicals used in oil and gas well cementing, stimulation and
production.
o The Equipment Manufacturing segment designs and manufactures
specialized cementing and stimulation equipment, including heavy
vehicles used for pressure pumping, blending and bulk material
transport. This segment also designs, constructs and manages automated
bulk material handling and loading facilities for other oilfield
service companies.
o The Downhole Equipment segment manufactures and markets the Petrovalve
line of downhole pump components and the Turbeco line of casing
centralizers.
Principles of Consolidation
The consolidated financial statements consist of Flotek Industries, Inc. and its
subsidiaries, all of which are wholly owned. All significant intercompany
transactions and balances have been eliminated in consolidation.
Revenue Recognition
The Specialty Chemical and Downhole Equipment segments recognize revenues when
products have been delivered and all significant risks and rewards of ownership
have passed to customers. 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. Accounts deemed uncollectible are applied
against the allowance for doubtful accounts. Deposits and other funds received
in advance of delivery are deferred until the transfer of ownership is complete.
The Equipment Manufacturing segment recognizes revenues from manufacturing and
construction contracts under the percentage-of-completion method of accounting,
generally in the ratio of costs incurred to total estimated costs of completion.
Contract costs include all direct labor and material costs and those indirect
costs related to manufacturing and construction operations. General and
administrative costs are charged to expense as incurred. Changes in job
performance and estimated profitability, including those arising from contract
bonus or penalty provisions and final contract settlements, may result in
revisions to costs and income and are recognized in the period in which such
revisions appear probable. All known or anticipated losses on contracts are
recognized in full when such amounts become apparent.
23
Customers are invoiced under the terms of manufacturing or construction
contracts and accounts receivable are recorded at that time. Revenues recognized
in excess of customer billings are reflected in current assets as work in
progress. Deposits and billings in excess of revenues on specific contracts are
recognized as a current liability.
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, 2001, the
Company had deposits in excess of federally insured limits.
Inventories and Work in Progress
Inventories consist of raw materials, finished goods and parts and materials
used in manufacturing and construction operations. Finished goods inventories
include raw materials, direct labor and production overhead. Inventories are
carried at the lower of cost or market using the average cost method. The
Company maintains a reserve for impaired or obsolete inventory, which is
reviewed for adequacy on a periodic basis. Work in progress consists of
percentage of completion revenues recognized in excess of customer billings. The
components of inventories and work in progress at December 31, 2001 were as
follows:
Raw materials................................... $ 496,332
Finished goods.................................. 1,856,011
Manufacturing parts and materials............... 708,036
Work in progress................................ 1,000,799
Inventory reserve............................... (357,025)
---------
$3,704,153
==========
Property and Equipment
Property and equipment are stated at cost. The cost of ordinary maintenance and
repairs is charged to operations, while replacements and major improvements are
capitalized. Depreciation is provided at rates considered sufficient to amortize
the cost of the assets using the straight-line method over the following
estimated useful lives:
Buildings and improvements............ 20 years
Machinery and equipment............... 5 years
Furniture and fixtures................ 5 years
Transportation equipment.............. 3 years
Computer equipment.................... 3 years
24
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 represents the excess of cost over the fair value of net assets of
companies acquired in business combinations accounted for using the purchase
method. Goodwill acquired in business combinations prior to June 30, 2001 has
been amortized using the straight-line method over an estimated useful life of
20 years. In July 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. SFAS No. 142 requires that goodwill
no longer be amortized but instead be reviewed periodically for possible
impairment. The Company will adopt SFAS No. 142 effective January 1, 2002 and
will no longer amortize goodwill. The goodwill amortization expense during the
year ended December 31, 2001, was $378,040.
Under SFAS 142, the Company must complete its initial assessment of goodwill for
possible impairment no later than December 31, 2002. This impairment test is
required to be performed for each reporting segment. As of December 31, 2001,
the Company had net goodwill of approximately $1.3 million attributable to its
Equipment Manufacturing segment. This segment experienced a significant
operating loss during the year ended December 31, 2001 and may be subject to
impairment under SFAS 142. However, the Company has not implemented SFAS 142 and
has not reached a final determination of any potential impairment of goodwill at
this time. Additionally, while the other segments of the Company were profitable
during the year ended December 31, 2001, the Company will also assess the
goodwill associated with these segments for potential impairment under SFAS 142.
Income Taxes
Income taxes are computed under the liability method based upon rates prevailing
at the end of the period. The Company provides deferred income tax assets and
liabilities for the expected future tax consequences attributable to differences
between the financial statement carrying amounts and the respective tax basis of
assets and liabilities. These deferred assets and liabilities are based on
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to amounts which are more likely than not to be
realized.
Loss Per Share
Loss per common share is calculated by dividing net loss attributable to common
shareholders by the weighted average number of common shares outstanding.
Dilutive loss per share is calculated by dividing net loss attributable to
common shareholders by the weighted average number of common shares and dilutive
potential common shares outstanding. There were no potentially dilutive common
shares as of December 31, 2001 or 2000.
25
Stock-Based Compensation
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic method, as prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the fair market value of the Company's stock at the date of the grant
over the amount the employee must pay to acquire the stock, and is recognized
over the related vesting period. The Company provides supplemental disclosure of
the effect on net income and earnings per share as if the provisions of SFAS No.
123, Accounting for Stock-Based Compensation, had been applied in measuring
compensation expense.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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 these estimates.
Note 2 - Acquisitions
Effective January 1, 2001, the Company acquired four entities in purchase
transactions in exchange for payment of the following consideration:
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............. 500,000 400,000 100,000 1,000,000
Padko International, Inc........... 237,600 - 250,000 487,600
---------- ---------- ---------- ----------
$6,587,600 $1,400,000 $1,600,000 $9,587,600
========= ========= ========= =========
In June 2001, the Company acquired Material Translogistics, Inc. ("MTI") in
exchange for 52,232 shares of common stock valued at $200,000 and $600,000 of
cash. The shareholders of MTI can also receive up to 52,232 additional common
shares, contingent upon the execution of certain future contracts. The Company
did not purchase any tangible assets, nor did it assume any liabilities of MTI.
The common stock in all of the above transactions was valued at $3.83 per share,
consistent with recent cash transactions. The Company incurred approximately
$169,000 in transaction costs associated with the above transactions. The
transactions resulted in approximately $7,765,000 of goodwill.
On October 31, 2001, the Company completed the Merger with CESI. The business
combination has been accounted for as a reverse acquisition under the purchase
method of accounting. In connection with the Merger, the CESI shareholders as a
group received 2,994,480 common shares and the assumption of employee stock
options to purchase 65,291 common shares and contingent share issuance
obligations related to MTI of 52,232 common shares. The retained ownership of
the Flotek shareholders as a group amounted to 1,856,216 shares of common stock
and the combined company assumed Flotek employee stock options to purchase
101,499 common shares and warrants to purchase 51,076 shares of common stock.
Simultaneously with the closing of the Merger, all preferred shares of Flotek
previously outstanding, including accrued dividends, were converted to common
stock at the rate of $3.24 per share.
26
Subsequent to August 15, 2001, the date the Merger agreement was signed, and
prior to the closing of the Merger, Flotek warrants to purchase 536,141 shares
of common stock at $3.60 per share were exercised, resulting in cash proceeds to
Flotek of $1,930,106. The warrant proceeds are not reflected in these financial
statements as they occurred prior to the Merger.
For purposes of the reverse acquisition, the value of the stock issued to the
Flotek shareholders as a group was $8,278,000, which together with merger costs
of approximately $385,000, gave rise to approximately $5,725,000 of goodwill.
The following unaudited pro forma information reflects the combined results of
operations for the years ended December 31, 2001 and 2000 as if all of the
acquisitions discussed above had been completed on January 1, 2000 (amounts in
$000's, except per share amounts):
2001 2000
Revenues................................ $15,982 $11,685
Net income (loss)....................... $(1,443) $ 389
Basic income (loss) per share........... $ (0.30) $ 0.08
Diluted income (loss) per share......... $ (0.30) $ 0.08
The pro forma 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
results of operations of acquired companies are included in these consolidated
financial statements only for periods subsequent to the date of acquisition.
Note 3 - Property and Equipment
At December 31, 2001 and 2000, property and equipment were comprised of the
following:
December 31, 2001 December 31, 2000
------------------ -----------------
Land.................................. $ 145,000 $ -
Buildings and leasehold improvements.. 2,114,878 36,325
Machinery and equipment............... 1,128,894 -
Furniture and fixtures................ 135,937 1,411
Transportation........................ 456,794 70,000
Computer equipment.................... 77,436 9,185
------ -------
Total property and equipment...... 4,058,939 116,921
Less accumulated depreciation........ 387,000 15,933
------- -------
Net property and equipment....... $3,671,939 $100,988
========= =======
Note 4 - Capital Lease Obligation
Effective March 2001, the Company entered into a lease and purchase agreement
with a third party for the purchase of land and buildings. The agreement had a
one-year term and provided for lease payments of $3,000 per month, with the
final purchase price of $639,000 due on March 1, 2002. As of December 31, 2001,
the capital lease obligation was recorded at the net present value of $633,894.
See Note 12 for discussion of the disposition of this obligation subsequent to
year end.
27
Note 5 - Notes Payable
Notes payable at December 31, 2001, consisted of the following:
Revolving line of credit, secured by accounts receivable and inventory,
bearing interest at the prime rate plus 1.25%, due in May 2002, with
maximum borrowings of $1,414,020....................................... $1,252,966
Other notes payable...................................................... 30,000
----------
Total notes payable.................................................... $1,282,966
==========
The revolving line of credit is limited to a borrowing base amount calculated as
60% of eligible accounts receivable and inventory.
Note 6 - Long-Term Debt
Long-term debt at December 31, 2001, consisted of the following:
Notes payable to shareholders of acquired businesses, unsecured, bearing
interest at 9% payable quarterly, due in five annual installments of
$200,000 each beginning January 2002................................... $1,000,000
Note payable to bank, bearing interest at the prime rate plus 1%, payable
in monthly installments of $39,715 including interest, due in January
2008................................................................... 2,439,532
Notes payable to Duncan Area Economic Development Foundation, unsecured,
with interest at 6%, payable in monthly installments of $1,934 including
interest, due in May 2006.............................................. 87,620
Note payable to bank, bearing interest at the prime rate plus 1%, payable
in monthly installments of $14,829 including interest, due in September
2004................................................................... 464,538
Mortgage note on property, bearing interest at 10%, payable in monthly
installments of $1,451 including interest, with a final payment of
$111,228 due in December 2002.......................................... 115,877
Secured vehicle and other equipment loans................................ 109,140
----------
Total............................................................. 4,216,707
Less current maturities........................................... 876,737
----------
Long-term debt................................................ $3,339,970
==========
The revolving line of credit and bank notes payable are owed to the Company's
primary lending bank and are secured by substantially all of the assets of the
Company. They have also been personally guaranteed by an officer of the Company.
28
The following is a schedule of future maturities of long-term debt:
Years ending
December 31,
---------------
2002........... $ 876,737
2003........... 773,758
2004........... 767,919
2005........... 646,786
2006........... 656,845
Thereafter..... 494,662
----------
$4,216,707
==========
Note 7 - Stock Options and Warrants
The Company and its predecessors have issued non-qualified employee stock
options to employees, officers, directors and consultants from time to time as
approved by the Board of Directors. The exercise price has been equal to the
fair market value at the date of grant. The shares covered by the option
agreements are not registered with the Securities and Exchange Commission.
The following table presents stock options issued and outstanding during the
period:
Range of Exercise Weighted
Prices Average
------------------ Exercise
Shares Low High Price
-------- ----- ------ -----
Balance at December 31, 2000........ - $ - $ - $ -
Options granted..................... 65,291 3.83 3.83 3.83
Flotek options assumed (a).......... 101,499 3.60 12.96 5.80
Options exercised................... - - - -
Options cancelled................... - - - -
------- ----- ----- -----
Balance at December 31, 2001........ 166,790 $3.60 $12.96 $5.03
======= ==== ===== ====
Exercisable at December 31, 2001.... 153,179 $3.60 $12.96 $5.09
======= ==== ===== ====
(a) The exercise price for 22,332 of these stock option shares is denominated
in Canadian dollars at amounts ranging from C$18.00 to C$20.40. The high
and low prices in the above table represent the U.S. dollar equivalent
exercise prices based on exchange rates in effect at December 31, 2001.
The weighted average contractual life remaining on outstanding stock options was
approximately 2.5 years at December 31, 2001.
Had stock-based compensation cost been determined under the fair value method
pursuant to SFAS 123 for options granted during the year ended December 31,
2001, the net loss for the period would have increased by approximately $12,000.
The impact on basic and diluted loss per share would have been immaterial. The
weighted average fair value of the options granted during the period was $0.36
per share, based on the Black-Scholes option pricing model using the contractual
life of two years, a risk free interest rate of 5.0% and zero expected
volatility, since there was no public market for the stock of CESI on the date
of grant.
Prior to the Merger, Flotek had outstanding warrants to purchase 51,076 shares
of common stock at an exercise price of $14.40 per share, which expire in
October 2006. These warrants were assumed by the combined company. The
expiration date of these warrants can be accelerated in the event that the
closing price of the common stock of the Company is in excess of $21.60 for a
period of 60 consecutive trading days.
29
Note 8 - Federal Income Tax
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
December 31, December 31,
2001 2000
----------- -----------
Federal income tax (benefit) at 34%..... $ (478,696) $ (53,968)
Nondeductible items..................... 4,833 1,132
Other................................... (108,137) (164)
Change in valuation allowance........... 582,000 53,000
----------- -----------
$ - $ -
=========== ===========
The components of deferred taxes are as follows:
Allowance for doubtful accounts..... $ 71,000 $ -
Inventory reserves.................. 121,000 -
Net operating loss carryforward..... 440,000 50,000
Book depreciation in excess of tax.. 3,000 3,000
----------- -----------
635,000 53,000
----------- -----------
Valuation allowance.................... (635,000) (53,000)
----------- -----------
$ - $ -
=========== ===========
At December 31, 2001, the Company had estimated net operating loss carryforwards
which may be available to offset future taxable income of approximately $1.3
million, expiring in 2021. In addition, Flotek Industries, Inc. had substantial
tax loss carryforwards which arose prior to the Merger. Under federal tax law,
the amount and availability of Flotek's loss carryforwards, as well as those of
the combined company, are subject to complex tax regulations and restrictive
tests. The utilization of such carryforwards can be severely limited or
effectively lost upon certain changes in ownership, such as the Merger. In
addition, under generally accepted accounting principles, the benefit of any
utilization of Flotek's tax loss carryforwards would be recorded as a reduction
of goodwill and would not affect net income. The utilization of any of these net
operating loss carryforwards is dependent on the future profitability of the
Company. Accordingly, no assurance can be given regarding the ultimate
realization of such loss carryforwards. An allowance has been recorded to fully
offset the net deferred tax asset.
30
Note 9 - Related Party Transactions
The Company had amounts due to officers and directors, representing advances
made to the Company and unreimbursed business expenses totaling $132,855 and
$164,410 at December 31, 2001 and 2000, respectively. The amount at December 31,
2001 includes a $120,839 cash advance made to the Company which bears interest
at 10% and is due upon demand.
Note 10 - Operating Leases
The Company has entered into operating leases for office space, vehicles and
equipment. Future minimum lease payments under these leases are as follows:
Years ending
December 31,
----------------------
2002.......... $114,938
2003.......... 90,763
2004.......... 75,242
2005.......... 3,902
--------
$284,845
========
Total rent expense under these operating leases totaled approximately $40,000
during the year ended December 31, 2001.
Note 11 - Segment Information
The Company has three reportable segments, as follows:
o The Specialty Chemicals segment develops, manufactures, packages and
sells chemicals used in oil and gas well cementing, stimulation and
production.
o The Equipment Manufacturing segment designs and manufactures
specialized cementing and stimulation equipment, including heavy
vehicles used for pressure pumping, blending and bulk material
transport. This segment also designs, constructs and manages automated
bulk material handling and loading facilities for other oilfield
service companies.
o The Downhole Equipment segment manufactures and markets the Petrovalve
line of downhole pump components and the Turbeco line of casing
centralizers.
The Company's reportable segments are strategic business units that offer
different products and services. Each business segment requires different
technology and marketing strategies and is managed independently. The accounting
policies used in each of the segments are the same as those described in the
significant accounting policies. The Company evaluates the performance of its
operating segments based on operating income, net of depreciation expense and
goodwill amortization, but excluding other income and unusual charges.
Intersegment sales and transfers are not material.
Essentially all of the Company's revenues are derived from the oil and gas
industry. This concentration of customers in one industry increases the credit
and business risks of the Company, particularly given the volatility of activity
levels in the industry. The majority of the Company's sales are to major or
large independent oilfield service companies with established credit histories
and actual credit losses have been within the Company's expectations. Two
customers accounted for 17.1% and 14.2%, respectively, of consolidated revenues
for the year ended December 31, 2001. Both of these customers were in the
Specialty Chemicals segment of our business and they collectively accounted for
53.7% of the revenues in this segment.
31
The Company operates primarily in the United States. The Company derived less
than 10% of its revenues from international customers during the year ended
December 31, 2001, but expects to increase the level of these sales in the
future. International customers can pose additional credit risks to the Company.
As of December 31, 2001, the Company had approximately $828,000 in accounts
receivable from a customer located in Venezuela. The majority of these sales
were recorded prior to the Merger. As a result of political instability in
Venezuela and a work stoppage by the employees of the national oil company, the
Company has experienced significant delays in receiving payment for these sales.
The Company has an established long-term relationship with this customer and has
continued to ship products to this customer subsequent to December 31, 2001. The
Company expects that these accounts receivable will ultimately be paid, but
cannot predict the timing of such payment. The Company has not provided a
reserve for doubtful accounts associated with this balance.
The following table presents the revenues, operating income, total assets and
other information for each reportable segment as of and for the year ended
December 31, 2001:
Specialty Equipment Downhole Corporate
Chemicals Manufacturing Equipment and Other Total
--------- ------------- --------- --------- --------
Net sales to external customers....... $ 7,330 $ 4,884 $ 348 $ - $ 12,562
Income (loss) from operations......... $ 1,114 $(1,171) $ (133) $ (874) $ (1,064)
Depreciation and amortization......... $ 500 $ 149 $ 5 $ 90 $ 744
Total assets.......................... $ 9,266 $ 5,024 $ 8,199 $ 732 $ 23,221
Goodwill, net......................... $ 6,130 $ 1,257 $ 5,725 $ - $ 13,112
Capital expenditures.................. $ 605 $ 1,577 $ 127 $ 8 $ 2,317
Note 12 - Subsequent Events (Unaudited)
On January 4, 2002, the Company entered into a credit agreement with its primary
lending bank to finance the construction of bulk material transload facility in
Raceland, Louisiana. The loan agreement provides for maximum financing of
$854,350, which is expected to fund the majority of the total construction costs
for the project.
On January 7, 2002, the Company entered into an additional line of credit
arrangement with its primary lending bank. The new line of credit adds
$1,608,100 of availability to its short-term borrowing arrangements which are
secured by accounts receivable and inventory. The new line of credit has a
borrowing base limitation of 50% of eligible accounts receivable and inventory.
It has a maturity date of January 7, 2003.
On February 19, 2002, the Company acquired 100% of the common stock of IBS 2000,
Inc. ("IBS"), a Denver-based company engaged in the development and
manufacturing of environmentally neutral chemicals for the oil industry. IBS is
in the development stage and has had limited operating history. The Company paid
$100,000 in cash and issued 34,000 shares of common stock to acquire IBS.
On February 28, 2002, the Company sold its rights and obligation to purchase the
land and buildings covered by the capital lease obligation discussed in Note 5,
together with capital improvements to the property totaling approximately
$750,000, to Oklahoma Facilities, LLC ("Facilities"). An officer of the Company
has a minority investment interest in and is an officer of Facilities. The total
consideration at closing was $1,400,000, with net cash proceeds to the Company
of $761,000. The transaction is not expected to generate any significant gain or
loss. The Company simultaneously entered into a lease agreement with Facilities
under which it is obligated to pay average rent of $18,000 per month for a fixed
term of ten years. The Company has the right to buy the property at any time
during the first two years of the lease for a fixed price of $1,400,000. The
Company also has the option to purchase the building for a fixed price of
$420,000 at the end of the ten year lease term. The transaction will be recorded
as a capital lease.
32
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Items 9 to 12 Inclusive.
These items have been omitted in accordance with the general instructions to
Form 10-KSB Annual Report. The Registrant intends to file with the Securities
and Exchange Commission prior to April 30, 2002, pursuant to Regulation 14A, a
definitive proxy statement that will involve the election of directors. The
information required by these items will be included in such proxy statement and
are incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits:
Index to Exhibits
Exhibit
Number Description of Exhibit
------------- ----------------------------------------------------------------------------------
3.1* Articles of Incorporation of Flotek Industries, Inc. (incorporated by reference to
Appendix E of the Company's Definitive Proxy Statement filed with the Commission
on September 27, 2001)
3.2* By-laws of Flotek Industries, Inc. (incorporated by reference to Appendix F of the
Company's Definitive Proxy Statement filed with the Commission on September 27,
2001)
4.1* Registration Right Agreement, effective as of April 30, 2000,
signed in August 2000 (incorporated by reference to Exhibit 4.3
of the Company's Form 10-QSB for the quarter ended August 31, 2000)
10.1* Agreement and Plan of Reorganization by and between Flotek Industries, Inc. and
Chemical & Equipment Specialties, Inc. (incorporated by reference to the Company's
Form 8-K filed with the Commission on October 12, 2001)
10.2 Business Loan Agreement and Promissory Note, with related Commercial Security
Agreement and Commercial Guaranty Agreement, all dated January 23, 2001, in the
original principal amount of $2,709,980
10.3 Business Loan Agreement and Promissory Note dated May 30, 2001 in the original
principal amount of $1,414,020
10.4 Promissory Note dated January 23, 2001 in favor of John Todd Sanner in the
principal amount of $500,000 issued in connection with the acquisition of Esses,
Inc. by CESI
10.5 Promissory Note dated January 23, 2001 in favor of Earl E. Schott in the principal
amount of $500,000 issued in connection with the acquisition of Esses, Inc. by CESI
21.1 List of Subsidiaries
27.0 Financial Data Schedule
99.1 Unaudited Pro Forma Combined Statement of Operations of Flotek Industries, Inc.
for the year ended December 31, 2001, including the basis of presentation and pro
forma adjustments
99.2 Unaudited Pro Forma Combined Statements of Operations by
Segment for the years ended December 31, 2001 and 2000,
including the basis of presentation for those statements.
* Previously filed
33
(b) Reports on Form 8-K:
o Current Report on Form 8-K filed with the Securities and
Exchange Commission on October 12, 2001. This Form 8-K reported
the Company had entered into an Agreement and Plan of
Reorganization with CESI, dated August 15, 2001, pursuant to
which shares of the common stock of the Company would be issued
to the shareholders of CESI in connection with the merger of
CESI with a newly formed subsidiary of the Company. No financial
statements were filed in connection with this report.
o Current Report on Form 8-K filed with the Securities and
Exchange Commission on November 14, 2001. This Form 8-K reported
the Company had completed the closing of its previously
announced merger with CESI. This Form 8-K also discussed a
special shareholders' meeting held on October 23, 2001 to
consider and vote upon a change in the Company's jurisdiction of
incorporation from Alberta, Canada to Delaware. No financial
statements were filed in connection with this report.
o Current Report on Form 8-K/A filed with the Securities and
Exchange Commission on January 16, 2002. This Amendment No. 1 to
Current Report on Form 8-K filed on November 14, 2001 included
the financial statements of CESI 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.
In addition, this report included unaudited pro forma combined
financial statements related to the merger of the Company
with CESI.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FLOTEK INDUSTRIES, INC.
By: /s/ Jerry D. Dumas, Sr.
------------------------------------
Jerry D. Dumas, Sr.
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date Signature Title(s)
April 15, 2002 /s/ Jerry D. Dumas, Sr. Chairman and Chief Executive Officer
--------------------------------------
Jerry D. Dumas, Sr.
April 15, 2002 /s/ Glenn S. Penny President, Chief Technical Officer and Director
--------------------------------------
Glenn S. Penny
April 15, 2002 /s/ Randall D. Keys Chief Financial Officer
--------------------------------------
Randall D. Keys
April 15, 2002 /s/ Robert S. Beall Director
--------------------------------------
Robert S. Beall
April 15, 2002 /s/ John W. Chisholm Director
--------------------------------------
John W. Chisholm
April 15, 2002 /s/ Richard L. Johnson, II Vice President and Director
--------------------------------------
Richard L. Johnson, II
April 15, 2002 /s/ Roger K. Padgham Vice President and Director
--------------------------------------
Roger K. Padgham
April 15, 2002 /s/ Gary M. Pittman Director
--------------------------------------
Gary M. Pittman
April 15, 2002 /s/ Barry E. Stewart Director
--------------------------------------
Barry E. Stewart
April 15, 2002 /s/ Willaim R. Ziegler Director
--------------------------------------
William R. Ziegler
35