-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PPdJ64VR8GnXvCxYdyWuxoKdUGlpAFnpu1iiK+DRbvNnVyhZeUGN8eX9Gzsb30ED AGYOFau6CgMV/SMsy4legw== 0000899243-02-000069.txt : 20020413 0000899243-02-000069.hdr.sgml : 20020413 ACCESSION NUMBER: 0000899243-02-000069 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011031 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20020116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLOTEK INDUSTRIES INC/CN/ CENTRAL INDEX KEY: 0000928054 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-INDUSTRIAL MACHINERY & EQUIPMENT [5084] IRS NUMBER: 770709256 FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-13270 FILM NUMBER: 2510926 BUSINESS ADDRESS: STREET 1: 7030 EMPIRE CENTRAL DRIVE CITY: HOUSTON STATE: TX ZIP: 77040 BUSINESS PHONE: 7138499911 MAIL ADDRESS: STREET 1: 7030 EMPIRE CENTRAL DRIVE CITY: HOUSTON STATE: TX ZIP: 77040 8-K/A 1 d8ka.txt AMENDMENT NO. 1 TO FORM 8-K As filed with the Securities and Exchange Commission on January 16, 2002. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 8-K/A AMENDMENT No. 1 to CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) OCTOBER 31, 2001 FLOTEK INDUSTRIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 1-132170 77-0709256 (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) 7030 EMPIRE CENTRAL DRIVE, HOUSTON, TEXAS 77040 (Address of Principal Executive Offices) Registrant's telephone number, including area code: (713) 849-9911 NOT APPLICABLE (Former name or former address, if changed since last report) FLOTEK INDUSTRIES, INC. TABLE OF CONTENTS FOR AMENDMENT NO. 1 TO CURRENT REPORT ON FORM 8-K Item 2. Acquisition and Disposition of Assets......... 3 Item 7. Financial Statements and Exhibits............. 4 Signature........................................................ 6 2 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. On October 31, 2001, Flotek Industries, Inc. (the "Company") completed the closing of its previously announced merger with Chemical & Equipment Specialties, Inc. ("CESI"). In connection with the merger, the Company issued 2,994,478 shares of common stock and assumed employee stock options and contingent share issuance obligations totaling 117,524 shares. All such share amounts reflect the 120 to 1 reverse stock split which was given effect at the opening of trading on November 5, 2001. Also on that date, the Company began trading with a new stock ticker symbol, "FLTK", to reflect its change in status from a foreign-domiciled corporation to a Delaware corporation. Simultaneously with the closing of the merger, all preferred shares of Flotek Industries, Inc. were converted to common stock at the rate of $3.24 per share (post-split). Subsequent to August 15, 2001 and prior to the closing of the merger, warrants to purchase 536,141 shares of common stock at $3.60 per share (post-split) were exercised, resulting in cash proceeds to the Company of $1,930,106. Accordingly, the total outstanding common shares of the Company, after giving effect to the shares issued in the CESI merger and the reverse stock split (excluding adjustments for fractional shares to be paid in cash) is 4,850,696 shares. CESI, headquartered in Duncan, Oklahoma, operates in two primary segments of the oilfield service industry; specialty chemicals and well service equipment manufacturing. The specialty chemical segment develops, manufactures and packages innovative cementing and stimulation chemicals, including the development of environmentally neutral chemicals. The well service equipment manufacturing segment manufactures, to exacting specifications and ISO 9001 standards, specialized cementing equipment (pumping and bulk material transport) and stimulation equipment (nitrogen, blending and pumping), as well as proprietary automated monitoring and control systems. CESI also designs and constructs automated bulk material handling and loading facilities for major oilfield service companies. For accounting purposes, the merger has been treated under the purchase method of accounting as a "reverse" acquisition of Flotek Industries, Inc. by CESI. Accordingly, the financial statements of the Company will reflect the historical results of CESI and will incorporate the results of the current Flotek Industries, Inc. only for periods subsequent to the merger. The financial statements will also revalue the assets and liabilities of the current Flotek Industries, Inc. on the date of the merger in accordance with purchase accounting rules. The Company will report its results on a calendar year basis, effective with the current year ending December 31, 2001. 3 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. (a) Financial Statements of Businesses Acquired. Included in this Amendment No. 1 to Current Report on Form 8-K are the financial statements of Chemical & Equipment Specialties, Inc. and the separate financial statements of its recently acquired subsidiaries, Esses, Inc., Plainsman Technology, Inc., Neal's Technology, Inc., Padko International, Inc. and Material Translogistics, Inc.
Financial Statements of Chemical & Equipment Specialties, Inc. Report of Independent Public Accountants................................... F-1 Balance Sheets as of December 31, 2000 and September 30, 2001 (Unaudited).. F-2 Statements of Operations for the Period from June 27, 2000 (Inception) Through December 31, 2000 and the Unaudited Nine Month Period Ended September 30, 2001............................................... F-3 Statements of Changes in Stockholders' Equity for the Period from June 27, 2000 (Inception) Through December 31, 2000 and the Unaudited Nine Month Period Ended September 30, 2001........... F-4 Statements of Cash Flows for the Period from June 27, 2000 (Inception) Through December 31, 2000 and the Unaudited Nine Month Period Ended September 30, 2001............................................... F-5 Notes to Financial Statements............................................ F-6 Financial Statements of Esses, Inc. Report of Independent Public Accountants................................ F-15 Balance Sheets as of December 31, 1999 and 2000......................... F-16 Statements of Earnings for the Years Ended December 31, 1999 and 2000............................................ F-17 Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1999 and 2000............................................ F-18 Statements of Cash Flows for the Years Ended December 31, 1999 and 2000............................................. F-19 Notes to Financial Statements............................................ F-20 Financial Statements of Plainsman Technology, Inc. Report of Independent Public Accountants................................. F-25 Balance Sheets as of December 31, 1999 and 2000.......................... F-26 Statements of Operations and Comprehensive Loss for the Years Ended December 31, 1999 and 2000.................................. F-27 Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1999 and 2000.............................................. F-28 Statements of Cash Flows for the Years Ended December 31, 1999 and 2000.............................................. F-29 Notes to Financial Statements............................................. F-30 Financial Statements of Neal's Technology, Inc. Report of Independent Public Accountants.................................. F-35 Balance Sheet as of December 31, 2000..................................... F-36 Notes to Financial Statement.............................................. F-37
4
Financial Statements of Padko International, Inc. Report of Independent Public Accountant................................... F-40 Balance Sheets as of December 31, 1999 and 2000........................... F-41 Statements of Operations for the Years Ended December 31, 1999 and 2000.............................................. F-42 Statements of Changes in Stockholders' Equity (Deficit) for the Years Ended December 31, 1999 and 2000.................................. F-43 Statements of Cash Flows for the Years Ended December 31, 1999 and 2000.............................................. F-44 Notes to Financial Statements............................................. F-45 Financial Statements of Material Translogistics, Inc. Report of Independent Public Accountants.................................. F-49 Statement of Earnings for the Period From April 5, 2000 (Inception) Through December 31, 2000............................................... F-50 Notes to Financial Statement.............................................. F-51 (b) Pro Forma Financial Information. Unaudited Pro Forma Combined Financial Statements Basis of Presentation..................................................... P-1 Unaudited Pro Forma Combined Balance Sheet as of September 30, 2001....... P-3 Unaudited Pro Forma Combined Statement of Operations for the Year Ended December 31, 2000............................................ P-4 Unaudited Pro Forma Combined Statement of Operations for the Year Ended December 31, 2000 for the CESI Entities...................... P-5 Unaudited Pro Forma Combined Statement of Operations for the Nine Month Period Ended September 30, 2001.............................. P-6 Notes to Unaudited Pro Forma Combined Financial Statements................ P-7
(c) Exhibits. The following exhibits are filed herewith or incorporated by reference. Exhibit Number Description of Exhibit - ------- ---------------------- 2.1 * Agreement and Plan of Reorganization by and between Flotek Industries Inc. and Chemical & Equipment Specialties, Inc. 99.1 * Acquiror Shareholders Agreement 99.2 * Acquiror Shareholder Lock-up Agreement * Previously Filed 5 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. FLOTEK INDUSTRIES, INC. Registrant Date: January 16, 2002 By: /s/ Jerry D. Dumas, Sr. ------------------------------------- Jerry D. Dumas, Sr. Chairman and Chief Executive Officer 6 Independent Auditors' Report Board of Directors and Shareholders Chemical and Equipment Specialties, Inc. Duncan, Oklahoma We have audited the accompanying Consolidated Balance Sheet of Chemical and Equipment Specialties, Inc. as of December 31, 2000, and the related Consolidated Statements of Operations, Changes in Shareholders' Equity and Cash Flows for the period June 27, 2000 (date of incorporation) through December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chemical and Equipment Specialties, Inc. as of December 31, 2000, and the results of its consolidated operations for the period June 27, 2000 (date of incorporation) through December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. WEINSTEIN SPIRA & COMPANY, P.C. Houston, Texas July 19, 2001 F-1 CHEMICAL AND EQUIPMENT SPECIALTIES, INC. CONSOLIDATED BALANCE SHEETS
September 30, December 31, 2001 2000 -------------- -------------- (Unaudited) ASSETS Current Assets Cash and cash equivalents $ 124,765 $ 1,293,142 Accounts receivable - net of allowance for doubtful accounts of $196,783 in 2001 1,410,116 Costs and estimated earnings in excess of billings on uncompleted contracts 1,146,106 Inventories 1,204,082 Prepaid expenses 38,469 -------------- -------------- Total Current Assets 3,923,538 1,293,142 -------------- -------------- Property and Equipment Land 120,000 Buildings and leasehold improvements 1,663,502 36,325 Machinery and equipment 1,075,171 Computer equipment 86,040 9,185 Furniture and fixtures 102,227 1,411 Transportation 304,614 70,000 -------------- -------------- 3,351,554 116,921 Less: Accumulated depreciation 233,820 15,933 -------------- -------------- 3,117,734 100,988 -------------- -------------- Other Assets Goodwill, net of accumulated amortization of $270,036 in 2001 7,753,450 95,459 Loan fees, net of accumulated amortization of $5,008 in 2001 51,632 Patents 7,651 Deposits 11,029 -------------- -------------- 7,823,762 95,459 -------------- -------------- $ 14,865,034 $ 1,489,589 ============== ============== LIABILITIES Current Liabilities Short-term debt $ 1,935,572 Capital lease obligations 631,825 Accounts payable: Trade 1,574,924 $ 80,469 Shareholders 14,919 164,410 Accrued expenses 59,612 20,069 -------------- -------------- Total Current Liabilities 4,216,852 264,948 Long-Term Debt 3,593,586 -------------- -------------- 7,810,438 264,948 -------------- -------------- SHAREHOLDERS' EQUITY Preferred Stock, $.01 par value, 2,500,000 shares authorized, no shares issued Common Stock, $.01 par value, 5,000,000 shares authorized, 1,164,688 shares issued and outstanding 11,646 5,459 Additional Paid-in Capital 7,433,725 1,377,912 Accumulated Deficit (390,775) (158,730) -------------- -------------- 7,054,596 1,224,641 -------------- -------------- $ 14,865,034 $ 1,489,589 ============== ==============
See notes to financial statements. F-2 CHEMICAL AND EQUIPMENT SPECIALTIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the Period June 27, 2000 For the (Date of Nine Month Incorporation) Period Ended through September 30, December 31, 2001 2000 ---------------- ---------------- (Unaudited) Revenues $ 10,100,060 Cost of Revenues 7,063,038 ---------------- ---------------- Gross Margin 3,037,022 Expenses: Selling, general and administrative 2,560,921 $ 153,462 Depreciation and amortization 493,173 15,933 ---------------- ---------------- 3,054,094 169,395 ---------------- ---------------- Loss from Operations (17,072) (169,395) Other Income (Expense) Interest expense (282,955) Interest income 47,547 10,665 Other, net 20,435 ---------------- ---------------- (214,973) 10,665 ---------------- ---------------- Net Loss $ (232,045) $ (158,730) ================ ================ See notes to financial statements. F-3 CHEMICAL AND EQUIPMENT SPECIALTIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Nine Month Period Ended September 30, 2001 and For the Period June 27, 2000 (Date of Incorporation) through December 31, 2000 (Information for the Nine Month Period Ended September 30, 2001 is unaudited)
Additional Common Paid-in Accumulated Stock Capital Deficit Total ---------- ------------- ----------- ------------- Issuance of Common Stock $ 5,459 $ 1,377,912 $ 1,383,371 Net Loss $ (158,730) (158,730) ---------- ------------- ----------- ------------- Balance - December 31, 2000 5,459 1,377,912 (158,730) 1,224,641 Stock issued for acquisitions 1,950 1,948,050 1,950,000 Stock issued for cash 4,237 4,107,763 4,112,000 Net Loss (232,045) (232,045) ---------- ------------- ----------- ------------- Balance - September 30, 2001 (Unaudited) $ 11,646 $ 7,433,725 $ (390,775) $ 7,054,596 ========== ============= =========== =============
See notes to financial statements. F-4 CHEMICAL AND EQUIPMENT SPECIALTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Period June 27, 2000 For the (Date of Nine Month Incorporation) Period Ended through September 30, December 31, 2001 2000 -------------------- ------------------ (Unaudited) Cash Flows From Operating Activities Net loss $ (232,045) $ (158,730) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 223,137 15,933 Amortization of intangibles 270,036 Imputed interest expense 22,031 Bad debt expense 216,302 Loss on sale of assets (18,528) Gain on sale of securities 38,963 (Increase) Decrease in: Accounts receivable (522,262) Costs and earnings (579,815) Inventory (491,561) Prepaids (26,684) Deposits and other (53,550) Federal income tax receivable 2,303 Increase (Decrease) in: Accounts payable 632,886 80,469 Billings in excess (38,505) Accrued expenses (39,532) 20,069 ---------------- -------------- Net Cash Used in Operating Activities (596,824) (42,259) ---------------- -------------- Cash Flows From Investing Activities Acquisition of subsidiaries, net (6,963,016) Capital expenditures (1,157,766) (116,921) Proceeds from sales 230,888 Payment of deferred acquisition costs (256,497) (95,459) ---------------- -------------- Net Cash Used in Investing Activities (8,146,391) (212,380) ---------------- -------------- Cash Flows From Financing Activities Payments of capital lease obligations (21,000) Payments of debt (346,883) Proceeds from debt 2,416,701 Issuance of stock 4,112,000 1,383,371 Proceeds from shareholder advances 164,410 Net line proceeds 1,414,020 ---------------- -------------- Net Cash Provided by Financing Activities 7,574,838 1,547,781 ---------------- -------------- Net Increase (Decrease) in Cash and Cash Equivalents (1,168,377) 1,293,142 Cash and Cash Equivalents - Beginning of Year 1,293,142 ---------------- -------------- Cash and Cash Equivalents - End of Year $ 124,765 $ 1,293,142 ================ ============== Supplemental Schedule of Noncash Investing and Financing Activities Land and building acquired under capital lease $ 630,794 ================ Supplemental Disclosures of Cash Flow Information Acquisition of Subsidiaries: Assets Acquired: Cash $ 224,584 Accounts receivable 1,104,156 Inventories 712,521 Costs and estimated earnings in excess of billings on uncompleted contracts 566,291 Prepaid expenses 6,777 Federal income tax receivable 2,303 Land 60,000 Property and equipment 1,438,073 Investments in marketable securities 204,573 Goodwill 7,671,530 Other assets 21,770 Debt (495,829) Accounts payable (861,569) Billings in excess of costs and estimated earnings on uncompleted contracts (38,505) Accrued liabilities (79,075) ---------------- 10,537,600 Common stock issued (1,950,000) Promissory notes issued (1,400,000) ---------------- Net Cash Used in Acquisition of Subsidiaries $ 7,187,600 ================
See notes to financial statements. F-5 CHEMICAL AND EQUIPMENT SPECIALTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 and December 31, 2000 (Information for the Nine Months Ended September 30, 2001 is unaudited) Note 1 - Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements consist of Chemical and Equipment Specialties, Inc. and its wholly-owned subsidiaries which operate in two primary segments of the oilfield service industry: specialty chemicals and equipment manufacturing. The specialty chemical segment comprised of Plainsman Technology, Inc.; Esses, Inc. and Padko International, Inc. develop, manufacture and package innovative cementing and stimulation chemicals, including the development of environmentally neutral chemicals. The equipment manufacturing segment comprised of Neal's Technology, Inc. and Material Translogistics, Inc. dba Gillespie Consulting Company manufacture specialized cementing equipment (pumping and bulk material transport) and stimulation equipment (nitrogen, blending and pumping) as well as proprietary automated monitoring and control systems. This segment also designs and constructs automated bulk material handling and loading facilities for major oilfield service companies. Chemical and Equipment Specialties, Inc. was incorporated June 27, 2000, and the operations for the period ended September 30, 2000 were immaterial. Revenue Recognition The specialty chemical segment recognizes revenues at the date of delivery, and accounts receivable are recorded at that time. Earnings are charged with a provision for doubtful accounts based on a current review of collectibility of accounts. The equipment manufacturing segment recognizes revenues from manufacturing contracts under the percentage-of-completion method of accounting, generally in the ratio in which costs incurred bear to total estimated costs at completion. All known or anticipated losses on contracts are recognized in full when such amount becomes apparent. Contract costs include all direct labor and material costs and those indirect costs related to job performance. General and administrative costs are charged to expense as incurred. Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income and are recognized in the period in which the revisions are determined. The asset, costs and estimated earnings in excess of billings on uncompleted contracts, represents revenues recognized in excess of amounts billed. The liability, billings in excess of costs and estimated earnings on uncompleted contracts, represents billings in excess of revenues recognized. Billings are rendered under terms of customer contracts. Accounts receivable are recorded at that time. Earnings are charged with a provision for doubtful accounts receivable based on collection experience and current review of collectibility of accounts. Accounts deemed uncollectible are applied against the allowance for doubtful accounts. F-6 CHEMICAL AND EQUIPMENT SPECIALTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2001 and December 31, 2000 (Information for the Nine Months Ended September 30, 2001 is unaudited) Cash and Cash Equivalents The Company considers all short-term investments with an original maturity of three months or less to be cash equivalents. As of September 30, 2001, the Company had deposits in excess of federally insured limits. Inventories Inventories are valued at the lower of cost or market. Cost is determined under the first-in, first-out or weighted average methods. Finished goods inventory include raw materials, direct labor and production overhead. Property and Equipment Property and equipment are presented at cost. The cost of ordinary maintenance and repairs is charged to operations, while replacements are capitalized. Depreciation is computed at rates considered sufficient to amortize the cost of the assets over their estimated useful lives using the straight-line method. Depreciation is based upon the following estimated useful lives: Buildings and improvements 20 years Machinery and equipment 3 - 5 years Computer equipment 5 years Furniture and fixtures 5 years Transportation 3 years The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Goodwill Goodwill arises from the acquisition of assets prior to June 30, 2001, at an amount in excess of their fair market value. Amortization is computed by the straight-line method over the estimated useful life of the asset of 20 years. (See new accounting pronouncements.) F-7 CHEMICAL AND EQUIPMENT SPECIALTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2001 and December 31, 2000 (Information for the Nine Months Ended September 30, 2001 is unaudited) Income Taxes The Company will file a consolidated federal income tax return. Income taxes are computed based upon rates prevailing at year end. The Company provides deferred income taxes for the expected future tax consequences based upon differences between the financial reporting and tax bases of assets and liabilities and are based on enacted tax laws and rates. Start-Up Costs Start-up costs are expensed as incurred. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and certain assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Interim Financial Statements (Unaudited) In the opinion of management, the unaudited interim financial statements at September 30, 2001, and for the nine months then ended, include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company's financial position, results of operations, shareholders' equity and cash flows for the interim period. The combined results of operations and cash flows for the nine months ended September 30, 2001 are not necessarily indicative of the results which would be expected for a full year. F-8 CHEMICAL AND EQUIPMENT SPECIALTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2001 and December 31, 2000 (Information for the Nine Months Ended September 30, 2001 is unaudited) New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. The Company does not believe that the prospective adoption of this standard will have a material impact on its consolidated financial statements. SFAS No. 142 changes the accounting for goodwill and certain other intangible assets from an amortization method to an impairment only approach. Due to the adoption of SFAS No. 142, the Company will not amortize goodwill beginning in fiscal 2002. The goodwill amortization expense during the nine months ended September 30, 2001, was $270,036. The Company will complete its initial impairment assessment as required by SFAS No. 142 by December 31, 2002. The Company does not anticipate this assessment will result in a material write down during fiscal 2002. Note 2 - Acquisitions Effective January 1, 2001, the Company acquired the following entities in purchase transactions:
Consideration Paid for Acquired Companies - ------------------------------------------------------------------------------------------------------------------ Promissory Common Total Company Cash Notes Stock Consideration - ----------------------------------- ---------------- ---------------- ---------------- ------------------ Esses, Inc. $ 4,000,000 $ 1,000,000 $ 1,000,000 $ 6,000,000 Plainsman Technology, Inc. 1,850,000 250,000 2,100,000 Neal's Technology, Inc. 500,000 400,000 250,000 1,150,000 Padko International, Inc. 237,600 250,000 487,600 ---------------- ---------------- ---------------- ------------------ $ 6,587,600 $ 1,400,000 $ 1,750,000 $ 9,737,600 ================ ================ ================ ==================
In June, 2001, the Company entered into an agreement and plan of reorganization (the Agreement) with Material Translogistics, Inc. dba Gillespie Consulting Company (Gillespie). At the closing of the Agreement, all issued and outstanding common stock of Gillespie was exchanged for 20,000 shares of common stock and the right to receive an additional 20,000 shares upon the satisfaction of certain contingencies. F-9 CHEMICAL AND EQUIPMENT SPECIALTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2001 and December 31, 2000 (Information for the Nine Months Ended September 30, 2001 is unaudited) As part of the Agreement, Gillespie also sold to the Company certain intangible assets, including customer lists, business records and contract rights, in consideration of $600,000. The Company did not purchase any other assets owned or leased by Gillespie, and did not assume any liability of Gillespie. The common stock in these transactions was valued at $10 per share. The above transactions generated approximately $7,670,000 in goodwill. The following unaudited proforma information represents the combined results of operations as if the acquisitions had been combined as of January 1, 2000: Revenues $ 8,704,000 ============ Net income $ 383,000 ============ The proforma information is not necessarily indicative of operating results that would have occurred if the acquisition had been consummated as of January 1, 2000, nor is it necessarily indicative of future operating results. The actual results of operations of an acquired company are included in these consolidated financial statements only from the date of acquisition. Note 3 - Inventories Inventories consisted of the following at September 30, 2001: Raw materials $ 537,418 Finished goods 666,664 ------------ $ 1,204,082 ============ Note 4 - Construction Contracts in Progress Information regarding contracts in progress at September 30, 2001, is as follows: Costs incurred on uncompleted contracts $ 2,244,777 Estimated earnings on uncompleted contracts 138,059 ------------ 2,382,836 Less: Billings to date 1,236,730 ------------ $ 1,146,106 ============ F-10 CHEMICAL AND EQUIPMENT SPECIALTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2001 and December 31, 2000 (Information for the Nine Months Ended September 30, 2001 is unaudited) The Company has a backlog of approximately $600,000 at September 30, 2001. Note 5 - Capital Lease Obligations Effective March 2001, the Company entered into a lease and purchase agreement with a third party for the purchase of land and buildings. The purchase of the property will occur upon completion of an initial lease term of 12 months. Lease payments during the initial term are $3,000/month. The total purchase price of the property is $675,000. Lease payments made during the initial lease term will be applied towards the purchase price, which will be payable at the closing in cash. Future minimum lease payments under the capital lease, together with the present value of the minimum lease payments at September 30, 2001, are as follows: Total minimum lease payments year ending September 30, 2002 $654,000 Less: amount representing interest (22,175) -------- Present value of minimum lease payments $631,825 ======== Assets recorded under the capital lease consist of: Land $ 60,000 Buildings 570,794 ------------ $ 630,794 ============ Note 6 - Short-Term Debt Short-term debt at September 30, 2001, consists of the following: $1,414,020 Legacy Bank revolving line-of-credit, bearing interest at the prime rate plus 1%, due in May, 2002 (see Note 7) $ 1,414,020 Current portion of long-term debt 521,552 ------------ $ 1,935,572 ============ Note 7 - Long-Term Debt Long-term debt at September 30, 2001, consists of the following: Notes payable to shareholders, unsecured, interest at 9%, payable quarterly beginning March, 2001, principal due in five annual installments of $200,000 beginning January, 2002 until December, 2005 $ 1,000,000 Note payable to Legacy Bank, bearing interest at the prime rate plus 1%, payable in monthly installments of $45,179 including interest, due in January, 2008 2,520,527 Notes payable to Duncan Area Economic Development Foundation, unsecured, interest at 6%, payable in monthly installments of $1,934 including interest, due in May, 2006 92,061 F-11 CHEMICAL AND EQUIPMENT SPECIALTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2001 and December 31, 2000 (Information for the Nine Months Ended September 30, 2001 is unaudited) Note payable to Legacy Bank, interest at the prime rate plus 1%, due in September, 2004 502,550 ----------- 4,115,138 Less: Current maturities 521,552 ----------- $ 3,593,586 =========== The notes payable to Legacy Bank are secured by all the assets of the Company. The following is a schedule of future maturities of long-term debt: Year Ending September 30, ------------------------- 2002 $ 521,552 2003 554,443 2004 1,093,280 2005 630,765 2006 664,476 Thereafter 650,622 ---------- $4,115,138 ========== Note 8 - Federal Income Tax A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows: September 30, December 31, 2001 2000 ----------- ------------ Federal income tax (benefit) at 34% $ (71,405) $ (53,968) Nondeductible items 8,610 1,132 Other (205) (164) Change in valuation allowance 63,000 53,000 --------- --------- $ 0 $ 0 ========= ========= F-12 CHEMICAL AND EQUIPMENT SPECIALTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2001 and December 31, 2000 (Information for the Nine Months Ended September 30, 2001 is unaudited) The components of deferred taxes are as follows: Allowance for doubtful accounts $ 67,000 Net operating loss carryforward 39,000 $ 50,000 Book depreciation in excess of tax 10,000 3,000 ------------- ---------- 116,000 53,000 ------------- ========== Valuation allowance (116,000) 53,000) ------------- ---------- $ 0 $ 0 ============= ========== At December 31, 2000, the Company had net operating loss carryforwards available to offset future taxable income of approximately $146,000, expiring in 2010. Under federal tax law, the amount and availability of loss carryforwards are subject to a variety of interpretations and restrictive tests applicable to the Company. The utilization of such carryforwards could be limited or effectively lost upon certain changes in ownership. Accordingly, while the Company believes certain loss carryforwards are available to it, no assurance can be given concerning such loss carryforwards or whether such loss carryforwards will be available in the future. An allowance has been recorded to fully offset the net deferred tax asset. Note 9 - Related Party Transactions The Company has accounts payable to shareholders totaling $14,919 and $164,410 at September 30, 2001 and 2000, respectively. As further described in Note 7 to these financial statements, the Company has notes payable to shareholders of $1,000,000 at September 30, 2001. Note 10 - Operating Leases The Company leases vehicles from a third party. Future minimum lease payments on these leases are as follows: Year Ending September 30, ------------------------- 2002 $ 15,460 2003 5,787 ---------- $ 21,247 ========== Total rent expense for these vehicles was approximately $12,000 for the nine months ended September 30, 2001. F-13 NOTE 11 - SEGMENT INFORMATION The Company has two reportable segments: specialty chemicals and equipment manufacturing. The specialty chemical segment comprised of Plainsman Technology, Inc.; Esses, Inc. and Padko International, Inc. develop, manufacture and package innovative cementing and stimulation chemicals, including the development of environmentally neutral chemicals. The equipment manufacturing segment comprised of Neal's Technology, Inc. and Material Translogistics, Inc. dba Gillespie Consulting Company manufacture specialized cementing equipment (pumping and bulk material transport) and stimulation equipment (nitrogen, blending and pumping) as well as proprietary automated monitoring and control systems. This segment also designs and constructs automated bulk material handling and loading facilities for major oilfield service companies. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately, because each business requires different technology and marketing strategies. The Company operates primarily in the United States. As of September 30, 2001, and for the nine months then ended, segment information is as follows:
For the Nine Months Ended September 30, 2001 ---------------------------------------------------------- Specialty Equipment Chemicals Manufacturing Other TOTAL ----------- -------------- ----------- ------------- Net sales to external customers $6,355,562 $3,744,498 $10,100,060 Income (Loss) from Operations 1,087,724 (804,113) $ (300,683) (17,072) Depreciation and amortization 384,213 59,722 49,238 493,173 Total Assets 9,953,344 4,083,236 828,454 14,865,034 Capital expenditures 670,878 1,112,857 4,825 1,788,560
F-14 INDEPENDENT AUDITORS' REPORT Board of Directors Esses, Inc. Duncan, Oklahoma We have audited the accompanying Balance Sheets of Esses, Inc. as of December 31, 2000 and 1999, and the related Statements of Earnings, Changes in Shareholders' Equity and Cash Flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Esses, Inc. as of December 31, 2000 and 1999, and the results of their operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. WEINSTEIN SPIRA & COMPANY, P.C. Houston, Texas June 28, 2001 F-15 ESSES, INC. BALANCE SHEETS
DECEMBER 31, ------------------------------- 2000 1999 ---------- -------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 14,310 $ 69,082 Accounts receivable 651,245 349,305 Inventory 356,812 188,300 Prepaid expenses 452 5,337 ---------- -------- Total Current Assets 1,022,819 612,024 ---------- -------- PROPERTY AND EQUIPMENT Land 23,878 12,878 Buildings and leasehold improvements 69,360 53,887 Machinery and equipment 305,540 148,784 Furniture and fixtures 44,886 38,643 Transportation 34,804 34,208 ---------- -------- 478,468 288,400 Less: Accumulated depreciation 240,344 177,829 ---------- -------- 238,124 110,571 ---------- -------- DEPOSITS 13,721 11,927 ---------- -------- $1,274,664 $734,522 ========== ======== LIABILITIES CURRENT LIABILITIES Current portion of long-term debt $ 32,985 $ 50,920 Line-of-credit 189,411 172,578 Accounts payable 283,063 185,450 Accrued expenses 8,127 80,132 ---------- -------- Total Current Liabilities 513,586 489,080 ---------- -------- LONG-TERM DEBT 27,406 60,655 ---------- -------- 540,992 549,735 ---------- -------- SHAREHOLDERS' EQUITY COMMON STOCK, $1 par value, 50,000 shares authorized, 30,000 shares issued and outstanding 30,000 30,000 RETAINED EARNINGS 703,672 154,787 ---------- -------- 733,672 184,787 ---------- -------- $1,274,664 $734,522 ========== ========
See notes to financial statements. F-16 ESSES, INC. STATEMENTS OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- 2000 1999 ---------- ---------- PERCENT TO PERCENT TO AMOUNT REVENUES AMOUNT REVENUES ------------- -------------- ----------------- -------------- REVENUES $3,755,748 100.0% $1,921,661 100.0% Cost of Revenues 2,153,039 57.3 1,237,304 64.4 ---------- ----- ---------- ----- GROSS MARGIN 1,602,709 42.7 684,357 35.6 Operating Expenses 701,673 18.7 450,173 23.4 ---------- ----- ---------- ----- OPERATING INCOME 901,036 24.0 234,184 12.2 ---------- ----- ---------- ----- OTHER INCOME (EXPENSE) Interest expense (22,195) (.6) (18,169) (.9) Interest income 44 43 (22,151) (.6) (18,126) (.9) ---------- ----- ---------- ----- NET EARNINGS $ 878,885 23.4% $ 216,058 11.3% ========== ===== ========== =====
See notes to financial statements. F-17 ESSES, INC. STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Common Retained Stock Earnings Total --------------- ---------------- ---------------- Balance - December 31, 1998 $30,000 $ 67,208 $ 97,208 Distributions (128,479) (128,479) Net Earnings 216,058 216,058 ------- --------- --------- Balance - December 31, 1999 30,000 154,787 184,787 Distributions (330,000) (330,000) Net Earnings 878,885 878,885 ------- --------- --------- Balance - December 31, 2000 $30,000 $ 703,672 $ 733,672 ======= ========= =========
See notes to financial statements. F-18 ESSES, INC. STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------- 2000 1999 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 878,885 $ 216,058 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 62,515 18,880 (Increase) Decrease in: Accounts receivable (301,940) (162,978) Inventory (168,512) (64,536) Prepaid expenses 4,885 121 Deposits (1,794) (8,293) Increase (Decrease) in: Accounts payable 97,613 67,003 Accrued expenses (72,005) 79,654 --------- --------- Net Cash Provided By Operating Activities 499,647 145,909 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (190,068) (53,997) --------- --------- Net Cash Used in Investing Activities (190,068) (53,997) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid (330,000) (128,479) Proceeds from debt 25,174 47,080 Payments on debt (76,358) (24,922) Net line-of-credit proceeds 16,833 63,996 --------- --------- Net Cash Used in Financing Activities (364,351) (42,325) --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (54,772) 49,587 Cash and Cash Equivalents - Beginning of Year 69,082 19,495 --------- --------- CASH AND CASH EQUIVALENTS - END OF YEAR $ 14,310 $ 69,082 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for interest $ 20,744 $ 17,847 ========= =========
See notes to financial statements. F-19 ESSES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 NOTE 1 - ACCOUNTING POLICIES Esses, Inc. (the Company) maintains its accounts on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. Accounting principles followed by the Company and the methods of applying those principles which materially affect the determination of financial position, results of operations, and cash flows are summarized below: DESCRIPTION OF BUSINESS The Company is primarily engaged in purchasing, manufacturing and selling dry and liquid stimulation additives. The Company distributes these additives to the oil and gas service industry throughout the United States of America. INCOME RECOGNITION Revenues are recognized at the date of delivery, and accounts receivable are recorded at that time. Earnings are charged with a provision for doubtful accounts based on a current review of collectibility of accounts. There was no allowance for doubtful accounts at December 31, 2000 and 1999. CASH AND CASH EQUIVALENTS The Company considers all short-term investments with an original maturity of three months or less to be cash equivalents. As of December 31, 2000, the Company had deposits in excess of federally insured limits. INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined under the weighted average method. Finished goods inventory include raw materials, direct labor and production overhead. PROPERTY AND EQUIPMENT Property and equipment are presented at cost. The cost of ordinary maintenance and repairs is charged to operations, while replacements are capitalized. Depreciation is computed at rates considered sufficient to amortize the cost of the assets over their estimated useful lives using the straight-line method for building and improvements and double declining method for the remainder. Depreciation is based upon the following estimated useful lives: Building and improvements 20 years Machinery and equipment 3-5 years Furniture and fixtures 5 years Transportation 3 years F-20 ESSES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999 FEDERAL INCOME TAX The Company has elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under those provisions, net income or losses are reportable for tax purposes by the shareholders. Accordingly, no federal income taxes are included in the accompanying financial statements. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and certain assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2 - INVENTORY Inventory as of December 31, 2000 and 1999, consisted of the following: 2000 1999 ---- ---- Raw materials $243,363 $121,471 Finished goods 113,449 66,829 -------- -------- $356,812 $188,300 ======== ======== NOTE 3 - LINE-OF-CREDIT The line-of-credit at December 31, 2000 and 1999, is as follows: 2000 1999 ---- ---- $250,035 Line-of-credit, secured by accounts receivable, inventory, contract rights, general intangibles and property and equipment, bearing interest at prime plus 1.00%, due November, 2001 $189,411 $172,578 ======== ======== In connection with the revolving line-of-credit, the Company has entered into a loan agreement which contains certain restrictive covenants. As of December 31, 2000, the Company was in compliance with these covenants. F-21 ESSES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999 NOTE 4 - LONG-TERM DEBT Long-term debt as of December 31, 2000 and 1999, is as follows:
2000 1999 ------- -------- Note payable to bank, secured by real estate, payable in monthly installments of $795, including interest at 8.75%, due June, 2003 $21,367 Note payable to bank, secured by vehicle, payable in monthly installments of $655, including interest at 7.5%, due November, 2003 20,533 $ 26,514 Note payable to bank, secured by substantially all assets of the Company, bearing interest at 9.25%, principle due at maturity in November, 2000 20,000 Note payable to bank, secured by substantially all assets of the Company, payable in monthly installments of $1,360, including interest at 10%, due December, 2001 15,241 28,366 Unsecured promissory note payable, due in monthly installments of $472, including interest at 10%, due September, 2001 3,250 8,606 Note payable to related party, secured by real estate, payable in monthly principal installments of $685, including interest at 7%, due November, 2003, principal paid in entirety in 2000 28,089 ------- -------- 60,391 111,575 Less: Current maturities 32,985 50,920 ------- -------- $27,406 $ 60,655 ======= ========
F-22 ESSES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999 Future maturities of long-term debt are as follows: Year Ending December 31, --------------------------------- 2001 $32,985 2002 15,745 2003 11,661 ------- $60,391 ======= NOTE 5 - OPERATING LEASES The Company leases vehicles from a third party. Future minimum lease payments on these leases are as follows: Year Ending December 31, --------------------------------- 2001 $15,460 2002 7,604 2003 1,267 ------- $24,331 ======= Auto lease expense for the years ended December 31, 2000 and 1999, totaled $15,474 and $7,048, respectively. NOTE 6 - SIGNIFICANT CUSTOMERS During the year ended December 31, 2000, the Company sold chemicals to three customers during the normal course of business representing 34%, 29% and 11%, respectively, of the Company's sales revenue for the year. At December 31, 2000, the Company had receivables from these customers representing approximately 50%, 23% and 11%, respectively, of the Company's trade accounts receivable. During the year ended December 31, 1999, the Company sold chemicals to three customers during the normal course of business representing 29%, 27% and 19%, respectively, of the Company's sales revenue for the year. At December 31, 1999, the Company had receivables from these three customers representing approximately 49%, 19% and 0%, respectively, of the Company's trade accounts receivable. F-23 ESSES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999 NOTE 7 - EMPLOYEE BENEFIT PLAN The Company has a simplified employee pension plan for all eligible employees. The Company may elect to make contributions to individual retirement accounts for eligible employees up to a maximum of 15% of their income. Company contributions to the plan for the year ended December 31, 2000 were $29,625. NOTE 8 - SUBSEQUENT EVENT The shareholders of the Company entered into a stock purchase agreement with Chemical & Equipment Specialties, Inc. (CESI), an Oklahoma corporation, to sell all of the Company's common stock to CESI, effective January 2001. The purchase price of the stock consisted of $1,000,000 in notes payable to the shareholders, and 100,000 shares of CESI's common stock. In addition, the Company agreed to sell all of its intangible assets for $4,000,000. F-24 INDEPENDENT AUDITORS' REPORT Board of Directors Plainsman Technology, Inc. Marlow, Oklahoma We have audited the accompanying Balance Sheets of Plainsman Technology, Inc. as of December 31, 2000 and 1999, and the related Statements of Operations and Comprehensive Loss, Changes in Shareholders' Equity and Cash Flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Plainsman Technology, Inc. as of December 31, 2000 and 1999, and the results of its operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. WEINSTEIN SPIRA & COMPANY, P.C. Houston, Texas June 29, 2001 F-25 PLAINSMAN TECHNOLOGY, INC. BALANCE SHEETS
DECEMBER 31, --------------------------------------- 2000 1999 ---------- ---------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 86,120 $ 18,001 Accounts receivable 429,257 328,664 Inventories 342,104 367,029 Prepaid expenses 500 6,754 ---------- ---------- Total Current Assets 857,981 720,448 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT Land 25,769 25,769 Buildings and improvements 406,418 406,418 Plant equipment 209,618 204,781 Laboratory equipment 128,971 127,245 Furniture and fixtures 165,710 165,710 Transportation equipment 238,645 238,645 ---------- ---------- 1,175,131 1,168,568 Less: Accumulated depreciation 931,841 876,200 ---------- ---------- 243,290 292,368 INVESTMENTS IN MARKETABLE SECURITIES 204,573 269,526 OTHER ASSETS 8,049 8,624 ---------- ---------- $1,313,893 $1,290,966 ========== ========== LIABILITIES CURRENT LIABILITIES Current portion of long-term debt $ 53,429 $ 87,277 Accounts payable 300,578 230,990 Accrued liabilities 40,832 10,728 ---------- ---------- Total Current Liabilities 394,839 328,995 LONG-TERM DEBT 7,609 ---------- ---------- 394,839 336,604 SHAREHOLDERS' EQUITY COMMON STOCK, par value $1 per share, 100,000 shares authorized and issued 100,000 100,000 PAID-IN CAPITAL 136,146 136,146 RETAINED EARNINGS 1,061,862 1,097,930 ACCUMULATED OTHER COMPREHENSIVE INCOME 38,594 37,834 Less: Treasury stock - at cost, 54,569 shares (417,548) (417,548) ---------- ---------- 919,054 954,362 ---------- ---------- $1,313,893 $1,290,966 ========== ==========
See notes to financial statements. F-26 PLAINSMAN TECHNOLOGY, INC. STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEAR ENDED December 31, ----------------------------------------- 2000 1999 ---------- ---------- SALES $2,768,478 $1,681,005 Cost of Goods Sold 1,619,863 995,612 ---------- ---------- GROSS PROFIT 1,148,615 685,393 Operating Expenses 1,177,741 1,016,683 ---------- ---------- LOSS FROM OPERATIONS (29,126) (331,290) ---------- ---------- OTHER INCOME (EXPENSE) Dividend income 5,000 Interest expense (6,755) (11,410) Gain (Loss) on sale of assets (187) 55,585 ---------- ---------- (6,942) 49,175 ---------- ---------- NET LOSS (36,068) (282,115) OTHER COMPREHENSIVE INCOME Unrealized holding gains arising during period 1,556 16,990 Less: Reclassification adjustment for gains included in net income (796) 16,205 ---------- ---------- 760 785 ---------- ---------- COMPREHENSIVE LOSS $ (35,308) $ (281,330) ========== ==========
See notes to financial statements. F-27 PLAINSMAN TECHNOLOGY, INC. STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
ACCUMULATED OTHER TOTAL COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS' STOCK CAPITAL EARNINGS INCOME STOCK EQUITY --------- --------- ------------ ------------- ---------- ------------- Balance - December 31, 1998 $100,000 $136,146 $1,380,045 $37,049 $(417,548) $1,235,692 Net Loss (282,115) (282,115) Change in Unrealized Net Gains on Marketable Securities 785 785 --------- --------- ----------- ------------- ---------- ----------- Balance - December 31, 1999 100,000 136,146 1,097,930 37,834 (417,548) 954,362 Net Loss (36,068) (36,068) Change in Unrealized Net Gains on Marketable Securities 760 760 --------- --------- ----------- ------------- ---------- ----------- Balance - December 31, 2000 $100,000 $136,146 $1,061,862 $38,594 $(417,548) $ 919,054 ========= ========= ========== ======= ========== ==========
See notes to financial statements. F-28 PLAINSMAN TECHNOLOGY, INC. STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------- 2000 1999 --------- --------- RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net loss $ (36,068) $(282,115) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 56,216 82,995 Bad debt expense 17,450 (Gain) Loss on sale of assets 187 (55,585) (Increase) Decrease in: Accounts receivable (100,593) (15,176) Inventory 24,925 90,727 Prepaids 6,254 (6,254) Increase in: Accounts payable 69,588 22,968 Accrued expenses 30,104 7,333 Other assets 15,300 --------- --------- Net Cash Provided by (Used in) Operating Activities 50,613 (122,357) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property and equipment (6,563) (40,371) Proceeds from sale of assets 66,891 159,104 Purchases of marketable securities (1,365) --------- --------- Net Cash Provided by Investing Activities 58,963 118,733 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from debt (61,457) (56,612) Payments of debt 20,000 61,835 --------- --------- Net Cash Provided by (Used in) Financing Activities (41,457) 5,223 --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (68,119) 1,599 Cash and Cash Equivalents - Beginning of Year 18,001 16,402 --------- --------- CASH AND CASH EQUIVALENTS - END OF YEAR $ 86,120 $ 18,001 ========= ========= NONCASH INVESTING AND FINANCING ACTIVITIES Unrealized gain on marketable securities $ 760 $ 785 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash Paid for Interest $ 6,755 $ 11,411 ========= =========
See notes to financial statements. F-29 PLAINSMAN TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 NOTE 1 - ACCOUNTING POLICIES Plainsman Technology, Inc. (the Company) maintains its accounts on the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America. Accounting principles followed by the Company and the methods of applying those principles which materially affect the determination of financial position, results of operations and cash flows are summarized as follows: DESCRIPTION OF BUSINESS The Company is primarily engaged in purchasing, manufacturing and selling dry and liquid cementing and stimulation additives. The Company distributes these additives to the oil and gas service industry throughout the United States of America. INCOME RECOGNITION Revenues are recognized at the date of delivery and accounts receivable are recorded at that time. Earnings are charged with a provision for doubtful accounts based on a current review of collectibility of accounts. There was no allowance for doubtful accounts at December 31, 2000 and 1999. CASH AND CASH EQUIVALENTS The Company considers all short-term investments with an original maturity of three months or less to be cash equivalents. As of December 31, 2000 the Company had deposits in excess of federally insured limits. INVENTORIES Inventories are valued at the lower of average cost or market. Cost is determined under the weighted average method. Finished goods inventory include raw materials, direct labor and production overhead. INVESTMENTS IN MARKETABLE SECURITIES The Company accounts for equity securities as available-for-sale securities and reports them at fair value, principally determined by the closing price on independent stock exchanges, with unrealized gains and losses being reported as a component of accumulated other comprehensive income. F-30 PLAINSMAN TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999 PROPERTY AND EQUIPMENT Property and equipment are presented at cost. Depreciation is computed at rates considered sufficient to amortize the cost of the assets over their estimated useful lives, using the straight-line and declining-balance methods. Depreciation is based upon the following estimated useful lives: Buildings and improvements 20 years Equipment 3-5 years Furniture and fixtures 5 years Transportation equipment 3 years The cost of ordinary maintenance and repairs is charged to operations. FEDERAL INCOME TAX Federal income tax expense in these statements is computed at prevailing tax rates. The Company provides deferred income taxes for the expected future tax consequences of temporary differences between tax bases and financial reporting bases of assets and liabilities. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2 - INVENTORIES Inventories consist of the following at December 31, 2000 and 1999: 2000 1999 ---- ---- Raw materials $203,965 $169,522 Finished goods 138,139 197,507 -------- -------- $342,104 $367,029 ======== ======== F-31 PLAINSMAN TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999 NOTE 3 - MARKETABLE SECURITIES The gross realized proceeds from the sale of investments were $66,891 and $131,636 for the years ended December 31, 2000 and 1999, respectively. The gross unrealized gains on available-for-sale securities were $26,544 and $9,185 for the years ended December 31, 2000 and 1999, respectively. The gross unrealized losses on available-for-sale securities were $25,784 and $8,400 for the years ended December 31, 2000 and 1999, respectively. NOTE 4 - LONG-TERM DEBT Long-term debt as of December 31, 2000 and 1999, is as follows:
2000 1999 ------- ------- $100,000 Bank revolving line-of-credit, secured by land, accounts receivable, inventory and equipment, bearing interest at 10.5%, interest payable quarterly, due September, 2001 $41,609 $44,089 Note payable to bank, secured by land, accounts receivable, inventory and equipment, payable in monthly installments of $1,351 including interest at 10.5%, due on demand or if no demand is made, in September, 2001 11,820 26,227 Note payable to bank, secured by vehicle, payable in monthly principal installments of $787 including interest at prime plus 2%, due in September, 2000 7,028 Note payable to bank, secured by vehicle, payable in monthly principal installments of $494 including interest at prime plus 2%, due in October, 2000 6,252 Note payable to bank, secured by vehicle, payable in monthly principal installments of $375 including interest at 8.5%, due in October, 2002 11,290 ------- ------- 53,429 94,886 Less: Current portion 53,429 87,277 ------- ------- $ 0 $ 7,609 ======= =======
F-32 PLAINSMAN TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999 NOTE 5 - RELATED PARTY TRANSACTIONS The Company leases two warehouse facilities. One of the facilities is leased from a majority shareholder. Both leases are on a month-to-month basis and have been classified as operating leases. Total rent expense was $20,280 for the years ended December 31, 2000 and 1999. Rent expense attributable to the related party totaled $11,280 for the years ended December 31, 2000 and 1999. NOTE 6 - FEDERAL INCOME TAXES A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows:
DECEMBER 31, ------------------------------- 2000 1999 --------- --------- Federal income tax (benefit) at 34% $ (12,263) $ (95,919) Nondeductible items 2,263 5,903 Nontaxable income (14,226) Change in valuation allowance 10,000 104,242 --------- --------- $ 0 $ 0 ========= ========= The components of the deferred tax asset are as follows: DECEMBER 31, ------------------------------- 2000 1999 --------- --------- Net operating loss carryforward $ 150,000 $ 140,000 Valuation allowance (150,000) (140,000) --------- --------- $ 0 $ 0 ========= =========
At December 31, 2000, the Company had net operating loss carryforwards available to offset future taxable income of approximately $444,000. Under federal tax law, the amount and availability of loss carryforwards (and certain other tax attributes) are subject to a variety of interpretations and restrictive tests applicable to the Company. The utilization of such carryforwards could be limited, based upon certain changes in ownership. An allowance has been recorded to properly value the deferred tax asset at December 31, 2000 and 1999. NOTE 7 - SIGNIFICANT CUSTOMERS During the year ended December 31, 2000, the Company had sales of approximately $688,000 to two customers in the normal course of business, representing 25% of the Company's sales revenue for the period. At December 31, 2000, the Company had receivables from these two customers in the approximate amount of $105,000, representing 24% of the Company's trade accounts receivable. F-33 PLAINSMAN TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999 During the year ended December 31, 1999, the Company had sales of approximately $423,000 to two customers in the normal course of business, representing 25% of the Company's sales revenue for the period. At December 31, 1999, the Company had receivables from these two customers in the approximate amount of $85,000, representing 26% of the Company's trade accounts receivable. NOTE 8 - EMPLOYEE BENEFIT PLAN The Company has an employee benefit plan under Section 401(k) of the Internal Revenue Code for all eligible employees. All eligible employees are permitted to defer compensation up to a maximum of 15% of their income, subject to limitations imposed by the Internal Revenue Service. The Company makes contributions which amount to 50% of employees' contributions, up to a maximum of 5% of eligible compensation. The Company contributed $16,110 and $14,660 for 2000 and 1999, respectively. NOTE 9 - SUBSEQUENT EVENT In January 2001, the Company entered into a stock acquisition agreement (the Agreement) with Chemical and Equipment Specialties, Inc. (CESI), an Oklahoma corporation. At the closing of the Agreement, CESI acquired all of the common stock of the Company in consideration of $1,850,000 cash and 25,000 shares of CESI stock. F-34 INDEPENDENT AUDITORS' REPORT Board of Directors Neal's Technology, Inc. Duncan, Oklahoma We have audited the accompanying Balance Sheet of Neal's Technology, Inc. as of December 31, 2000. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit of the balance sheet provides a reasonable basis for our opinion. In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of Neal's Technology, Inc. as of December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. WEINSTEIN SPIRA & COMPANY, P.C. Houston, Texas September 28, 2001 F-35 NEAL'S TECHNOLOGY, INC. BALANCE SHEET DECEMBER 31, 2000 ASSETS CURRENT ASSETS Cash and cash equivalents $121,061 Accounts receivable 419 Inventories 13,605 Costs and estimated earnings in excess of billings on uncompleted contracts 566,291 Prepaid expenses 5,825 -------- Total Current Assets 707,201 PROPERTY AND EQUIPMENT Machinery and equipment $174,738 Furniture and office equipment 43,293 Leasehold improvements 53,652 -------- 271,683 Less: Accumulated depreciation 156,872 114,811 -------- -------- $822,012 ======== LIABILITIES CURRENT LIABILITIES Notes payable $174,839 Accounts payable 247,005 Billings in excess of costs and estimated earnings on uncompleted contracts 38,505 Accrued expenses 4,940 -------- Total Current Liabilities 465,289 SHAREHOLDERS' EQUITY COMMON STOCK - no par value, 50,000 shares authorized, 10,000 shares issued and outstanding $ 10,000 CONTRIBUTED CAPITAL 50,000 RETAINED EARNINGS 296,723 356,723 -------- -------- $822,012 ========
See notes to financial statement. F-36 NEAL'S TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENT DECEMBER 31, 2000 NOTE 1 - ACCOUNTING POLICIES Neal's Technology, Inc. (the Company) maintains its accounts on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. Accounting principles followed by the Company and the methods of applying those principles which materially affect the determination of financial position are summarized below: DESCRIPTION OF BUSINESS Neal's Technology, Inc. has contracts to manufacture, to exacting specifications, specialized cementing equipment (pumping and bulk material transport) and stimulation equipment (nitrogen, blending and pumping). Also manufactured are proprietary automated monitoring and control systems, both vehicle mounted and hand portable. Equipment design and automation are performed in-house. Neal's Technology is an ISO 9001 certified shop. REVENUE RECOGNITION FROM MANUFACTURING CONTRACTS Revenues from manufacturing contracts are recognized under the percentage-of- completion method of accounting, generally in the ratio in which costs incurred bear to total estimated costs at completion. All known or anticipated losses on contracts are recognized in full when such amount becomes apparent. Contract costs include all direct labor and material costs and those indirect costs related to job performance. General and administrative costs are charged to expense as incurred. Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income and are recognized in the period in which the revisions are determined. The asset, costs and estimated earnings in excess of billings on uncompleted contracts, represents revenues recognized in excess of amounts billed. The liability, billings in excess of costs and estimated earnings on uncompleted contracts, represents billings in excess of revenues recognized. Billings are rendered under terms of customer contracts. Accounts receivable are recorded at that time. Earnings are charged with a provision for doubtful accounts receivable based on collection experience and current review of collectibility of accounts. Accounts deemed uncollectible are applied against the allowance for doubtful accounts. There was no such allowance recorded at December 31, 2000. INVENTORY Inventory, which consists of raw materials and supplies used in the manufacturing process, is carried at the lower of cost (as determined by the first-in, first-out method) or market. F-37 NEAL'S TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENT (CONTINUED) DECEMBER 31, 2000 PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation is computed at rates considered sufficient to amortize the costs of the assets over their estimated useful lives using the straight-line method. Depreciation is based on the following estimated useful lives: Machinery and equipment 3-5 years Furniture and office equipment 5 years Leasehold improvements 20 years FEDERAL INCOME TAX The Company has elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under those provisions, net income or losses are reportable for tax purposes by the shareholders. Accordingly, no federal income taxes are included in the accompanying financial statements. CASH AND CASH EQUIVALENTS The Company considers all short-term investments with an original maturity of three months or less to be cash equivalents. As of December 31, 2000, the Company had deposits in excess of federally insured limits. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and certain assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2 - CONSTRUCTION CONTRACTS IN PROGRESS Information regarding contracts in progress is as follows: December 31, 2000 ------------ Costs incurred on uncompleted contracts $ 656,243 Estimated earnings on uncompleted contracts 273,736 --------- 929,979 Less: Billings to date (402,193) --------- $ 527,786 ========= F-38 NEAL'S TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENT (CONTINUED) DECEMBER 31, 2000 The net under billed revenues are included in the accompanying Balance Sheet as follows: December 31, 2000 ------------ Costs and estimated earnings in excess of billings on uncompleted contracts $566,291 Billings in excess of costs and estimated earnings on uncompleted contracts 38,505 -------- $527,786 ======== The Company has a backlog of approximately $900,000 at December 31, 2000. NOTE 3 - NOTES PAYABLE Notes payable as of December 31, 2000, are as follows: Note payable to bank, secured by equipment, inventory and accounts receivable, payable on demand or, if no demand made, in monthly installments of $990 including interest at 9.673%, due June, 2002 $ 43,038 Note payable to bank, secured by equipment, inventory and accounts receivable, payable on demand or, if no demand made, in one principal payment in January, 2001, interest at 9.673% payable monthly 131,801 -------- $174,839 ======== NOTE 4 - SUBSEQUENT EVENT In January 2001, the Company entered into a stock acquisition agreement (the Agreement) with Chemical and Equipment Specialties, Inc. (CESI), an Oklahoma corporation. At the closing of the Agreement, CESI acquired all of the common stock of the Company in consideration of $400,000 notes payable and 10,000 shares of CESI stock. As part of the Agreement, the Company also sold to CESI certain intangible assets, including customer lists, business records and contract rights, in consideration of $500,000. F-39 INDEPENDENT AUDITORS' REPORT Board of Directors Padko International Incorporated Duncan, Oklahoma We have audited the accompanying Balance Sheets of Padko International Incorporated as of December 31, 2000 and 1999, and the related Statements of Operations, Changes in Shareholders' Equity (Deficit), and Cash Flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Padko International Incorporated as of December 31, 2000 and 1999, and the results of its operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. WEINSTEIN SPIRA & COMPANY, P.C. Houston, Texas June 29, 2001 F-40 PADKO INTERNATIONAL INCORPORATED BALANCE SHEETS
DECEMBER 31, -------------------------------------- 2000 1999 -------- ------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 3,093 $ 9,270 Accounts receivable 23,235 37,605 Federal income tax receivable 2,303 -------- ------- Total Current Assets 28,631 46,875 -------- ------- PROPERTY AND EQUIPMENT Furniture and office equipment 4,369 4,369 Computer equipment 12,699 12,699 Automobile 34,542 34,542 -------- ------- 51,610 51,610 Less: Accumulated depreciation 48,122 41,233 -------- ------- 3,488 10,377 -------- ------- $ 32,119 $57,252 ======== ======= LIABILITIES CURRENT LIABILITIES Current maturities of long-term debt $ 17,759 $ 5,642 Accounts payable 30,923 9,258 Accrued expenses 21,607 1,318 Federal income tax payable 931 -------- ------- Total Current Liabilities 70,289 17,149 LONG-TERM DEBT 17,759 DEFERRED FEDERAL INCOME TAX 7,000 -------- ------- 70,289 41,908 -------- ------- SHAREHOLDERS' EQUITY (DEFICIT) COMMON STOCK - $.10 par value, 500,000 shares authorized; 150,000 shares issued 15,000 15,000 RETAINED EARNINGS (DEFICIT) (40,770) 344 Less: Treasury stock, 100,000 shares, at cost (12,400) -------- ------- (38,170) 15,344 -------- ------- $ 32,119 $57,252 ======== =======
See notes to financial statements. F-41 PADKO INTERNATIONAL INCORPORATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, ------------------------------ 2000 1999 -------- -------- REVENUES $377,772 $338,452 Cost of Revenues 300,490 276,710 -------- -------- GROSS MARGIN 77,282 61,742 EXPENSES: Operating 76,886 13,047 Selling, general and administrative 51,333 56,667 -------- -------- 128,219 69,714 -------- -------- OPERATING LOSS (50,937) (7,972) OTHER INCOME (EXPENSE) Interest expense (2,110) (3,191) Other 2,630 6,557 -------- -------- 520 3,366 -------- -------- LOSS BEFORE INCOME TAXES (50,417) (4,606) FEDERAL INCOME TAX EXPENSE (BENEFIT) Current (2,303) 931 Deferred (7,000) (3,000) -------- -------- (9,303) (2,069) -------- -------- NET LOSS $(41,114) $ (2,537) ======== ========
See notes to financial statements. F-42 PADKO INTERNATIONAL INCORPORATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
COMMON STOCK RETAINED TREASURY STOCK ------------------ EARNINGS ---------------------- SHARES AMOUNT (DEFICIT) SHARES AMOUNT TOTAL ------- -------- ---------- --------- -------- ---------- Balance, December 31, 1998 150,000 $15,000 $ 2,881 $ 17,881 Net Loss (2,537) (2,537) ------- ------- -------- -------- -------- -------- Balance, December 31, 1999 150,000 15,000 344 15,344 Purchase of Treasury Stock (100,000) $(12,400) (12,400) Net Loss (41,114) (41,114) ------- ------- -------- -------- -------- -------- Balance, December 31, 2000 150,000 $15,000 $(40,770) (100,000) $(12,400) $(38,170) ======= ======= ======== ======== ======== ========
See notes to financial statements. F-43 PADKO INTERNATIONAL INCORPORATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED December 31, --------------------------------------- 2000 1999 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(41,114) $ (2,537) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation 6,889 14,264 Deferred federal income tax benefit (7,000) (3,000) (Increase) Decrease in: Accounts receivable 14,370 33,111 Prepaid expenses 72,248 Federal income tax receivable (2,303) Increase (Decrease) in: Accounts payable 21,665 (37,952) Accrued expenses 20,289 1,478 Customer deposits (85,024) Federal income tax payable (931) (436) -------- -------- Net Cash Provided by (Used in) Operating Activities 11,865 (7,848) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (5,157) -------- -------- Net Cash Used in Investing Activities (5,157) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt 22,500 Payment of debt (5,642) (15,217) Purchase of treasury stock (12,400) -------- -------- Net Cash Provided by (Used in) Financing Activities (18,042) 7,283 -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS (6,177) (5,722) Cash and Cash Equivalents - Beginning of Year 9,270 14,992 -------- -------- CASH AND CASH EQUIVALENTS - END OF YEAR $ 3,093 $ 9,270 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest $ 166 $ 2,007 ======== ======== Cash paid for income taxes $ 931 $ 1,367 ======== ========
See notes to financial statements. F-44 PADKO INTERNATIONAL INCORPORATED NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 NOTE 1 - ACCOUNTING POLICIES The Company maintains its accounts on the accrual basis of accounting in accordance with generally accepted accounting principles. Accounting principles followed by the Company and the methods of applying those principles which materially affect the determination of financial position, results of operations, and cash flows are summarized below: DESCRIPTION OF BUSINESS The Company buys oilfield supplies and equipment (primarily from Plainsman Technology, Inc. and Neal's Technology, Inc.) and sells the products internationally. INCOME RECOGNITION Revenues are recognized at the date of delivery, and accounts receivable are recorded at that time. Earnings are charged with a provision for doubtful accounts based on current review of collectibility of accounts. Accounts deemed uncollectible are applied against the allowance for doubtful accounts. There is no allowance for doubtful accounts at December 31, 2000 and 1999. PROPERTY AND EQUIPMENT Property and equipment are presented at cost. Depreciation is computed at rates considered sufficient to amortize the cost of the assets over their estimated useful lives using straight-line and accelerated methods. Depreciation is based upon the following estimated useful lives: Furniture and office equipment 5 years Computer equipment 3 years Automobile 3 years FEDERAL INCOME TAX Federal income tax expense in these statements is computed at prevailing tax rates. The Company provides deferred income taxes for the expected future tax consequences of temporary differences between tax bases and financial reporting bases of assets and liabilities. F-45 PADKO INTERNATIONAL INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999 CASH AND CASH EQUIVALENTS The Company considers all short-term investments with an original maturity of three months or less to be cash equivalents. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and certain assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2 - LONG-TERM DEBT Long-term debt is as follows: 2000 1999 ------- ------- Note payable to shareholder, unsecured, interest at 10%, maturing February, 2001 $17,759 $17,759 Note payable to shareholder, secured by automobile, interest at 10.0%, payable in monthly installments of $960, including interest, until June, 2000 5,642 ------- ------- 17,759 23,401 Less: Current maturities 17,759 5,642 ------- ------- $ 0 $17,759 ======= ======= F-46 PADKO INTERNATIONAL INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999 NOTE 3 - FEDERAL INCOME TAX A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows:
DECEMBER 31, ----------------------------------------- 2000 1999 -------- ------- Federal income tax (benefit) at the statutory rate $(17,142) $(1,566) Increase (Decrease) resulting from: Nondeductible expenses 1,229 1,169 Surtax exemption 2,918 1,179 Change in valuation allowance 4,000 Other items, net (308) (2,851) -------- ------- $ (9,303) $(2,069) ======== =======
The components of the net deferred tax asset and net deferred tax liability are as follows:
DECEMBER 31, --------------------------------------- 2000 1999 ------- ------- Deferred tax asset: Net operating loss carryforward $ 5,000 Deferred tax liability: Accelerated tax depreciation (1,000) $(7,000) ------- ------- Net deferred tax asset (liability) 4,000 (7,000) Valuation allowance (4,000) ------- $ 0 $(7,000) ======= =======
At December 31, 2000, the Company had net operating loss carryforwards available to offset future taxable income of approximately $25,000, expiring in 2010. Under federal tax law, the amount and availability of loss carryforwards are subject to a variety of interpretations and restrictive tests applicable to the company. The utilization of such carryforwards could be limited or effectively lost upon certain changes in ownership. Accordingly, while the Company believes certain loss carryforwards are available to it, no assurance can be given concerning such loss carryforwards or whether such loss carryforwards will be available in the future. An allowance has been recorded to properly value the net deferred tax asset at December 31, 2000. F-47 PADKO INTERNATIONAL INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 AND 1999 NOTE 4 - TRANSACTIONS WITH MAJOR CUSTOMERS During the year ended December 31, 2000, the Company had sales of approximately $310,000 to two customers in the ordinary course of business, representing 82% of the Company's sales revenue for the period. All of the Company's accounts receivable at December 31, 2000, were due from one of these two customers. During the year ended December 31, 1999, the Company had sales of approximately $244,000 to one customer in the normal course of business, representing 72% of the Company's sales revenues for the period. There were no accounts receivable from this customer at December 31, 1999. NOTE 5 - TRANSACTIONS WITH MAJOR VENDORS During the year ended December 31, 2000, the Company had purchases of approximately $173,000 from Neal's Technology, Inc. and $121,000 from Plainsman Technology, Inc. All of the Company's accounts payable were due to Plainsman Technology, Inc. at December 31, 2000. During the year ended December 31, 1999, the Company had purchases of approximately $207,000 from Neal's Technology, Inc. and $59,000 from Plainsman Technology, Inc. The Company had accounts payable totaling $7,602 due to Plainsman Technology, Inc. at December 31, 1999. There were no accounts payable due to Neal's Technology, Inc. at December 31, 1999. NOTE 6 - RELATED PARTY TRANSACTIONS The Company has notes payable to a shareholder totaling $17,759 and $23,401 at December 31, 2000 and 1999, respectively. NOTE 7 - SUBSEQUENT EVENT In January 2001, the Company entered into a stock purchase agreement (the Agreement) with Chemical and Equipment Specialties, Inc. (CESI), an Oklahoma corporation. At the closing of the Agreement, all issued and outstanding common stock of the Company was purchased by CESI for $237,600. In addition, 25,000 shares of CESI's common stock were issued to the Company's shareholders. F-48 INDEPENDENT AUDITORS' REPORT Board of Directors Material Translogistics, Inc. dba Gillespie Consulting Company Duncan, Oklahoma We have audited the accompanying Statement of Earnings of Material Translogistics, Inc. dba Gillespie Consulting Company for the period April 5, 2000 (date operations commenced) to December 31, 2000. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the Statement of Earnings referred to above presents fairly, in all material respects, the results of operations of Material Translogistics, Inc. dba Gillespie Consulting Company for the period April 5, 2000 (date operations commenced) to December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. WEINSTEIN SPIRA & COMPANY, P.C. Houston, Texas July 13, 2001 F-49 MATERIAL TRANSLOGISTICS, INC. DBA GILLESPIE CONSULTING COMPANY STATEMENT OF EARNINGS FOR THE PERIOD APRIL 5, 2000 (DATE OPERATIONS COMMENCED) TO DECEMBER 31, 2000 REVENUES $424,379 Operating Expenses 302,811 -------- OPERATING INCOME 121,568 -------- OTHER INCOME (EXPENSE): Interest income 752 Interest expense (1,050) -------- (298) -------- NET EARNINGS $121,270 ======== See notes to financial statements. F-50 MATERIAL TRANSLOGISTICS, INC. DBA GILLESPIE CONSULTING COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 NOTE 1 - ACCOUNTING POLICIES Material Translogistics, Inc. dba Gillespie Consulting Company (the Company) maintains its accounts on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. Accounting principles followed by the Company and the methods of applying those principles which materially affect the results of operations are summarized below: ORGANIZATION Material Translogistics, Inc. was incorporated February 20, 2001, as a successor to the operations of Gillespie Consulting Company, a sole proprietorship owned by Michael Gillespie. As the assets and liabilities of Gillespie Consulting Company were not transferred to the new corporation, no balance sheet is presented. DESCRIPTION OF BUSINESS The Company designs and constructs bulk material handling facilities for the oil and gas services industry in the United States of America. Additionally, the Company offers design, construction, project management and maintenance services for related facilities. INCOME RECOGNITION Revenues for services are recognized as they are performed. Earnings are charged with a provision for doubtful accounts based on a current review of collectibility of accounts. There was no provision for doubtful accounts for the year ended December 31, 2000. DEPRECIATION Depreciation is computed at rates considered sufficient to amortize the cost of the assets over their estimated useful lives using the straight-line method. Depreciation expense totaled $15,991 for the year ended December 31, 2000. FEDERAL INCOME TAX No provision for federal income taxes has been made for the Company (a sole proprietorship), as these taxes are the responsibility of the owners. F-51 MATERIAL TRANSLOGISTICS, INC. DBA GILLESPIE CONSULTING COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and certain assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2 - SUBSEQUENT EVENT Effective June 29, 2001, the Company entered into an agreement and plan of reorganization (the Agreement) with Chemical and Equipment Specialties, Inc. (CESI), an Oklahoma corporation. At the closing of the Agreement, all issued and outstanding common stock of the Company was converted into the right to receive up to 40,000 shares of CESI common stock. When so converted, the common stock of the Company will be automatically cancelled and retired. As part of the Agreement, the Company also sold to CESI certain intangible assets, including customer lists, business records and contract rights, in consideration of $600,000. CESI did not purchase any other assets owned or leased by the Company, and did not assume any liability of the Company. F-52 Flotek Industries, Inc. and Acquired Businesses Unaudited Pro Forma Combined Financial Statements Basis of Presentation Flotek Industries, Inc. (the "Company") merged with Chemical & Equipment Specialties, Inc. (CESI) on October 31, 2001 (the "Merger"). The Company is accounting for the Merger as a "reverse" acquisition of Flotek Industries, Inc. by CESI, in accordance with the purchase method of accounting. The purchase price has been allocated first to the fair value of assets acquired and liabilities assumed based on management's estimates of fair value, with the excess purchase price recorded to goodwill. CESI was incorporated on June 27, 2000 to acquire businesses in the specialty chemical and well service equipment manufacturing segments of the oilfield service industry. It had no revenues or operations prior to the acquisitions of Esses, Inc., Plainsman Technology, Inc., Neal's Technology, Inc., and Padko International, Inc. in January 2001. It subsequently acquired Material Translogistics, Inc. in June 2001. These five companies are referred to as the "CESI Acquired Businesses." The Company is reporting its results on a calendar year basis, effective with the current year ending December 31, 2001. CESI, which is treated as the acquiring company, maintains its accounting on a calendar year basis. Prior to the Merger, Flotek Industries, Inc. maintained its accounting on the basis of a fiscal year ending the last day of February. Pursuant to regulations of the Securities and Exchange Commission, the Company is permitted, for the purpose of these pro forma financial statements, to combine statements of operations for periods which have different ending dates so long as the periods combined are of equal length and are not more than 93 days apart. The statements of operations for Flotek Industries, Inc. are presented on the basis of its prior fiscal year, as noted in the statements. The unaudited pro forma combined financial statements give effect to (1) the acquisition of the CESI Acquired Businesses by CESI, (2) the Merger, (3) the 120 to 1 reverse stock split which was given effect on November 5, 2001, (4) the conversion of all preferred stock of Flotek Industries, Inc. to common stock and (5) the exercise of warrants to purchase Flotek Industries, Inc. common stock in connection with the Merger (collectively, the "Transactions"). The unaudited pro forma combined statement of operations for the year ended December 31, 2000 presents the acquisition of the CESI Acquired Companies by CESI separately from the other Transactions. The unaudited pro forma combined balance sheet gives effect to the Transactions which occurred subsequent to September 30, 2001 as if they had occurred on that date. The unaudited pro forma combined statements of operations give effect to the Transactions which are not reflected in the respective historical financial statements as if they had occurred at the beginning of each period presented. The unaudited pro forma combined financial statements include pro forma adjustments to the results of operations as follows: (1) pro forma increases in goodwill amortization attributable to the CESI Acquired Businesses using a 20-year estimated life, (2) pro forma increases in interest expense associated with borrowings used to finance the acquisition of the CESI Acquired Businesses, (3) pro forma adjustments to depreciation expense resulting from purchase price adjustments to the basis of fixed assets, (4) adjustments to selling, general and administrative expenses to reflect (a) decreases in salaries and benefits associated with certain owners and managers of the CESI Acquired Businesses who were not employed by CESI after the acquisition of their businesses and who will not be replaced, (b) increases in salaries and P-1 benefits associated with members of CESI executive management who were not employed for the full period, (c) decreases in compensation expense attributable to distributions of funds from Subchapter S corporations designated for the payment of income taxes, (5) elimination of intercompany revenue transactions between CESI Acquired Businesses, and (6) adjustments to federal and state income tax provisions. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 141, there have been no pro forma adjustments for amortization of goodwill attributable to the Merger as it was initiated after June 30, 2001 and amortization of goodwill is not required for business combination initiated after that date. Additionally, no pro forma adjustments have been made for potential cost reductions which may result from consolidation efforts or economies of scale of the combined companies nor have there been any adjustments for potential incremental costs associated with increased corporate management and administration and system integration. Such potential cost reductions or incremental costs cannot be accurately quantified. The pro forma adjustments are based on preliminary estimates, available information and assumptions that management deems appropriate. The unaudited pro forma combined financial statements presented herein do not purport to represent what the Company's financial position or results of operations actually would have been had such events occurred at the beginning of the periods presented, as assumed, or to project the Company's financial position or results of operations for any future period or the future results of any of the acquired businesses. P-2 Flotek Industries, Inc. and Subsidiaries Unaudited Pro Forma Combined Balance Sheet September 30, 2001
Flotek Industries, Pro Forma Pro Forma CESI Inc. (1) Adjustments Combined --------- ------------- ------------- ------------ ASSETS Current assets: Cash and cash equivalents $ 124,765 $ 57,292 $ 1,778,466 (b) $ 1,734,738 (225,785)(c) Accounts receivable, net 1,410,116 1,030,281 - 2,440,397 Inventories and work in progress 2,350,188 999,404 - 3,349,592 Other current assets 38,469 - - 38,469 ---------- ------------ ------------ ----------- Total current assets 3,923,538 2,086,977 1,552,681 7,563,196 Property and equipment, net 3,117,734 214,531 - 3,332,265 Goodwill 7,753,450 317,615 5,037,795 (c) 13,108,860 Other assets 70,312 200,288 - 270,600 ---------- ------------ ------------ ----------- Total assets $14,865,034 $ 2,819,411 $ 6,590,476 $24,274,921 ========== ============ ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 1,649,455 $ 603,137 $ - $ 2,252,592 Short-term debt 1,414,020 199,409 - 1,613,429 Current maturities of long-term debt 521,552 11,000 - 532,552 Other current liabilities 631,825 140,839 - 772,664 ---------- ------------ ------------ ----------- Total current liabilities 4,216,852 954,385 - 5,171,237 Long-term debt, less current maturities 3,593,586 177,502 - 3,771,088 Other liabilities - 294,216 (294,216)(a) - Stockholders' equity: Common stock 11,646 19,279,495 (23,452,410)(c) 485 2,383,288 (a) 1,778,466 (b) Preferred stock - 2,089,072 (2,089,072)(a) - Additional paid-in capital 7,433,725 160,879 8,128,282 (c) 15,722,886 Retained earnings (390,775) (19,841,397) 19,841,397 (c) (390,775) Other comprehensive loss - (294,741) 294,741 (c) - ---------- ------------ ------------ ----------- Total stockholders' equity 7,054,596 1,393,308 6,884,692 15,332,596 ---------- ------------ ------------ ----------- Total liabilities and stockholders' equity $14,865,034 $ 2,819,411 $ 6,590,476 $24,474,921 ========== ============ ============ ===========
(1) Amounts for Flotek Industries, Inc. are as of August 31, 2001. See accompanying basis of presentation and notes to unaudited pro forma combined financial statements. P-3 Flotek Industries, Inc. and Subsidiaries Unaudited Pro Forma Combined Statement of Operations For the Year Ended December 31, 2000
CESI Flotek Pro Forma Industries, Pro Forma Pro Forma Combined (1) Inc. (2) Adjustments Combined ------------- ----------- ------------ ----------- REVENUES $8,703,612 $2,981,408 $ - $ 11,685,020 EXPENSES: Cost of goods sold 4,524,063 1,394,284 - 5,918,347 Selling, general and administrative 2,407,299 1,454,731 - 3,862,030 Depreciation and amortization 683,454 90,547 - 774,001 ---------- --------- ---------- ---------- Total expenses 7,614,816 2,939,562 - 10,554,378 Income from operations 1,088,796 41,846 - 1,130,642 Other income (expense), net: Interest (430,440) (83,968) - (514,408) Other 2,443 52,490 - 54,933 ---------- --------- ---------- ---------- Income before income taxes 660,799 10,368 - 671,167 Income tax expense 277,536 - 4,354 (ee) 281,890 ---------- --------- ----------- ---------- Net income $ 383,263 $ 10,368 $ (4,354) 389,277 ========== ========= ========== ========== Basic and Diluted Pro Forma Net Income per Share $ 0.08 ========== Shares Used in Computing Pro Forma Income per Share (ff)$ 4,850,696 ==========
(1) See separate pro forma combined financial statement schedule attached. (2) Amounts for Flotek Industries, Inc. are for the fiscal year ended February 28, 2001. See accompanying basis of presentation and notes to unaudited pro forma combined financial statements. P-4 Chemical & Equipment Specialties, Inc. and Subsidiaries Unaudited Pro Forma Combined Statement of Operations For the Year Ended December 31, 2000
Chemical & Equipment Plainsman Neal's Padko Material Specialties, Technology, Technology, International, Translogistics, Inc. (CESI) Esses, Inc. Inc. Inc. Inc. Inc. ------------ ------------ ------------ ------------ ------------- ------------ REVENUES $ - $ 3,755,748 $ 2,768,478 $ 1,671,235 $ 377,772 $ 424,379 EXPENSES: Cost of goods sold - 2,153,039 1,619,863 744,671 300,490 - Selling, general and administrative 153,462 639,158 1,121,525 566,463 121,330 302,811 Depreciation and amortization 15,933 62,515 56,216 54,073 6,889 - -------- --------- --------- --------- ------- ------- Total expenses 169,395 2,854,712 2,797,604 1,365,207 428,709 302,811 Income (loss) from operations (169,395) 901,036 (29,126) 306,028 (50,937) 121,568 Other income (expense), net: Interest 10,665 (22,151) (6,755) (21,826) (2,110) (298) Other - - (187) - 2,630 - -------- --------- --------- --------- ------- ------- Income (loss) before income taxes (158,730) 878,885 (36,068) 284,202 (50,417) 121,270 Income tax expense (benefit)(1) - - - 119,365 (9,303) - -------- --------- --------- --------- ------- ------- Net income (loss) $ (158,730) $ 878,885 $ (36,068) $ 164,837 $ (41,114) $ 121,270 ======== ========= ========= ========= ======= ======= CESI CESI Pro Forma Pro Forma Adjustments Combined ------------ ----------- REVENUES $ (294,000)(aa) $ 8,703,612 EXPENSES: Cost of goods sold (294,000)(aa) 4,524,063 Selling, general and administrative (497,450)(bb) 2,407,299 Depreciation and amortization 487,828 (cc) 683,454 -------- --------- Total expenses (303,622) 7,614,816 Income (loss) from operations 9,622 1,088,796 Other income (expense), net: Interest (387,965)(dd) (430,440) Other - 2,443 -------- --------- Income (loss) before income taxes (378,343) 660,799 Income tax expense (benefit)(1) 167,474 (ee) 277,536 -------- --------- Net income (loss) $ (545,817) $ 383,263 ======== =========
(1) No income tax expense was recorded on Esses, Inc. and Material Translogistics, Inc. as these earnings were taxable to their shareholders. See accompanying basis of presentation and notes to unaudited pro forma combined financial statements. P-5 Flotek Industries, Inc. and Subsidiaries Unaudited Pro Forma Combined Statement of Operations For the Nine Month Period Ended September 30, 2001
Material Flotek Translogistics, Industries, Pro Forma Pro Forma CESI Inc. (1) Inc. (2) Adjustments Combined ------------ -------------- ----------- ----------- ---------- REVENUES $10,100,060 $ 349,107 $ 2,985,176 $ - $13,434,343 EXPENSES: Cost of goods sold 7,063,038 - 1,265,230 - 8,328,268 Selling, general and administrative 2,560,921 335,369 1,338,304 - 4,234,594 Depreciation and amortization 493,173 - 71,565 - 564,738 ----------- --------- ---------- -------- ---------- Total expenses 10,117,132 335,369 2,675,099 - 13,127,600 Income from operations (17,072) 13,738 310,077 - 306,743 Other income (expense), net: Interest (235,408) 872 (35,280) - (269,816) Other 20,435 - 6,942 - 27,377 ----------- --------- ---------- -------- ---------- Income (loss) before income taxes (232,045) 14,610 281,739 - 64,304 Income tax expense - - - 27,008(ee) 27,008 ----------- --------- ---------- -------- ---------- Net income (loss) $ (232,045) $ 14,610 $ 281,739 $ (27,008) $ 37,296 =========== ========= ========== ======== ========== Basic and Diluted Pro Forma Net Income per Share $ 0.01 ========== Shares Used in Computing Pro Forma Income per Share (ff) 4,850,696 ==========
(1) Amounts for Material Translogistics, Inc. ("MTI") are for the six month period ended June 30, 2001 prior to the acquisition by CESI. No income tax expense was recorded for MTI as the earnings were taxable directly to the shareholder. (2) Amounts for Flotek Industries, Inc. are for the nine month period ended August 31, 2001. See accompanying basis of presentation and notes to unaudited pro forma combined financial statements. P-6 Flotek Industries, Inc. and Subsidiaries Notes to Unaudited Pro Forma Combined Financial Statements UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS: (a) Records the conversion of all preferred stock of Flotek Industries, Inc. ("Flotek"), including accrued dividends, to common stock effective with the closing of the Merger. (b) Records cash proceeds from the exercise, after August 31, 2001, of 494,018 warrants to purchase common stock at $3.60 per share (adjusted for the 120 to 1 reverse stock split which was given effect on November 5, 2001) for total proceeds of $1,778,466 in connection with the Merger. (c) Records the consideration deemed issued to the Flotek shareholders to effect the "reverse" acquisition of Flotek by Chemical & Equipment Specialties, Inc. ("CESI"). The total number of common shares attributable to the Flotek shareholders was 1,856,216, (adjusted for the 120 to 1 reverse stock split which was given effect on November 5, 2001), with a value of $8,278,000. In addition, the Company incurred $341,643 in transaction costs associated with the Merger, of which $225,785 were recorded after September 30, 2001. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS: (aa) Eliminates revenue and cost of sales associated with transactions between CESI Acquired Businesses prior to their acquisition by CESI. (bb) Records adjustments to compensation expense, including (1) a reduction of $467,450 for certain owners and managers of CESI Acquired Businesses who were not employed by CESI after the acquisition of their businesses and who will not be replaced, (2) an increase of $90,000 for salaries and benefits of CESI executives who were not employed for the full period, and (3) a reduction of $120,000 attributable to bonus payments from Subchapter S corporations designated for the payment of income taxes on profits distributed to employee shareholders. (cc) Records amortization of goodwill of $383,477 arising from the acquisition of the CESI Acquired Entities by CESI using an estimated life of 20 years, plus a net increase in depreciation expense of $104,851 attributable to purchase price adjustments to the basis of property and equipment of the CESI Acquired Entities. In accordance with SFAS No. 141, no pro forma adjustments to amortization expense relating to the Merger of CESI and Flotek have been made as the Merger was initiated after June 30, 2001 and amortization of goodwill is not required for business combinations initiated after that date. (dd) Records additional interest expense associated with borrowings to finance the cash portion of the consideration paid by CESI to acquire the CESI Acquired Entities. (ee) Records the incremental provision for federal and state income taxes relating to Subchapter S corporation income and other pro forma adjustments to reflect an estimated effective tax rate of 42%. (ff) The number of shares used to compute pro forma combined net income per share includes shares issued to accomplish (1) the Merger of Flotek and CESI, (2) the conversion of all Flotek preferred stock and accrued dividends to common stock, (3) the issuance of 494,018 shares of Flotek common stock resulting from the exercise of warrants in connection with the Merger, and (4) the 120 to 1 reverse stock split which was given effect on November 5, 2001. The common stock equivalents on the date of the Merger were not dilutive. P-7 -----END PRIVACY-ENHANCED MESSAGE-----