FLOTEK INDUSTRIES, INC.
7030 Empire Central Drive
Houston, Texas 77040
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
May 22, 2003
TO THE STOCKHOLDERS OF FLOTEK INDUSTRIES, INC.:
At the direction of the Board of Directors of Flotek Industries, Inc. (the
"Company"), a Delaware corporation, NOTICE IS HEREBY GIVEN that the Annual
Meeting of Stockholders of the Company will be held at the Crowne Plaza Hotel,
12801 Northwest Freeway, Houston, Texas 77040, on May 22, 2003 at 2:00 p.m.
(local time), for the purpose of considering and voting upon the following
matters:
1. The election of seven directors to serve until the next annual meeting
of stockholders of the Company or until their successors are duly elected and
qualified, or until their earlier resignation or removal.
2. Approval of the 2003 Long-Term Incentive Plan.
3. Any other business which may be properly brought before the meeting or
any adjournment thereof.
By order of the Board of Directors
/s/ Rosalie Melia
-------------------
Rosalie Melia
Secretary
April 23, 2003
YOU ARE REQUESTED TO MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY AS
PROMPTLY AS POSSIBLE, WHETHER YOU PLAN TO ATTEND THE MEETING IN PERSON OR NOT.
YOU MAY REVOKE YOUR PROXY AT ANY TIME PRIOR TO THE MEETING, OR IF YOU ATTEND THE
MEETING YOU MAY REVOKE YOUR PROXY AT THAT TIME, IF YOU WISH.
FLOTEK INDUSTRIES, INC.
7030 Empire Central Drive
Houston, Texas 77040
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
May 22, 2003
This Proxy Statement and the accompanying form of proxy are being sent to
the stockholders of Flotek Industries, Inc. (the "Company"), a Delaware
corporation, in connection with the solicitation by the Board of Directors of
the Company (the "Board") of proxies to be voted at the Annual Meeting of
Stockholders of the Company (the "Meeting") to be held at 2:00 p.m. (local time)
on Thursday, May 22, 2003, at the Crowne Plaza Hotel, 12801 Northwest Freeway,
Houston, Texas 77040, and at any adjournments thereof.
The Notice of Meeting, this Proxy Statement and the accompanying form of
proxy are first being mailed to the stockholders on or about April 23, 2003. The
Annual Report of the Company for the year 2002 has been furnished to
stockholders with this Proxy Statement.
At the Meeting, stockholders will be asked (i) to consider and vote upon
the election of seven nominees to serve on the Board of Directors of the
Company; (ii) to consider and vote upon the adoption of the 2003 Long-Term
Incentive Plan of the Company; and (iii) to consider and take action upon such
other matters as may properly come before the Meeting.
VOTING RIGHTS AND PROXIES
The Board of Directors has fixed the close of business on April 2, 2003, as
the record date for determination of stockholders entitled to notice of, and to
vote at, the Meeting. At the close of business on such date, there were
outstanding and entitled to vote 5,521,670 shares of common stock, $0.0001 par
value per share ("Common Stock") of the Company, which is the Company's only
authorized and outstanding class of stock entitled to vote at the Meeting.
Holders of at least one-third of the outstanding shares of Common Stock are
required to be represented at the Meeting, in person or by proxy, to constitute
a quorum. Each outstanding share of Common Stock as of the record date is
entitled to one vote. There will be no cumulative voting of shares for any
matter voted upon at the Meeting.
Directors are elected by a plurality of the votes cast. Abstentions and
broker nonvotes will be disregarded and have no effect on the outcome of the
election of directors.
The affirmative vote of at least a majority of the shares represented at
the Meeting is required to approve the 2003 Long-Term Incentive Plan of the
Company. In determining whether this proposal has received the requisite number
of affirmative votes, abstentions and broker nonvotes will have the same effect
as votes against the proposal.
If the enclosed form of proxy is properly executed and returned to the
Company prior to or at the Meeting and is not revoked prior to its exercise, all
shares of Common Stock represented thereby will be voted at the Meeting and,
where instructions have been given by a stockholder, will be voted in accordance
with such instructions.
2
Any stockholder executing a proxy which is solicited hereby has the power
to revoke it prior to its exercise. Revocation may be made by attending the
Meeting and voting the shares of Common Stock in person or by delivering to the
Secretary of the Company at the principal executive offices of the Company
located at 7030 Empire Central Drive, Houston, Texas 77040 prior to exercise of
the Proxy a written notice of revocation or a later-dated, properly executed
proxy.
The solicitation of proxies will be by mail, but proxies also may be
solicited by telephone, telegram or in person by directors, officers and other
employees of the Company. The Company will bear all costs of soliciting proxies.
Should the Company, in order to solicit proxies, request the assistance of
financial institutions, brokerage houses or other custodians, nominees or
fiduciaries, the Company will reimburse such persons for their reasonable
expenses in forwarding proxy materials to stockholders and obtaining their
proxies.
ITEM 1: ELECTION OF DIRECTORS
The members of the Board of Directors serve one-year terms. Directors are
elected by a plurality of the votes cast. Abstentions and broker nonvotes will
be disregarded and have no effect on the outcome of the election of directors.
Both Messrs. Richard L. Johnson II and Roger K. Padgham voluntarily
resigned as directors of the Company in December, 2002.
Seven nominees, Jerry D. Dumas, Sr., Gary M. Pittman, Robert S. Beall,
Barry E. Stewart, Dr. Glenn S. Penny, John W. Chisholm, and William R. Ziegler,
are proposed to be elected to serve as directors of the Company until the next
annual meeting of stockholders or until their successors are duly elected and
qualified, or until their earlier resignation or removal.
All proxies which are timely received in proper form will be voted FOR the
Board's nominees for director, unless contrary instructions are given. All
nominees are presently directors of the Company. If any nominee is unable to
serve, the Board of Directors may designate a substitute nominee, in which event
the proxy votes which would have been cast for the nominee not serving will be
cast for the substitute nominee.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE
ELECTION OF THE NOMINEES.
NOMINEES AND EXECUTIVE OFFICERS
The following table provides certain information with respect to the
Board nominees, and the executive officers of the Company.
POSITION
NAME AGE POSITIONS HELD SINCE
Jerry D. Dumas, Sr. 68 Chief Executive Officer 1998
and Director
Gary M. Pittman 39 Director 1997
Robert S. Beall 45 Director 2001
Barry E. Stewart 48 Director 2001
Glenn S. Penny 53 Chief Technical Officer
and Director 2001
John W. Chisholm 48 Director 1999
William R. Ziegler 61 Director 1997
Mark D. Kehnemund 53 Chief Financial Officer 2002
3
The following is a brief description of the background and principal
occupation of each Nominee and executive officer:
JERRY D. DUMAS, SR.. - Mr. Dumas became Chairman of the Board of Directors
of the Company in 1998. He has served as Chief Executive Officer of the Company
since September 1998. Prior to that he was Vice President of Corporate and
Executive Services with Merrill Lynch from 1988 to 1998. Mr. Dumas also served
as Group Division President with Hughes Tool Company, a predecessor to Baker
Hughes, Inc. from 1980 to 1984.
GLENN S. PENNY - Dr. Penny became President, Chief Technical Officer and a
Director of the Company effective with the closing of the merger (the "Merger")
between Flotek Industries, Inc. and Chemical & Equipment Specialties, Inc.
("CESI") on October 31, 2001. Dr. Penny founded CESI in April 2000 and served as
its President and Chief Executive Officer until the Merger. Prior to founding
CESI, Dr. Penny served as President of Stim-Lab, Inc., a company specializing in
independent testing of completion fluids and methods, from its founding in 1985
to April 2000. Stim-Lab, Inc. was acquired by Core Laboratories N.V., an
NYSE-listed oilfield service company, in 1997.
MARK D. KEHNEMUND - Mr. Kehnemund was appointed Chief Financial Officer of
the Company in June 2002. Prior to joining Flotek, Mr. Kehnemund spent
twenty-six years with Halliburton Company in various executive, financial, and
administrative positions, including Controller of Halliburton Energy Services,
Vice President & Controller of Halliburton Geophysical Services, and Director of
Accounting for Halliburton Services. Mr. Kehnemund is a CPA.
ROBERT S. BEALL - Mr. Beall has served as a Director of the Company since
the closing of the Merger between Chemical and Equipment Specialties, Inc. and
Flotek Industries, Inc. (October 2001). He is currently President of R. S. Beall
Investments, Inc. He founded Beall Concrete Enterprises, Ltd. in 1980 and
resigned his position as President in December 2002. In February 2000, Beall
Concrete Enterprises, Ltd. became a subsidiary of publicly traded U. S.
Concrete, Inc.
JOHN W. CHISHOLM - Mr. Chisholm has served as a Director of the Company
since 1999. He was formerly Chairman of and now serves as a consultant for
Wellogix, Inc., a technology company which provides internet-based software
applications to improve productivity and collaboration in the oil and gas
industry. Mr. Chisholm co-founded ProTechnics Company and served as President of
that company from 1985 to 1998. ProTechnics was acquired by Core Laboratories
N.V. in 1996. After leaving Core Laboratories in 1998 as Senior Vice President
of Global Sales and Marketing, Mr. Chisholm started Chisholm Energy Partners LLC
to invest in mid-size energy service companies, including Wellogix, Inc. and the
Company.
GARY M. PITTMAN - Mr. Pittman has served as a Director of the Company since
1997. He is President and Chief Executive Officer of Pittman & Company, a
company he founded in 1995 to provide investment and merchant banking services
to private and public companies. From 1987 to 1995, Mr. Pittman was Vice
President of The Energy Recovery Fund, a $180 million private equity fund
focused on the energy industry. Mr. Pittman serves as Chairman of the Company's
Compensation Committee.
BARRY E. STEWART - Mr. Stewart was appointed as a Director of the Company
upon the closing of the Merger. Since 2000, he has served as Chief Financial
Officer of Inphact, Inc., a provider of internet-based radiology services to the
health care industry. He was previously Vice President of Finance for Community
Health Systems, a leading NYSE-listed hospital chain. Mr. Stewart is a CPA and
serves as Chairman of the Company's Audit Committee.
4
WILLIAM R. ZIEGLER - Mr. Ziegler has been a Director of the Company since
1997. He has been of counsel to the law firm of Satterlee Stephens Burke & Burke
LLP since January 2001. Prior to that time he was a partner in that law firm and
predecessor firms for over five years. Mr. Ziegler is a Director and Vice
Chairman of Grey Wolf, Inc., a provider of contract land drilling services to
the oil and gas industry, and a Director of Geokinetics, Inc., a provider of
seismic acquisition and geophysical services to the oil and gas industry.
There are no family relationships between any director or executive
officer.
BOARD COMMITTEES AND MEETINGS
The Board of Directors of the Company met seven times during 2002. Each
director attended 75% or more of the Board of Directors and committee meetings
held during the period he was a director or committee member.
The standing committees of the Board include the Compensation Committee
consisting of Messrs. Gary Pittman, Robert Beall, and William Ziegler, and the
Audit Committee, comprised of Messrs. John Chisholm and Barry Stewart.
The Compensation Committee sets compensation policy for all employees of
the Company, makes recommendations to the full Board of Directors regarding
executive compensation and employee stock option awards, and will administer the
2003 Long-Term Incentive Plan of the Company. The Compensation Committee met
three times during the last fiscal year.
The primary function of the Audit Committee is to provide advice with
respect to our financial matters and to assist the Board of Directors in
fulfilling its oversight responsibilities regarding audit, finance, accounting,
and tax compliance. In particular, the Audit Committee is responsible for
overseeing the engagement, independence, and services of our independent
auditors. The Audit Committee also serves to: (i) act as an independent and
objective party to monitor the financial reporting process and internal control
system of the Company; (ii) review and appraise the audit efforts of the
independent auditors; (iii) evaluate the quarterly financial performance as well
as the compliance with laws and regulations of the Company; (iv) oversee
management's establishment and enforcement of financial policies and business
practices; and (v) provide an open avenue of communication among the independent
auditors, financial and senior management, counsel, and the Board of Directors.
The Audit Committee met five times during the last fiscal year, which meetings
were separate and apart from meetings of the full Board. The Board has adopted a
written charter for the Audit Committee.
The Board of Directors of the Company does not have a standing executive or
nominating committee or committees performing similar functions.
The above Committees meet as and when required, except for the Audit
Committee which meets at least four times each year. Certain matters that may
come before a committee may be reviewed or acted on by the Board as a whole.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Pursuant to Section 16(a) of the Securities Exchange Act of 1934 and the
rules issued thereunder, the Company's directors and executive officers are
required to file with the Securities and Exchange Commission ("SEC") reports of
ownership and changes in ownership of Common Stock. Copies of such forms are
required to be filed with the Company. Based solely on its review of copies of
such reports furnished to the Company, the Company believes that the directors
and executive officers were in compliance with the filing requirements of
Section 16(a) during the most recent fiscal year.
5
EXECUTIVE COMPENSATION
The following table sets forth cash and certain other compensation paid to
or earned by the Chief Executive Officer and other executive officers of the
Company who earned at least $100,000 in cash compensation for the years
indicated. Amounts in the table include all compensation paid and stock options
granted by the Company and its predecessor, CESI.
SUMMARY COMPENSATION TABLE
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY OPTIONS COMPENSATION
Jerry D. Dumas, Sr..................... 2002 $ 137,600 84,557 $ -
Chairman and Chief Executive Officer 2001 $ 66,000 43,750 $ -
2000 $ - 16,667 $ -
Glenn S. Penny......................... 2002 $ 93,700 - $ -
President and Chief Technical Officer 2001 $ 100,000 - $ -
2000 $ 50,000 - $ -
Mr. Dumas did not receive a salary prior to May 2001. There were no bonuses
paid to any Executive Officers in any of the years presented. Excludes certain
personal benefits, the aggregate value of which does not exceed 10% of the
annual compensation shown for each person.
OPTIONS GRANTS IN 2002
The Company does not currently have a formal stock option plan. No options
were granted by the Board of Directors in 2002.
YEAR-END OPTION VALUES
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISABLE IN-THE-MONEY OPTIONS
OPTIONS AT DECEMBER 31, 2002 (#) AT YEAR-END ($)
-------------------------------- ---------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
Jerry D. Dumas, Sr.................. 84,557 - $ - $ -
There were no stock options exercised by Executive Officers in 2002. There
were no in-the-money unexercised options as of December 31, 2002. Exercisable
options at year-end were adjusted for the stock dividend issued on July 19, 2002
to Flotek Industries, Inc. shareholders other than former CESI shareholders.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company are paid $250 for each
meeting attended. There were a total of seven Board of Directors meetings in
2002.
6
EMPLOYMENT CONTRACTS
Dr. Penny is covered by an employment contract which provides for minimum
compensation of $100,000 per year through January 21, 2004. The contract cannot
be terminated except for cause and requires continuing salary payments for the
remaining term in the event of involuntary termination, including termination in
connection with a change in control.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 25, 2003, information with
respect to the beneficial ownership of the Company's common stock by Executive
Officers and Directors and persons known by management of the Company to be the
beneficial owners of more than 5% of the outstanding shares of common stock of
the Company.
SHARES RIGHT TO TOTAL PERCENT
NAME OF BENEFICIAL OWNER OWNED (a) ACQUIRE (b) SHARES OF CLASS
------------------------ --------- ----------- ------ --------
Executive Officers and Directors:
Jerry D. Dumas, Sr. (c)................. 125,198 84,557 209,755 3.8%
Glenn S. Penny.......................... 875,415 - 875,415 15.9%
Mark D. Kehnemund....................... 5,000 - 5,000 0.1%
Robert S. Beall......................... 493,810 - 493,810 8.9%
John W. Chisholm (d).................... 245,580 31,825 277,405 5.0%
Gary M. Pittman (e), (f)................ 10,000 11,427 21,427 0.4%
William R. Ziegler...................... 131,797 2,285 134,082 2.4%
Barry E. Stewart........................ 9,999 - 9,999 0.2%
All directors and officers as a group... 1,896,799 130,094 2,026,893 36.7%
Other Beneficial Owners:
TOSI, L.P. (e), (f)..................... 585,681 - 585,681 10.6%
1601 Elm Street, Suite 3900
Dallas, Texas 75201
Richard L. Johnson II (g)............... 327,030 - 327,030 5.9%
(a) Each person has sole voting and investment power with respect to the
common shares listed, except as noted below. The address for each of the
Executive Officers and Directors is 7030 Empire Central Drive, Houston, Texas
77040.
(b) Includes common shares which may be acquired within 60 days of March
25, 2003 through the exercise of stock options or warrants to acquire common
shares.
(c) Includes 105,438 common shares owned by Saxton River Corporation and
19,760 common shares owned by Hinckley Brook, Inc., both of which are controlled
by Mr. Dumas.
(d) Includes 231,692 common shares held by Chisholm Energy Partners LLC, of
which Mr. Chisholm is a manager and member. Also includes 15,235 common shares
held by ProTechnics II (Nevada), Inc., of which Mr. Chisholm is President.
(e) The sole general partner of TOSI, L.P., Pitman Property Corp. and its
President and controlling person, J.W. Beavers, may also be deemed to be the
beneficial owners of those shares. Pitman Property Corp. has no affiliation with
Mr. Gary Pittman, a Director of Flotek.
(f) Mr. Pittman, through Pittman & Company, owns 10% of TOSI, LP. Pittman &
Company has no voting nor investment rights in TOSI.
(g) Includes 199,603 common shares held in IRA account for the benefit of
Mr. Johnson and 26,116 common shares held by Mr. Johnson's wife for which Mr.
Johnson shares voting and dispositive powers.
7
AUDIT COMMITTEE REPORT
In accordance with resolutions adopted by the Board of Directors, the Audit
Committee (the "Committee"), which consists entirely of directors who meet the
independence and experience requirements of Nasdaq Stock Market, Inc., assists
the Board of Directors in fulfilling its responsibility for oversight of the
quality and integrity of the accounting, auditing and financial reporting
practices of the Company.
In discharging its oversight responsibility as to the audit process, the
Committee obtained from the independent auditors a formal written statement
describing all relationships between the auditors and the Company that might
bear on the auditors' independence as required by Independence Standards Board
Standard No. 1, "Independence Discussions with Audit Committees." The Committee
discussed with the auditors any relationships that may impact their objectivity
and independence, including fees for non-audit services, and satisfied itself as
to the auditors' independence. The Committee also discussed with management, the
internal auditors and the independent auditors the quality and adequacy of the
Company's internal controls. The Committee reviewed with the independent
auditors their management letter on internal controls.
The Committee discussed and reviewed with the independent auditors all
matters required to be discussed by auditing standards generally accepted in the
United States of America, including those described in Statement on Auditing
Standards No. 61, as amended, "Communication with Audit Committees".
The Committee reviewed the audited consolidated financial statements of the
Company as of and for the year ended December 31, 2002, with management and the
independent auditors. Management has the responsibility for the preparation of
the Company's financial statements and the independent auditors have the
responsibility for the examination of those statements.
Based on the above-mentioned review and discussions with the independent
auditors and management, the Committee recommended to the Board of Directors
that the Company's audited consolidated financial statements be included in its
Annual Report on Form 10-KSB for the year ended December 31, 2002, for filing
with the Securities and Exchange Commission. The Committee also recommended the
reappointment of Weinstein Spira & Company, P.C. as independent auditors and the
Board of Directors concurred with such recommendation.
AUDIT COMMITTEE
Barry E. Stewart, Chairman
John W. Chisholm, Member
8
CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH MANAGEMENT
The Company leases certain automobiles and equipment from corporations
controlled by Mr. Dumas who is Chairman of the Board and Chief Executive Officer
of the Company. Payments under these leases totalled approximately $52,000 and
$66,000 during the years ended December 31, 2001 and December 31, 2002,
respectively, and the remaining balance owed at those dates was approximately
$43,000 and $5,000, respectively. The Company also owes $100,892 ($120,839 at
December 31, 2001) to a corporation controlled by Mr. Dumas pursuant to loans
made in 1999 and 2002. Payments on these loans totalling $71,681 were made
during the year ended December 31, 2002. There were no payments on the loan in
2001. These loans bear interest at the rate of 10%.
In December 2002, 100,000 shares of the common stock of the Company were
issued by Mr. Dumas in exchange for $100,000.
The Company from time to time utilizes the services of Satterlee Stephens
Burke & Burke LLP. Mr. Ziegler, a Director of the Company is of counsel with the
firm. The Company paid the firm approximately $27,000 and $2,000 for services
during the years ended December 31, 2001 and December 31, 2002, respectively,
and owed this firm approximately $15,000 and $40,000 on those same dates,
respectively.
In March 2002, the Company entered into a sale-leaseback transaction with
Oklahoma Facilities LLC ("Facilities"). Dr. Penny is an officer and has a
minority investment interest in Facilities, and is a Director of the Company and
the Presdent and Chief Technical Officer of the Company. Pursuant to this
transaction, Facilities assumed the capital lease obligation on one of the
Company's operating facilities in the amount of $639,000 and paid the Company
net cash proceeds of approximately $761,000. The transaction did not result in
any significant gain or loss to the Company. 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.
On July 25, 2002, the Company borrowed $500,000 under a promissory note
from Facilities. Dr. Penny has a minority investment interest in and is an
officer of Facilities. The note is secured by an account receivable from the
Company's major customer in Venezuela. The note requires payments of interest
only for the first three months and fixed payments of $8,045 per month
thereafter. The note bears interest at the rate of prime plus 4.5%. The note is
due upon the collection of the account receivable, but in any event must be paid
in full by August 1, 2003.
Pursuant to an arrangement which existed at the time of the Merger, Dr.
Penny is a personal guarantor on substantially all of the bank debt of the
Company. Dr. Penny does not receive any compensation for his guaranty of Company
indebtedness.
Effective August 1, 2002, the Company cancelled an arrangement with
Chisholm Management, Inc., originally entered into January 1, 2002, under which
the Company had paid $5,000 per month for marketing and sales consulting
services. Mr. Chisholm, a Director of the Company, is the President and sole
owner of Chisholm Management, Inc.
Effective December 1, 2002, the Company cancelled an arrangement with
Pittman & Company, originally entered into October 15, 2001, under which the
Company had paid $5,000 per month for investment banking services and consulting
on mergers and acquisitions. Mr. Pittman, a Director of the Company, is the
Chief Executive Officer and sole owner of Pittman & Company.
In December 2002, 10,000 shares of common stock of the Company were issued
to Mr. Pittman in exchange for $10,000.
9
On January 9, 2003, the Company entered into agreements with Stimulation
Instruments, Inc. to refurbish four Nitrogen Skid Units at a total sales price
of $412,000 and broker the sale of these units on behalf of Stimulation
Instruments, Inc. for a commission of $5,000 per unit plus 50% of the sales
proceeds in excess of $160,000 per skid. Stimulation Instruments, Inc. is owned
solely by Dr. Penny.
On January 30, 2003, the Company entered into an agreement with Stimulation
Chemicals, LLC ("SCL") for the purchase of various raw materials from suppliers
of the Company under deferred payment terms. Under this arrangement, SCL will
procure the raw materials as ordered by the Company and grant to the Company 120
day payment terms for a 15% markup on established supplier prices up to a
purchase value of $330,000. SCL invoices not paid by the Company within 120 days
will bear interest at 1% per month. SCL is owned jointly by Dr. Penny and Mr.
Beall, both Directors of the Company.
On February 11, 2003, Mr. Dumas, Chairman of the Board and Chief Executive
Officer, made a short-term loan to the Company for $135,000 to cover operating
cash flow requirements. This note bears interest at 6%.
RELATIONSHIP WITH INDEPENDENT AUDITORS
On recommendation of the Audit Committee of the Company, the Board has
appointed Weinstein Spira & Company, P.C. as independent auditors of the Company
and the Bank for the year ending December 31, 2003. The appointment of Weinstein
Spira & Company, P.C. continues a relationship that began in 1998.
Representatives of Weinstein Spira & Company, P.C. are expected to be present at
the Meeting and will have the opportunity to make statements if they so desire
and will be available to respond to appropriate questions.
AUDIT FEES. The aggregate fees billed by Weinstein Spira & Company, P.C.
for professional services rendered for the audit of the annual financial
statements of the Company for the most recent fiscal year and the review of the
financial statements of the Company included in the Forms 10-QSB for that year
was $89,176.
FINANCIAL INFORMATION SYSTEM DESIGN AND IMPLEMENTATION. Weinstein Spira &
Company P.C. did not charge the Company any fees for financial information
system design and implementation fees.
ALL OTHER FEES. The aggregate fees billed for services rendered by
Weinstein Spira & Company, P.C., other than for audit services (and financial
information system design and implementation fees), for the most recent fiscal
year of the Company was $38,109. The Audit Committee has considered whether the
provision of such non-audit services is compatible with Weinstein Spira &
Company, P.C. maintaining its independence and determined that these services do
not compromise their independence.
ITEM 2: ADOPTION OF THE 2003 LONG-TERM INCENTIVE PLAN
DESCRIPTION OF THE PLAN
On April 3, 2003, the Board of Directors of the Company adopted the Flotek
Industries, Inc. 2003 Long-Term Incentive Plan (the "2003 Plan"), subject to
approval by the Company's stockholders. The summary description that follows is
qualified by reference to the 2003 Plan, a copy of which is attached hereto as
Exhibit A. Capitalized terms used but not defined herein have the meanings
assigned to them in the 2003 Plan. In the event that stockholder approval is not
received, the 2003 Plan will be terminated.
The purpose of the 2003 Plan is to provide employees, directors,
consultants and other individuals rendering services to or on behalf of the
Company and/or one or more of its subsidiaries an opportunity to acquire an
equity interest in the Company. The Company intends to use the Plan to link the
long-term interests of stockholders of the Company and participants in the 2003
Plan, attract and retain participants' services, motivate participants to
increase the Company's value and create flexibility in compensating
participants.
10
The 2003 Plan is administered by a committee (the "Plan Committee")
appointed by the Board of Directors and is currently administered by the
Compensation Committee of the Board of Directors.
The 2003 Plan provides for the grant of incentive and nonqualified stock
options, stock appreciation rights, restricted stock, performance shares and
performance units (individually an "Award" or collectively, "Awards"). All
employees, directors and consultants of the Company or its subsidiaries will be
eligible to receive Awards under the 2003 Plan (currently approximately 100
individuals). The Plan Committee has the discretion to select the individuals to
whom the Awards will be granted, to determine the type, size and terms and
conditions applicable to each Award and the authority to interpret, construe and
implement the provisions of the 2003 Plan. The Plan Committee's decisions will
be binding.
The total number of shares of Common Stock that may be subject to Awards
under the 2003 Plan is 700,000 shares (subject to adjustment as provided in the
2003 Plan). No more than 140,000 shares authorized under the 2003 Plan may be
issued as restricted stock. Any shares of Common Stock subject to an Award which
expires, is canceled, is forfeited or terminated for any reason other than being
settled in shares of Common Stock shall again be available for issuance under
the Plan.
The Company has not granted any Awards under the 2003 Plan to date. The
Company intends to grant Awards in the future to the named executive officers
and other selected participants, but no determination is contemplated or has
been made regarding the number or terms of such Awards.
The Compensation Committee intends to grant Awards under the 2003 Plan
which will strongly link the interests of stockholders and Award recipients.
Accordingly, the Compensation Committee intends to grant awards to eligible
individuals who have demonstrated successful performance in their respective
positions with the Company.
Set forth below is a brief description of the types of Awards that may be
granted under the 2003 Plan.
STOCK OPTIONS. Options (each an "Option") to purchase shares of Common
Stock, which may be incentive or nonqualified stock options, may be granted
under the 2003 Plan at an exercise price (the "Option Price") determined by the
Plan Committee in its discretion, provided that the Option Price may be no less
than the trading price of the Common Stock on the date of grant. Each Option
represents the right to purchase one share of Common Stock at the specified
Option Price.
Options will expire no later than 10 years after the date on which they are
granted and will become exercisable at such times and in such installments as
determined by the Plan Committee. Payment of the Option Price must be made in
full at the time of exercise in cash, certified or bank check, or by tendering
to the Company shares of Common Stock having a fair market value equal to the
Option Price.
Options may become vested and exercisable based upon satisfaction of
criteria established by the Plan Committee. Such criteria may be time-based
vesting based on continuous employment or rendering services to the Company over
a specified period of time from the date of grant.
STOCK APPRECIATION RIGHTS. An Award of a stock appreciation right ("SAR")
may be granted under the 2003 Plan with respect to shares of Common Stock.
Generally, one SAR is granted with respect to one share of Common Stock. The SAR
entitles the participant, upon the exercise of the SAR, to receive an amount
equal to the appreciation in the underlying share of Common Stock. The
appreciation is equal to the difference between (i) the "base value" of the SAR
(which is the trading price of the Common Stock on the date the SAR is granted),
and (ii) the closing trading price of the Common Stock on the date preceding the
date the SAR is exercised. Upon the exercise of a vested SAR, the exercising
participant will be entitled to receive the appreciation in the value of one
share of Common Stock as so determined, payable at the discretion of the Plan
Committee in cash or in shares of Common Stock.
11
SARs will expire no later than 10 years after the date on which they are
granted. SARs become exercisable at such times and in such installments as
determined by the Plan Committee.
TANDEM OPTION/SARs. An Option and an SAR may be granted "in tandem" with
each other (a "Tandem Option/SAR"). An Option and an SAR are considered to be in
tandem with each other because the exercise of the Option aspect of the tandem
unit automatically cancels the right to exercise the SAR aspect of the tandem
unit, and vice versa. The Option may be an incentive stock option or a
nonqualified stock option, and the Option may be coupled with one SAR, more than
one SAR or a fractional SAR in any proportionate relationship selected by the
Plan Committee.
RESTRICTED STOCK. An Award of restricted stock ("Restricted Stock") is an
Award of Common Stock that is subject to such restrictions, if any, as the Plan
Committee deems appropriate, including forfeiture conditions and restrictions
against transfer for a period specified by the Plan Committee. Restricted Stock
Awards may be granted under the 2003 Plan as consideration for services and/or
payments of cash by the participant, as determined by the Compensation
Committee. Restrictions, if any, on Restricted Stock may lapse in installments
based on factors selected by the Plan Committee. Prior to the expiration of the
restricted period, except as provided by the Plan Committee, a grantee who has
received a Restricted Stock Award generally has the rights of a stockholder of
the Company, including the right to vote and to receive cash dividends on the
shares subject to the Award. Stock dividends issued with respect to a Restricted
Stock Award may be treated as additional shares under such Award and may be
subject to the same restrictions and other terms and conditions that apply to
the shares with respect to which such dividends are issued.
PERFORMANCE SHARES AND PERFORMANCE UNITS. A performance share Award (a
"Performance Share") and/or a performance unit Award (a "Performance Unit") may
be granted under the 2003 Plan. Each Performance Unit will have an initial value
that is established by the Plan Committee at the time of grant. Each Performance
Share will have an initial value equal to the trading price of one share of
Common Stock on the date of grant. Such Awards may be earned based upon
satisfaction of certain specified performance criteria, subject to such other
terms and conditions as the Plan Committee deems appropriate. Prior to the end
of a performance period, the Plan Committee, in its discretion, may adjust the
performance objectives to reflect an event that may materially affect the
performance of the Company, including, but not limited to, market conditions or
a significant acquisition or disposition of the assets or other property by the
Company. The extent to which a grantee is entitled to payment in settlement of
such an Award at the end of the performance period will be determined by the
Plan Committee, in its sole discretion, based on whether the performance
criteria have been met and payment will be made in cash or in shares of Common
Stock in accordance with the terms of the applicable Award Agreements.
ADJUSTMENTS
Under the 2003 Plan, if there is any change in the capitalization of the
Company, a reorganization or a similar transaction, such proportionate
adjustments as may be necessary (in the form determined by the Plan Committee)
to reflect such change will be made to prevent dilution or enlargement of the
rights with respect to the aggregate number of shares of Common Stock for which
Awards in respect thereof may be granted under the 2003 Plan, the number of
shares of Common Stock covered by each outstanding Award and the price per share
in respect thereof. Unless otherwise provided in an Award Agreement, an
individual's rights under the 2003 Plan may not be assigned or transferred
(except in the event of death).
12
The award agreements will provide that in the event of a change-in-control
of the Company, each Award will expire as of the effective date of such
transaction, provided that to the extent possible the Company is to provide 30
days written notice of such transaction to the participants so as to enable them
to exercise their vested awards prior to the change-in-control event.
TERMINATION
The 2003 Plan will remain in effect until terminated by the Board of
Directors and thereafter until all Awards granted thereunder are satisfied by
the issuance of shares of Common Stock or the payment of cash or the 2003 Plan
is otherwise terminated pursuant to the terms of the 2003 Plan or under any
Award Agreements. Notwithstanding the foregoing, no Awards may be granted under
the 2003 Plan after the tenth anniversary of the effective date of the 2003
Plan. The Board of Directors may at any time terminate, modify or amend the 2003
Plan, provided however, that no such amendment, modification or termination may
(i) materially adversely affect an optionee's or grantee's rights under any
Award previously granted under the 2003 Plan, except with the consent of such
optionee or grantee, or (ii) increase the number of shares subject to the 2003
Plan, or change the designation of the class of persons eligible to receive
Awards, unless approved by the stockholders of the Company.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF AWARDS
An employee to whom an Option which is an incentive stock option ("ISO")
that qualifies under Section 422 of the Internal Revenue Code is granted will
not recognize income at the time of grant or exercise of such option. No federal
income tax deduction will be allowable to the Company upon the grant or exercise
of such ISO. However upon the exercise of an ISO, any excess in the fair market
price of the Common Stock over the Option Price constitutes an item of
adjustment that may have alternative minimum tax consequences for the employee.
When the employee sells such shares more than one year after the date of
transfer of such shares and more than two years after the date of grant of such
ISO (the "ISO Holding Period"), the employee will generally recognize either a
long-term or mid-term capital gain or loss equal to the difference, if any,
between the sale prices and the aggregate Option Price and the Company will not
be entitled to a federal income tax deduction with respect to the exercise of
the ISO or the sale of such shares. The shares must be held for more than 12
months to qualify for long-term capital gains. If the employee does not hold
such shares for the required ISO Holding Period, when the employee sells such
shares the employee will recognize ordinary compensation income and possibly
short-term capital gain or loss in such amounts as are prescribed by the
Internal Revenue Code and the regulations thereunder and the Company will
generally be entitled to a federal income tax deduction.
A participant to whom a nonqualified stock option ("NSO") or SAR is granted
will not recognize income at the time of grant of such Option or SAR. When the
participant exercises such NSO or SAR, the participant will recognize ordinary
compensation income equal to the difference, if any, between the exercise price
paid and the fair market value, as of the date of exercise of such Option or
SAR, of the shares of Common Stock the participant receives. The tax basis of
such shares to such participant will be equal to the exercise price paid plus
the amount includible in the participant's gross income, and the participant's
holding period for such shares will commence on the date of exercise. Subject to
the applicable provisions of the Internal Revenue Code and regulation
thereunder, the Company will generally be entitled to a federal income tax
deduction in respect of an NSO or SAR in an amount equal to the ordinary
compensation income recognized by the employee upon the exercise of the NSO or
SAR.
No income generally will be recognized upon the grant of performance shares
or performance units. Upon payment in respect of performance shares or earned
performance units, the recipient generally will be required to include as
taxable ordinary income in the year of receipt an amount equal to the amount of
cash received and the fair market value of any nonrestricted shares of Common
Stock received less any amount paid for such award at the time of payment or
transfer pursuant to the fulfillment of the specified conditions or the
achievement of the performance goals.
13
The recipient of Restricted Stock generally will be subject to tax at
ordinary income rates on the fair market value of the shares of Common Stock on
the first date that such shares either are transferable by the recipient or
cease to be subject to forfeiture, and the capital gain or loss holding period
for such shares will also commence on that date.
REQUIRED AFFIRMATIVE VOTE
The affirmative vote of holders of a majority of the shares of Common Stock
present in person or by proxy at the 2003 Annual Meeting of Stockholders is
required to approve the Flotek Industries, Inc. 2003 Long-Term Incentive Plan.
If not approved, the 2003 Plan will not become effective.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL OF
THE COMPANY'S 2003 LONG-TERM INCENTIVE PLAN, AND PROXIES EXECUTED AND RETURNED
WILL BE SO VOTED UNLESS CONTRARY INSTRUCTIONS ARE INDICATED THEREON.
OTHER MATTERS
The Board of Directors of the Company is not aware of any other matters
that may come before the Meeting. However, the proxies may be voted with
discretionary authority with respect to any other matters that may properly come
before the Meeting.
ANNUAL REPORT
A Summary Annual Report to Stockholders and an Annual Report on Form 10-KSB
covering the fiscal year of the Company ended December 31, 2002 are enclosed
herewith. These reports do not form any part of the material for solicitation of
proxies.
STOCKHOLDER PROPOSALS
Stockholder proposals for inclusion in the proxy statement for the 2003
Annual Meeting of Stockholders must be received by the Company at its principal
executive offices by February 1, 2003. Such stockholder proposals, together with
any supporting statements, should be directed to the Secretary of the Company.
Date: April 23, 2003
By order of the Board of Directors
/s/ Rosalie Melia
Rosalie Melia, Secretary