-----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, SO8erE0z7NVGpskLQgsVMn/oC4kFAv+p7dBCdEH7wz87KvZeCYCmA8u1m8FyR787 qEGRz728O68mgTs+h4kAZQ== 0000928054-02-000019.txt : 20020520 0000928054-02-000019.hdr.sgml : 20020520 20020520145545 ACCESSION NUMBER: 0000928054-02-000019 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020520 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: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-13270 FILM NUMBER: 02657481 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 10QSB 1 form10q1stqtr02.txt FORM 10Q-SB 1ST QTR 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10 - QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 2002 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) Commission File Number 1-13270 FLOTEK INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Delaware 77-0709256 (State or other jurisdiction of incorporation) (I.R.S. Employer Identification Number) 7030 Empire Central Drive, Houston TX 77040 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (713) 849-9911 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [x] No [_] The number of shares of the Registrant's common stock outstanding on May 14, 2002 was 4,910,812. Transitional Small Business Disclosure Format (check one): Yes [_] No [x] PART I Item 1 - Financial Information FLOTEK INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS
March 31, December 31, 2002 2001 ----------------- ------------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents........................................... $ 45,238 $ 240,438 Accounts receivable, less reserve of $182,800 and $208,333, as of March 31, 2002 and December 31, 2001, respectively................ 3,189,903 2,189,566 Inventories and work in progress.................................... 3,314,329 3,704,153 Other current assets................................................ 67,144 24,735 --------- --------- Total current assets........................................... 6,616,614 6,158,892 --------- --------- Property and equipment, net............................................ 4,173,413 3,671,939 Goodwill, net.......................................................... 13,319,090 13,111,840 Patents and other intangibles, net..................................... 295,657 191,333 Other assets........................................................... 53,589 87,253 ---------- ---------- Total assets.................................................. $24,458,363 $23,221,257 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................................... $ 2,020,181 $ 2,225,219 Accrued liabilities................................................ 240,801 722,910 Amounts due to related parties..................................... 120,839 132,855 Notes payable...................................................... 2,711,790 1,282,966 Current portion of long-term debt.................................. 1,052,731 876,737 Capital lease obligations, current portion......................... 15,909 633,894 --------- --------- Total current liabilities..................................... 6,162,251 5,874,581 --------- --------- Long-term debt........................................................ 2,997,103 3,339,970 Capital lease obligations, long-term.................................. 1,369,591 - Stockholders' equity: Preferred stock, $.0001 par value, 100,000 shares authorized, no shares issued................................................. - - Common stock, $.0001 par value, 20,000,000 shares authorized, 4,910,812 and 4,850,696 shares issued and outstanding as of March 31, 2002 and December 31, 2001, respectively............................... 491 485 Additional paid-in capital........................................ 15,762,346 15,572,886 Accumulated deficit............................................... (1,833,419) (1,566,665) ---------- ---------- Total stockholders' equity.................................... 13,929,418 14,006,706 ---------- ---------- Total liabilities and stockholders' equity.................... $24,458,363 $23,221,257 ========== ==========
The accompanying notes are an integral part of these statements. 2 FLOTEK INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended March 31, ------------------------------------ 2002 2001 ---------------- --------------- Revenues...................................................... $ 3,659,583 $ 2,689,681 Cost of revenues.............................................. 2,098,813 1,557,185 --------- --------- Gross margin.................................................. 1,560,770 1,132,496 --------- --------- Expenses: Selling, general and administrative....................... 1,583,730 1,253,740 Depreciation and amortization............................. 148,545 135,429 Research and development.................................. 4,542 1,056 --------- --------- Total expenses......................................... 1,736,817 1,390,225 --------- --------- Loss from operations.......................................... (176,047) (257,729) Other income (expense): Interest expense.......................................... (92,428) (93,059) Interest income........................................... - 24,858 Other, net................................................ 1,721 44,101 -------- ------- Total other income (expense)........................... (90,707) (24,100) -------- ------- Net loss...................................................... $ (266,754) $ (281,829) ========= ========= Basic and diluted net loss per common share................... $ (.055) $ (.113) ========= ========= Weighted average number of shares outstanding................. 4,892,301 2,501,326 ========= =========
The accompanying notes are an integral part of these financial statements. 3
FLOTEK INDUSTRIES, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) Additional Common Stock Paid-in Accumulated Shares Amount Capital Deficit Total Balance at December 31, 2001........... 4,850,696 $ 485 $15,572,886 $(1,566,665) $14,006,706 Common stock issued in acquisitions 60,116 6 189,460 - 189,466 Net loss............................... - - - (266,754) (266,754) --------- ----- ---------- ---------- ---------- Balance at March 31, 2002.............. 4,910,812 $ 491 $15,762,346 $(1,833,419) $13,929,418 ========= ===== ========== ========== ==========
The accompanying notes are an integral part of these financial statements. 4 FLOTEK INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Three Months Ended March 31, ------------------------------------ 2002 2001 ----------------- ---------------- Cash flows from operating activities: Net loss.................................................... $ (266,754) $ (281,829) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................... 148,545 135,429 Gain on sale of assets.................................. - (38,963) (Increase) decrease in: Accounts receivable................................... (1,000,337) (601,330) Inventories and work in progress...................... 389,824 119,656 Other current assets.................................. (42,409) (5,978) Accounts payable and accrued liabilities............. (687,147) 641,636 --------- -------- Net cash used in operating activities (1,458,278) (31,379) --------- -------- Cash flows from investing activities: Acquisition of subsidiaries, net............................ (122,250) (6,271,258) Capital expenditures........................................ (650,019) (12,744) Proceeds from sales of assets............................... - 243,536 Deposits and other.......................................... 33,806 (46,000) --------- --------- Net cash used in investing activities............... (738,463) (6,086,466) --------- --------- Cash flows from financing activities: Issuance of stock for cash.................................. - 4,112,000 Proceeds from borrowings.................................... 1,653,614 2,314,277 Proceeds from sale/leaseback transaction.................... 761,000 - Repayments of indebtedness.................................. (391,663) (43,452) Proceeds from (payments to) related parties................. (12,016) (149,491) Principal payments on capital leases........................ (9,394) (3,000) --------- --------- Net cash provided by financing activities............ 2,001,541 6,230,334 --------- --------- Net increase (decrease) in cash and cash equivalents............. (195,200) 112,489 Cash and cash equivalents - beginning of period.................. 240,438 1,293,142 --------- --------- Cash and cash equivalents - end of period........................ $ 45,238 $1,405,631 ========= =========
The accompanying notes are an integral part of these financial statements. 5 FLOTEK INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)
For the Three Months Ended March 31, --------------------------------------- 2002 2001 ------------------ ----------------- 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 (liabilities) acquired: Cash....................................................... $ - $ 224,584 Accounts receivable........................................ - 1,104,156 Inventories and work in progress........................... - 1,240,307 Other current assets....................................... - 9,080 Property and equipment..................................... - 1,418,879 Marketable securities...................................... - 204,573 Patents and other intangibles.............................. 104,466 - Goodwill................................................... 207,250 6,704,587 Other assets............................................... - 21,770 Debt....................................................... - (495,829) Accounts payable and accrued liabilities................... - (936,265) --------- --------- 311,716 9,495,842 Common stock issued......................................... (189,466) (1,600,000) Promissory notes issued..................................... - (1,400,000) --------- --------- Net cash paid to sellers and transaction costs............ $ 122,250 $ 6,495,842 ========= ========= Cash paid for interest........................................ $ 92,428 $ 93,059 ========= =========
5 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 - General The consolidated condensed financial statements included herein are unaudited and have been prepared by Flotek Industries, Inc. (the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information relating to the Company's organization and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted in this Form 10-QSB pursuant to such rules and regulations. These financial statements reflect all adjustments which the Company considers necessary for the fair presentation of such financial statements for the interim periods presented and the Company believes that the disclosures included herein are adequate to make the interim information presented not misleading. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001. The results of operations for interim periods are not necessarily indicative of the results expected for the full year. Note 2 - Acquisitions In January 2002, the Company issued 26,116 shares of common stock to the former shareholders of Material Translogistics, Inc. ("MTI"). Under the original acquisition agreement, which had an effective date of June 29, 2001, the shareholders of MTI could receive up to 52,232 additional shares of common stock, contingent upon the execution of two future contracts. One of these contracts became effective in January 2002 and the shares issued above relate to that contract. The other contract had not been executed as of March 31, 2002. On February 19, 2002, the Company acquired 100% of the common stock of IBS 2000, Inc. ("IBS"), a Denver-based company engaged in the development and manufacturing of environmentally neutral chemicals for the oil industry. IBS is in the development stage and has had limited operating history. The Company paid $100,000 in cash and issued 34,000 shares of common stock to acquire IBS. Including legal and other transaction costs, the acquisition resulted in the recording of approximately $197,000 of goodwill and other intangibles. Note 3 - Accounts Receivable At March 31, 2002, the Company had approximately $1,794,000 of accounts receivable from a customer in Venezuela, of which $966,000 arose from goods shipped in the first quarter of 2002 and $828,000 was recorded prior to December 31, 2001. As a result of political instability and work disruptions in the country, these amounts have not been paid within the customary payment terms for this customer and no payments have been received since September 2001. The ultimate customer for these goods is PDVSA, the national oil company of Venezuela. Our customer holds a contract to deliver over $5 million of our proprietary products to PDVSA during the next three years. However, PDVSA has delayed acceptance of the majority of the goods shipped until its field operations return to higher activity levels. Our customer is unable to pay for the goods until payment has been received from PDVSA. We have been informed that activity levels are returning to previous levels and we expect a resumption of product receipts and payments by PDVSA during the second quarter of 2002. The Company has an established long-term relationship with this customer and believes that it will ultimately collect the balance due, but cannot accurately predict the timing of future payments. The Company has not provided a reserve for doubtful accounts associated with this balance. 6 Note 4 - Inventories and Work in Progress Inventories consist of raw materials, finished goods and parts and materials used in manufacturing and construction operations. Finished goods inventories include raw materials, direct labor and production overhead. Inventories are carried at the lower of cost or market using the average cost method. The Company maintains a reserve for impaired or obsolete inventory, which is reviewed for adequacy on a periodic basis. Work in progress consists of percentage of completion revenues recognized in excess of customer billings plus any provision for estimated losses on contracts. The components of inventories and work in progress at March 31, 2002 and December 31, 2001 were as follows:
March 31, December 31, 2002 2001 ------------------ ------------------ Raw materials...................................... $ 392,214 $ 496,332 Finished goods..................................... 1,823,109 1,856,011 Manufacturing parts and materials.................. 629,667 708,036 Work in progress................................... 775,190 1,000,799 Inventory valuation reserve........................ (305,851) (357,025) --------- -------- Inventories and work in progress, net......... $ 3,314,329 $ 3,704,153 ========= =========
Note 5 - Property and Equipment At March 31, 2002 and December 31, 2001, property and equipment were comprised of the following:
March 31, December 31, 2002 2001 ------------------ ------------------ Land $ 138,700 $ 145,000 Buildings and leasehold improvements............... 2,206,226 2,114,878 Machinery and equipment............................ 1,121,990 1,128,894 Construction in progress........................... 484,149 - Furniture and fixtures............................. 67,936 135,937 Transportation..................................... 566,244 456,794 Computer equipment................................. 90,451 77,436 --------- --------- Total property and equipment................... 4,675,696 4,058,939 Less accumulated depreciation..................... 502,283 387,000 --------- --------- Net property and equipment.................... $ 4,173,413 $ 3,671,939 ========= =========
Note 6 - Goodwill Goodwill represents the excess of cost over the fair value of net assets of companies acquired in business combinations accounted for using the purchase method. Goodwill acquired in business combinations prior to June 30, 2001 had been amortized using the straight-line method over an estimated useful life of 20 years. In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 142 requires that goodwill no longer be amortized but instead be reviewed periodically for possible impairment. The Company has adopted SFAS No. 142 effective January 1, 2002 and will no longer amortize goodwill. Goodwill amortization expense during the three months ended March 31, 2001 was approximately $87,000. 7 Under SFAS 142, the Company must complete its initial assessment of goodwill for possible impairment no later than December 31, 2002. This impairment test is required to be performed for each reporting segment. As of March 31, 2002, the Company had net goodwill of approximately $1.3 million attributable to its Equipment Manufacturing segment. This segment has experienced significant operating losses in recent periods and may be subject to impairment under SFAS 142. However, the Company and has not reached a final determination of any potential impairment of goodwill at this time. Additionally, the Company will also assess the goodwill associated with the other segments for potential impairment under SFAS 142, although the other segments have been profitable. Note 7 - Capital Lease Obligation On February 28, 2002, the Company sold its rights and obligation to purchase the land and buildings covered by a capital lease obligation, together with capital improvements to the property totaling approximately $750,000, to Oklahoma Facilities, LLC ("Facilities"). An officer of the Company has a minority investment interest in and is an officer of Facilities. The total consideration at closing was $1,400,000, with net cash proceeds to the Company of $761,000. The transaction did not generate any gain or loss. The Company simultaneously entered into a lease agreement with Facilities under which it is obligated to pay average rent of $18,000 per month for a fixed term of ten years. The Company has the right to buy the property at any time during the first two years of the lease for a fixed price of $1,400,000. The Company also has the option to purchase the building for a fixed price of $420,000 at the end of the ten-year lease term. Note 8 - Notes Payable Notes payable at March 31, 2002 and December 31, 2001 consisted of the following:
March 31, December 31, 2002 2001 ---- ---- Revolving line of credit, secured by accounts receivable and inventory, bearing interest at the prime rate plus 1.25%, due in May 2002, with maximum borrowings of $1,414,020 (1)................................... $ 1,414,020 $ 1,252,966 Revolving line of credit, secured by accounts receivable and inventory, bearing interest at the prime rate plus 1.25%, due in January 2003, with maximum borrowings of $1,608,100 (2).............................. 1,267,770 - Other notes payable...................................................... 30,000 30,000 --------- --------- Total notes payable.................................................... $ 2,711,790 $ 1,282,966 ========= ========= (1) Limited to a borrowing base amount calculated as 60% of eligible accounts receivable and inventory. (2) Limited to a borrowing base amount calculated as 50% of eligible accounts receivable and inventory.
8 Note 9 - Long-Term Debt Long-term debt at March 31, 2002 and December 31, 2001, consisted of the following:
March 31, December 31, 2002 2001 ---- ---- Notes payable to shareholders of acquired businesses, unsecured, bearing interest at 9% payable quarterly, due in five annual installments of $200,000 each beginning January 2002................................. $ 800,000 $ 1,000,000 Note payable to bank, bearing interest at the prime rate plus 1%, payable in monthly installments of $39,812 including interest, due in January 2008 2,356,315 2,439,532 Note payable to bank, bearing interest at the prime rate plus 1%, payable in monthly installments of $14,823 including interest, due in September 2004....................................................... 426,074 464,538 Construction loan payable to bank, bearing interest at the prime rate plus 1%, payable in monthly installments of $25,923 including interest, due in January 2005...................................................... 173,840 - Mortgage note on property, bearing interest at 10%, payable in monthly installments of $1,451 including interest, with final payment of $111,228 due in December 2002........................................ 114,413 115,877 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............................................ 83,111 87,620 Secured vehicle and other equipment loans................................. 96,081 109,140 --------- --------- Total................................................................ 4,049,834 4,216,707 Less current maturities.............................................. 1,052,731 876,737 --------- --------- Long-term debt................................................... $ 2,997,103 $ 3,339,970 ========= =========
The revolving lines of credit and bank notes payable are owed to the Company's primary lending bank and are secured by substantially all of the assets of the Company. They have also been personally guaranteed by an officer of the Company. The construction loan payable has a maximum availability of $854,350 and is designated for the construction of a bulk material transload facility in Raceland, Louisiana. Of such available amount, $224,790 had been advanced and $50,950 had been repaid as of March 31, 2002. Note 10 - Net Loss Per Common Share Net loss per common share is calculated by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding. Dilutive loss per share is calculated by dividing net loss attributable to common shareholders by the weighted average number of common shares and dilutive potential common shares outstanding. There were no potentially dilutive common shares as of March 31, 2002 or December 31, 2001. Note 11 - Segment Information The Company has three reportable segments, as follows: o The Specialty Chemicals segment develops, manufactures and packages chemicals used by other oilfield service companies in cementing and stimulation jobs. 9 o The Equipment Manufacturing segment designs and manufactures specialized cementing and stimulation equipment, including heavy vehicles used for pressure pumping, blending and bulk material transport. This segment also designs and constructs automated bulk material handling and loading facilities for other oilfield service companies. o The Downhole Equipment segment manufactures and markets the Petrovalve line of downhole pump components and the Turbeco line of casing centralizers. The Company's reportable segments are strategic business units that offer different products and services. Each business segment requires different technology and marketing strategies and is managed independently. The accounting policies used in each of the segments are the same as those described in the significant accounting policies. The Company evaluates the performance of its operating segments based on operating income excluding goodwill amortization and unusual charges. Intersegment sales and transfers are not material. The following table presents the revenues and operating income for each reportable segment and for the three month periods ended March 31, 2002 and 2001: Three months ended March 31, ------------------------------------- 2002 2001 ------------------ ----------------- Revenues: Specialty Chemicals........... $1,302,930 $1,990,110 Equipment Manufacturing....... 1,110,168 699,571 Downhole Equipment............ 1,246,485 - --------- --------- Consolidated............... $3,659,583 $2,689,681 ========= ========= Income (loss) from operations: Specialty Chemicals........... $ 118,503 $ 436,825 Equipment Manufacturing....... (196,983) (550,246) Downhole Equipment............ 454,506 - Corporate and Other........... (552,073) (144,308) --------- --------- Consolidated............... $ (176,047) $ (257,729) ========= ========= 10 ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Business Overview Flotek was established in 1985 and is currently traded on the OTC Bulletin Board market. On October 31, 2001, the Company completed a Merger with Chemical & Equipment Specialties, Inc. ("CESI"). The Merger has been accounted for as a reverse acquisition using the purchase method of accounting. In the Merger, the shareholders of the acquired company, CESI, received the majority of the voting interests in the surviving consolidated company. Accordingly, CESI was deemed to be the acquiring company for financial reporting purposes and the historical financial statements of the Company are the historical financial statements of CESI. All of the assets and liabilities of Flotek were recorded at fair value on October 31, 2001, the date of the Merger, and the operations of Flotek have been reflected in the operations of the combined company only for periods subsequent to the date of the Merger. CESI was incorporated on June 27, 2000 to acquire businesses in the specialty chemical and equipment manufacturing segments of the oilfield service industry. It had no revenues or operations prior to the acquisitions of Esses, Inc., Plainsman Technology, Inc., Neal's Technology, Inc., and Padko International, Inc. in January 2001. It subsequently acquired Material Translogistics, Inc. in June 2001. These five companies are referred to collectively as the "CESI Acquired Businesses". The Company's product lines are divided into three segments within the oilfield service industry: o The Specialty Chemicals segment develops, manufactures, packages and sells chemicals used in oil and gas well cementing, stimulation and production. o The Equipment Manufacturing segment designs and manufactures specialized cementing and stimulation equipment, including heavy vehicles used for pressure pumping, blending and bulk material transport. This segment also designs, constructs and manages automated bulk material handling and loading facilities for other oilfield service companies. o The Downhole Equipment segment manufactures and markets the Petrovalve line of downhole pump components and the Turbeco line of casing centralizers. Our businesses serve the oil and gas industry. All of our businesses are affected by changes in the worldwide demand for and price of oil and natural gas. The majority of our products are dependent on the level of exploration and development activity and the completion phase of oil and gas well drilling. Other products and services, such as our Petrovalve downhole pump products and certain of our specialty chemicals are more closely tied to the production of oil and gas and are less dependent on drilling activity. The oil and gas industry has been subject to significant volatility in recent years due to changes in the demand, supply and pricing of oil and natural gas. The U.S. rig count, as measured by Baker Hughes Incorporated, began 2001 at around 1,100 active rigs and reached a peak of almost 1,300 in July 2001. During the third quarter of 2001, the demand for oil and natural gas began to weaken in response to slowing growth in worldwide economies. This resulted in a slowdown in North American drilling rig activity, with a steady decline in the rig count during the second half of 2001 until it had reached a level of just under 900 active rigs at December 31, 2001. During the quarter ended March 31, 2002, the rig count has dropped further, with around 750 active rigs working at the end of the quarter. Natural gas prices have declined from a near record high of almost $10.00 per Mcf in early 2001 to approximately $2.50 per Mcf at year-end. Crude oil prices experienced a similar decline in 2001, from $30.00 per barrel at the beginning of the year to below $20.00 at the end. As of March 31, 2002 prices for both commodities had recovered to approximately $3.50 per Mcf and $27.00 per barrel, respectively. Our businesses were adversely affected by the decline in drilling activity which began in the second half of 2001 and continued in the 11 first quarter of 2002. Many industry observers expect drilling activity levels to increase during the remainder of 2002 based on higher oil and gas prices and an expected rebound in overall economic activity. However, we continue to face a challenging industry environment in the near term and there can be no assurance that these expected improvements will occur. Risk Factors The Company faces various business risks specific to its industry, product lines, financial resources and competitive position, as well as general economic and financial risks. The following risk factors, among others, may cause the Company's operating results and/or financial position to be adversely affected: o The Company is dependent on the oil and gas industry, and activity levels in the industry are volatile. o Oil and gas prices are volatile and have a direct impact on the spending levels of our customers. o The oilfield service industry is highly competitive and we must compete with many companies possessing greater financial resources and better established market positions. o The introduction of new products and technologies by competitors may adversely affect the demand for our products and services. o The Company's debt service obligations may limit our ability to fund operations and capital spending or provide for future growth. o The Company may not be able to successfully manage its growth. o Changes in political conditions, governmental regulations, economic and financial market conditions, unexpected litigation and other uncertainties may have an adverse effect on our operations. Results of Operations
Three months ended March 31, 2002 2001 ----------------- ---------------- Revenues........................................... $ 3,659,583 $ 2,689,681 Cost of revenues................................... 2,098,813 1,557,185 --------- --------- Gross margin.................................... 1,560,770 1,132,496 --------- --------- Gross margin %.................................. 42.6% 42.1% Selling, general and administrative................ 1,583,730 1,253,740 Depreciation and amortization...................... 148,545 135,429 Research and development........................... 4,542 1,056 --------- --------- Total expenses.................................. 1,736,817 1,390,225 --------- --------- Operating income (loss)......................... (176,047) (257,729) --------- --------- Operating income (loss) %....................... (4.8)% (9.6)% Interest expense................................... (92,428) (93,059) Interest income.................................... - 24,858 Other, net......................................... 1,721 44,101 --------- -------- Other income (expense), net.................... (90,707) (24,100) --------- -------- Pre-tax income (loss).......................... $ (266,754) $ (281,829) ========= ========
Total revenues increased by $970,000, or 36.17%, in the first quarter of 2002 compared to the comparable period in 2001. As discussed in the segment analysis below, the Specialty Chemicals segment experienced a significant drop in revenues in 2002 compared to 2001, while the Equipment Specialties and Downhole Equipment segments had higher revenues in the 2002 quarter, although these increases resulted primarily from business combinations whose operations were not reflected in the first quarter of 2001. 12 On an aggregate basis, the gross margin as a percentage of revenues increased very slightly, from 42.1% in 2001 to 42.6% in 2002. The gross margin is best analyzed on a segment by segment basis, discussed below, as the margin varies significantly between operating segments and can vary significantly from period to period in certain of our operating segments. Selling, general and administrative ("SG&A") costs represent the costs of selling, operations and overhead expenses not directly attributable to products sold or services rendered. The revenues from services are less than 10% of consolidated revenues and the direct costs of providing these services are included in cost of revenues. SG&A amounted to 43.3% of revenues in 2002, a decrease of 3.3% of revenues from the level of 46.6% in 2001. The costs of operations and administration decreased as a percentage of revenues as we were able to spread these semi-fixed costs over a larger revenue base. Interest expense did not change significantly between periods. While the average amount outstanding under the Company's credit agreements was higher in 2002 as a result of the financing of capital expenditures and increased working capital needs during the year, interest rates were significantly lower in 2002 and the decline in rates more than offset the additional interest expense associated with higher debt levels. The majority of the Company's indebtedness carries a variable interest rate tied to the prime rate and is adjusted on a quarterly basis. Results by Segment Specialty Chemicals Three months ended March 31, ------------------------------------- 2002 2001 ----------------- ---------------- Revenues.......................... $1,302,930 $1,990,110 Gross margin...................... $ 514,344 $1,009,160 Gross margin percentage...... 39.5% 50.7% Operating income.................. $ 118,503 $ 436,825 Operating margin percentage.. 9.1% 21.9% Specialty Chemical revenues decreased by $687,000, or 34.5%, in the current year from 2001 levels. Sales in this segment are heavily dependent on drilling activity and the decrease in revenue is primarily attributable to sharply lower drilling activity in the first quarter of 2002 versus 2001. Average product pricing levels in this segment declined as lower demand caused our pricing to come under pressure. The gross margin percentage in this segment also declined significantly from 50.7% in 2001 to 39.5% in 2002. In certain cases, in trying to maintain sales levels and market share, we sold our products at a lower gross margin. The combination of lower revenues and lower gross margins had a significant adverse effect on our operating margin and overall levels of operating income. Operating income fell $318,000, or 73%, in the current year from 2001 levels, primarily as a result of lower revenues and gross margins. We took actions to reduce our selling, general, and administrative expenses in this segment to keep these costs in line with the reduced revenue levels. However, the above revenue and margin issues combined to result in a significant decrease in our operating margin percentage in this segment from 21.9% in 2001 to 9.1% in 2002. 13 Equipment Manufacturing Three months ended March 31, ------------------------------------- 2002 2001 ----------------- ---------------- Revenues.......................... $ 1,110,168 $ 699,571 Gross margin...................... $ 282,994 $ 123,336 Gross margin percentage...... 25.5% 17.6% Operating income.................. $ (196,983) $ (550,246) Operating margin percentage.. (17.7%) (78.7%) Equipment Manufacturing revenues increased $411,000, or 58.7%, in 2002 over 2001 levels. This increase primarily resulted from the addition of Material Translogistics, Inc. ("MTI"), a company that was acquired in June 2001. Under purchase accounting, MTI's results of operations are included only for periods subsequent to the acquisition; therefore it is not reflected in the results for the first quarter of 2001. During the first quarter of 2002, MTI had revenues of $482,000 and positive operating income of $48,000. We continued to experience poor results in our Equipment Specialties operations (formerly Neal's Technology, Inc.) and initiated cost reduction measures during the first quarter of 2002 that reduced the loss we sustained in 2002. The gross margin improved in the first quarter of 2002 to 25.5% from 17.6% in 2001, primarily as a result of the addition of MTI's business, which had a 43% gross margin on its revenues in 2002. Subsequent to the Merger, the Company replaced the management of this segment and focused significant efforts and financial resources on improving the performance of this segment, including the implementation of improved operating procedures, better accounting controls and proper documentation of work processes. The Company also initiated cost reduction measures in response to lower revenue levels and reduced sales expectations. While significant improvements have been made, this segment continued to operate at a loss, although the magnitude of that loss has been reduced. We continue to face a difficult market outlook for the equipment manufacturing operations in this segment. Orders for new manufactured equipment slowed significantly in the second half of the year. Management is continuing to solicit new orders and in the event it does not secure sufficient new orders, the Company is prepared to take continuing action to limit its financial exposure from further losses in this segment. The outlook for MTI's operations within this segment, consisting of the design, construction and management of bulk material handling and loading facilities, is much more positive. Based on the current work in progress and outstanding bids in response to requests for quotations, management believes that the revenues and operating margin attributable to these operations will continue to increase over the remainder of 2002. However, there can be no assurance that the Equipment Manufacturing segment as a whole will be profitable. As more fully discussed in Note 1 of the Notes to Consolidated Financial Statements, there is approximately $1.3 million of net goodwill attributable to this segment, all or some portion of which may be subject to an impairment charge based on new accounting requirements which must be implemented by the end of 2002. 14 Downhole Equipment Three months ended March 31, ------------------------------------- 2002 2001 ----------------- ---------------- Revenues............................ $ 1,246,485 $ - Gross margin........................ $ 763,432 $ - Gross margin percentage........ 61.2% - Operating income.................... $ 454,506 $ - Operating margin percentage.... 36.5% - The Downhole Equipment segment became part of the consolidated group after the Merger became effective on October 31, 2001. These operations, which consist of manufacturing and marketing the Petrovalve line of downhole pump components and the Turbeco line of casing centralizers, were the original operations of Flotek Industries, Inc. prior to the Merger. Since the Merger was recorded for accounting purposes as a reverse merger, the results of operations of this segment were included in the consolidated results of operations only for periods subsequent to the Merger and are not reflected in the first quarter of 2001. Our Petrovalve sales, totaling $973,000 in the first quarter of 2002, were almost exclusively to one customer in Venezuela. As more fully discussed in Note 3 of the Notes to Consolidated Financial Statements and the Capital Resources and Liquidity section, below, this customer has not paid for these goods within the customary payment terms. These sales carry a high gross margin and are significantly profitable to this segment. Sales of the Turbeco line of casing centralizers, which constitute the balance of the revenues in this segment, are very dependent on the level of drilling activity and have suffered from lower demand. We have recently seen signs of improvement in this line of business and are positive about the outlook for the balance of the year. Capital Resources and Liquidity In the first quarter of 2002, the Company sustained a net loss of $267,000 and had negative cash flow from operations of $1.46 million. These losses resulted primarily from the poor operating results in the Equipment Manufacturing segment, although the losses were reduced from the levels in 2001. As discussed above, management has taken and will continue to take appropriate steps to improve performance and attempt to limit the losses in this segment. The negative cash flow resulted primarily from delays in collecting accounts receivable from sales to a Venezuelan customer, as discussed below. As of March 31, 2002, net working capital was approximately $454,000, resulting in a current ratio of 1.07 to 1. The balance in accounts payable and accrued liabilities decreased $687,000 during the first quarter of 2002, as we used part of the proceeds of borrowings to pay vendor invoices. As disclosed in Note 3 of the Notes to Consolidated Financial Statements, at March 31, 2002, the Company had approximately $1,794,000 of accounts receivable from a customer in Venezuela, of which $966,000 arose from goods shipped in the first quarter of 2002 and $828,000 was recorded prior to December 31, 2001. As a result of political instability and work disruptions in the country, these amounts have not been paid within the customary payment terms for this customer and no payments have been received since September 2001. The ultimate customer for these goods is PDVSA, the national oil company of Venezuela. Our customer holds a contract to deliver over $5 million of our proprietary products to PDVSA during the next three years. However, PDVSA has delayed acceptance of the majority of the goods shipped until its field operations return to higher activity levels. Our customer is unable to pay for the goods until payment has been received from PDVSA. We have been informed that activity levels are returning to previous levels and we expect a resumption of product receipts and payments by PDVSA during the second quarter of 2002. The Company has an established long-term relationship with this customer and believes that it will ultimately collect the balance due, but we cannot accurately predict the timing of future payments. The Company has not provided a reserve for doubtful accounts associated with this balance. The failure to collect this accounts receivable balance has had a significant adverse effect on the cash flow of the Company. Additionally, all invoice amounts which are greater than 90 days old cannot be included in the borrowing base under our lines of credit. 15 During the first quarter of 2002, the Company entered into a sale and leaseback transaction regarding its Equipment Manufacturing facility in Duncan, Oklahoma. This transaction resulted in net cash proceeds to the Company of $761,000. The Company simultaneously entered into an agreement to lease back the facility over ten years. This transaction has been recorded as a capital lease. The Company also borrowed $1.65 million under its line of credit arrangements, including a new $1.6 million line of credit which was executed in January of 2002. We have had discussions with our primary lending bank and they have given us a verbal indication that the $1.4 million dollar line of credit , which is due on May 29, 2002, will be extended until May 29, 2003. We also made total debt service payments of approximately $400,000 during the first quarter of 2002. The Company has estimated minimum debt service obligations in 2002 of $1.8 million. This amount includes the estimated minimum principal and interest payments on the new credit agreements and capital lease obligations incurred during the first quarter of 2002. Capital expenditures during the first quarter of 2002 were $650,000. The majority of these capital expenditures relate to a bulk material transload facility which the Company is constructing in Raceland, Louisiana. With the exception of the capital expenditures required to complete the construction of this project, the Company does not at this time expect to have any major requirements for capital expenditures in 2002. As discussed in Note 9 of the Notes to Consolidated Financial Statements, the capital required to complete the Raceland transload facility is expected to be substantially financed by a construction loan in the amount of $854,350. The Company believes its operations are capable of generating sufficient cash flow to meet its debt service obligations and working capital needs during the next twelve months. However, we face a challenging near-term industry environment and there are many factors involved in executing our business strategy which are beyond our control. In particular, it is critical that we successfully collect amounts due from our Venezuelan customer. In the event that we are unable to collect at least part of these amounts due in the near future, or if we are unable to successfully limit our losses in the Equipment Manufacturing segment, the Company may be forced to seek additional equity or debt financing. There can be no assurance that the Company would be able to secure such financing on terms which would be acceptable to it. Accordingly, investors are advised that the Company faces significant financial risks in the next year as we attempt to meet these challenges. Forward Looking Statements Except for the historical information contained herein, the discussion in this Form 10-QSB includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. The words "anticipate," "believe," "expect," "plan," "intend," "project," "forecast," "could" and similar expressions are intended to identify forward-looking statements. All statements other than statements of historical facts included in this Form 10-QSB regarding the Company's financial position, business strategy, budgets and plans and objectives of management for future operations are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those in the forward-looking statements for various reasons including the effect of competition, the level of petroleum industry exploration and production expenditures, world economic conditions, prices of, and the demand for crude oil and natural gas, weather, the legislative environment in the United States and other countries, adverse changes in the capital and equity markets, and other risk factors identified herein. 16 PART II - OTHER INFORMATION Item 1 - Legal Proceedings On May 1, 2002, Milam Tool Company and the Estate of Jack J. Milam filed a complaint against Flotek Industries, Inc., Turbeco, Inc., and Jerry D. Dumas, Sr. individually, in the United States District Court for the Southern District of Texas, Houston Division. The complaint asserts that the sale of TURBO-LOK turbulators, which are part of the Company's Downhole Equipment segment, violates an agreement among the parties and infringes a United States patent controlled by the plaintiffs. Plaintiffs seek injunctive relief and unspecified damages. The Company strongly denies the assertions in the complaint and intends to vigorously contest this matter. Item 2 - Changes in Securities and Use of Proceeds In January 2002, the Company issued 26,116 shares of common stock to the former shareholders of Material Translogistics, Inc., which were issued in accordance with the terms of the original acquisition agreement. In February 2002, the Company issued 34,000 shares of common stock in connection with the acquisition of IBS 2000, Inc. Additional disclosure related to the issuance of these shares is included in Note 2 of the Notes to Consolidated Financial Statements. The foregoing issuances of common stock were made in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act of 1933 for transactions not involving a public offering. No underwriters were engaged in connection with the foregoing sales of securities. The sales were made without general solicitation or advertising. Each purchaser was an "accredited investor" or a sophisticated investor with access to all relevant information necessary to evaluate the investment who represented to the Company that the sales were being acquired for investment. Item 3 - Defaults Upon Senior Securities None. Item 4 - Submission of Matters to a Vote of Security Holders None. Item 5 - Other Information None. 17 Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description of Exhibit - ------ ---------------------- 10.1 Lease Agreement with Option to Purchase, dated February 28, 2002, by and between Oklahoma Facilities, LLC and Neal's Technology Company, Inc. 10.2 Employment Contract dated July 1, 2000, by and between Chemical & Equipment Specialties, Inc. and Glenn S. Penny. (b) Reports on Form 8-K Current Report on Form 8-K/A filed with the Securities and Exchange Commission on January 16, 2002. This Amendment No. 1 to Current Report on Form 8-K filed on November 14, 2001 included the financial statements of CESI and the separate financial statements of its recently acquired subsidiaries, Esses, Inc., Plainsman Technology, Inc., Neal's Technology, Inc., Padko International, Inc. and Material Translogistics, Inc. In addition, this report included unaudited pro forma combined financial statements related to the merger of the Company with CESI. SIGNATURE In accordance with 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 thereunto duly authorized. FLOTEK INDUSTRIES, INC. Date: May 20, 2002 /s/ Jerry D. Dumas, Sr. ----------------------------------- Jerry D. Dumas, Sr. Chairman and Chief Executive Officer EX-10 3 nealsleaseamt.txt NEALS LEASE AGREEMENT, 10.1 LEASE AGREEMENT WITH OPTION TO PURCHASE THIS LEASE AGREEMENT WITH OPTION TO PURCHASE is made and entered into as of the 28th day of February, 2002, by and between OKLAHOMA FACILITIES, LIMITED LIABILITY COMPANY, an Oklahoma limited liability company ("Landlord"), and NEAL'S TECHNOLOGY, INC., an Oklahoma corporation ("Tenant"). W I T N E S S E T H: In consideration of the mutual covenants herein contained, Landlord and Tenant hereby agree as follows: ARTICLE I DEMISED PROPERTY 1.01 Real Property. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the real property situated in Stephens County, Oklahoma, and described on Exhibit "A" attached hereto and made a part hereof, together with all improvements and fixtures thereon and therein and all appurtenances thereunto belonging, upon and subject to the terms and conditions expressed below. 1.02 Demised Property. The real property, improvements, fixtures and appurtenances described in Section 1.01 above are collectively referred to herein as the "Demised Property." ARTICLE II TERM 2.01 Base Term. The term of this lease shall begin on March 1, 2002, and, unless earlier terminated or extended, shall end on February 28, 2004 (the "Base Lease Term"). 2.02 Extended Term. Unless terminated by mutual agreement of Landlord and Tenant or unless Tenant has acquired the Demised Property under its purchase rights in Article XVII, the term of this lease shall automatically renew for an additional period of eight years. Such renewal term shall be referred to herein as the "Extended Lease Term." The terms of this lease during the Extended Lease Term, including rent, shall be the same as those during the Base Lease Term or as otherwise expressly provided in this lease. At the expiration of the Extended Lease Term, in the event that this lease has not been earlier terminated and Tenant is not in default hereunder,Tenant shall have the option to purchase the Demised Property from Landlord for a purchase price of $420,000, by giving written notice of its intent to purchase at or prior to the end of the Lease Term. Such conveyance shall occur under the terms and conditions set forth in Sections 17.04 through 17.09 of this lease, and under other such terms and conditions as are usual and customary for similar transactions. 2.03 Lease Term. The Base Lease Term and the Extended Lease Term shall sometimes be collectively referred to herein as the "Lease Term." ARTICLE III RENT 3.01 Payment of Rent. Tenant shall pay the rent, as defined below, during the Lease Term, in the amounts and at the times prescribed below, in lawful money of the United States of America, at Landlord's address for notice hereunder or otherwise as Landlord may designate. 3.02 Rent During Lease Term. Tenant covenants and agrees to pay Landlord as rent for the Demised Property during the Lease Term the following sums (the "Rent") commencing on March 1, 2002, and continuing on the first day of each succeeding calendar month through the expiration of the Lease Term or sooner termination of this lease: First 12 Months $14,500 per month Next 24 Months $19,750 per month Last 84 Months $18,000 per month 3.03 Rent During Extended Lease Term. The rent during the Extended Lease Term shall be as set forth in Section 3.02 above. 3.04 Late Payments of Rent. Rent payments not paid by their respective due dates shall bear interest at the per annum rate of 12.00% until paid, as and for additional rent hereunder. ARTICLE IV USE OF PREMISES, OPERATION OF BUSINESS AND COMPLIANCE WITH REQUIREMENTS 4.01 Use of Premises. Tenant shall use the Demised Property for the operation of a business engaged in the manufacture, sales, service and rental of equipment and other goods. 4.02 Operation of Business. During the Lease Term Tenant shall operate a business as described in Section 4.01 above, as permitted by this agreement and applicable laws and ordinances. 2 4.03 Compliance. Tenant shall promptly fulfill and comply with all valid laws, rules and regulations made by competent governmental authority which are applicable to the occupancy or use of the Demised Property or for the correction, prevention and abatement of nuisances in or about or connected with the Demised Property because of Tenant's use thereof, all at Tenant's expense, except that any requirement to replace or repair structural bearing parts, the roof, or exterior walls and foundation shall be at Landlord's expense, subject to the provisions of Section 7.02 herein. 4.04 Insurance Requirements. Tenant, at its expense, shall promptly comply with the requirements of all public liability, fire and other types of insurance policies at any time in force with respect to the Demised Property. 4.05 Nuisance. Tenant will not do any act or thing which constitutes a public or private nuisance on the Demised Property or in connection with its business located thereon. ARTICLE V COVENANTS AGAINST LIENS 5.01 Liens of Tenant. If, because of any act or omission of Tenant, any mechanic's lien or other lien, charge or order for the payment of money is filed against any portion of the Demised Property, Tenant shall, at its expense, cause the lien or liens to be discharged of record or bonded within 90 days after they receive written notice from Landlord of such filing, unless Tenant contests the validity in good faith and establish reserves deemed by Landlord to be appropriate therefor. 5.02 Liens of Landlord. If, because of any act or omission of Landlord, any lien, charge or order for the payment of money is filed against the Demised Property, Landlord shall, at its expense, cause the lien or liens to be discharged of record or bonded within 90 days after it receives written notice from Tenant of such filing, unless Landlord contests the validity in good faith and establishes reserves deemed by Tenant to be appropriate therefor. 5.03 Removal of Liens. If either party fails to cause the liens which have been filed against the property because of any act or omission of that party (unless such party contests the validity of the lien as provided above) to be discharged of record or bonded within the required 90-day period or to satisfy such liens within 60 days after any final, non-appealable judgment in favor of the lien holders, the other party may cause the lien to be discharged. All payments made by a party whose act or omission did not cause the filing of such lien shall be immediately due and payable to such party from the party whose act or omission did cause the filing of such lien, with interest at the rate of ten percent (10%) per annum from the date of payment until repaid in full. 3 ARTICLE VI TRADE FIXTURES, EQUIPMENT AND SIGNAGE 6.01 Trade Fixtures and Equipment. All trade fixtures and signs currently owned by Landlord and located in and around the real property are part of the Demised Property. Should Tenant place additional trade fixtures, signs, equipment, furniture or other personal property in or on the Demised Property, such shall not become the property of Landlord or a part of the realty unless such is affixed to the Demised Property in such a manner that it can not be removed without material injury to the Demised Property. Any such property which cannot be removed from the Demised Property without material injury shall, upon the termination of this lease, become a part of the Demised Property and the property of the Landlord. 6.02 Signage. Tenant shall have the right to install and operate on the exterior and interior of the building located on the Demised Property electrical signs or other signs as are necessary and reasonable in the conduct of the Tenant's business thereon. ARTICLE VII MAINTENANCE, ALTERATIONS AND ADDITIONS 7.01 Maintenance by Tenant. Subject to Landlord's obligation to make repairs as set forth in Section 7.02, Tenant shall be responsible for, and shall promptly pay any expenses in connection with, all maintenance of the Demised Property during the Lease Term and any subsequent extensions or holding over under this lease. Tenant shall not cause or permit any waste, damage or injury to the Demised Property. At the expiration of the Lease Term or any extension or holding over thereunder, Tenant will move its goods and effects and will peacefully yield to Landlord the Demised Property, and the interior thereof shall be in as good order and repair as when delivered to Tenant, except for ordinary wear and tear. 7.02 Repairs by Landlord. During the term of this Lease and any renewal thereof, Landlord shall, at its sole cost and expense, make any repairs or replacements to the structural bearing parts of the interior and exterior walls and foundation of any building on the Demised Property, and roof repairs and replacement, which are necessary to keep the Demised Property in good condition and repair, ordinary wear and tear excepted. Landlord's obligations under this Section are subject to Tenant's obligation to insure the Demised Property under Article IX. Further, Landlord's obligations under this Section do not extend to damages, conditions or repairs for which Tenant is liable under Section 10.01. 4 7.03 Alterations and Additions. No alteration, addition or improvement to the Demised Property shall be made by Tenant without the prior written consent of Landlord, which consent shall not be unreasonably withheld. All alterations, decorations, additions, improvements, lights, heating and air conditioning equipment, partitions, paneling, railings and the like, except trade fixtures removable pursuant to Section 6.01, and signs, shall become the property of Landlord upon the expiration or sooner termination of this lease. ARTICLE VIII TAXES 8.01 Real Property Taxes and Special Assessments. Landlord shall be liable for, pay and hold Tenant harmless from liability with respect to all real property taxes and special assessments assessed against the Demised Property during the Lease Term and any subsequent extensions or holding over under this lease. 8.02 Personal Property Taxes. Tenant shall be liable for, pay and hold Landlord harmless from liability with respect to all personal property taxes assessed against the personal property of Tenant located in and on the Demised Property during the Lease Term and any subsequent extensions or holding over under this lease. 8.03 Other Taxes. Except as provided in Section 8.01, Tenant shall be liable for, pay and hold Landlord harmless from liability with respect to all other taxes levied upon Tenant or in connection with its operations upon the Demised Property during the Lease Term and any subsequent extensions or holding over under this lease. ARTICLE IX INSURANCE 9.01 Coverage by Tenant. Tenant shall maintain with insurers authorized to do business in the State of Oklahoma and which are approved by Landlord, acting reasonably and in good faith, the following: (a) Fire and extended coverage insurance, insuring the improvements located upon the Demised Property, in an amount equal to or greater than $1,400,000. (b) Comprehensive general public liability insurance against claims for bodily injury, death or property damage arising out of the use or occupancy of the Demised Property by the Tenant, in a limit of not less than $500,000.00 for each person, $1,000,000.00 for each occurrence and $100,000.00 for property damage. 5 (c) Workmen's compensation insurance against claims for bodily injury or death by employees of Tenant, with limits in at least the minimum amounts required by law. 9.02 Policy Terms and Conditions. All insurance policies that Tenant must maintain under this Article shall name Landlord (as an additional insured) and Tenant as the insured parties, as their respective interests may appear. The policies may be carried under blanket policies maintained by Tenant if they comply with the provisions of this Section. All such policies of insurance shall provide for the benefit of the holder or holders, that thirty (30) days prior written notice of cancellation, termination, modification or lapse of coverage shall be given to and must be received by Landlord and Tenant, and such policies shall not contain a provision relieving the insurer thereunder of liability for any loss by reason of the existence of other insurance policies covering the Demised Property against the perils involved, regardless of collectibility. 9.03 Insurance Certificates. Tenant shall deliver to Landlord, promptly after this lease commences, insurance certificates evidencing all insurance that Tenant must maintain under this lease, and, within thirty (30) days before any insurance expires, other certificates evidencing its renewal. ARTICLE X INDEMNIFICATION AND EXONERATION 10.01 Indemnification. Tenant shall indemnify and hold Landlord harmless against all claims, liabilities, fines, penalties, damages, expenses and judgments by reason of any default by Tenant hereunder, any act or negligence of Tenant or its officers, agents, contractors, employees, licensees or invitees, or any injury or claim of injury to person or property, of any nature, arising out of the use, occupation and control of the Demised Property, or the adjacent streets, alleys and sidewalks, by Tenant at any time during the Lease Term, including those resulting from any work in connection with any alterations, changes, new construction or demolition at the Demised Property requested by Tenant or contracted for by Tenant; provided, however, that Landlord shall not be entitled to indemnity hereunder to the extent that any such losses, claims, liabilities and expenses are caused by the negligence, gross negligence, recklessness or willful misconduct of Landlord or its agents. Tenant is hereby subrogated to any rights of Landlord against any other parties whomsoever in connection therewith. Landlord shall promptly notify Tenant of any claim asserted against Landlord on account of any such injury or claimed injury to persons or property and shall promptly deliver to Tenant the original or a true copy of any summons or other process, pleading or notice issued in any suit or other proceeding to assert or enforce any such claim. Tenant shall have the right to defend any such suit with attorneys of their own selection. Landlord shall have the right, if it sees fit, to participate in such defense at its own expense. 6 10.02 Exoneration. Landlord shall not be liable for any claims, liabilities, fines, penalties, damages, judgments or other expenses (including attorney's fees), including but not limited to any personal injury or property damage to Tenant or to its officers, agents, contractors, employees, licensees or invitees, or to any other occupant of any part of the Demised Property, except such that may be caused by the intentional, negligent or grossly negligent acts or omissions of Landlord. ARTICLE XI CASUALTY DAMAGES 11.01 Destruction or Condemnation of Demised Property. If the Demised Property is totally destroyed or totally condemned or otherwise taken by governmental authority exercising its power of eminent domain, or if the Demised Property is partially destroyed, condemned or taken, in a manner that prevents Tenant's use of the Demised Property in a normal manner, and if, in the case of partial destruction or taking, the damage is not reasonably repairable within thirty (30) days after the occurrence of the destruction or taking, as applicable, Tenant shall have the right to terminate this lease upon notice to Landlord. If Tenant does not elect to terminate this Lease, then Landlord shall utilize the insurance proceeds available to Landlord under the insurance policy or policies maintained by Tenant hereunder to repair the Demised Property, and the lease payments accruing during the period of damage and repair shall abate in proportion to the extent to which such damage renders the Demised Property unsuitable for Tenant's normal use. 11.02 Insurance Awards. Tenant hereby assigns to Landlord any award or payment on account of any damage or destruction with respect to the Demised Property. However, Tenant shall be entitled to that portion of the net award representing payment of its leasehold interest, trade fixtures, moving expenses, business interruption or loss of profits. 11.03 Notice. If there is any damage to or destruction of the Demised Property or if any proceedings or negotiations are instituted which do or may result in a taking, each party will promptly give notice thereof to the other, describing its nature and extent. 7 ARTICLE XII UTILITIES 12.01 Payment and Indemnification. Tenant shall pay or cause to be paid all charges for air conditioning, heat, water, gas, electricity, light, telephone or any other communication or utility service used in or rendered or supplied to the Demised Property during the Lease Term and any subsequent extensions or holding over under this lease. ARTICLE XIII ACCESS TO LANDLORD 13.01 Access to Landlord. Landlord and its representatives may enter the Demised Property at any reasonable time and upon reasonable advance notice to Tenant, for the purpose of inspecting the Demised Property, performing any work which Landlord elects to undertake made necessary by reason of Tenant's default hereunder, exhibiting the Demised Property for sale or lease, or posting notices of non-responsibility under any mechanic's lien law or other law. As permitted under law, in the case of an emergency Landlord may enter the Demised Property without Tenant's consent. ARTICLE XIV ASSIGNMENT AND SUBLETTING 14.01 Assignment and Sublease. Tenant may not mortgage, pledge or otherwise encumber its interest in this lease. Tenant may not assign or sublet the Demised Property without the prior written consent of Landlord, which shall not be unreasonably withheld; provided, however, that Tenant may assign or sublease this lease or the Demised Property to an affiliate of Tenant without the consent of Landlord; provided further, however, that in the event of such an assignment to an affiliate of the Tenant, the Tenant shall nevertheless remain liable under the terms of this lease. 14.02 Tenant's Obligations. Any sublease or assignment permitted by Landlord shall be expressly subject to the provisions of this lease and shall not affect or reduce Tenant's obligations hereunder, which continue in full effect as the obligations of a principal and not as a guarantor or surety, to the same extent as though no assignment or sublease had been made. 8 ARTICLE XV EVENTS OF DEFAULT AND REMEDIES 15.01 Default. Any of the following occurrences, conditions or acts shall constitute an event of default under this lease: (a) If Tenant defaults in making payment when due of any Rent and such default continues for twenty (20) days following the due date. (b) If Tenant defaults in the observance or performance of any other provision of this lease and the default continues for thirty (30) days after Landlord gives written notice to Tenant specifying the default and demanding that it be cured. (c) If the Demised Property is abandoned by Tenant. (d) If Tenant files a petition in bankruptcy, for reorganization or for an arrangement under the bankruptcy law or any similar federal or state law, is adjudicated bankrupt or becomes insolvent, is unable to meet Tenant's obligations as they become due, or takes any action in furtherance of any of the foregoing. (e) If a receiver, trustee or liquidator (or other similar official) is appointed for Tenant or of all or substantially all of their business or assets, or of the estate or interest of Tenant in the Demised Property, or if Tenant consents to or acquiesce in such appointment. (f) If Tenant's estate or interest in the Demised Property is levied upon or attached in any proceeding and the process is not vacated or discharged within thirty (30) days after such levy or attachment. 15.02 Remedies. Upon the occurrence of any event of default which is not cured under the time frame provided for in Section 15.01 above, the following shall occur: (a) The Rent shall immediately become due and be paid up to the time of reentry, expiration and/or dispossession. (b) Landlord may relet the Demised Property or any part or parts of it, either in Landlord's name or otherwise, for a term or terms which may, at Landlord's option, be less than or exceed the then remaining term of this lease. 9 (c) Tenant shall also pay to Landlord, as liquidated damages for Tenant's failure to observe and perform their covenants under this lease, any deficiency between the Rent hereby reserved and agreed to be paid and the net amount, if any, of the rents collected on account of the Demised Property lease or leases for each month of the period which would otherwise have constituted the balance of the term of this lease. In computing the liquidated damages, there shall be added to the deficiency all reasonable expenses that Landlord may incur in connection with re-letting, such as brokerage and preparation for reletting. Landlord may make all alterations, repairs, replacements and decorations in the Demised Property that it, in its sole judgment, considers advisable and necessary for the purpose of reletting the premises. Such action by Landlord shall not operate or be construed to release Tenant from its liability under this lease. Landlord shall use its best efforts to mitigate all damages and to relet the Demised Property if there is any event of default by Tenant. 15.03 Waiver of Default. The waiver by Landlord of any breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of the same or any other term, covenant or condition herein contained. No covenant, term or condition of this lease shall be deemed to have been waived by Landlord unless such waiver be in writing by Landlord. 15.04 Cure of Default. Tenant shall have the periods of time provided for in this Lease Agreement to cure any default, as well as any other periods of time to cure which are subsequently granted by Landlord in writing. No other rights to cure defaults shall be granted or implied. ARTICLE XVI SURRENDER AND REENTRY 16.01 Surrender. Upon the expiration or earlier termination of this lease, Tenant shall surrender the Demised Property to Landlord in good order and condition, except for ordinary wear and tear and the results of any damage, destruction or taking. Tenant shall remove from the Demised Property on or prior to the expiration or earlier termination all of its moveable property and removable trade fixtures situated thereon and shall repair any damage caused by such removal. Property not so removed shall become the property of Landlord. 16.02 Reentry. Should Tenant default in the terms and conditions of this lease and not cure such default within the periods granted herein or subsequently in writing, then Landlord, besides any other rights or remedies it may have, shall have the immediate right of reentry without the necessity of any further demand whatsoever, and may at its option, remove all persons and property from the Demised Property and declare this agreement terminated. 10 ARTICLE XVII OPTION AND RIGHT OF FIRST REFUSAL TO PURCHASE 17.01 Option During Base Lease Term. So long as Tenant is not in default hereunder, at any time during the Base Lease Term, Tenant shall have a one-time, exclusive option to purchase the Demised Property for a purchase price of $1,400,000. In the event that Tenant elects to exercise its purchase option under this paragraph, Tenant shall give written notice thereof to Landlord before the end of the Base Lease Term, and Landlord and Tenant shall cause the closing to occur as soon as practicable thereafter in accordance with the terms of Sections 17.04 through 17.09 of this lease, and such other terms and conditions as usual and customary in similar transactions. 17.02 Option During Extended Lease Term. So long as Tenant is not in default hereunder, Tenant shall have the exclusive option at any time during the Extended Lease Term to purchase the Demised Property for such sum as may be mutually agreed upon at that time by Landlord and Tenant, or, failing such agreed price, at the greater of $1,400,000 or eighty percent (80%) of the appraised fair market value of the Demised Property as determined by a qualified and experienced independent appraiser selected by the mutual agreement of Landlord and Tenant or, in the absence of such an agreement within 30 days of the request by the Tenant that an appraiser be appointed, by the American Arbitration Association. All appraisal fees hereunder shall be shared equally by Landlord and Tenant. In order to exercise the purchase option, Tenant must deliver written notice to Landlord of Tenant's intent to exercise such option prior to the expiration of the Extended Lease Term, and Landlord and Tenant shall cause the closing to occur as soon as practicable thereafter in accordance with the terms of Sections 17.04 through 17.09 of this lease, and such other terms and conditions as usual and customary in similar transactions. 17.03 Right of First Refusal During Lease Term. If Tenant does not exercise either of the purchase options described in Sections 17.01 and 17.02 above, then Tenant shall have the exclusive right of first refusal during the Lease Term to purchase the Demised Property. If Landlord proposes the sale of the Demised Property to a bona-fide third-party purchaser, then Landlord shall give written notice to Tenant of all of the terms of such proposed sale and a copy of any offer or proposal received by Landlord from the prospective third-party purchaser. Tenant shall be allowed thirty (30) days following receipt of the notice to elect in writing to exercise its right of first refusal, which shall thereafter be accomplished by Tenant and Landlord using their respective best efforts to close the sale under, in order of priority, (i) the provisions of Sections 17.04 through 17.09 of this lease, (ii) to the extent standard terms and conditions are not addressed therein, the terms and conditions contained in the third-party proposal or offer, (iii) to the extent standard terms and conditions are not addressed therein, terms and conditions that are usual and customary in similar transactions, or (iv) such other terms and conditions as otherwise agreed by Tenant and Landlord. 11 17.04 Title. If either the purchase option or the right of first refusal described above is exercised by Tenant, then within ten (10) days after the date of Tenant's notification thereof to Landlord, Landlord shall furnish an abstract of title to the Demised Property to Tenant extended to no more than thirty (30) days before the closing date, showing a marketable record title, according to the standards adopted by the Oklahoma Bar Association, where applicable, in Landlord. Tenant shall have ten (10) days to have the title examined and furnish title objections, in writing, to Landlord, and Landlord shall have not more than ten (10) days from receipt of written title objections to correct title objections, unless such time is further extended by agreement, by Tenant in writing, or Tenant waives said objections. 17.05 Conveyance. If either the purchase option or the right of first refusal described above is exercised by Tenant, then the conveyance of the real property shall be by general warranty deed properly executed and conveying the real property, free and clear from all encumbrances except easements of record, prior reservations of record for oil, gas and other mineral rights, and oil and gas leases of record. 17.06 Expenses. If either the purchase option or the right of first refusal described above is exercised by Tenant, then Landlord shall pay all general taxes and special assessments during the year of closing. Landlord shall pay the costs of extending the abstract to within thirty (30) days of the closing date, the documentary stamps, the filing fees for recording any releases of mortgages given by Landlord, and other costs and expenses required to correct title objections under Section 17.04, and its attorney's fees. Tenant shall pay any and all fees in connection with its mortgage loan, abstract examination fees, recording fees, and its attorney's fees. 17.07 Closing. If either the purchase option or the right of first refusal described above is exercised by Tenant, the transaction shall be closed at a time and place mutually agreeable to both parties, no more than sixty (60) days after said notification is received by Landlord of Tenant's intention to exercise the purchase option or the right of first refusal, as the case may be, unless such closing is extended by agreement in writing between Landlord and Tenant. 17.08 Risk of Loss. If either the purchase option or the right of first refusal described above is exercised by Tenant, then the risk of casualty loss to the Demised Property prior to closing shall be borne by Landlord, subject to the other provisions of this agreement concerning Tenant's responsibility for any such casualty loss. 17.09 Default. If either the purchase option or the right of first refusal described above is exercised by Tenant, then upon default by either party the other party may exercise any and all rights afforded to such party under the laws of the State of Oklahoma. If it is necessary in that event for either party to retain legal counsel to enforce the terms and provisions of this agreement, the non-prevailing party shall pay the prevailing party's reasonable attorney's fees and expenses. 12 17.10 Purchase Price Adjustment for Discount Rent. In the event that Tenant purchases the Demised Property under its purchase options set forth in this Article XVII within the first 36 months of the Lease Term, the purchase price shall be increased by the amount determined by subtracting the actual total rent paid by Tenant during the Lease Term through the date of purchase from the product of ($18,000 times the number of months elapsed in the Lease Term through the date of purchase). ARTICLE XVIII MISCELLANEOUS 18.01 Relationship of Landlord/Tenant. Nothing herein shall be deemed or construed by the parties hereto nor by any third party as creating the relationship of principal and agent, or of a partnership or a joint venture, between the parties hereto, it being understood and agreed that neither the method of computation of rent nor any provisions contained herein, nor any acts of the parties hereto, shall be deemed to create any relationship other than that of landlord and tenant. 18.02 Amendments. This lease may not be orally amended, modified or terminated, nor may any obligation hereunder be waived orally. No amendment, modification, termination or waiver shall be effective for any purpose unless it is in writing and signed by the party against whom enforcement thereof is sought. 18.03 Notices. All notices, demands, requests, consents, approvals, offers, statements and other instruments or communications required or permitted to be given hereunder shall be in writing and be deemed to have been given when delivered or when mailed by first-class certified mail, return receipt requested, as follows: (a) If to Landlord, to Oklahoma Facilities, LLC, 1105 South 14th Street, Duncan, OK 73533. (b) If to Tenant, to Neal's Technology, Inc., P.O. Box 1006, Duncan, OK 73534-1006. 18.04 Counterparts. This lease may be simultaneously executed in two (2) or more counterparts, each of which shall be deemed a fully enforceable original but all of which together shall constitute but one and the same instrument. This lease may be executed and delivered by facsimile. 13 18.05 Headings. The Article and Section headings herein are for convenience and reference only and shall not be used to limit or otherwise affect the meaning of any provision hereof. 18.06 Broker's Commissions. Neither Landlord nor Tenant has retained the services of any realtors or other agents concerning this lease and option to purchase, nor shall either of them be responsible for any expenses or commissions of any such realtors or agents engaged by the other party with respect to this lease or to the subsequent exercise of the purchase option by Tenant. 18.07 Attorney's Fees. If it is subsequently necessary for either party to retain legal counsel to enforce the terms and provisions of this agreement, the losing party shall pay the prevailing party's reasonable attorney's fees and expenses. 18.08 Advice of Counsel. Both parties have been represented by counsel, or by signing this agreement waive such right, with respect to the negotiation and review of this agreement. No coercion, duress, undue influence or improper conduct of any kind has been practiced by either party hereto. The decision of each party to enter into this agreement has been a free and voluntary decision made after full opportunity to consult with counsel and other representatives as deemed appropriate by each party. 18.09 Governing Law. This agreement has been executed in and shall be construed in accordance with the laws of the State of Oklahoma. 18.10 Severability. If any provision of this agreement shall be held invalid by any court of competent jurisdiction, that provision shall be severed herefrom and the remaining provisions hereof shall remain in full force and effect. 18.11 Entire Agreement. Other than a Bill of Sale, Assignment and Assumption Agreement of even date herewith, this agreement shall constitute the entire agreement between Landlord and Tenant with respect to the subject matter hereof. No representations, warranties, promises or agreements, either oral or written, have been made by either party other than those incorporated in this agreement. This agreement shall not be modified except in writing signed by all of the parties hereto. 18.12 Binding Effect. This agreement shall be binding upon the parties hereto, their successors and assigns, when, as and if executed by both parties hereto. 14 18.13 Consent to Duncan Sublease. Landlord hereby consents to the sublease by Tenant to Duncan Equipment Co. of the approximate square footage occupied by Duncan Equipment Co. in the Demised Property on the date hereof. IN WITNESS WHEREOF, the parties have executed this Lease Agreement With Option to Purchase effective as of the date first written above. OKLAHOMA FACILITIES, LIMITED LIABILITY COMPANY, an Oklahoma limited liability company By: /s/ Glenn S. Penny ----------------------- GLENN S. PENNY, Manager LANDLORD NEAL'S TECHNOLOGY, INC., an Oklahoma corporation By: /s/ Jerry D. Dumas, Sr. --------------------------- JERRY D. DUMAS, SR. Chief Executive Officer TENANT 15 EXHIBIT "A" TO LEASE AGREEMENT WITH OPTION TO PURCHASE BY AND BETWEEN OKLAHOMA FACILITIES, LIMITED LIABILITY COMPANY, LANDLORD, AND NEAL'S TECHNOLOGY, INC., TENANT SURFACE AND SURFACE RIGHTS ONLY in and to: A tract of land beginning at the NW/Corner of the SW/4 SW/4 of Section 17, Township 1 South, Range 7 West, I.M., Stephens County, Oklahoma: thence East a distance of 660 feet to a point; thence South a distance of 1,320 feet to a point on the South line of said Section 17; thence West a distance of 190 feet to a point; thence North a distance of 810 feet to a point; thence West a distance of 470 feet to a point on the West line of said Section 17; thence North a distance 510 feet to the point of beginning (formerly described as Blocks 1, 2, 4, 5, 6 and 7 of Airport Heights Addition to the City of Duncan, Stephens County, Oklahoma, and all streets, alley, easements and ways abutting and running through said property). 16 EX-10 4 pennycontract.txt GLENN PENNY EMPLOYMENT CONTRACT, 10.2 EMPLOYMENT CONTRACT THIS AGREEMENT made and entered into this 1st day of July, 2000, by and between Chemical & Equipment Specialties, Inc., an Oklahoma corporation, hereinafter referred to as "CORPORATION", and Glenn Penny, hereinafter referred to as "EMPLOYEE". W I T N E S S E T H: WHEREAS, CORPORATION desires to employ EMPLOYEE upon the terms and conditions hereinafter set forth, and EMPLOYEE desires to accept such employment. NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto agree as follows: 1. EMPLOYMENT. CORPORATION hereby employs EMPLOYEE and EMPLOYEE hereby accepts employment by CORPORATION, upon all of the terms and conditions as are hereinafter set forth. 2. DUTIES. CORPORATION hereby employs EMPLOYEE as President, his duties and powers in that capacity to be determined by the board of directors of CORPORATION. EMPLOYEE shall further perform such other duties as may be assigned to him from time to time by the board of directors of CORPORATION. During the term of this agreement, EMPLOYEE shall also serve without additional compensation in such other offices of the CORPORATION to which he may be elected or appointed by the board of directors of CORPORATION. 3. TERM. Unless hereafter extended by mutual agreement of the parties, the term of employment under this agreement shall be for a period of three (3) years commencing July 1, 2000, and terminating June 30, 2003, subject, however, to an earlier termination during said period as provided hereinafter. The contract is extendable for one year on the expiration date and each anniversary thereafter. 4. COMPENSATION. CORPORATION shall pay EMPLOYEE for all services rendered a salary of One Hundred Thousand Dollars ($100,000.00) per year, payable in equal bi-weekly installments. Salary payments shall be subject to withholding and other applicable taxes. 5. EXTENT OF SERVICES. EMPLOYEE shall devote his time and attention to the business of CORPORATION. During the term of this agreement, EMPLOYEE shall not engage in any other conflicting business activity, regardless of whether it is pursued for gain or profit, without the prior consent of CORPORATION. EMPLOYEE, however, may invest his assets in other companies, so long as they do not require the services of EMPLOYEE in the operation of their affairs. 6. WORKING FACILITIES. CORPORATION shall provide EMPLOYEE with such facilities and secretarial or technical help as may be suitable to his position and adequate for the performance of his duties. 7. DISCLOSURE OF INFORMATION. EMPLOYEE acknowledges that certain information of CORPORATION, e.g. customer lists, drawings, designs, bid documents, formulations and computer programs ("Confidential Information"), all as CORPORATION may determine from time to time, is valuable, special and confidential information of the business of CORPORATION. EMPLOYEE shall not, during and after the term of his employment, disclose all or any part of the Confidential Information to any person, firm, corporation, association, or other entity for any reason or purpose. In the event of the EMPLOYEE's breach or threatened breach of this paragraph, CORPORATION shall be entitled to a preliminary restraining order and an injunction restraining and enjoining the EMPLOYEE from disclosing all or any part of the Confidential Information and from rendering any services to any person, firm, corporation, association, or other entity to whom all or any part of such Confidential Information has been or is threatened to be disclosed. In addition to or in lieu of the above, CORPORATION may pursue all other remedies available to CORPORATION or for such breach or threatened breach, including the recovery of damages from the EMPLOYEE. 8. VACATION. EMPLOYEE shall be entitled to 4 weeks vacation (20 days), during which time his compensation shall be paid in full. 9. SICKNESS. EMPLOYEE shall be entitled to a number of working days of leave each year during the term of this agreement as defined in the employee policy manual because of the sickness, accident, and/or disability of EMPLOYEE or any member of his immediate family without any adjustment in salary. Unused sick leave during any year may not be accumulated and may not be used for additional vacation. 10. DISABILITY. If the EMPLOYEE is unable to perform his services by reason of illness or incapacity for a period of more than two consecutive weeks, the compensation thereafter payable to him during the continued period of such illness or incapacity shall be as outlined in the employee policy manual. 11. EXPENSES. During the term of this agreement, CORPORATION shall reimburse EMPLOYEE for the reasonable expenses incurred by EMPLOYEE for the benefit of CORPORATION, all in accordance with the general policy or policies of CORPORATION as adopted by the board of directors of CORPORATION from time to time. CORPORATION shall reimburse the EMPLOYEE for all such expenses upon the periodic presentation by EMPLOYEE of an itemized account of such expenditures. 12. AUTHORITY TO BIND CORPORATION. EMPLOYEE shall have authority to enter into any contracts binding upon CORPORATION, and to create any obligations on the part of CORPORATION, as shall be specifically authorized by the board of directors of CORPORATION. 13. TERMINATION WITHOUT CAUSE.CORPORATION may, without cause, terminate this agreement at any time by giving sixty (60) days' written notice to the EMPLOYEE. In that event, EMPLOYEE, if requested by CORPORATION, shall continue to render his services, and shall be paid his regular compensation up to the date of termination. In addition, EMPLOYEE shall be paid on the date of termination a severance allowance equal to the pay for the remaining time of the contract (less all amounts required to be withheld and deducted). EMPLOYEE may, without cause, terminate this agreement by giving sixty (60) days' written notice to CORPORATION. In such event, EMPLOYEE shall continue to render his services and shall be paid his regular compensation up to the date of termination, but he shall not receive any severance allowance. 14. TERMINATION UPON SALE OF BUSINESS. Notwithstanding anything herein to the contrary, CORPORATION may terminate this agreement by giving sixty (60) days notice to the EMPLOYEE if any of the following events occur: (a) CORPORATION sells substantially all of its assets to a single purchaser or to a group of associated purchasers; (b) At least two-thirds of the outstanding corporate shares of CORPORATION are sold, exchanged, or otherwise disposed of, in one transaction; (c) CORPORATION elects to terminate its business or liquidate its assets; or (d) There is a merger or consolidation of the CORPORATION in a transaction in which the CORPORATION's shareholders receive less than fifty percent (50%) of the outstanding voting shares of the new or continuing corporation. In such event, EMPLOYEE shall continue to render his services and shall be paid his regular compensation up to the date of termination, and shall receive severance allowance equal to the remaining pay in the contract (less all amounts required to be withheld and deducted). 15. RESTRICTIVE COVENANT. For a period of two (2) years after the termination or expiration of this agreement, EMPLOYEE shall not, within the State of Oklahoma, directly or indirectly, own, manage, operate, control, be employed by, participate in or be connected in any manner with the ownership, management, operation, or control of any business similar to the type of business conducted by the CORPORATION at the time this agreement terminates. In the event of the actual or threatened breach by EMPLOYEE of this paragraph, CORPORATION shall be entitled to a preliminary restraining order and injunction restraining the EMPLOYEE from violating its provisions. Nothing in this agreement shall be construed to prohibit the CORPORATION from pursuing any other available remedies for such breach or threatened breach, including the recovery of damages from the EMPLOYEE. 16. NOTICES. Any notice required or desired to be given under this agreement shall be deemed given if delivered in person or in writing and sent by certified mail, return receipt requested, to the residence of EMPLOYEE or to the principal office of CORPORATION, as the case may be. 17. WAIVER OF BREACH. The waiver by CORPORATION of a breach of any provision of this agreement by the EMPLOYEE shall not operate or be construed as a waiver of any subsequent breach by the EMPLOYEE. No waiver shall be valid unless in writing and signed by an authorized officer of the CORPORATION. 18. ASSIGNMENT. EMPLOYEE acknowledges that his services are unique and personal. Accordingly, EMPLOYEE may not assign his rights or delegate his duties or obligations under this agreement. The rights and obligations of CORPORATION under this agreement shall enure to the benefit of, and shall be binding upon, the successors and assigns of CORPORATION. 19. ENTIRE AGREEMENT. This agreement contains the entire understanding of the parties and may not be changed orally but only by an agreement in writing signed by the parties against whom enforcement of any waiver, change, modification, extension, or discharge is sought. 20. GOVERNING LAW. This agreement shall be governed by the laws of the State of Oklahoma. 21. HEADINGS. Headings in this agreement are for convenience only and shall not be used to interpret or construe its provisions. 22. COSTS. In the event either party hereto is forced to resort to arbitration or use of a court of competent jurisdiction in the resolution of any controversy arising out of this Employment Contract, or in the enforcement of any rights granted herein, then the successful party shall, in addition to any litigation costs incurred, be entitled to the payment of its attorney's fees by the unsuccessful party. 23. COUNTERPARTS. This agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall be construed one and the same instrument. 24. EFFECTIVE DATE. This agreement shall, regardless of the date of execution, be deemed effective as of the 1st day of July, 2000, in all respects. 18 IN WITNESS WHEREOF, the parties hereunto have executed this agreement as of the day and year first above set forth. CHEMICAL & EQUIPMENT SPECIALTIES, INC. By:/s/Tom Morton ------------------ Tom Morton, CFO "CORPORATION" /s/ Glenn Penny ------------------ Glenn Penny "EMPLOYEE" -----END PRIVACY-ENHANCED MESSAGE-----