-----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, NaOsiG+Jwsa2WpCv6g3PDpVG0vPCw/3C1qS06Tt8YO/p8fKvGhQQ2K3wsxo6ibFZ x4udpvyXJakebcWv4qeYHw== 0000950129-98-000126.txt : 19980115 0000950129-98-000126.hdr.sgml : 19980115 ACCESSION NUMBER: 0000950129-98-000126 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19971130 FILED AS OF DATE: 19980114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLOTEK INDUSTRIES INC/CN/ CENTRAL INDEX KEY: 0000928054 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-INDUSTRIAL MACHINERY & EQUIPMENT [5084] IRS NUMBER: 120370187 FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13270 FILM NUMBER: 98506219 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 10-Q 1 FLOTEK INDUSTRIES, INC - DATED 11/30/97 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10 - Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1997 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-13270 FLOTEK INDUSTRIES INC. (Exact name of registrant as specified in its charter) ALBERTA 77-0709256 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 7030 EMPIRE CENTRAL DRIVE, HOUSTON, TEXAS 77040 (Address of principal executive offices) (zip code) REGISTRANTS 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 ( ) As of November 30, 1997 the number of shares of common stock outstanding was 43,180,795 (Exhibit Index located on page 13) 2 Part I - Financial Information FLOTEK INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Expressed in Canadian Dollars (unaudited)
November 30, February 28, 1997 1997 ------------ ------------ ASSETS CURRENT ASSETS Cash $ 1,511,827 $ 124,978 Accounts receivable 809,943 1,106,869 Inventory 2,108,622 1,814,291 ------------ ------------ 4,430,392 3,046,138 CAPITAL ASSETS 334,627 416,088 OTHER ASSETS 209,520 205,518 ------------ ------------ $ 4,974,539 $ 3,667,744 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Note payable 1,151,463 335,000 Current portion of long-term debt 124,512 196,250 Accounts payable and accrued liabilities 561,633 949,916 Due to related party -- 274,000 ------------ ------------ 1,837,608 1,755,166 LONG-TERM DEBT 34,805 83,517 SHAREHOLDERS' EQUITY (DEFICIT) Share capital 23,912,352 21,474,894 Accumulated deficit (20,810,226) (19,645,833) ------------ ------------ 3,102,126 1,829,061 ------------ ------------ $ 4,974,539 $ 3,667,744 ============ ============
The accompanying notes are an integral part of these financial statements and should be read in conjunction herewith. 2 3 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICITS Expressed in Canadian Dollars (unaudited)
Three Months Nine Months Ended November 30, Ended November 30, ------------------ ------------------ 1997 1996 1997 1996 ------------ ------------ ------------ ------------ REVENUE $ 1,185,728 $ 1,209,079 $ 3,557,419 $ 3,247,339 COSTS AND EXPENSES Cost of Sales 653,916 698,847 1,955,133 1,792,197 Selling 490,329 592,410 1,553,846 2,082,381 General and Administrative 399,061 353,542 1,038,777 1,519,563 Research and development -- 37,158 4,293 69,186 Depreciation and Amortization 30,975 44,532 96,618 146,450 ------------ ------------ ------------ ------------ 1,574,281 1,726,489 4,648,667 5,609,777 OPERATING LOSS (388,553) (517,410) (1,091,248) (2,362,438) OTHER INCOME (EXPENSE) Interest Expense (39,544) (137,835) (86,619) (386,998) Other, Net 13,046 12,802 13,474 63,716 ------------ ------------ ------------ ------------ (26,498) (125,033) (73,145) (323,282) LOSS BEFORE UNUSUAL ITEMS (415,051) (642,443) (1,164,393) (2,685,720) ------------ ------------ ------------ ------------ UNUSUAL ITEMS -- -- -- (424,932) ------------ ------------ ------------ ------------ NET LOSS (415,051) (642,443) (1,164,393) (3,110,652) ============ ============ ============ ============ ACCUMULATED DEFICIT, BEGINNING OF PERIOD (20,395,175) (18,085,077) (19,645,833) (15,616,868) ACCUMULATED DEFICIT, END OF PERIOD (20,810,226) (18,727,520) (20,810,226) (18,727,520) ============ ============ ============ ============ NET LOSS PER COMMON SHARE (0.01) (0.04) (0.04) (0.19) ============ ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 31,565,130 17,298,441 27,684,908 16,476,108 ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements and should be read in conjunction herewith. 3 4 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Expressed in Canadian Dollars (unaudited)
Nine Months Ended November 30, ------------------ 1997 1996 ----------- ----------- Cash flow from operating activities: Net Loss $(1,164,393) $(3,110,652) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization 96,618 146,450 Unusual items -- 424,932 Change in accounts receivable 296,926 104,455 Change in inventory (294,331) (311,640) Change in accounts payable 42,675 314,478 ----------- ----------- Net cash used in operating activities (1,022,505) (2,431,977) Cash flows from investing activities: Purchase of capital assets, net (8,970) (37,603) Purchase of other assets (10,189) (10,826) ----------- ----------- Net cash (used in) provided by investing activities (19,159) (48,429) Cash flows from financing activities: Issue of share capital, net of costs 1,732,500 1,765,230 Proceeds from notes payable 1,151,463 263,030 Payment of notes payable (335,000) -- Repayment of long-term debt (120,450) (98,415) ----------- ----------- Net cash provided by financing activities 2,428,513 1,929,845 ----------- Increase (decrease) in cash 1,386,849 (550,561) Cash and cash equivalents, beginning of year 124,978 751,710 ----------- ----------- Cash and cash equivalents, end of period $ 1,511,827 $ 201,149 =========== =========== Supplementary disclosure of cash flow information: Interest paid $ 91,843 $ 28,780 Income taxes paid -- --
The accompanying notes are an integral part of these financial statements and should be read in conjunction herewith. 4 5 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Expressed in Canadian Dollars (unaudited) Note 1 - General The unaudited consolidated condensed financial statements included herein have been prepared by Flotek Industries Inc. (the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission. These financial statements reflect all adjustments which are, in the opinion of management, necessary for the fair presentation of such financial statements for the interim periods presented. Although the Company believes that the disclosures in these financial statements are adequate to make the interim information presented not misleading, 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-Q pursuant to such rules and regulations. The results of operations for the nine months ended November 30, 1997 are not necessarily indicative of the results to be expected for the full year. Note 2 - Reclassifications Certain of the 1996 amounts have been reclassified to conform to the 1997 presentation. Note 3 - Other Assets Included in Other Assets are patents which are amortized over the life of the patent. Petrovalve received a United States patent on the design of its Petrovalve Plus valve on June 2, 1992 and on the Petrovalve Gas Breaker valve on October 5, 1993. In addition, filings were made in the United States to protect improvements to the core technology. Original filings were also made in Canada, Venezuela, and Mexico. Note 4 - Notes Payable On November 4, 1997, the Company closed a private placement of a $1,039,500 convertible loan with 7,000,000 detachable warrants. The loan matures on October 16, 1998 and can be converted into common shares of the Company at $0.15 per share at any time prior to maturity, at the option of the payee. The loan accrues interest at the rate of 10% per annum, and is secured by a senior lien, on certain assets of Flotek and its subsidiaries. Each detachable warrant entitles the holder to purchase one common share at $0.15. 5 6 Item 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MD&A 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," "forecasts," "could" and similar expressions are intended to identify forward looking statements. All statements other than statements of historical facts included in this Form 10-Q 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, no assurance can be given that actual results may not differ materially from those in the forward-looking statements herein for 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, drilling activity, weather, the legislative environment in the United States and other countries, and the condition of the capital and equity markets. Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's Consolidated Financial Statements and the related notes thereto. All references to amounts are expressed in Canadian dollars unless otherwise indicated. Business Environment Flotek Industries Inc. consists of two divisions that provide products and services used in the drilling and production of oil and gas wells. The business environment for oilfield operations and its corresponding operating results are affected significantly by petroleum industry exploration and production expenditures. These expenditures are influenced strongly by oil company expectations about energy prices and the supply and demand for crude oil and natural gas. Petroleum supply and demand, and pricing, in turn, are influenced by numerous factors including, but not limited to 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, drilling activity, weather, the legislative environment in the United States and other countries, and the condition of the capital and equity markets. While the Company anticipates continued growth in the worldwide demand for hydrocarbons will result in increased spending by oil and gas companies for the development of the hydrocarbon supply; crude oil and natural gas prices have continued to fluctuate over the last several years. This price volatility creates some market uncertainties despite the overall improvement in oil and gas fundamentals. Historically, crude oil prices, natural gas prices and the number of rotary rigs in operation have been a significant factor in determining the amount of 6 7 worldwide exploration and production expenditures. The Company, however, has seen this historical operating environment change slightly over the past few years. While these indicators are still very important, the Company believes a number of new trends are emerging which could positively affect the market for the Company's products. One of those trends is the expanded use of technology aimed at reducing the finding costs of oil and gas and the use of technology to extract that oil and gas from the well. Because of these and other industry trends, even with a limited decrease in both rig count and the price of oil and gas, the Company anticipates an increase in the acceptance of and use of its technologies. The Company's ability to benefit from the increased acceptance of its technologies will depend upon the industry risk factors stated above as well as its ability to maintain adequate working capital. RESULTS OF OPERATIONS Revenue by Operating Division:
Three Months Nine Months Ended November 30, Ended November 30, ------------------ ------------------ 1997 1996 1997 1996 ------------ ------------ ------------ ------------ REVENUES Centralizer $ 1,015,730 $ 898,332 $ 3,019,270 $ 2,513,144 Artificial Lift 169,998 310,747 538,149 734,195 ------------ ------------ ------------ ------------ Consolidated Revenues 1,185,728 1,209,079 3,557,419 3,247,339 ============ ============ ============ ============
Consolidated revenues were down 2% and up 10% for the three months and nine months ended November 1997, respectively, as compared to the same periods in 1996. Revenues from the Centralizer division were up 13% for the quarter and 20% for the nine months as compared to the same periods in 1996. The deployment of new technology aimed at reducing the cost to drill and complete a well, coupled with increased drilling activity around the world contributed to this revenue gain. Revenues from the Artificial Lift division were down 45% for the quarter and 27% for the nine months as compared to the same periods in 1996. The Company's lack of sufficient working capital for inventory requirements and a reduction in the salesforce in this division contributed to this decrease. Operating Loss The Company's consolidated operating loss was down 25% and 54% for the three months and nine months ended November 1997, respectively, as compared to the same periods in 1996. The reduction in overall selling, general and administrative expenses contributed to this reduction. Costs and Expenses Gross margins were 45% for the quarter and the nine months ended November 30, 1997. Selling expenses, which consist primarily of the salaries, wages, and benefits of the Company's salesmen, rent, insurance, and other direct selling costs, were down 17% and 25% for the three months and nine months ended November 1997, respectively, as compared to the same periods in 1996. The consolidation of the Company's operating units contributed to this reduction. 7 8 General corporate expenses were up 13% and down 31% for the three months and nine months ended November 1997, respectively, as compared to the same periods in 1996. The increase in the quarter was the result of a one time charge of approximately $66,000 to write-down a note receivable that management deemed as uncollectable. The decrease for the nine-months was attributed to the Company ongoing reduction of corporate overhead expenses. The administrative expense reduction efforts have been on-going and are designed to reduce redundant costs and to improve the Company's ability to deliver higher levels of operational efficiency. Interest Expenses Interest expenses for the three and nine months ended November 30, 1997 decreased compared to the same periods in 1996 due to the conversion of a $4,574,000 loan to equity and an overall reduction in the Company's debt levels. CAPITAL RESOURCES AND LIQUIDITY The Company has financed its growth to date from stock offerings, subordinated borrowings, and internally generated funds. The principal uses of its cash have been to fund the working capital needs of the Company. Operating Activities Net cash outflows from operating activities for the first nine months of 1997 were $1,022,505 compared to cash outflows of $2,431,977 in the first nine months of 1996. The decrease of $1,409,472 in 1997 was due to a decrease in net loss adjusted for noncash items. Investing Activities Net cash outflows from investing activities were $19,159 in the first nine months of 1997 compared to cash outflows of $48,429 in the first nine months of 1996. Financing Activities Net cash inflows from financing activities were $2,428,513 in the first nine months of 1997 compared to cash inflows of $1,929,845 in the first nine months of 1996. The overall increase was due to the Company closing the following transactions during the quarter: On November 4, 1997, the Company closed a private placement of a $1,039,500 convertible loan with 7,000,000 detachable share purchase warrants. In addition, the Company closed a private placement of 11,666,667 units (one common share with a warrant attached) at $0.15 per unit. Each warrant will entitle the holder to purchase one common share at $0.15 for the first year and at $0.17 during the second year. Total proceeds from the private placement were $1,732,500. At November 30, 1997, the Company had working capital of $2,592,784 and cash of $1,511,827. 8 9 Part II - Other Information Item 2 - Changes in Securities On September 16, 1997 the Company issued common shares in connection with a short-term loan. The following number of common shares were issued:
Number of Shares Name Dated Issued Issued ---- ------------ ------ Stanberry September 16, 1997 10,000 James Mott-Smith September 16, 1997 2,500
On November 4, 1997, the Company closed a private placement of 11,666,667 units (one common share with a warrant attached) at $0.15 per unit. Each warrant entitles the holder to purchase one common share at $0.15 for the first year and at $0.17 during the second year. Of the 11,666,667 units privately placed, Charles Dickinson was issued 2,333,333 units (one common share with a warrant attached) for consideration of $350,000. An investment group, Marlin Investors LLC, was issued the additional 9,333,334 units. (one common share with a warrant attached) for consideration of $1,400,000. In connection with this private placement, three individuals were issued shares as a finders fee for consummating the transaction. The individuals and the number of shares issued to each of them are as follows:
Number of Shares Name Dated Issued Issued ---- ------------ ------ Tom Panos November 4, 1997 345,833 Adam Weiss November 4, 1997 233,333 James Mott-Smith November 4, 1997 112,500
On November 4, 1997, the Company closed a second private placement of a $1,039,500 convertible loan with 7,000,000 detachable warrants. The loan matures on October 16, 1998, and can be converted into common shares of the Company at $0.15 per share at any time prior to maturity, at the option of the payee. The loan accrues interest at the rate of 10% per annum, and is secured by a senior lien on certain assets of Flotek and its subsidiaries. Each detachable warrant entitles the holder to purchase one common share at $0.15. In connection with the above transaction, 350,000 common shares were issued to David Hunt on November 4, 1997 as a finders fee. Each of the above issuances of securities was exempt from registration under the Securities Act of 1933, pursuant to section 4 (2) thereof, as a transaction by the issuer not involving any public offering. 9 10 On November 21, 1997, the Company converted a portion of its trade and short-term debt into common shares of the Company. The Company issued 4,715,165 common shares to retire $722,589 in trade and short-term debt. Included in the common shares issued was 1,531,419 shares issued to a director, Wallace Robertson, to retire trade debt of $245,027, and 2,405,832 common shares to Camuri Holdings LTD, a security holder known to own more than five percent of the Company's outstanding common shares, to retire short-term debt and accrued interest of $360,875. Item 5 - Other Information The Company filed a registration statement on Form 20-F under Section 12 of the Securities and Exchange Act of 1934, as amended ("Exchange Act") on June 19, 1996. In doing so, the Company registered its common shares without par value as of September 15, 1995 and associated common share purchase rights. At the time of this original registration, the Company qualified as a "foreign private issuer." Under the general instructions to Form 20-F, foreign private issuers may use Form 20-F as an annual report filed under Section 13(a) or 15(d) of the Exchange Act. In addition, as a foreign private issuer, the Company was required to file current reports on Form 6-K pursuant to Rule 13a-16 of the Exchange Act. As a foreign private issuer, there was no requirement to file quarterly Form 10-Q's. On November 4, 1997, the Company closed a private placement, as described above. With the consummation of the above transaction, the Company ceased to qualify as a foreign private issuer, as more than 50% of its outstanding shares were held of record by residents of the United States. When the Company ceased to be a foreign private issuer, it was no longer eligible to utilize Form 20-F and 6-K or other Forms utilized under the integrated disclosure system for foreign private issuers. The Company must now comply with the reporting requirements required by the Exchange Act. 10 11 Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits 3.1 Articles of Incorporation 3.2 By-laws 4.1 Shareholders Protection Rights Plan 10.1 Distributorship Agreement--Downhole Products (UK), LTD 10.2 Wallace Robertson Inc. Consulting Agreement 10.3 Bill Jayroe Employment Agreement 10.4 Convertible Loan Agreement between the Company and TOSI, L.P. dated October 16,1997 10.5 Form of Warrant Agreement dated October 16, 1997--Marlin Investors, L.L.C. 10.6 Form of Warrant Agreement dated October 16, 1997--Charles A. Dickinson 10.7 License Agreement--Harlan King 10.8 Form of Subscription Agreement by and between the Company and certain shareholders, dated September 16, 1997--Marlin Investors, L.L.C. 10.9 Form of Subscription Agreement by and between the Company and Certain shareholders, dated September 16, 1997--Charles A. Dickinson 21.1 List of Operating Subsidiaries 27 Financial Data Schedule (b) Reports on Form 8-K - None 11 12 Signatures Pursuant to the requirement 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. (Registrant) Date: January 14, 1997 By: /s/ William Jayroe President and Chief Executive Officer Date: January 14, 1997 By: /s/ Scott Cook Chief Financial Officer 12 13 Exhibit Index 3.1 Articles of Incorporation 3.2 By-laws 4.1 Shareholders Protection Rights Plan 10.1 Distributorship Agreement--Downhole Products (UK), LTD 10.2 Wallace Robertson Inc. Consulting Agreement 10.3 Bill Jayroe Employment Agreement 10.4 Convertible Loan Agreement between the Company and TOSI, L.P. dated October 16,1997 10.5 Form of Warrant Agreement dated October 16, 1997--Marlin Investors, L.L.C. 10.6 Form of Warrant Agreement dated October 16, 1997--Charles A. Dickinson 10.7 License Agreement--Harlan King 10.8 Form of Subscription Agreement by and between the Company and certain shareholders, dated September 16, 1997--Marlin Investors, L.L.C. 10.9 Form of Subscription Agreement by and between the Company and Certain shareholders, dated September 16, 1997--Charles A. Dickinson 21.1 List of Operating Subsidiaries 27 Financial Data Schedule
EX-3.1 2 ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 CORPORATE ACCESS NUMBER 20666323 Alberta Registries BUSINESS CORPORATIONS ACT CERTIFICATE OF CONTINUANCE FLOTEK INDUSTRIES INC. CONTINUED FROM BRITISH COLUMBIA TO ALBERTA ON SEPTEMBER 7, 1995. SEAL ------------------------ Registrar of Corporations Municipal Affairs Government of Alberta FORM 11 2 BUSINESS CORPORATIONS ACT (SECTIONS 181,261 AND 262) ARTICLES OF CONTINUANCE CONSUMER AND CORPORATE AFFAIRS ALBERTA - -------------------------------------------------------------------------------- 1. NAME OF CORPORATION 2. CORPORATE ACCESS NUMBER Flotek Industries Inc. 20666323 - -------------------------------------------------------------------------------- 3. THE CLASSES AND ANY MAXIMUM NUMBER OF SHARES THAT THE CORPORATION IS AUTHORIZED TO ISSUE. The Corporation is authorized to issue an unlimited number of common shares and an unlimited number of first preferred shares issuable in series, all subject to the rights, privileges, restrictions and conditions set forth in Appendix A attached hereto. - -------------------------------------------------------------------------------- 4. RESTRICTIONS, IF ANY, ON SHARE TRANSFERS. None. - -------------------------------------------------------------------------------- 5. NUMBER (OR MINIMUM OR MAXIMUM NUMBER) OF DIRECTORS. A minimum of three and a maximum of twelve inclusive. - -------------------------------------------------------------------------------- 6. RESTRICTIONS IF ANY ON BUSINESS THE CORPORATION MAY CARRY ON. None. - -------------------------------------------------------------------------------- 7. IF CHANGE OF NAME EFFECTED, PREVIOUS NAME. N/A - -------------------------------------------------------------------------------- 8. DETAILS OF INCORPORATION. Incorporated pursuant to the Companies Act of British Columbia on May 17, 1985. - -------------------------------------------------------------------------------- 9. OTHER PROVISIONS, IF ANY. (1) The directors of the Corporation may appoint one or more additional directors who shall hold office for a term expiring not late than the close of the next annual general meeting of the Corporation. The total number of directors so appointed shall not exceed one-third of the number of the directors elected at the previous annual meeting of shareholders. (2) The annual general meeting and all special meetings of shareholders of the Corporation may be held anywhere in Alberta, Houston, Texas, New York, New York or San Francisco, California. - -------------------------------------------------------------------------------- 10. DATE: SIGNATURE TITLE September 5, 1995 /s/ Illegible Director 3 APPENDIX A COMMON SHARES The common shares as a class, shall carry and be subject to the following rights, privileges, restrictions and conditions: 1. the right to one vote per share held on a ballot at any meeting of the shareholders of the Corporation except meetings at which only holders of a specified class or series of a class of shares are entitled to vote; 2. the right to receive dividends as and when declared by the Corporation on the common shares as a class, subject to prior satisfaction of all preferential rights to dividends attached to all shares of other classes of shares of the Corporation ranking in priority to the common shares in respect of dividends; and 3. the right to receive the remaining property of the Corporation on dissolution, subject to prior satisfaction of all preferential rights to return to capital on dissolution attached to all shares of other classes of shares of the Corporation ranking in priority to the common shares in respect of return of capital on dissolution. FIRST PREFERRED SHARES The First Preferred Shares, as a class, shall carry and be subject to the following rights, privileges, restrictions and conditions: 1. Right to Issue in One or More Series The First Preferred Shares may at any time or from time to time be issued in one or more series, each series to consist of such number of shares as may before the issue thereof be determined by the directors who may determine, from time to time before the issue thereof, the designation, rights, privileges, restrictions and conditions attaching to the shares of each such series, the whole subject to the following provisions and to the issue of Articles of Amendment setting forth the designation, rights, privileges, restrictions and conditions attaching to the shares of each series. 2. Ranking of First Preferred Shares The First Preferred Shares of each series shall rank on a parity with the First Preferred Shares of every other series with respect to priority in payment of dividends and amounts payable on return of capital. When any dividends or amounts payable on return of capital are not paid in full, the First Preferred Shares of all series shall participate rateably in respect of such dividends which, in the case of cumulative dividends, shall cover all prior completed periods in respect of which such dividends are accrued and unpaid plus such further amounts, if any, in respect of dividends as may be specified in the provisions attaching to any particular series, and, in the case of non-cumulative dividends, shall cover all such dividends declared and unpaid, and on any return of capital in accordance with the sums that would be A-1 4 payable on such return of capital if all sums so payable were paid in full including premiums, if any, as have been provided for with respect to any series. The First Preferred Shares shall be entitled to preference over the common shares of the Corporation and over any other shares ranking junior to the First Preferred Shares with respect to priority in payment of dividends which, in the case of cumulative dividends, shall cover all prior completed periods in respect of which such dividends are accrued and unpaid plus such further amounts, if any, in respect of dividends as may be specified in the provisions attaching to any particular series and, in the case of non-cumulative dividends, shall cover all such dividends declared and unpaid, and with respect to distribution of assets, including premiums, if any, as have been provided for with respect to any series in the event of liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, or any other distribution of the assets of the Corporation among its shareholders for the purpose of winding up its affairs and may also be given such other preferences not inconsistent with paragraphs 1 to 6 hereof over the common shares of the Corporation and over any other shares ranking junior to the First Preferred Shares. After payment to the holders of the First Preferred Shares of the amounts payable to them, they shall not be entitled to share in any further distributions of the property or assets of the Corporation. The holders of any series of First Preferred Shares shall not be entitled to any further or other dividends than those expressly provided for in the rights, privileges, restrictions and conditions attached to the First Preferred Shares of such series. 3. Declaration of Dividends The directors may, at any time or from time to time, determine, with respect to any cash dividend declared payable on the First Preferred Shares as a class or any series thereof, that the holders of the shares of such class or series, or the holders of shares of such class or series whose addresses, on the records of the Corporation, are in Canada and/or in specified jurisdictions outside Canada, shall have the right to elect to receive such dividends in the form of a stock dividend payable in shares of the capital stock of the Corporation having a value, as determined by the directors, that is substantially equivalent, as of the date determined by the directors, to the cash amount of such dividend, except that shareholders shall receive cash in lieu of fractional interests in the shares to which they would otherwise be entitled unless the directors shall otherwise determine. 4. Voting Rights Except as required by law or as hereinafter specifically provided or as provided with respect to any series of First Preferred Shares then outstanding, the holders of the First Preferred Shares shall not be entitled as such to receive notice of or to attend any meeting of the shareholders of the Corporation or to vote at any such meeting. A-2 5 5. Amendment with Approval of Holders First Preferred Shares The rights, privileges, restrictions and conditions attaching to the First Preferred Shares as a class may be added to, changed or removed at any time or from time to time with such approvals as may be required by law and with the approval of the holders of the First Preferred Shares as a class, such approval to be given in the manner provided in paragraph 6 hereof. 6. Approval of Holders of First Preferred Shares Any consent or approval given by the holders of First Preferred Shares as a class shall be deemed to have been sufficiently given if passed at a meeting of holders of First Preferred Shares duly called and held upon not less than twenty-one days notice at which the holders of outstanding First Preferred Shares to which are attached forty per cent of the votes attached to all outstanding First Preferred Shares are present (the "quorum") or are represented by proxy and carried by the affirmative vote of not less than two-thirds of the votes cast at such meeting. If at any such meeting a quorum is not present or represented by proxy within one-half hour after the time appointed for such meeting then the meeting (if called by the Corporation) shall be adjourned to such date not less than twenty-one days thereafter and to such time and place as may be designated by the chairman, and not less than ten days' written notice shall be given of such adjourned meeting. At such adjourned meeting the holders of the First Preferred Shares present or represented by proxy may transact the business for which the meeting was originally convened and a resolution passed thereat by affirmative vote of not less than two-thirds of the votes cast at such meeting shall constitute the consent or approval of the holders of First Preferred Shares. On every ballot taken at every such meeting every holder of First Preferred Shares shall be entitled to one vote in respect of each one dollar aggregate stated issue price of First Preferred Shares held by such holder. Subject to the foregoing, the formalities to be observed in respect of the giving or waiving of notice of any such meeting and the conduct thereof shall be those from time to time prescribed in the by-laws of the Corporation with respect to meetings of shareholders. If the variation of the rights, privileges, restrictions and conditions hereinbefore contained affects the rights of the holders of First Preferred Shares of any series in a manner different from other holders of First Preferred Shares, then such variation shall, in addition to being approved by the holders of the First Preferred Shares as a class, be approved by the holders of the First Preferred Shares of such series so affected, which approval shall be given by resolution passed by not less than two-thirds of the votes cast at the meeting of the holders of First Preferred Shares of such series, and the provisions of this paragraph 6 shall apply, mutatis mutandis, with respect to the holding of such meeting and in particular in respect of the quorum required. A-3 EX-3.2 3 BY-LAWS 1 EXHIBIT 3.2 FLOTEK INDUSTRIES INC. BY-LAW NO. 1 A by-law relating generally to the transaction of the business and the conduct of the affairs of Flotek Industries Inc. SECTION 1 INTERPRETATION 1.1 DEFINITIONS. In this By-law No. 1, unless the context otherwise requires: "ACT" means the Business Corporations Act (Alberta), or any statute that may be substituted therefor, as from time to time amended; "ARTICLES" means the articles of continuance on which is endorsed the certificate of continuance of the Corporation, pursuant to the provisions of the Act, as from time to time amended or restated; "BOARD" means the board of directors of the Corporation; "BY-LAW No. 1" means this by-law no. 1 of the Corporation as from time to time amended or restated and in force and effect; "CHEQUE" includes a draft; "CORPORATION" means the corporation continued under the Act by the certificate of continuance endorsed on the Articles and named Flotek Industries Inc.; "DIRECTOR" means a member of the Board; "MEETING of Shareholders" includes an annual meeting of Shareholders and a Special Meeting of Shareholders; "SECTION" means a section of this by-law no. 1 of the Corporation; "SHAREHOLDERS" means the shareholders of the Corporation; "SPECIAL MEETING OF SHAREHOLDERS" includes a meeting of any class or classes of Shareholders and a special meeting of all Shareholders entitled to vote at an annual meeting of Shareholders' and "RECORDED ADDRESS" has the meaning set forth in Section 11.8; 1 2 Save as aforesaid, words and expressions defined in the Act, including "resident Canadian" and "unanimous shareholder agreement", have the same meanings when used herein. Subject to the Act, the words "appoint" and "appointment" include "elect" and "election", respectively, and vice versa. 1.2 INTERPRETATION. Words importing the singular number include the plural and vice versa; words importing gender include the masculine, feminine and neuter genders; and words importing a person include an individual, sole proprietorship, partnership, unincorporated association, unincorporated syndicate, unincorporated organization, trust, body corporate, and a natural person in his capacity as trustee, executor, administrator, or other legal representative. 1.3 HEADINGS. The division of this By-law No.1 into sections and the provision of headings for all or any thereof are for convenience of reference only and shall not affect the meaning of this By-law No 1. SECTION 2 BUSINESS OF THE CORPORATION 2.1 REGISTERED OFFICE. The registered office of the Corporation shall be located within Alberta as the Board may from time to time determine. 2.2 CORPORATE SEAL. The corporate seal of the Corporation shall be such as the Board may by resolution from time to time adopt. An instrument or agreement executed on behalf of the Corporation by a Director, an officer or an agent of the Corporation is not invalid merely because the corporate seal is not affixed thereto. 2.3 FINANCIAL YEAR. Until changed by the Board, the financial year of the Corporation shall end on the last day of February in each year. 2.4 EXECUTION OF INSTRUMENTS. Deeds, transfers, assignments, contracts, obligations, certificates and other instruments may be signed on behalf of the Corporation by two persons, one of whom holds the office of chairman of the Board, managing director, president, vice-president or is a Director and the other of whom is a Director or holds one of the said offices or the office of secretary, treasurer, assistant secretary or assistant treasurer or any other office created by By-law or by the Board. In addition, the Board or the said two persons may from time to time direct the manner in which and the person or persons by whom any particular instrument or class of instruments may or shall be signed. Any signing officer may affix the corporate seal to any instrument requiring the same. 2.5 BANKING ARRANGEMENTS. The banking business of the Corporation including, without limitation, the borrowing of money and the giving of security therefor, shall be transacted with such banks, trust companies or other bodies corporate or organizations as may from time to time be designated by or under the authority of the Board. Such banking business or any part thereof shall be transacted under such agreements, instructions and delegations of powers as the Board may from time to time prescribe. 2 3 2.6 VOTING RIGHTS IN OTHER BODIES CORPORATE. The signing officers of the Corporation under Section 2.4 may execute and deliver proxies and arrange for the issuance of voting certificates or other evidence of the right to exercise the voting rights attaching to any securities held by the Corporation. Such instruments shall be in favour of such persons as may be determined by the officers executing or arranging for the same. In addition, the Board may from time to time direct the manner in which and the persons by whom any particular voting rights or class of voting rights may or shall be exercised. 2.7 DIVISIONS. The Board may cause the business and operations of the Corporation or any part thereof to be divided into one or more divisions upon such basis, including without limitation types of business or operations, geographical territories, product lines or goods or services, as may be considered appropriate in each case. In connection with any such division the Board or, subject to any direction by the Board, the chief executive officer may authorize from time to time, upon such basis as may be considered appropriate in each case: (a) Subdivision and Consolidation - the further division of the business and operations of any such division into sub-units and the consolidation of the business and operations of any such divisions and sub-units; (b) Name - the designation of any such division or sub-unit by, and the carrying on of the business and operations of any such division or sub-unit under, a name other than the name of the Corporation; provided that the Corporation shall set out its name in legible characters in all places required by law; and (c) Officers - the appointment of officers for any such division or sub-unit, the determination of their powers and duties, and the removal of any of such officers so appointed, provided that any such officers shall not, as such, be officers of the Corporation. SECTION 3 BORROWING AND SECURITY 3.1 BORROWING POWER. Without limiting the borrowing powers of the Corporation as set forth in the Act, but subject to the Articles, the Board may from time to time on behalf of the Corporation, without authorization of the Shareholders: (a) borrow money upon the credit of the Corporation; (b) issue, reissue, sell or pledge bonds, debentures, notes or other evidences of indebtedness or guarantee of the Corporation, whether secured or unsecured; (c) to the extent permitted by the Act, give directly or indirectly financial assistance to any person by means of a loan, a guarantee on behalf of the Corporation to secure performance of any present or future indebtedness, liability or obligation of any person, or otherwise; and 3 4 (d) mortgage, hypothecate, pledge or otherwise create a security interest in all or any currently owned or subsequently acquired real or personal, movable or immovable, property of the Corporation including book debts, rights, powers, franchises and undertakings, to secure any such bonds, debentures, notes or other evidences of indebtedness or guarantee or any other present or future indebtedness, liability or obligation of the Corporation. Nothing in this Section limits or restricts the borrowing of money by the Corporation on bills of exchange or promissory notes made, drawn, accepted or endorsed by or on behalf of the Corporation. 3.2 DELEGATION. Subject to the Act and the Articles, the Board may from time to time delegate to a committee of the Board, a Director or an officer of the Corporation or any other person as may be designated by the Board all or any of the powers conferred on the Board by Section 3.1 or by the Act to such extent and in such manner as the Board may determine at the time of such delegation. SECTION 4 DIRECTORS 4.1 NUMBER OF DIRECTORS. Until changed in accordance with the Act, the Board shall consist of not fewer than the minimum number and not more than the maximum number of Directors provided in the Articles. 4.2 QUALIFICATION. No person shall be qualified for election as a Director if he is less than 18 years of age; if he is of unsound mind and has been so found by a court in Canada or elsewhere; if he is not an individual; or if he has the status of a bankrupt. A Director need not be a Shareholder. A majority of the Directors shall be resident Canadians. At least two of the Directors shall not be officers or employees of the Corporation or any of its affiliates. 4.3 ELECTION AND TERM. The election of Directors shall take place at each annual meeting of Shareholders and all the Directors then in office shall retire but, if qualified, shall be eligible for re-election. The number of directors to be elected at any such meeting shall be the number then in office unless the Directors otherwise determine, in which case the number of Directors to be elected shall, subject to the Articles, be the number fixed by the Directors. Where the Shareholders adopt an amendment to the Articles to increase the number or minimum number of Directors, the Shareholders may, at the meeting at which they adopt the amendment, elect the additional number of Directors authorized by the amendment to take office from the effective date of the endorsement of the articles of amendment with respect thereto. The election shall be by resolution. If an election of Directors is not held at the proper time, the incumbent Directors shall continue in office until their successors are elected. Whenever at any election of Directors the number or the minimum number of Directors required by the Articles is not elected by reason of the disqualification, incapacity or the death of any candidates, the Directors elected at that meeting may exercise all the powers of the Directors if the number of Directors so elected constitutes a quorum. 4 5 4.4 REMOVAL OF DIRECTORS. Subject to the Act, the Shareholders may by ordinary resolution passed at a Meeting of Shareholders remove any Director from office and the vacancy created by such removal may be filled by the election of any qualified individual at the same meeting, failing which it may be filled by the Board. 4.5 VACATION OF OFFICE. A Director ceases to hold office when he dies; he is removed from office by the Shareholders; he ceases to be qualified for election as a Director; or his written resignation is received by the Corporation, or, if a time is specified in such resignation, at the time so specified, whichever is later. 4.6 VACANCIES. Subject to the Act, a quorum of the Board may appoint a qualified individual to fill a vacancy in the Board. 4.7 ACTION BY THE BOARD. The Board shall manage or supervise the management of the business and affairs of the Corporation. The powers of the Board may be exercised at a meeting (subject to Sections 4.8 and 4.9) at which a quorum is present or by resolution in writing signed by all the Directors entitled to vote on that resolution at a meeting of the Board. Where there is a vacancy in the Board, the remaining Directors may exercise all the powers of the Board so long as a quorum remains in office. 4.8 CANADIAN MAJORITY AT MEETINGS. The Board shall not transact business at a meeting, other than filling a vacancy in the Board unless a majority of the Directors present are resident Canadians, except where: (a) a resident Canadian Director who is unable to be present approves in writing or by telephone, electronic, or other communications facilities the business transacted at the meeting; and (b) a majority of resident Canadians would have been present had that Director been present at the meeting. 4.9 MEETING BY TELEPHONE. If all the Directors consent thereto generally or if all the Directors present at or participating in the meeting consent, a Director may participate in a meeting of the Board or of a committee of the Board by means of such telephone, electronic or other communications facilities as permit all persons participating in the meeting to communicate with each other, simultaneously and instantaneously, and a Director participating in such a meeting by such means is deemed to be present at the meeting. Any such consent shall be effective whether given before or after the meeting to which it relates and may be given with respect to all meetings of the Board and of committees of the Board. 4.10 PLACE OF MEETINGS. Meetings of the Board may be held at any place within or outside Canada and in any financial year of the Corporation a majority of the meetings need not be held in Canada. 4.11 CALLING OF MEETINGS. Meetings of the Board shall be held from time to time at such time and at such place as the Board, the chairman of the Board, the president or any two Directors may determine. 5 6 4.12 NOTICE OF MEETING. Notice of the time and place of each meeting of the Board shall be given in the manner provided in Section 11 to each Director not less than 48 hours before the time when the meeting is to be held. No notice of a meeting shall be necessary if all the Directors in office are present or if those absent waive notice of such meeting, except where a Director attends a meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully called. A notice of a meeting of Directors need not specify the purpose of or the business to be transacted at the meeting except where the Act requires such purpose or business or the general nature thereof to be specified. 4.13 FIRST MEETING OF NEW BOARD. Provided a quorum of Directors is present, each newly elected Board may without notice hold its first meeting immediately following the Meeting of Shareholders at which such Board is elected. 4.14 ADJOURNED MEETING. Any meeting of Directors or of any committee of Directors may be adjourned from time to time by the chairman of the meeting, with the consent of the meeting, to a fixed time and place. Notice of an adjourned meeting of the Board is not required if the time and place of the adjourned meeting is announced at the original meeting. Any adjourned meeting shall be duly constituted if held in accordance with the terms of the adjournment and a quorum is present thereat. The Directors who formed a quorum at the original meeting are not required to form the quorum at the adjourned meeting. If there is no quorum present at the adjourned meeting, the original meeting shall be deemed to have terminated forthwith after its adjournment. 4.15 REGULAR MEETINGS. The Board may appoint a day or days in any month or months for regular meetings of the Board at a place and hour to be named. A copy of any resolution of the Board fixing the place and time of such regular meetings shall be sent to each Director forthwith after being passed, but no other notice shall be required for any such regular meeting except where the Act requires the purpose thereof or the business to be transacted thereat to be specified. 4.16 CHAIRMAN. The chairman of any meeting of the Board shall be the first mentioned of such of the following officers as have been appointed and who is a director and is present at the meeting: chairman of the Board, managing director or president. If no such officer is present, the Directors present shall choose one of their number to be chairman. 4.17 QUORUM. Subject to Sections 4.6, 4.8 and 4.21, the quorum for the transaction of business at any meeting of the Board shall be a majority of the number of Directors or minimum number of Directors, as the case may be, or such greater number of Directors as the Board may from time to time determine. 4.18 VOTES TO GOVERN. At all meetings of the Board every question shall be decided by a majority of the votes cast on the question. In case of an equality of votes the chairman of the meeting shall not be entitled to a second or casting vote. audit committee may call a meeting of the committee. The audit committee shall review the financial statements of the Corporation prior to approval thereof by the Board and shall have such other powers and duties as may from time to time by resolution be assigned to it by the Board. 6 7 4.19 CONFLICT OF INTEREST. A Director who is a party to, or who is a Director or officer of or has a material interest in any person who is a party to, a material contract or transaction or proposed material contract or transaction with the Corporation shall disclose to the Corporation the nature and extent of his interest at the time and in the manner provided by the Act. Such a Director shall not vote on any resolution to approve the same except as provided by the Act. 4.20 REMUNERATION AND EXPENSES. The Directors shall be paid such remuneration for their services as the Board may from time to time determine. The Directors shall also be entitled to be reimbursed for traveling and other expenses properly incurred by them in attending meetings of the Board or any committee thereof. Nothing herein contained shall preclude any Director from serving the Corporation in any other capacity and receiving remuneration therefor. 4.21 RESOLUTIONS IN LIEU OF MEETING. A resolution in writing signed by all the Directors entitled to vote on that resolution at a meeting of Directors or committee of Directors is as valid as if it had been passed at a meeting of Directors or committee of Directors. Any such resolution in writing may be signed in one or more counterparts, all of which together shall constitute one and the same resolution, and a facsimile of a signed counterpart of such resolution shall be deemed to be as valid as an originally signed counterpart unless it is proven that such facsimile does not accurately reflect an authentic originally signed counterpart. SECTION 5 COMMITTEES 5.1 COMMITTEES OF THE BOARD. The Board may appoint from their number one or more committees of the Board, however designated, and delegate to any such committee any of the powers of the Board except those which pertain to items which, under the Act, a committee of the Board has no authority to exercise. A majority of the members of any such committee shall be resident Canadians. 5.2 TRANSACTION OF BUSINESS. The powers of a committee of the Board may be exercised by a meeting at which a quorum is present or by resolution in writing signed by all members of such committee who would have been entitled to vote on that resolution at a meeting of the committee. Meetings of such committee may be held at any place in or outside of Canada. 5.3 AUDIT COMMITTEE. The Board shall select annually from among their number an audit committee to be composed of not fewer than three Directors of whom a majority shall not be officers or employees of the Corporation or any of its affiliates. The audit committee shall have the powers and duties provided in the Act. Each member of the audit committee shall serve during the pleasure of the Board and, in any event, only so long as he shall be a Director. The Directors may fill vacancies in the audit committee by election from among their number. The auditor of the Corporation is entitled to receive notice of every meeting of the audit committee and, at the expense of the Corporation, to attend and be heard thereat; and, if so requested by a member of the audit committee, shall attend every meeting of the committee held during the term of office of 7 8 the auditor. The auditor of the Corporation or any member of the of seniority, shall sign such contracts, documents or instruments in writing as require his or their signatures and shall also have such other powers and duties as may from time to time be assigned to him or them by resolution of the Directors. 5.4 ADVISORY BODIES. The Board may from time to time appoint such advisory bodies as it may deem advisable. 5.5 PROCEDURE. Unless otherwise determined by the Board, each committee and advisory body shall have power to fix its quorum at not less than a majority of its members, to elect its chairman and to regulate its procedure. SECTION 6 OFFICERS 6.1 APPOINTMENT. The Board shall annually, or as often as may be required, appoint a president, one or more vice-presidents (to which title may be added words indicating seniority or function) and such other officers as the Board may determine, including one or more assistants to any of the officers so appointed. One person may hold more than one office. The Board may specify the duties of and, in accordance with this By-law and subject to the Act, delegate to such officers powers to manage the business and affairs of the Corporation. Subject to Sections 6.2 and 6.3, an officer may but need not be a Director. 6.2 CHAIRMAN OF THE BOARD. The Board may from time to time also appoint a chairman of the Board who shall be a Director. If appointed, the Board may assign to him any of the powers and duties that are by any provisions of this By-law assigned to the managing director or to the president; and he shall have such other powers and duties as the Board may specify. 6.3 MANAGING DIRECTOR. The Board may from time to time also appoint a managing director who shall be a resident Canadian and a Director. If appointed, he shall be the chief executive officer and, subject to the authority of the Board, shall have general supervision of the business and affairs of the Corporation; and he shall have such other powers and duties as the Board may specify. During the absence or disability of the president, or if no president has been appointed, the managing director shall also have the powers and duties of that office. 6.4 PRESIDENT. The president shall be the chief operating officer and, subject to the authority of the Board, shall have general supervision of the business of the Corporation; and he shall have such other powers and duties as the Board may specify. During the absence or disability of the managing director, or if no managing director has been appointed, the president shall also have the powers and duties of that office. 6.5 VICE-PRESIDENT. The vice-president or, if more than one, the vice-presidents in order of seniority, shall be vested with all the powers and shall perform all the duties of the president in the absence, inability or refusal to act of the president; provided, however, that a vice-president who is not a Director shall not preside as the chairman at any meeting of Directors or Shareholders. The vice-president or, if more than one, the vice-presidents in order 8 9 6.6 SECRETARY. Unless otherwise determined by the Board, the secretary, if appointed, shall be the secretary of all meetings of the Board, Shareholders and committees of the Board that he attends. The secretary shall enter or cause to be entered in records kept for that purpose minutes of all proceedings at meetings of the Board, Shareholders and committees of the Board, whether or not he attends such meetings; he shall give or cause to be given, as and when instructed, all notices to Shareholders, Directors, officers and auditors of the Corporation, and members of committees of the Board; he shall be the custodian of the stamp or mechanical device generally used for affixing the corporate seal of the Corporation and of all books, records and instruments belonging to the Corporation, except when some other officer or agent has been appointed for that purpose; and he shall have such other powers and duties as otherwise may be specified. 6.7 TREASURER. The treasurer, if appointed, shall keep proper accounting records in compliance with the Act and shall be responsible for the deposit of money, the safekeeping of securities and the disbursement of the funds of the Corporation; he shall render to the Board whenever required an account of all his transactions as treasurer and of the financial position of the Corporation; and he shall have such other powers and duties as otherwise may be specified. 6.8 POWERS AND DUTIES OF OFFICERS. The powers and duties of all officers shall be such as the terms of their engagement call for or as the Board or (except for those whose powers and duties are to be specified only by the Board) the chief executive officer may specify. The Board and (except as aforesaid) the chief executive officer may, from time to time and subject to the provisions of the Act, vary, add to or limit the powers and duties of any officer. Any of the powers and duties of an officer to whom an assistant has been appointed may be exercised and performed by such assistant, unless the Board or the chief executive officer otherwise directs. 6.9 TERM OF OFFICE. The Board, in its discretion, may remove any officer of the Corporation. Otherwise each officer appointed by the Board shall hold office until his successor is appointed or until his earlier resignation. 6.10 AGENTS AND ATTORNEYS. The Corporation, by or under the authority of the Board, shall have power from time to time to appoint agents or attorneys for the Corporation in or outside Canada with such powers (including the power to subdelegate) of management, administration or otherwise as may be thought fit. 6.11 CONFLICT OF INTEREST. An officer shall disclose his interest in any material contract or transaction or proposed material contract or transaction with the Corporation in accordance with Section 4.19. 9 10 SECTION 7 PROTECTION OF DIRECTORS, OFFICERS AND OTHERS 7.1 LIMITATION OF LIABILITY. Every Director and officer of the Corporation in exercising his powers and discharging his duties shall act honestly and in good faith with a view to the best interests of the Corporation and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Every Director and officer of the Corporation shall comply with the Act, the regulations thereunder, the Articles and the By-laws. Subject to the foregoing, no Director or officer of the Corporation shall be liable for the acts, receipts, neglects or defaults of any other Director, officer or employee, or for joining in any receipt or other act for conformity, or for any loss, damage or expense happening to the Corporation through the insufficiency or deficiency of title to any property acquired for or on behalf of the Corporation, or for the insufficiency or deficiency of any security in or upon which any of the moneys of the Corporation shall be invested, or for any loss or damage arising from the bankruptcy, insolvency or tortious acts of any person with whom any of the moneys, securities or effects of the Corporation shall be deposited, or for any loss occasioned by any error of judgment or oversight on his part, or for any other loss, damage or misfortune which shall happen in the execution of the duties of his office or in relation thereto; provided that nothing herein shall relieve any Director or officer of the Corporation from the duty to act in accordance with the Act and the regulations thereunder or from liability for any breach thereof. 7.2 INDEMNITY. Subject to the Act, the Corporation shall indemnify a Director or officer of the Corporation, a former Director or officer, or a person who acts or acted at the Corporation's request as a director or officer of a body corporate of which the Corporation is or was a shareholder or creditor, and his heirs and legal representatives, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him in respect of any civil, criminal or administrative action or proceeding to which he is made a party by reason of being or having been a Director or officer of the Corporation or a director or officer of such body corporate, if (a) he acted honestly and in good faith with a view to the best interests of the Corporation, and (b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, he had reasonable grounds for believing that his conduct was lawful. The Corporation shall also indemnify such person in such other circumstances as the Act or law permits or requires. Nothing in this By-law shall limit the right of any person entitled to indemnity to claim indemnity apart from the provisions of this By-law. 7.3 INSURANCE. Subject to the Act, the Corporation may purchase and maintain such insurance for the benefit of any person referred to in Section 7.2 hereof as the Board may from time to time determine. SECTION 8 SHARES 8.1 ALLOTMENT OF SHARES. Subject to the Act and the Articles, the Board may from time to time allot, or grant options to purchase, the whole or any part of the authorized and unissued shares of the Corporation at such times and to such persons and for such consideration as the Board shall determine, provided that no share shall be issued until it is fully paid as provided by the Act. 8.2 COMMISSIONS. The Board may from time to time authorize the Corporation to pay a reasonable commission to any person in consideration of his purchasing or agreeing to purchase shares of the Corporation, whether from the Corporation or from any other person, or procuring or agreeing to procure purchasers for any such shares. 10 11 8.3 REGISTRATION OF TRANSFERS. Subject to the Act, no transfer of a share of the Corporation shall be registered in a securities register except upon presentation of the certificate representing such share with an endorsement which complies with the Act made thereon or delivered therewith duly executed by an appropriate person as provided by the Act, together with such reasonable assurance that the endorsement is genuine and effective as the Board may from time to time prescribe, upon payment of all applicable taxes and any reasonable fees prescribed by the Board, upon compliance with such restrictions on issue, transfer or ownership as are authorized by the Articles. 8.4 NON-RECOGNITION OF TRUSTS. Subject to the Act, the Corporation may treat the registered holder of any share of the Corporation as the person exclusively entitled to vote, to receive notices, to receive any dividend or other payment in respect of the share, and otherwise to exercise all the rights and powers of an owner of the share. 8.5 SHARE CERTIFICATES. Every holder of one or more shares of the Corporation shall be entitled, at his option, to a share certificate, or to a non-transferable written certificate of acknowledgment of his right to obtain a share certificate, stating the number and class or senes of shares held by him as shown on the securities register. Such certificates shall be in such form as the Board may from time to time approve. Any such certificate shall be signed in accordance with Section 2.4 and need not be under the corporate seal. Notwithstanding the foregoing, unless the Board otherwise determines, certificates in respect of which a registrar, transfer agent, branch transfer agent or issuing or other authenticating agent has been appointed shall not be valid unless countersigned by or on behalf of such registrar, transfer agent, branch transfer agent or issuing or other authenticating agent. The signature of one of the signing officers under Section 2.4 (or, in the case of a certificate which is not valid unless countersigned by or on behalf of a registrar, transfer agent, branch transfer agent or issuing or other authenticating agent, the signatures of both signing officers under section 2.4) may be printed or otherwise mechanically reproduced thereon. Every such printed or mechanically reproduced signature shall for all purposes be deemed to be the signature of the officer whose signature it reproduces and shall be binding upon the Corporation. A certificate executed as aforesaid shall be valid notwithstanding that one or both of the officers whose printed or mechanically reproduced signature appears thereon no longer holds office at the date of issue of the certificate. 8.6 REPLACEMENT OF SHARE CERTIFICATES. The Board or any officer or agent designated by the Board may in its or his discretion direct the issue of a new share of the Corporation or other such certificate in lieu of and upon cancellation of a certificate that has been mutilated or in substitution for a certificate claimed to have been lost, apparently destroyed or wrongfully taken on payment of such reasonable fee and on such terms as to indemnity, reimbursement of expenses and evidence of loss and of title as the Board may from time to time prescribe, whether generally or in any particular case. 8.7 JOINT SHAREHOLDERS. If two or more persons are registered as joint holders of any share of the Corporation, the Corporation shall not be bound to issue more than one certificate in respect thereof, and delivery of such certificate to one of such persons shall be sufficient delivery to all of them. Any one of such persons may give effectual receipts for the certificate issued in respect thereof or for any dividend, bonus, return of capital or other money payable or warrant issuable in respect of such share. 11 12 8.8 DECEASED SHAREHOLDERS. In the event of the death of a holder, or of one of the joint holders, of any share of the Corporation, the Corporation shall not be required to make any entry in the securities register in respect thereof or to make any dividend or other payments in respect thereof except upon production of all such documents as may be required by law and upon compliance with the reasonable requirements of the Corporation and its transfer agents. 8.9 TRANSFER AGENTS AND REGISTRARS. The Corporation may from time to time, in respect of each class of securities issued by it, appoint a trustee, transfer or other agent to keep the securities register and the register of transfers and a registrar, trustee or agent to maintain a record of issued security certificates and may appoint one or more persons or agents to keep branch registers, and, subject to the Act, one person may be appointed to keep the securities register, register of transfers and the records of issued security certificates. Such appointment may be terminated at any time by the Board. SECTION 9 DIVIDENDS AND RIGHTS 9.1 DIVIDENDS. Subject to the Act and the Articles, the Board may from time to time declare dividends payable to the Shareholders according to their respective rights and interests in the Corporation. Dividends may be paid in money or property or by issuing fully paid shares of the Corporation or options or rights to acquire fully paid shares of the Corporation. Any dividend unclaimed after a period of six years from the date on which the same has been declared to be payable shall be forfeited and shall revert to the Corporation. 9.2 DIVIDEND CHEQUES. A dividend payable in money by the Corporation shall be paid by Cheque to the order of each registered holder of shares of the class or series in respect of which it has been declared and mailed by prepaid ordinary mail to such registered holder at his recorded address, unless such holder otherwise directs. In the case of joint holders the Cheque shall, unless such joint holders otherwise direct, be made payable to the order of all of such joint holders and mailed to them at their recorded address. The mailing of such Cheque as aforesaid, unless the same is not paid on due presentation, shall satisfy and discharge the liability for the dividend to the extent of the sum represented thereby plus the amount of any tax which the Corporation is required to and does withhold. In the event of non-receipt of any dividend Cheque by the person to whom it is sent as aforesaid, the Corporation shall issue to such person a replacement Cheque for a like amount on such terms as to indemnity, reimbursement of expenses and evidence of non-receipt and of title as the Board may from time to time prescribe, whether generally or in any particular case. 9.3 RECORD DATE FOR DIVIDENDS AND RIGHTS. The Board may fix in advance a date, preceding by not more than 50 days the date for the payment of any dividend or the date for the issue of any warrant or other evidence of the right to subscribe for securities of the Corporation, as a record date for the determination of the persons entitled to receive payment of such dividend or to exercise the right to subscribe for such securities, and notice of any such record date shall be given not less than seven days before such record date in the manner provided by the Act. If no record date is so fixed, the record date for the determination of the persons entitled to receive payment of any dividend or to exercise the right to subscribe for securities of the Corporation shall be at the close of business on the day on which the resolution relating to such dividend or right to subscribe is passed by the Board. 12 13 SECTION 10 MEETINGS OF SHAREHOLDERS 10.1 ANNUAL MEETINGS. Subject to the Act, the annual meeting of Shareholders shall be held at such time in each year and, subject to Section 10.3, at such place as the Board, the chairman of the Board, the managing director or the president may from time to time determine, for the purpose of considering the financial statements and reports required by the Act to be placed before the annual meeting, electing Directors, appointing auditors and for the transaction of such other business as may properly be brought before the meeting. 10.2 SPECIAL MEETINGS. The Board, the chairman of the Board, the managing director or the president shall have power to call a Special Meeting of Shareholders at any time. 10.3 PLACE OF MEETINGS. Subject to the Act and the Articles, Meetings of Shareholders of the Corporation shall be held at such place in or outside Alberta as the Directors determine or, in the absence of such a determination, at the place where the registered office of the Corporation is located. 10.4 NOTICE OF MEETINGS. Notice of the time and place of each Meeting of Shareholders shall be given in the manner provided in Section 11 not less than 21 days nor more than 50 days before the date of the meeting to each Director, to the auditor of the Corporation, and to each Shareholder who at the close of business on the record date for notice is entered in the securities register as the holder of one or more shares carrying the right to vote at the meeting. Notice of a Meeting of Shareholders called for any purpose other than consideration of the minutes of an earlier meeting, financial statements and auditor's report, election of Directors and reappointment of the incumbent auditor shall state the nature of such business in sufficient detail to permit the Shareholder to form a reasoned judgment thereon and shall state the text of any special resolution or by-law to be submitted to the meeting. 10.5 LIST OF SHAREHOLDERS ENTITLED TO NOTICE. For every Meeting of Shareholders, the Corporation shall prepare a list of Shareholders entitled to receive notice of the meeting, arranged in alphabetical order and showing the number of shares held by each Shareholder entitled to vote at the meeting. If a record date for the meeting is fixed pursuant to Section 10.6, the Shareholders listed shall be those registered at the close of business on such record date. If no record date is fixed, the Shareholders listed shall be those registered at the close of business on the day immediately preceding the day on which notice of the meeting is given or, where no such notice is given, on the day on which the meeting is held. The list shall be available for examination by any Shareholder during usual business hours at the registered office of the Corporation or at the place where the central securities register is maintained and at the meeting for which the list was prepared. Where a separate list of Shareholders has not been prepared, the names of persons appearing in the securities register at the requisite time as the holder of one or more shares carrying the right to vote at such meeting shall be deemed to be a list of Shareholders. 13 14 10.6 RECORD DATE FOR NOTICE. The Board may fix in advance a date, preceding the date of any Meeting of Shareholders by not more than 50 days and not less than 21 days, subject to the Act, as a record date for the determination of the Shareholders entitled to notice of the meeting, and notice of any such record date shall be given not less than seven days before such record date, by newspaper advertisement in the manner provided in the Act and by written notice to each stock exchange in Canada on which the shares of the Corporation are listed for trading. If no such record date is so fixed, the record date for the determination of the Shareholders entitled to receive notice of the meeting shall be at the close of business on the day immediately preceding the day on which the notice is given or, if no notice is given, shall be the day on which the meeting is held. 10.7 MEETINGS WITHOUT NOTICE. A Meeting of Shareholders may be held without notice at any time and place permitted by the Act (a) if all the Shareholders entitled to vote thereat are present in person or duly represented or if those not present or represented waive notice of or otherwise consent to such meeting being held, and (b) if the auditors of the Corporation and the Directors are present or waive notice of or otherwise consent to such meeting being held; so long as such Shareholders, auditors or Directors present are not attending for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully called. At such a meeting any business may be transacted which the Corporation at a Meeting of Shareholders may transact. 10.8 CHAIRMAN, SECRETARY AND SCRUTINEERS. The chairman of any Meeting of Shareholders shall be the first mentioned of such of the following officers as have been appointed and who is present at the meeting: chairman of the Board, managing director, president, or a vice-president who is a Shareholder. If no such officer is present within 15 minutes from the time fixed for holding the meeting, the persons present and entitled to vote shall choose one of their number to be chairman. If the secretary of the Corporation is absent, the chairman shall appoint some person, who need not be a Shareholder, to act as secretary of the meeting. If desired, one or more scrutineers, who need not be Shareholders, may be appointed by a resolution or by the chairman with the consent of the meeting. 10.9 PERSONS ENTITLED TO BE PRESENT. The only persons entitled to be present at a Meeting of Shareholders shall be those entitled to vote thereat, the Directors and auditor of the Corporation and others who, although not entitled to vote, are entitled or required under any provision of the Act or the Articles or By-laws to be present at the meeting. Any other person may be admitted only on the invitation of the chairman of the meeting or with the consent of the meeting. 10.10 QUORUM. A quorum for the transaction of business at any Meeting of Shareholders shall be two persons present in person, each being a Shareholder entitled to vote thereat or a duly appointed proxyholder or representative for a Shareholder so entitled, and holding or representing not less than 10% of the shares entitled to vote at the Meeting of Shareholders. If a quorum is present at the opening of any Meeting of Shareholders, the Shareholder or Shareholders present or represented may proceed with the business of the meeting notwithstanding that a quorum is not present throughout the meeting. If a quorum is not present at the time appointed for the meeting or within a reasonable time thereafter as the Shareholders may determine, the Shareholders present or represented may adjourn the meeting to a fixed time and place but may not transact any other business. 14 15 10.11 RIGHT TO VOTE. Every person named in the list referred to in Section 10.5 shall be entitled to vote the shares shown thereon opposite his name at the meeting to which such list relates, except to the extent that (a) where the Corporation has fixed a record date in respect of such meeting, such person has transferred any of his shares after such record date or, where the Corporation has not fixed a record date in respect of such meeting, such person has transferred any of his shares after the date on which such list is prepared, and (b) the transferee, having produced properly endorsed certificates evidencing such shares or having otherwise established that he owns such shares, has demanded not later than ten days before the meeting that his name be included in such list. In any such excepted case the transferee shall be entitled to vote the transferred shares at such meeting. 10.12 PROXYHOLDERS AND REPRESENTATIVES. Every Shareholder entitled to vote at a Meeting of Shareholders may appoint a proxyholder, or one or more alternate proxyholders, as his nominee to attend and act at the meeting in the manner and to the extent authorized and with the authority conferred by the proxy. A proxy shall be in writing executed by the Shareholder or his attorney and shall conform with the requirements of the Act. Alternatively, every such Shareholder which is a body corporate or association may authorize by resolution of its directors or governing body an individual to represent it at a Meeting of Shareholders and such individual may exercise on the Shareholder's behalf all the powers it could exercise if it were an individual Shareholder. The authority of such an individual shall be established by depositing with the Corporation a certified copy of such resolution, or in such other manner as may be satisfactory to the secretary of the Corporation or the chairman of the meeting. Any such proxyholder or representative need not be a Shareholder. A proxy ceases to be valid one year from its date. 10.13 TIME FOR DEPOSIT OF PROXIES. The Board may fix a time not exceeding 48 hours, excluding Saturdays and holidays, preceding any Meeting or adjourned Meeting of Shareholders before which time proxies to be used at the meeting must be deposited with the Corporation or an agent thereof, and any period of time so fixed shall be specified in the notice calling the meeting. A proxy shall be acted upon only if, prior to the time so specified, it shall have been deposited with the Corporation or an agent thereof specified in such notice or if, no such time having been specified in such notice, it has been received by the secretary of the Corporation or by the chairman of the meeting or any adjournment thereof prior to the time of voting. 10.14 JOINT SHAREHOLDERS. If two or more persons hold shares jointly, any one of them present in person or duly represented at a Meeting of Shareholders may, in the absence of the other or others, vote the shares; but if two or more of those persons are present in person or represented and vote, they shall vote as one the shares jointly held by them. 10.15 VOTES TO GOVERN. At any Meeting of Shareholders every question shall, unless otherwise required by the Articles or By-laws or by law, be determined by a majority of the votes cast on the question. In case of an equality of votes either upon a show of hands or upon a poll, the chairman of the meeting shall not be entitled to a second or casting vote. 10.16 SHOW OF HANDS. Subject to the Act, any question at a Meeting of Shareholders shall be decided by a show of hands, unless a ballot thereon is required or demanded as hereinafter provided, and upon a show of hands every person who is present and entitled to vote shall have one vote. Whenever a vote by show of hands shall have been taken upon a question, unless a ballot thereon is so required or demanded, a declaration by the 15 16 chairman of the meeting that the vote upon the question has been carried or carried by a particular majority or not carried and an entry to that effect in the minutes of the meeting shall be prima facie evidence of the fact without proof of the number or proportion of the votes recorded in favour of or against any resolution or other proceeding in respect of the said question, and the result of the vote so taken shall be the decision of the Shareholders upon the said question. 10.17 BALLOTS. On any question proposed for consideration at a Meeting of Shareholders, and whether or not a show of hands has been taken thereon, the chairman may require a ballot or any person who is present and entitled to vote on such question at the meeting may demand a ballot. A ballot so required or demanded shall be taken in such manner as the chairman shall direct. A requirement or demand for a ballot may be withdrawn at any time prior to the taking of the ballot. If a ballot is taken each person present shall be entitled, in respect of the shares which he is entitled to vote at the meeting upon the question, to that number of votes provided by the Act or the Articles, and the result of the ballot so taken shall be the decision of the Shareholders upon the said question. 10.18 ADJOURNMENT. The chairman at a Meeting of Shareholders may, with the consent of the meeting and subject to such conditions as the meeting may decide, adjourn the meeting from time to time and from place to place. If a Meeting of Shareholders is adjourned for less than 30 days, it shall not be necessary to give notice of the adjourned meeting, other than by announcement at the earliest meeting that is adjourned; Subject to the Act, if a Meeting of Shareholders is adjourned by one or more adjournments for an aggregate of 30 days or more, notice of the adjourned meeting shall be given as for an original meeting. 10.19 RESOLUTIONS IN LIEU OF MEETING. A resolution in writing signed by all the Shareholders entitled to vote on that resolution is as valid as if it had been passed at a meeting of the Shareholders. Any such resolution in writing may be signed in one or more counterparts, all of which together shall constitute one and the same resolution, and a facsimile of a signed counterpart of such resolution shall be deemed to be as valid as an originally signed counterpart unless it is proven that such facsimile does not accurately reflect an authentic originally signed counterpart. SECTION 11 NOTICES 11.1 METHOD OF GIVING NOTICES. Any notice (which term includes any communication or document) to be given (which term includes sent, delivered or served) pursuant to the Act, the regulations thereunder, the Articles, the By-laws or otherwise to a Shareholder, Director, officer or auditor of the Corporation, or member of a committee of the Board shall be sufficiently given if delivered personally to the person to whom it is to be given or if mailed to him at his recorded address by prepaid mail. A notice so delivered shall be deemed to have been received when it is delivered personally and a notice so mailed shall be deemed to have been received on the fifth day after it is deposited in a post office or public letter box. The Secretary may change or cause to be changed the recorded address of any Shareholder, Director, officer or auditor of the Corporation, or member of a committee of the Board in accordance with any information believed by him to be reliable. 16 17 11.2 NOTICE TO JOINT SHAREHOLDERS. If two or more persons are registered as joint holders of any share of the Corporation, any notice may be addressed to all such joint holders, but notice addressed to one of such persons shall be sufficient notice to all of them. 11.3 COMPUTATION OF TIME. In computing the date when notice must be given under any provision requiring a specified number of days notice of any meeting or other event, the day of giving the notice shall be excluded and the day of the meeting or other event shall be excluded. 11.4 UNDELIVERED NOTICES. If any notice given to a Shareholder pursuant to Section 11.1 is returned on three consecutive occasions because he cannot be found, the Corporation shall not be required to give any further notices to such Shareholder until he informs the Corporation in writing of his new address. 11.5 OMISSIONS AND ERRORS. The accidental omission to give any notice to any Shareholder, Director, officer or auditor of the Corporation, or member of a committee of the Board or the non-receipt of any notice by any such person or any error in any notice not affecting the substance thereof shall not invalidate any action taken at any meeting held pursuant to such notice or otherwise founded thereon. 11.6 PERSONS ENTITLED BY DEATH OR OPERATION OF LAW. Every person who, by operation of law, transfer, death of a Shareholder or any other means whatsoever, shall become entitled to any share of the Corporation, shall be bound by every notice in respect of such share which shall have been duly given to the Shareholder from whom he derives his title to such share prior to his name and address being entered on the securities register (whether such notice was given before or after the happening of the event upon which he became so entitled) and prior to his furnishing to the Corporation the proof of authority or evidence of his entitlement prescribed by the Act. 11.7 WAIVER OF NOTICE. Any Shareholder, proxyholder or other person entitled to attend a Meeting of Shareholders, or any director, officer or auditor of the Corporation, or member of a committee of the Board may at any time waive any notice, or waive or abridge the time for any notice, required to be given to him under the Act, the regulations thereunder, the Articles, the By-laws or otherwise, and such waiver or abridgment, whether given before or after the meeting or other event of which notice is required to be given, shall cure any default in the giving or in the time of such notice, as the case may be. Any such waiver or abridgment shall be in writing except a waiver of notice of a Meeting of Shareholders, a meeting of the Board or a committee of the Board which may be given in any manner. 11.8 INTERPRETATION. In this By-law, "Recorded Address" means in the case of a Shareholder his address as recorded in the securities register; and in the case of joint Shareholders the address appearing in the securities register in respect of such joint holding or the first address so appearing if there are more than one; in the case of an officer, auditor or member of a committee of the Board of the Corporation, his latest address as recorded in the records of the Corporation; and in the case of a Director, his latest address as shown in the records of the Corporation or in the most recent notice filed under the Act, whichever is the more current. 17 18 SECTION 12 EFFECTIVE DATE 12.1 EFFECTIVE DATE. This By-law shall come into force when made by the Board in accordance with the Act. 12.2 REPEAL. All previous By-laws of the Corporation are repealed as of the coming into force of this By-law. Such repeal shall not affect the previous operation of any By-law so repealed or affect the validity of any act done or right, privilege, obligation or liability acquired or incurred under, or the validity of any contract or agreement made pursuant to, or the validity of any articles (as defined in the Act) or predecessor charter documents of the Corporation obtained pursuant to, any such By-law prior to its repeal. All officers and persons acting under any By-law so repealed shall continue to act as if appointed under the provisions of this By-law and all resolutions of the Shareholders or the Board or a committee of the Board with continuing effect passed under any repealed By-law shall continue to be good and valid except to the extent inconsistent with this By-law and until amended or repealed. Approved by the Board of Directors on the 23rd day of June, 1995 and effective as of the date of the Articles of Continuance of the Corporation under the laws of the Province of Alberta. /s/ BILL JAYROE ----------------------------------- President /s/ MICHAEL NOONAN ----------------------------------- Secretary CONFIRMED by the Shareholders in accordance with the Act the 16th day of August, 1995. /s/ MICHAEL NOONAN ----------------------------------- Secretary 18 EX-4.1 4 SHAREHOLDERS PROTECTION RIGHTS PLAN 1 EXHIBIT 4.1 SHAREHOLDER PROTECTION RIGHTS PLAN AGREEMENT dated as of JULY 28, 1993 between FLOTEK INDUSTRIES INC. and PACIFIC CORPORATE TRUST COMPANY as Rights Agent 2 TABLE OF CONTENTS
Page No. ------- ARTICLE 1- INTERPRETATION 1.1 Certain Definitions 2 1.2 Currency 11 1.3 Descriptive Headings 11 1.4 References to Agreement 11 1.5 Grandfather Provisions 11 ARTICLE 2- THE RIGHTS 2.1 Legend on Common Share Certificates 13 2.2 Execution, Authentication, Delivery and Dating of Rights Certificates 13 2.3 Registration, Registration of Transfer and Exchange 14 2.4 Mutilated, Destroyed, Lost and Stolen Rights Certificates 14 2.5 Persons Deemed Owners of Rights 15 2.6 Delivery and Cancellation of Certificates 15 2.7 Agreement of Rights Holders 15 2.8 Rights Certificate Holder Not Deemed a Shareholder 16 2.9 Agreement Not Available 16 ARTICLE 3- EXERCISE OF THE RIGHTS 3.1 Initial Exercise; Exercise of Rights; Detachment of Rights 17 3.2 Adjustments to Exercise Price; Number of Rights 19 3.3 Date on Which Exercise is Effective 23 ARTICLE 4- ADJUSTMENTS TO THE RIGHTS IN THE EVENT OF CERTAIN TRANSACTIONS 4.1 Flip-Over Event 23 4.2 Flip-In Event 24 4.3 Obligations of the Corporation 25 4.4 Exchange Option 26 ARTICLE 5- SPECIAL MEETINGS OF INDEPENDENT SHAREHOLDERS TO CONSIDER PERMITTED BIDS 5.1 Meetings of Independent Shareholders 26
3 - 2 - 5.2 Approval 27 5.3 Fiduciary Duties of the Board of Directors of the Corporation 27 5.4 Further Acts 27 ARTICLE 6- THE RIGHTS AGENT 6.1 General 28 6.2 Merger or Amalgamation or Change of Name of Rights Agent 28 6.3 Duties of Rights Agent 29 6.4 Change of Rights Agent 30 ARTICLE 7- MISCELLANEOUS 7.1 Redemption and Waiver 31 7.2 Expiration 32 7.3 Issuance of New Rights Certificates 32 7.4 Fractional Rights and Fractional Shares 32 7.5 Supplements and Amendments 33 7.6 Rights of Action 34 7.7 Notice of Proposed Actions 34 7.8 Notices 34 7.9 Costs of Enforcement 35 7.10 Successors 35 7.11 Benefits of this Agreement 36 7.12 Governing Law 36 7.13 Counterparts 36 7.14 Severability 36 7.15 Effective Date 36 7.16 Determinations and Actions by the Board of Directors 36 7.17 Successor Corporations 37 7.18 Meetings of Holders of Rights 37 7.19 Shareholder Review 37 7.20 Time of the Essence 38 Exhibit "A" - Form of Rights Certificate
4 MEMORANDUM OF AGREEMENT made as of the 28th day of July, 1993. BETWEEN: FLOTEK INDUSTRIES INC., a corporation incorporated under the laws of British Columbia (hereinafter called the "Corporation") OF THE FIRST PART AND: PACIFIC CORPORATE TRUST COMPANY, a trust company incorporated under the laws of British Columbia, as rights agent (hereinafter called the "Rights Agent") OF THE SECOND PART WHEREAS the board of directors of the Corporation has determined that it is advisable for the Corporation to adopt a shareholder protection rights plan (the "Rights Plan"); AND WHEREAS in order to implement the Rights Plan the board of directors of the Corporation has: 1. authorized the issuance, effective at 5:00 p.m. (Vancouver time) on July 28, 1993 (the "Record Time") of one right (a "Right") in respect of each Common Share of the Corporation outstanding at the Record Time; and 2. authorized the issuance of one Right in respect of each Common Share issued after the Record Time and prior to the Separation Time; AND WHEREAS each Right entitles the holder thereof, after the Separation Time, to purchase securities of the Corporation (or, in certain cases, of certain other entities) pursuant to the terms and subject to the condition set forth herein; AND WHEREAS the Corporation desires to appoint the Rights Agent to act on behalf of the Corporation and holders of Rights, and the Rights Agent is willing to so act, in connection with the issuance, transfer, exchange and replacement of Rights Certificates, the exercise of Rights and other matters referred to herein; NOW THEREFORE, in consideration of the premises and respective covenants and agreements set forth herein, the parties hereby agree as follows: 5 - 2 - ARTICLE 1- INTERPRETATION 1.1 CERTAIN DEFINITIONS For the purposes of this Agreement, the following terms have the meanings indicated: (1) "ACQUIRING PERSON" shall mean, subject to subsections 1.5(1) and 1.5(2), any Person who is the Beneficial Owner of 20 percent or more of the outstanding Voting Shares of the Corporation; provided, however, that the term "Acquiring Person" shall not include: (a) the Corporation or any Subsidiary of the Corporation, any employee benefit plan, deferred profit sharing plan, stock participation plan or trust for the benefit of employees, of the Corporation or any Subsidiary of the Corporation, or any Person organized, appointed or established by the Corporation or any Subsidiary of the Corporation for or pursuant to the terms of any such plan or trust; and (b) any Person who becomes the Beneficial Owner of 20 percent or more of the outstanding Voting Shares of the Corporation as a result of: (i) an acquisition or redemption by the Corporation or a Subsidiary of the Corporation of Voting Shares of the Corporation which, by reducing the number of Voting Shares of the Corporation outstanding, increases the proportionate number of Voting Shares of the Corporation Beneficially Owned by such Person to 20 percent or more of the Voting Shares of the Corporation then outstanding (a "Redemption Event"); (ii) share acquisitions made pursuant to a Permitted Bid and in accordance with the provisions of Article 5 ("Permitted Bid Acquisitions"); or (iii) share acquisitions in respect of which the Board of Directors has waived the application of section 4.2 pursuant to the provisions of subsection 7.1(2) or 7.1(3) or which were made on or prior to the date of this Agreement ("Exempt Acquisitions"); provided,however, that if a Person shall become the Beneficial Owner of 20 percent or more of the Voting Shares of the Corporation then outstanding by reason of Redemption Events, Permitted Bid Acquisitions or Exempt Acquisitions and, after such Redemption Events, Permitted Bid Acquisitions or Exempt Acquisitions, such Person, while still the Beneficial Owner of 20 percent or more of the outstanding Voting Shares of the Corporation, becomes the Beneficial Owner of any additional Voting Shares of the Corporation otherwise than pursuant to Permitted Bid Acquisitions, Exempt Acquisitions or Pro Rata Acquisitions, then as of the date such Person becomes the Beneficial Owner of such additional Voting Shares such Person shall be an "Acquiring Person" (2) "AFFILIATE" shall have the meaning ascribed to such term in the Company Act (B.C.); (3) "ASSOCIATE" shall have the meaning ascribed to such term in the Securities Act (B.C.); 6 - 3 - (4) A Person shall be deemed the "BENEFICIAL OWNER" of, and to have "BENEFICIAL OWNERSHIP" of, and to "BENEFICIALLY OWN": (a) any securities as to which such Person, or any of such Person's Affiliates or Associates, is the direct or indirect beneficial owner (including through being a beneficiary of a trust which owns such securities whether or not such Person's interest in the trust is present or future, vested or contingent) or would be deemed to be the beneficial owner pursuant to the provisions of the Securities Act (B.C.) for the purposes of insider trading or takeover bids or, if such provisions shall be rescinded and there shall be no successor laws or regulations, pursuant to the provisions of the Securities Act (B.C.) as in effect on the date of this Agreement, whether or not such beneficial owner or deemed beneficial owner is the holder of record of such securities; (b) any securities as to which such Person or any of such Person's Affiliates or Associates has, directly or indirectly: (i) the right to acquire (whether such right is exercisable immediately or after the lapse or passage of time or upon the occurrence of a contingency or otherwise) pursuant to any agreement, arrangement or understanding (other than customary agreements with and between underwriters and banking group or selling group members with respect to a bona fide public offering of securities and other than pledges of securities in the ordinary course of business) or upon the exercise of any conversion right, exchange right, share purchase right (other than the Rights), warrant or option, or otherwise; or (ii) the right to vote such security (whether such right is exercisable immediately or after the lapse or passage of time or otherwise) pursuant to any agreement, arrangement or understanding, or otherwise; and (c) any securities which are Beneficially Owned, directly or indirectly, within the meaning of the foregoing provisions of this subsection 1.1(4) by any other Person with which such Person or any of such Person's Affiliates or Associates has any agreement, arrangement or understanding (whether or not in writing) with respect to or for the purpose of acquiring, holding, voting or disposing of any Voting Shares of the Corporation (other than customary agreements with and between underwriters and banking group or selling group members with respect to a bona fide public offering of securities) or acquiring, holding or disposing of a significant portion of the property or assets of the Corporation or any Subsidiary of the Corporation; provided,however, that a Person shall not be deemed the "Beneficial Owner" of, or to have "Beneficial Ownership" of, or to "Beneficially Own", any security: (d) solely because such security has been deposited or tendered pursuant to any Takeover Bid made by such Person or made by any of such Person's Affiliates or Associates until such deposited security has been taken up or paid for, whichever shall occur first; 7 - 4 - (e) solely because such Person or any of such Person's Affiliates or Associates has or shares the right to vote or direct the voting of such security pursuant to a revocable proxy given in response to a public proxy solicitation made pursuant to, and in accordance with, the applicable rules and regulations under the Company Act (B.C.) and the Securities Act (B.C.); (f) solely because such Person or any of such Person's Affiliates or Associates has or shares the power to vote or direct the voting of such a security in connection with or in order to participate in a public proxy solicitation made or to be made pursuant to and in accordance with the applicable rules and regulations referred to in clause (e) above; or (g) solely because such Person holds or exercises voting or dispositive power over such security without claiming any beneficial interest therein, provided that: (i) a substantial portion of the ordinary business of such Person (the "Investment Manager") is the management of investment funds for others and such voting or dispositive power of such security is held by the Investment Manager in the ordinary course of such business for the account of any other Person who is not an Associate or Affiliate of the Investment Manager and of whom the Investment Manager is not an Associate; or (ii) such Person (the "Trust Company") is licensed to carry on the business of a trust company under the laws of Canada or any province thereof and, as such, acts as trustee or administrator or in a similar capacity in relation to the estates of deceased or incompetent Persons and holds such voting or dispositive power over such security in the ordinary course of such duties for the estate of any such deceased or incompetent Person where neither such estate nor any beneficiary thereof is an Associate or Affiliate of the Trust Company and the Trust Company is not an Associate of such estate or beneficiary; and provided further in either of the foregoing cases that: (iii) the Voting Shares of the Corporation Beneficially Owned by the Investment Manager or the Trust Company, as the case may be, other than those in respect of which the exemption in this clause 1. 1(4)(g) applies, do not exceed five percent of the outstanding Voting Shares of the Corporation; and (iv) the Investment Manager or the Trust Company, as the case may be, has not made and does not propose to make a Takeover Bid alone or by acting jointly or in concert with any other Person. For purposes of this Agreement, in determining the percentage of the outstanding Voting Shares of the Corporation with respect to which a Person is or is deemed the Beneficial Owner shall be deemed outstanding; 8 - 5 - (5) "BOARD OF DIRECTORS" shall mean the board of directors of the Corporation or, if duly constituted and whenever duly empowered, the executive committee of the board of directors for the Corporation; (6) "BUSINESS DAY" shall mean any day other than a Saturday, Sunday or a day on which banking institutions in Vancouver are authorized or obligated by law to close; (7) "CLOSE OF BUSINESS" on any given date shall mean the time on such date (or, if such date is not a Business Day, the time on the next succeeding Business Day) at which the offices of the transfer agent for the Shares (or, after the Separation Time, the offices of the Rights Agent) are closed to the public in the city in which such transfer agent or Rights Agent has an office for the purposes of this Agreement; (8) "COMMON SHARES", when used with reference to the Corporation, shall mean the common shares of the Corporation and any other shares of the Corporation into which such shares may be subdivided, consolidated, reclassified or changed, and when used with reference to any Person other than the Corporation, shall mean the class of shares (or similar equity interest) with the greatest per share voting power entitled to vote generally in the election of all directors of such other Person or the equity securities or other equity interest having power (whether or not exercised) to control or direct the management of such other Person or, if such other Person is a Subsidiary of another Person, the Person or Persons which ultimately control such first-mentioned Person; (9) "COMPANY ACT (B.C.)" shall mean the British Columbia Company Act (R.S.B.C. 1979, c.59), as amended, and the regulations made thereunder, and any successor laws or regulations thereto; (10) "DIVIDENDS PAID IN THE ORDINARY COURSE" shall mean cash dividends paid at regular intervals in any fiscal year of the Corporation to the extent that such cash dividends do not exceed, in the aggregate, the greatest of: (a) 200 percent of the aggregate amount of cash dividends declared payable by the Corporation on its Common Shares in its immediately preceding fiscal year; (b) 300 percent of the arithmetic average of the aggregate amounts of cash dividends declared payable by the Corporation on its Common Shares in its three immediately preceding fiscal years; and (c) 100 percent of the aggregate consolidated net income of the Corporation, before extraordinary items, for its immediately preceding fiscal year; (11) "EXEMPT ACQUISITION" shall have the meaning ascribed thereto in paragraph 1. 1(1(b)(iii); (12) "EXERCISE PRICE" shall mean, as of any date, the price at which a holder of a Right may purchase the securities issuable upon exercise of such Right. Until adjustment thereof in accordance with the terms hereof, the Exercise Price for a Right shall be $10.00; (13) "EXPIRATION TIME" shall mean the earlier of: (a) the Termination Time; 9 -6- (b) the time, if any, determined pursuant to section 7.19; and (c) 5:00 p.m. (Vancouver Time) on July 31, 1998; (14) "FLIP-IN EVENT" shall mean a transaction or event in or pursuant to which any Person shall become an Acquiring Person; provided, however, that the term "Flip-In Event" shall not include any transaction or event that constitutes a Flip-Over Event; (15) "FLIP-OVER ENTITY" shall have the meaning attributed thereto in section 4.1; (16) "FLIP-OVER EVENT" shall mean: (a) a transaction or event or series of transactions or events in or pursuant to which, directly or indirectly, the Corporation shall consolidate or merge with or into, amalgamate with or into or enter into a statutory arrangement with, any other Person (other than a wholly-owned Subsidiary of the Corporation), or any other Person (other than a wholly-owned Subsidiary of the Corporation) shall consolidate or merge with or into, amalgamate with or into or enter into a statutory arrangement with, the Corporation, and, in connection therewith, all or part of the outstanding Voting Shares of the Corporation shall be changed in any way, reclassified or converted into or exchanged for shares or other securities of the Corporation or of any other Person or cash or any other property; or (b) a transaction or event or series of transactions or events in which, directly or indirectly, the Corporation shall sell or otherwise transfer (including by way of a leasehold interest) (or one or more of its Subsidiaries shall sell or otherwise transfer) property or assets: (i) aggregating more than 50 percent of the property or assets (measured by either book value or fair market value); or (ii) which generated during the Corporation's last completed fiscal year or may reasonably be expected to generate in the Corporation's then-current fiscal year more than 50 percent of the Corporation's income or cash flow; of the Corporation and its Subsidiaries (taken as a whole) to any other Person or Persons (other than the Corporation or one or more of its wholly-owned Subsidiaries); (17) "GRANDFATHERED PERSON", "GRANDFATHERED PERSON TRANSFEREE" and "GRANDFATHERED BIDDER" shall have the respective meanings attributed thereto in subsections 1.5(1), 1.5(2) and 1.5(3); (18) "INCOME TAX ACT" shall mean the Income Tax Act, R.S.C. 1970, C.1-5, as amended, and the regulations thereunder, and any comparable or successor laws or regulations thereto; (19) "INDEPENDENT SHAREHOLDERS" shall mean, with respect to any Referendum (as such term is defined in Article 5) on any Permitted Bid, holders of Common Shares of the Corporation other than Common 10 - 7 - Shares of the Corporation Beneficially Owned by (a) the Offeror making such Permitted Bid, (b) any Associate or Affiliate of such Offeror and (c) any Person acting jointly or in concert with such Offeror or with any Associate or Affiliate of such Offeror; (20) "MARKET PRICE" per share of any securities on any date of determination shall mean the average of the daily closing prices per share of such securities (determined as described below) on each of the 20 consecutive Trading Days through and including the Trading Day immediately preceding such date; provided, however, that if an event described in section 3.3 shall have caused the closing price in respect of any Trading Day used to determine the Market Price not to be fully comparable with the closing price on such date of determination or, if the date of determination is not a Trading Day, on the immediately preceding Trading Day, each such closing price so used shall be appropriately adjusted in a manner analogous to the applicable adjustment provided for in section 3.2 in order to make it fully comparable with the closing price on such date of determination or, if the date of determination is not a Trading Day, on the immediately preceding Trading Day. The closing price per share of any securities on any date shall be: (a) the closing board lot sale price or, in case no such sale takes place on such date, the average of the closing bid and asked prices, for each share of such securities as reported by the principal stock exchange in Canada on which such securities are listed and posted for trading; (b) if the securities are not listed and posted for trading on any stock exchange in Canada, the last sale price, regular way, or, in case no such sale takes place on such date, the average of the closing bid and asked prices, regular way, for each share of such securities as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the principal national securities exchange in the United States on which such securities are listed or admitted to trading; (c) if for any reason none of such prices are available on such day or the securities are not listed and posted for trading on a stock exchange in Canada or a national securities exchange in the United States, the last quoted price, or if not so quoted, the average of the high bid and low asked prices for each share of such securities in the over-the-counter market as reported by the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") or, if the securities are not quoted on NASDAQ, as reported by the Canadian Over-The-Counter Automated Trading System or another such system then in use; or (d) if on any such date the securities are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the securities selected in good faith by the Board of Directors; provided,however, that if on any such date the securities are not traded on any exchange or in the over-the-counter market, the closing price per share of such securities on such date shall mean the fair value per security of such securities on such date as determined in good faith by the Board of Directors, after consultation with a nationally or internationally recognized investment dealer or investment banker with respect to the fair value per share of such securities; 11 - 8 - (21) "OFFER TO ACQUIRE" shall include: (a) an offer to purchase, or a solicitation of an offer to sell, Voting Shares of the Corporation; and (b) an acceptance of an offer to sell Voting Shares of the Corporation, whether or not such offer to sell has been solicited; or any combination thereof, and the Person accepting an offer to sell shall be deemed to be making an offer to acquire to the Person that made the offer to sell; (22) "OFFEROR" shall mean a Person who has announced an intention to make or who has made a Takeover Bid; (23) "OFFICERS' CERTIFICATE" shall mean a certificate signed by the Chairman of the Board, the President or any Vice-President and by the Secretary, the Treasurer, an Assistant-Secretary or an Assistant-Treasurer of the Corporation; (24) "OFFEROR'S SECURITIES" shall mean Voting Shares of the Corporation Beneficially Owned by any Person who has announced an intention to make or who has made a Takeover Bid; (25) "PERMITTED BID" shall mean a Takeover Bid made in compliance with, and not on a basis which is exempt from, the provisions of Part 11 of the Securities Act (B.C.) and the regulations thereunder (or such successor laws or regulations or, if such provisions shall be repealed and there shall be no successor laws or regulations pursuant to such provisions as they read on the date of this Agreement) and the securities laws of all the other relevant jurisdictions and also in compliance with the following additional provisions: (a) the Takeover Bid is made to all holders of Common Shares of the Corporation wherever resident or registered on the books of the Corporation for all Common Shares held; (b) subject to subsection 1.5(3), the Offeror does not, alone or together with Persons acting jointly or in concert with him, at the time of commencement of or at any time while the Takeover Bid remains outstanding Beneficially Own five percent or more of the outstanding Voting Shares of the Corporation; (c) if the Takeover Bid is made by a Grandfathered Person Transferee or any Person acting jointly or in concert with a Grandfathered Person Transferee or any Person who, as regards the Grandfathered Person Transferee, is a "control person" as defined in the Securities Act (B.C.) or any Affiliate or Associate of any of the foregoing within 12 months from the date upon which the Grandfathered Person Trustee became such, the Offeror shall offer consideration for Common Shares deposited under the Takeover Bid at least equal to the consideration that was paid on a per-Common Share basis to the Transferor [as defined in subsection 1.5(2)] from whom such Grandfathered Person Transferee acquired Voting Shares or the Offeror shall offer at least the cash equivalent of such consideration; 12 -9- (d) the Takeover Bid is made on terms and conditions that comply with, and which do not and will not, upon consummation of the bid, result in the Corporation or any Subsidiary of the Corporation being in default under, or in contravention of, any applicable laws; (e) the Takeover Bid shall contain and the take up and payment for securities tendered or deposited thereunder shall be subject to an irrevocable and unqualified condition that no Common Shares of the Corporation shall be taken up or paid for pursuant to the Takeover Bid unless a resolution is passed to approve the Takeover Bid at a special meeting in Independent Shareholders by the votes of Independent Shareholders holding or representing by proxy more than 50 percent of the Common shares of the Corporation in respect of which votes are cast at such a meeting, which special meeting of Independent Shareholders shall be called and held for that purpose in accordance with the provisions of Article 5; (f) the Takeover Bid shall not expire until the earlier of (i) 10 clear Business Days following the conclusion of the special meeting of Independent Shareholders referred to in clause 1 1(25)(e) and (ii) 120 days after the date of the Takeover Bid; provided, however, that in no circumstances shall the Takeover Bid expire earlier than five clear Business Days following the conclusion of the special meeting of Independent Shareholders referred to in clause 1. 1(25)(e); and (g) the Offeror shall provide the Rights Agent, within two Business Days of the announcement of the Takeover Bid, with a list of all securities of the Corporation Beneficially Owned by each of the Offeror and such Offeror's Associates and Affiliates and any Person acting jointly or in concert with the Offeror or the Offeror's Associates and Affiliates, together with the particulars of the registration of all such securities, and an undertaking to update such list on a daily basis to reflect any changes occurring or to occur in such Beneficial Ownership, and the Offeror shall perform its obligation under such undertaking; (26) "PERMITTED BID ACQUISITIONS" shall have the meaning ascribed thereto in paragraph 1.1(1)(b)(ii); (27) "PERSON" shall include any individual, firm, partnership, association, trust, trustee, executor, administrator, legal personal representative, group, body corporate, corporation, unincorporated organization, syndicate or other entity; (28) "PRO RATA ACQUISITION" shall mean the acquisition of Voting Shares of the Corporation as a result of a stock dividend, a stock split or other event pursuant to which a Person receives or acquires Voting Shares of the Corporation on the same pro rata basis as all other holders of Voting Shares of the Corporation of the same class; (29) "RECORD TIME" shall mean 5:00 p.m. (Vancouver time) on July 28, 1993; (30) "REDEMPTION EVENT" shall have the meaning ascribed thereto in paragraph 1.1(1)(b)(i); 13 - 10 - (31) "RIGHTS CERTIFICATE" shall mean the certificates representing the Rights after the Separation Time which shall be in the form attached hereto as Exhibit "A"; (32) "SECURITIES ACT (B.C.)" shall mean the Securities Act, S.B.C. 1985, c.83, as amended, and the regulations thereunder, and any successor laws or regulations thereto; (33) "SEPARATION TIME" shall mean the close of business on the eighth Trading Day after the earlier of: (a) the Stock Acquisition Date; and (b) the date of the commencement or first public announcement (provided such announcement is made after the Record Time) of the intent of any Person (other than the Corporation or any Subsidiary of the Corporation) to commence a Takeover Bid (other than a Permitted Bid), or such later date as may be determined by the Board of Directors, provided that if any Takeover Bid referred to in this clause (b) of this subsection 1.1(33) expires, is canceled, terminated or otherwise withdrawn prior to the Separation Time, such Takeover Bid shall be deemed, for the purposes of this subsection 1.1(33), never to have been made; (34) "RIGHT" shall have the meaning ascribed thereto in the recitals hereto; (35) "STOCK ACQUISITION DATE" shall mean the date of the first public announcement [which, for purposes of this definition, shall include, without limitation, the filing of a report pursuant to section 93 of the Securities Act (B.C.)] by the Corporation or an Acquiring Person of facts indicating that a Person has become an Acquiring Person; (36) "SUBSIDIARY" of a Person shall have the meaning ascribed thereto in the Company Act (B.C.); (37) "TAKEOVER BID" shall mean an Offer to Acquire Voting Shares of the Corporation where the Voting Shares of the Corporation subject to the Offer to Acquire, together with Voting Shares of the Corporation Beneficially Owned by the Person making the Offer to Acquire, constitute in the aggregate 20 percent or more of the outstanding Voting Shares of the Corporation at the date of the Offer to Acquire; (38) "TERMINATION TIME" shall mean the time at which the right to exercise Rights shall terminate pursuant to section 4.4 or section 7.1; (39) "TRADING DAY", when used with respect to any securities, shall mean a day on which the principal Canadian or United States securities exchange on which such securities are listed or admitted to trading is open for the transaction of business or, if the securities are not listed or admitted to trading on any Canadian or United States securities exchange, a Business Day; and (40) "Voting Shares", when used with reference to the Corporation, shall mean the Common shares of the Corporation and any other shares of the Corporation entitled to vote generally in the election of directors, and when used with reference to any Person other than the Corporation, shall mean Common Shares of such Person and any other shares of capital stock or voting interests of such Persons entitled to vote 14 - 11 - generally in the election of all directors; and the percentage of Voting Shares Beneficially Owned by any Person shall, for the purposes of this Agreement, be and be deemed to be the product determined by the formula; 100 x A - B where A = the number of votes for the election of all directors generally attaching to the Voting Shares Beneficially Owned by such Person; and B = the number of votes for the election of all directors generally attaching to all outstanding Voting Shares. 1.2 CURRENCY All sums of money which are referred to in this Agreement are expressed in lawful money of Canada, unless otherwise specified. 1.3 DESCRIPTIVE HEADINGS Descriptive headings appear herein for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. 1.4 REFERENCES TO AGREEMENT References to "this Agreement", "hereto", "herein", "hereby", "hereunder", "hereof" and similar expressions refer to this Agreement and not to any particular Article, section, subsection, paragraph, subparagraph, clause, subdivision or other portion hereof and include any and every instrument supplemental or ancillary hereto. 1.5 GRANDFATHER PROVISIONS (1) A Person shall not be and shall not be deemed to be an Acquiring Person if such Person (a "Grandfathered Person"): (a) is the Beneficial Owner of 20 percent or more of the outstanding Voting Shares of the Corporation as at the Record Time; or (b) becomes the Beneficial Owner of 20 percent or more of the outstanding Voting Shares of the Corporation after the Record Time and such Person's Beneficial Ownership of Voting 15 - 12 - Shares of the Corporation does not exceed the number of Voting Shares of the Corporation Beneficially Owned by such Person immediately prior to the Record time by more than one percent of the then-issued and outstanding Voting Shares of the Corporation; provided, however, that the exceptions in clauses 1.5(1)(a) and (b) shall cease to be applicable to a Grandfathered Person who shall after the Record Time become, pursuant to one or more transactions or events, the Beneficial Owner of additional Voting Shares of the Corporation constituting in the aggregate more than one percent of the Voting Shares of the Corporation then outstanding, other than pursuant to Permitted Bid Acquisitions, Exempt Acquisitions or Pro Rata Acquisitions. (2) A Person shall not be and shall not be deemed to be an Acquiring Person if such Person (a "Grandfathered Person Transferee") becomes the Beneficial Owner of 20 percent or more of the outstanding Voting Shares of the Corporation solely as a result of the acquisition of all but not less than all of the Voting Shares of the Corporation Beneficially Owned immediately prior thereto by a Grandfathered Person or a Grandfathered Person Transferee (the "Transferor") and such Person's Beneficial Ownership of Voting Shares of the Corporation after giving effect to such acquisition does not exceed the number of Voting Shares of the Corporation Beneficially Owned by the Transferor immediately prior to such acquisition by more than one percent of the then-issued and outstanding Voting Shares of the Corporation; provided, however, that the exception in this subsection 1.5(2) shall cease to be applicable to a Grandfathered Person Transferee who shall after the time at which he becomes a Grandfathered Person Transferee (the "Transfer Time") become, pursuant to one or more transactions or events, the Beneficial Owner of additional Voting Shares of the Corporation constituting, together with the number of Voting Shares Beneficially Owned by such Grandfathered Person Transferee immediately prior to the Transfer Time, in the aggregate more than one percent of the Voting Shares of the Corporation then outstanding, other than pursuant to Permitted Bid Acquisitions, Exempt Acquisitions or Pro Rata Acquisitions. (3) For the purpose of determining whether a Person is entitled to make a Permitted Bid, the provisions of clause 1. 1(25)(1,) shall not apply to a Person (a "Grandfathered Bidder") who is either: (a) a Grandfathered Person or a Grandfathered Person Transferee at the time of commencement of and at all times while such Person's Takeover Bid remains outstanding; or (b) the Beneficial Owner of more than five percent but less than 20 percent of the outstanding Voting Shares of the Corporation as at the Record Time; provided that the exception in this clause 1 .5(3)(b) shall cease to be applicable to a Grandfathered Bidder if such Grandfathered Bidder shall have the Record Time become, pursuant to one or more transactions or events, the Beneficial Owner of additional Voting Shares of the Corporation constituting in the aggregate more than one percent of the voting Shares of the Corporation then outstanding, other than pursuant to Permitted Bid Acquisitions, Exempt Acquisitions or Pro Rata Acquisitions. (4) For greater certainty, for the purposes of this section 1.5, a Person shall be deemed to have become the Beneficial Owner of additional Voting Shares of the Corporation if the Person becomes the Beneficial Owner of such Voting Shares pursuant to a transaction or event and, as a result, such Person is the 16 - 13 - Beneficial Owner of a greater number of Voting Shares than the number of Voting Shares that he Beneficially Owned immediately prior to such transaction or event. ARTICLE 2- THE RIGHTS 2.1 LEGEND ON COMMON SHARE CERTIFICATES Certificates for Common Shares issued after the Record Time but prior to the earlier of the Separation Time and the Expiration Time shall evidence, in addition to the Common Shares, one Right for each Common Share represented thereby and shall have impressed on, printed on, written on or otherwise affixed to them a legend substantially as follows: Until the Separation Time (as defined in the Rights Agreement referred to below), this certificate also evidences and entitles the holder hereof to certain Rights as set forth in a Shareholder Protection Rights Plan Agreement (the "Rights Agreement") between Flotek Industries Inc. (the "Corporation") and Pacific Corporate Trust Company, as rights agent, the terms of which are hereby incorporated herein by reference. Certificates representing Common Shares that are issued and outstanding from time to time hereafter shall evidence one Right for each Common Share evidenced thereby, notwithstanding the absence of the foregoing legend, until the earlier of the Separation Time and the Expiration Time. 2.2 EXECUTION. AUTHENTICATION., DELIVERY AND DATING OF RIGHTS CERTIFICATES (1) The certificates representing the Rights (the "Rights Certificates") shall be executed on behalf of the Corporation by its Chairman of the Board, President or one of its Vice-Presidents together with its Treasurer, Secretary or one of its Assistant-Treasurers or Assistant-Secretaries under its corporate seal reproduced thereon. The signature of any of these officers on the Rights Certificates may be manual or facsimile. Rights Certificates bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Corporation shall bind the Corporation, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the countersignature and delivery of such Rights Certificates. (2) Promptly after the Corporation learns of the Separation Time, the Corporation will notify the Rights Agent of such Separation Time and will deliver Rights Certificates executed by the Corporation to the Rights Agent for countersignature, and the Rights Agent shall manually countersign and deliver such Rights Certificates to the holders of the Rights pursuant to subsection 3.1(3). No Rights Certificate shall be valid for any purpose until countersigned by the Rights Agent as aforesaid. (3) Each Rights Certificate shall be dated the date of the countersignature thereof. 17 - 14 - 2.3 REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE (1) The Corporation will cause to be kept a register (the "Rights Register") in which, subject to such reasonable regulation as it may prescribe, the Corporation will provide for the registration and transfer of Rights. The Rights Agent is hereby appointed the "Rights Registrar" for the purpose of maintaining the Rights Register for the Corporation and registering Rights and transfers of Rights as herein provided. In the event that the Rights Agent shall cease to be the Rights Registrar, the Rights Agent will have the right to examine the Rights Register at all reasonable times. After the Separation Time and prior to the Expiration Time, upon surrender for registration of transfer or exchange of any Rights Certificate, and subject to the provisions of subsection (3) of this section 2.3, the Corporation will execute, and the Rights Agent will manually countersign and deliver, in the name of the holder or the designated transferee or transferees, as required pursuant to the holder's instructions, one or more new Rights Certificates evidencing the same aggregate number of Rights as did the Rights Certificates so surrendered. (2) All Rights issued upon any registration of transfer or exchange of Rights Certificates shall be the valid obligations of the Corporation, and such Rights shall be entitled to the same benefits under this Agreement as the Rights surrendered upon such registration of transfer or exchange. (3) Every Rights Certificate surrendered for registration of transfer or exchange shall be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Corporation or the Rights Agent, as the case may be, duly executed by the holder thereof or such holder's attorney duly authorized in writing. As a condition to the issuance of any new Rights Certificate under this section 2.3, the Corporation may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Rights Agent) in connection therewith. 2.4 MUTILATED. DESTROYED. LOST AND STOLEN RIGHTS CERTIFICATES (1) If any mutilated Rights Certificate is surrendered to the Rights Agent prior to the Expiration Time, the Corporation shall execute and the Rights Agent shall manually countersign and deliver in exchange therefor a new Rights Certificate evidencing the same number of Rights as the Rights Certificate surrendered. (2) If there shall be delivered to the Corporation and the Rights Agent prior to the Expiration Time (a) evidence to their satisfaction of the destruction, loss or theft of any Rights Certificate and (b) such security or indemnity as may be required by them to save each of them and any of their agents harmless, then, in the absence of notice to the Corporation or the Rights Agent that such Rights Certificate has been acquired by a bona fide purchaser, the Corporation shall execute and upon its request the Rights Agent shall countersign and deliver, in lieu of any such destroyed, lost or stolen Rights Certificate, a new Rights Certificate evidencing the same number of Rights as did the Rights Certificate so destroyed, lost or stolen. (3) As a condition to the issuance of any new Rights Certificate under this section 2.4, the Corporation may require the payment of a sum sufficient to cover any tax or other governmental charge that may be 18 - 15 - imposed in relation thereto and any other expenses (including the fees and expenses of the Rights Agent) connected therewith. (4) Every new Rights Certificate issued pursuant to this section 2.4 in lieu of any destroyed, lost or stolen Rights Certificate shall evidence the contractual obligation of the Corporation, whether or not the destroyed, lost or stolen Rights Certificate shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Agreement equally and proportionately with any and all other Rights duly issued by the Corporation. 2.5 PERSONS DEEMED OWNERS OF RIGHTS The Corporation, the Rights Agent and any agent of the Corporation or the Rights Agent may deem and treat the Person in whose name such Rights Certificate (or, prior to the Separation Time, the associated Common Share certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby for all purposes whatsoever. As used in this Agreement, unless the context otherwise requires, the term "holder" of any Rights shall mean the registered holder of such Rights (or, prior to the Separation Time, the associated Common Shares). 2.6 DELIVERY AND CANCELLATION OF CERTIFICATES All Rights Certificates surrendered upon exercise or for redemption, registration of transfer or exchange shall, if surrendered to any Person other than the Rights Agent, be delivered to the Rights Agent and, in any case, shall be promptly canceled by the Rights Agent. The Corporation may at any time deliver to the Rights Agent for cancellation any Rights Certificates previously countersigned and delivered hereunder which the Corporation may have acquired in any manner whatsoever, and all Rights Certificates so delivered shall be promptly canceled by the Rights Agent. No Rights Certificate shall be countersigned in lieu of or in exchange for any Rights Certificates canceled as provided in this section 2.6, except as expressly permitted by this Agreement. The Rights Agent shall destroy all canceled Rights Certificates and deliver a certificate of destruction to the Corporation. 2.7 AGREEMENT OF RIGHTS HOLDERS Every holder of Rights by accepting the same consents and agrees with the Corporation and the Rights Agent and with every other holder of Rights: (a) to be bound by and subject to the provisions of this Agreement, as amended from time to time in accordance with the terms hereof, in respect of the Rights held; (b) that prior to the Separation Time, each Right will be transferable only together with, and will be transferred by a transfer of, the Common Share representing such Right; (c) that after the Separation Time, the Rights Certificates will be transferable only upon registration of the transfer on the Rights Register as provided herein; 19 - 16 - (d) that prior to due presentment of a Rights Certificate (or, prior to the Separation Time, the associated Common Share certificate) for registration of transfer, the Corporation, the Rights Agent and any agent of the Corporation or the Rights Agent may deem and treat the Person in whose name the Rights Certificate (or, prior to the Separation Time, the associated Common Share certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on such Rights Certificate or the associated Common Share certificate made by anyone other than the Corporation or the Rights Agent) for all purposes whatsoever, and neither the Corporation nor the Rights Agent shall be affected by any notice to the contrary; (e) that such holder of Rights has waived his right to receive any fractional Rights or any fractional Common Shares upon exercise of a Right (except as provided herein); and (f) that without the approval of any holder of Rights and upon the sole authority of the Board of Directors acting in good faith, this Agreement may be supplemented or amended from time to time pursuant to and as provided herein. 2.8 RIGHTS CERTIFICATE HOLDER NOT DEEMED A SHAREHOLDER No holder, as such, of any Rights or Rights Certificate shall be entitled to vote, receive dividends or be deemed for any purpose whatsoever the holder of any Common Share or any other shares of the Corporation which may at any time be issuable on the exercise of the Rights represented thereby, nor shall anything contained herein or in any Rights Certificate be construed or deemed to confer upon the holder of any Right or Rights Certificate, as such, any of the rights, titles, benefits or privileges of a shareholder of the Corporation or any right to vote at any meeting of shareholders of the Corporation whether for the election of directors or otherwise or upon any matter submitted to holders of Common Shares or any other shares of the Corporation at any meeting thereof, or to give or withhold consent to any action of the Corporation, or to receive notice of any meeting or other action affecting any shareholder of the Corporation except as expressly provided herein, or to receive dividends, distributions or subscription rights, or otherwise, until the Right or Rights evidenced by any Rights Certificate shall have been duly exercised in accordance with the terms and provisions hereof. 2.9 AGREEMENT NOT AVAILABLE No person other than a director of the Company shall be entitled to review a copy of this Agreement and no person shall be entitled to receive a copy of this Agreement without the prior approval of the Board of Directors. 20 - 17 - ARTICLE 3- EXERCISE OF THE RIGHTS 3.1 INITIAL EXERCISE; EXERCISE OF RIGHTS: DETACHMENT OF RIGHTS (1) Subject as hereinafter provided, from and after the Separation Time and prior to the Expiration Time each Right will entitle the holder thereof to purchase one Common Share for the Exercise Price (which Exercise Price and number of Common Shares are subject to adjustment as set forth below). (2) Until the Separation Time (a) the Rights shall not be exercisable and no Right may be exercised and (b) for administrative purposes, each Right will be evidenced by the certificate for the associated Common Shares registered in the name of the holder thereof (which certificates shall also be deemed to be Rights Certificates) and will be transferable only together with, and will be transferred by a transfer of, such associated Common Share. (3) From and after the Separation Time and prior to the Expiration Time (a) the Rights shall be exercisable and (b) the registration and transfer of the Rights shall be separate from and independent of Common Shares. Promptly following the Separation Time, the Rights Agent will mail to each holder of record of Common Shares as of the Separation Time [other than an Acquiring Person, and in respect of any Rights Beneficially Owned by such Acquiring Person which are not held of record by such Acquiring Person the holder of Record of such Rights (a "Nominee")], at such holder's address as shown by the records of the Corporation (and the Corporation hereby agrees to furnish copies of such records to the Rights Agent for this purpose): (a) Rights Certificates representing the number of Rights held by such holder at the Separation Time in substantially the form of Exhibit A hereto, appropriately completed and having such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Corporation may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any law, rule, regulation or judicial or administrative order or with any rule or regulation made pursuant to thereto or with any rule or regulation of any stock exchange or quotation system on which the Rights may from time to time be listed or trade, or to conform to usage; and (b) a disclosure statement describing the Rights, provided that a Nominee shall be sent the materials provided for in (i) and (ii) only in respect of all Common Shares held of record by it which are not Beneficially Owned by an Acquiring Person. (4) Rights may be exercised in whole or in part on any Business Day after the Separation Time and prior to the Expiration Time by submitting to the Rights Agent the Rights Certificate evidencing such Rights together with: (a) an election to exercise such Rights (an "Election to Exercise") substantially in the form attached to the Rights Certificate duly completed and executed by the holder or his executors or administrators or other personal representatives or his or their legal attorney duly appointed by an instrument in writing in form and executed in a manner satisfactory to the Rights Agent; 21 - 18 - (b) payment in cash, or by certified cheque, banker's draft or money order payable to the order of the Corporation, of a sum equal to the applicable Exercise Price multiplied by the number of Rights being exercised and a sum sufficient to cover any transfer tax or charge which may be payable in respect of any transfer involved in the transfer or delivery of Rights Certificates or the issuance or delivery of certificates for Common Shares in a name other than that of the holder of the Rights being exercised; and (c) a declaration of ownership (a "Declaration") substantially in the form attached to the Rights Certificate representing the Rights or in such other form as may be approved by the Board of Directors pursuant to subsection 3.2(6), in respect of each Person to whom Common Shares are to be issued as a result of such exercise duly completed and executed by each such Person. (5) Subject to section 3.2, upon receipt of the Rights Certificate which is accompanied by (a) a completed Election to Exercise that does not indicate that such Right is null and void as provided by subsection 4.2(2), (b) payment as set forth in subsection 3.1(4) and (c) a completed Declaration, the Rights Agent (unless otherwise instructed by the Corporation) will thereupon promptly: (a) requisition from the transfer agent for the Common Shares, certificates representing the number of Common Shares to be purchased (the Corporation hereby irrevocably authorizing its transfer agents to comply with all such requisitions); (b) when appropriate, requisition from the Corporation the amount of cash to be paid in lieu of issuing fractional Common Shares; (c) after receipt of such certificate, deliver the same to or upon the order of the registered holder of such Rights Certificate, registered in such name or names as may be designated by such holder; and (d) when appropriate, after receipt, deliver such cash to or to the order of the registered holder of the Rights Certificate. (6) In case the holder of any Rights shall exercise less than all the Rights evidenced by such holder's Rights Certificate, a new Rights Certificate evidencing the Rights remaining unexercised will be issued by the Rights Agent to such holder or to such holder's duly authorized assigns. (7) The Corporation covenants and agrees that it will: (a) take all such action as may be necessary and within its power to ensure that all Common Shares delivered upon exercise of Rights shall, at the time of delivery of the certificates representing such Common Shares (subject to payment of the Exercise Price), be duly and validly authorized, executed, issued and delivered as fully paid and non-assessable; (b) take all such action as may be necessary and within its power to comply with any applicable requirements of the Company Act (B.C.), the Securities Act (B.C.) and the 22 - 19 - Securities Acts or comparable legislation of each of the provinces of Canada and any other applicable law, rule or regulation, in connection with the issuance and delivery of the Rights Certificates and the issuance of any Common Shares upon exercise of Rights; (c) use reasonable efforts to cause all Common Shares issued upon exercise of Rights to be listed on the principal exchanges on which the Common Shares were traded prior to the Stock Acquisition Date; (d) cause to be reserved and kept available out of its authorized and unissued Common Shares, the number of Common Shares that, as provided in this Agreement, will from time to time be sufficient to permit the exercise in full of all outstanding Rights; and (e) pay when due and payable any and all federal and provincial transfer taxes (for greater certainty, not including any income taxes of the holder or exercising holder or any liability of the Corporation to withhold tax) which may be payable in respect of the original issuance or delivery of the Rights Certificates, provided that the Corporation shall not be required to pay any transfer tax or charge which may be payable in respect of any transfer involved in the transfer or delivery of Rights Certificates or the issuance or delivery of certificates for Common Shares in a name other than that of the holder of the Rights being transferred or exercised. 3.2 ADJUSTMENTS TO EXERCISE PRICE; NUMBER OF RIGHTS The Exercise Price, the number and kind of Common Shares subject to purchase upon the exercise of each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this section 3.2. (1) In the event the Corporation shall at any time after the Record Time and prior to the Expiration Time: (a) declare or pay a dividend on the Common Shares payable in Common Shares (or other securities exchangeable for or convertible into or giving a right to acquire Common Shares or other securities) other than pursuant to any optional stock dividend program, (b) subdivide or change the outstanding Common Shares into a greater number of Common Shares, (c) combine or change the outstanding Common Shares into a smaller number of Common Shares; or (d) issue any Common Shares (or other securities exchangeable for or convertible into or giving a right to acquire Common Shares or other securities) in respect of, in lieu of or in exchange for existing Common Shares, except as otherwise provided in this section 3.2, 23 - 20 - the Exercise Price in effect at the time of the record date for such dividend or for the effective date of such subdivision, combination or reclassification, and the number and kind of Common Shares or other securities, as the case may be, issuable on such date, shall be proportionately adjusted so that the holder of any Right exercised after such time shall be entitled to receive, upon payment of the Exercise Price then in effect, the aggregate number and kind of Common Shares or other securities, as the case may be, which, if such Right had been exercised immediately prior to such date and at a time when the Common Share transfer books of the Corporation were open, he would have been entitled to receive by virtue of such dividend, subdivision, combination or reclassification. If an event occurs which would require an adjustment under both this section 3.2 and section 4.2, the adjustment provided for in this section 3.2 shall be in addition to, and shall be made prior to, any adjustment required pursuant to section 4.2. (2) In case the Corporation shall fix a record date for the issuance of rights, options or warrants to all holders of Common Shares entitling them to subscribe for or purchase (for a period expiring within 45 calendar days after such record date) Common Shares [or shares having the same rights, privileges and preferences as Common Shares ("equivalent common shares")] or securities convertible into Common Shares or equivalent common shares at a price per Common Share or per equivalent common share (or having a conversion price per share, if a security convertible into Common Shares or equivalent common shares) less than the Market Price per Common Share on such record date, the Exercise Price in respect of the Rights to be in effect after such record date shall be determined by multiplying the Exercise Price in effect immediately prior to such record date by a fraction, (a) the numerator of which shall be the number of Common Shares outstanding on such record date, plus the number of Common Shares that the aggregate offering price of the total number of Common Shares and/or equivalent common shares so to be offered (and/or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such Market Price per Common Share and (b) the denominator of which shall be the number of Common Shares outstanding on such record date, plus the number of additional Common Shares and/or equivalent common shares to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible). In case such subscription price may be paid by delivery of consideration, part or all of which may be in a form other than cash, the value of such consideration shall be as determined in good faith by the Board of Directors, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of the Rights. Such adjustment shall be made successively whenever such a record date is fixed and, in the event that such rights or warrants are not so issued, the Exercise Price shall be adjusted to be the Exercise Price which would then be in effect if such record date had not been fixed. (3) In case the Corporation shall fix a record date for a distribution to all holders of Common Shares (including any such distribution made in connection with a merger in which the Corporation is the continuing corporation) of evidences of indebtedness, cash (other than a dividend paid in the ordinary course or a dividend paid in Common Shares, but including any dividend payable in securities other than Common Shares), assets or subscription rights or warrants [excluding those referred to in subsection 3.2(2)), the Exercise Price to be in effect after such record date shall be determined by multiplying the Exercise Price in effect immediately prior to such record date by a fraction, (a) the numerator of which shall be the Market Price per Common Share on such record date, less the fair market value (as determined in good faith by the Board of Directors, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of the Rights) of the portion of the cash, assets or evidences of indebtedness so to be distributed or of such subscription rights or warrants 24 - 21 - applicable to a Common Share and (b) the denominator of which shall be such Market Price per Common Share. Such adjustments shall be made successively whenever such a record date is fixed and, in the event that such distribution is not so made, the Exercise Price shall be adjusted to be the Exercise Price which would have been in effect if such record date had not been fixed. (4) Notwithstanding anything herein to the contrary, no adjustment to the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least one percent in the Exercise Price; provided, however, that any adjustments which by reason of this subsection 3.2(4) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this section 3.2 shall be made to the nearest cent or to the nearest ten-thousandth of a Common Share or other share, as the case may be. Notwithstanding the first sentence of this subsection 3.2(4), any adjustment required by this section 3.2 shall be made no later than the earlier of (i) two years from the date of the transaction which mandates such adjustment and (ii) the Termination Date. (5) If as a result of an adjustment made pursuant to section 4.1 or 4.2, the holder of any Right thereafter exercised shall become entitled to receive any shares other than Common Shares, thereafter the number of such other shares so receivable upon exercise of any Right and the Exercise Price thereof shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Shares contained in subsections 3.2(1), (2), (3), (4), (5), (6)) (7), (8) and (9), and the provisions of this Agreement with respect to the Common Shares shall apply on like terms to any such other shares. (6) All Rights originally issued by the Corporation subsequent to any adjustment made to the Exercise Price hereunder shall evidence the right to purchase, at the adjusted Exercise Price, the number of Common Shares purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein. (7) Unless the Corporation shall have exercised its election as provided in subsection 3.2(8), upon each adjustment of the Exercise Price as a result of the calculations made in subsections 3.2(2) and (3), each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Exercise Price, that number of Common Shares (calculated to the nearest one ten-thousandth) obtained by: (a) multiplying (x) the number of Common Shares covered by a Right immediately prior to this adjustment by (y) the Exercise Price in effect immediately prior to such adjustment of the Exercise Price; and (b) dividing the product so obtained by the Exercise Price in effect immediately after such adjustment of the Exercise Price. (8) The Corporation may elect on or after the date of any adjustment of the Exercise Price to adjust the number of Rights, in lieu of any adjustment in the number of Common Shares purchasable upon the exercise of a Right. Each of the Rights outstanding after the adjustment in the number of Rights shall be exercisable for the number of Common Shares for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that 25 - 22 - number of Rights (calculated to the nearest one ten-thousandth) obtained by dividing the Exercise Price in effect immediately prior to adjustment of the Exercise Price by the Exercise Price in effect immediately after adjustment of the Exercise Price. The Corporation shall make a public announcement of its election to adjust the number of Rights, indicating the record date for the adjustment and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Exercise Price is adjusted or any day thereafter, but, if the Rights Certificates have been issued, shall be at least ten days later than the date of the public announcement. If Rights Certificates have been issued, upon each adjustment to the number of Rights pursuant to this subsection 3.2(8), the Corporation shall, as promptly as practicable, cause to be distributed to holders of record of Rights Certificates on such record date, Rights Certificates evidencing, subject to section 7.4, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Corporation, shall cause to be distributed to such holders of record in substitution and replacement for the Rights Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Corporation, new Rights Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Rights Certificates so to be distributed shall be issued, executed and countersigned in the manner provided for herein and may bear, at the option of the Corporation, the adjusted Exercise Price and shall be registered in the names of holders of record of Rights Certificates on the record date specified in the public announcement. (9) Irrespective of any adjustment or change in the Exercise Price or the number of Common Shares issuable upon the exercise of the Rights, the Rights Certificates theretofore and thereafter issued may continue to express the Exercise Price per Common Share and the number of Common Shares which were expressed in the initial Rights Certificates issued hereunder. (10) In any case in which this section 3.2 shall require that an adjustment in the Exercise Price be made effective as of a record date for a specified event, the Corporation may elect to defer until the occurrence of such event the issuance to the holder of any Right exercised after such record date the number of Common Shares and other securities of the Corporation, if any, issuable upon such exercise over and above the number of Common Shares and other securities of the Corporation, if any, issuable upon such exercise on the basis of the Exercise Price in effect prior to such adjustment; provided, however, that the Corporation shall deliver to such holder an instrument evidencing such holder's right to receive such additional shares (fractional or otherwise) or securities upon the occurrence of the event requiring such adjustment. (11) Notwithstanding anything in this section 3.2 to the contrary, the Corporation shall be entitled to make such reductions in the Exercise Price, in addition to those adjustments expressly required by this section 3.2, as and to the extent that in their good faith judgment the Board of Directors shall determine to be advisable in order that any (a) consolidation or subdivision of the Common Shares, (b) issuance wholly for cash of any Common Shares at less than the applicable Market Price, (c) issuance wholly for cash of any Common Shares or securities that by their terms are convertible into or exchangeable for Common Shares, (d) stock dividends or (e) issuance of rights, options or warrants referred to in this section 3.2, hereafter made by the Corporation to holders of its Common Shares, shall not be taxable to such shareholders. (12) The Corporation covenants and agrees that, after the Separation Time, it will not, except as permitted by section 7.1 or 7.7, take (or permit any Subsidiary of the Corporation to take) any action if at 26 - 23 - the time such action is taken it is reasonably foreseeable that such action will diminish substantially or otherwise eliminate the benefits intended to be afforded by the Rights. 3.3 DATE ON WHICH EXERCISE IS EFFECTIVE Each Person in whose name any certificate for Common Shares is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of the Common Shares represented thereby on, and such certificate shall be dated, the date upon which the Rights Certificate evidencing such Rights was duly surrendered (together with a duly completed Election to Exercise and Declaration) and payment of the Exercise Price for such Rights (and any applicable transfer taxes and other governmental charges payable by the exercising holder hereunder) was made; provided, however, that if the date of such surrender and payment is a date upon which the relevant Common Share transfer books of the Corporation are closed, such Person shall be deemed to have become the record holder of such Common Shares on, and such certificate shall be dated, the next succeeding Business Day on which the relevant Common Share transfer books of the Corporation are open. ARTICLE 4- ADJUSTMENTS TO THE RIGHTS IN THE EVENT OF CERTAIN TRANSACTIONS 4.1 FLIP-OVER EVENT (1) Subject to sections 4.3 and 4.4 and subsection 7.1(2), in the event that prior to the Expiration Time the Corporation enters into, consummates or permits or suffers to occur any Flip-Over Event, the Corporation shall take such action as shall be necessary to ensure that: (a) each Right shall from and after the date upon which any Flip-Over Event shall become effective constitute the right to purchase from such Person into which or with which the Corporation shall be consolidated, merged or amalgamated or with which the Corporation shall enter into a statutory arrangement or to which the Corporation shall sell assets (such Person being herein referred to as the "Flip-Over Entity"), upon exercise thereof in accordance with the terms hereof, that number of Common Shares of the Flip-Over Entity having an aggregate Market Price on the date of consummation or occurrence of such Flip-Over Event equal to twice the Market Price for an amount in cash equal to the Exercise Price (such right to be appropriately adjusted in a manner analogous to the applicable adjustments to the Rights provided for in section 3.2 in the event that after such date of consummation or occurrence an event analogous to any of the events described in section 3.2 shall have occurred with respect to such Common shares); and (b) the Flip-Over Entity shall be subject to all of the obligations, liabilities and duties of the Corporation pursuant to this Agreement; (2) The Corporation shall not enter into, consummate or permit or suffer to occur any Flip-Over Event unless and until it shall have entered into an agreement with the Flip-Over Entity supplemental to this 27 - 24 - Agreement pursuant to which the Flip-Over Entity shall covenant and agree, for the benefit of the holders from time to time of the Rights, to the matters contemplated by subsection 4.1(1) of this Agreement. (3) The Corporation shall do all such acts and things and shall ensure that the Flip-Over Entity does all such acts and things as shall be necessary to ensure compliance with the provisions of subsection 4.1(1) of this Agreement. 4.2 FLIP-IN EVENT (1) Subject to subsection 4.2(2), section 4.4 and subsections 7.1(2) and 7.1(3), in the event that prior to the Expiration Time a Flip-In Event shall occur, each Right shall constitute, effective on the Stock Acquisition Date, the right to purchase from the Corporation, upon payment of the Exercise Price and exercise of such Right on or after the Separation Time and in accordance with the terms hereof, that number of Common Shares having an aggregate Market Price on the date of consummation or occurrence of such Flip-In Event equal to twice the Exercise Price for an amount in cash equal to the Exercise Price (such right to be appropriately adjusted in a manner analogous to the applicable adjustments provided for in section 3.2 in the event that after the Stock Acquisition Date an event analogous to any of the events described in section 3.2 shall have occurred). (2) Notwithstanding anything in this Agreement to the contrary, upon the occurrence of any Flip-in Event, any Rights that are Beneficially Owned by (a) an Acquiring Person (or any Affiliate or Associate of an Acquiring Person or any Person acting jointly or in concert with an Acquiring Person or any Affiliate or Associate of an Acquiring Person), or (b) a transferee or other successor in title directly or indirectly (a "Transferee") of Rights held by an Acquiring Person (or any Affiliate or Associate of an Acquiring Person or any Person acting jointly or in concert with an Acquiring Person or any Affiliate or Associates of an Acquiring Person) who becomes a Transferee concurrently with or subsequent to the Acquiring Person becoming such shall become null and void without any further action, and any holder of such Rights (including Transferees) shall not have any rights whatsoever to exercise such Rights under any provision of this Agreement and shall not have thereafter any other rights whatsoever with respect to such Rights, whether under any provision of this Agreement or otherwise. (3) In the event that there shall not be sufficient Common Shares authorized for issuance to permit the exercise in full of the Rights in accordance with this section 4.2, the Corporation shall take all such action as may be necessary to authorize additional Common Shares for issuance upon the exercise of the Rights. (4) From and after the Separation Time, the Corporation shall do all such acts and things as shall be necessary and within its power to ensure compliance with provisions of this section 4.2, including without limitation, all such acts and things as may be required to satisfy the requirements of the Company Act (B.C.) and the Securities Act (B.C.) and the Securities Acts or comparable legislation in each of the Provinces of Canada in respect of the issue of Common Shares upon the exercise of Rights in accordance with this Agreement. 28 - 25 - 4.3 OBLIGATIONS OF THE CORPORATION The Corporation covenants and agrees that it shall not enter into or engage in any transaction of the kind referred to in section 4.1 if (a) at the time of or immediately after such transaction there are any rights, options, warrants, securities or other instruments outstanding or any other arrangements, agreements or instruments in effect which would eliminate or otherwise diminish in any respect the benefits intended to be afforded by the Rights and this Agreement to the holders of Rights upon consummation of such transaction, or (b) prior to, simultaneously with or immediately after any transaction of the kind referred to in section 4.1, the shareholders or holders of rights or interest in or to any other Person shall have received a distribution of Rights previously owned by such other Person or any of its Affiliates or Associates. The provisions of this section 4.3 shall apply to successive transactions of the kind referred to in section 4.1. 4.4 EXCHANGE OPTION (1) In the event that the Board of Directors acting in good faith shall determine that conditions exist which would eliminate or otherwise materially diminish in any respect the benefits intended to be afforded to the holders of Rights pursuant to this Agreement, the Board of Directors may, at its option, at any time after a Flip-In Event has occurred, authorize the Corporation to issue or deliver in respect of each Right which is not void pursuant to subsection 4.2(2), either (a) in return for the applicable Exercise Price and the Right, debt or equity securities or assets (or a combination thereof) having a value equal to twice the applicable Exercise Price, or (b) in return for the Right, subject to any amounts that may be required to be paid under applicable law, debt or equity securities or assets (or a combination thereof) having a value equal to the value of the Right, in full and final settlement of all rights attaching to the Rights, where in either case the value of such debt or equity securities or other assets (or a combination thereof) and, in the case of paragraph (b), the value of the Right, shall be determined by the Board of Directors which may rely upon the advice of a nationally or internationally recognized firm of investment dealers or investment bankers selected by the Board of Directors. (2) If the Board of Directors authorizes the exchange of debt or equity securities or assets for Rights pursuant to subsection 4.4(1), without any further action or notice the right to exercise the Rights will terminate and the only right thereafter of a holder of Rights shall be to receive the debt or equity securities or assets in accordance with the exchange formula authorized by the Board of Directors. Within ten Business Days after the Board of Directors has authorized the exchange of debt or equity securities or assets for Rights pursuant to subsection 4.4(1), the Corporation shall give notice of exchange to the holders of such Rights by mailing such notice to all such holders at their last addresses as they appear upon the register of Rights holders maintained by the Rights Agent. Each such notice of exchange will state the method by which the exchange of debt or equity securities or assets for Rights will be effected. 29 - 26 - ARTICLE 5- SPECIAL MEETINGS OF INDEPENDENT SHAREHOLDERS TO CONSIDER PERMITTED BIDS 5.1 MEETINGS OF INDEPENDENT SHAREHOLDERS In the event that an Offeror makes a Takeover Bid which is a Permitted Bid, the Board of Directors shall call and hold a special meeting (the "Special Meeting") of Independent Shareholders to consider and if thought fit to approve a resolution (the "Referendum") on the question whether such Takeover Bid (as such Takeover Bid may be amended or revised by the Offeror from time to time either to waive a condition thereof or to increase the price per Common Share to be paid to holders of Common Shares without reduction in amount or change in terms of any security or reduction in amount of cash that are components thereof) should be approved. The Special Meeting shall be held on a date fixed by the Board of Directors, which date shall be as soon as practicable after the date of mailing of the Takeover Bid, taking into account: (a) the time required to prepare a management proxy circular and to comply with applicable securities laws and other regulatory requirements relating to the holding of meetings of shareholders, record dates and a distribution of proxy-related materials to shareholders and intermediaries; (b) other actual or pending Takeover Bids including Permitted Bids, if any; and (c) other factors considered relevant by the Board of Directors; and not more than 110 days after the date (the "Offer Date") on which all of the documents referred to in subsection 1.1(25) or which have otherwise been sent to the holders of Common Shares by the Offeror in connection with such Takeover Bid have been delivered to the Corporation; provided that if a special meeting of Independent Shareholders has already been called for the purpose of considering a referendum approving another Takeover Bid and such other special meeting is scheduled for a date not less than 45 days following the Offer Date, then, subject to compliance with applicable securities laws and other regulatory requirements, both the Referendum and such other referendum shall be voted on at such other special meeting. The Board of Directors shall fix a record date for determining the Independent Shareholders entitled to receive notice of the Special Meeting in accordance with applicable law and regulatory requirements and the articles of the Corporation. The Special Meeting shall be conducted in accordance with the rules for holding meetings of shareholders set forth in the articles of the Corporation applied mutatis mutandis. At the Offeror's written request, the Corporation shall include with its management proxy circular prepared in connection with the Special Meeting, proxy solicitation materials submitted by the Offeror provided that the Offeror by written agreement with the Corporation in form and substance satisfactory to the Corporation shall have indemnified the Corporation from and against all costs and liabilities whatsoever, directly or indirectly, resulting from or arising out of any misstatements, misrepresentations, misleading statements or untrue statements contained in or omissions to state any fact in the Offeror's proxy solicitation materials necessary to make any statement contained therein not misleading in light of the circumstances in which it was made and shall have agreed to pay the Corporation's incremental costs incurred as a result of including such materials with the Corporation's management information circular. Notwithstanding the foregoing, no Special Meeting shall be held from 30 - 27 - and after such time as any Person becomes an Acquiring Person and any Special Meeting scheduled prior to such time and not theretofore held shall be canceled. 5.2 APPROVAL If at the Special Meeting the Referendum receives the affirmative vote of Independent Shareholders holding or representing by proxy more than 50 percent of the Common Shares of the Corporation in respect of which votes are cast at such meeting, then acquisitions of Voting Shares made under the Permitted Bid approved by the Referendum shall be deemed to be Permitted Bid Acquisitions provided that such Takeover Bid (a) is not thereafter amended or varied (except to waive any condition, to extend the deposit period or to increase the consideration to be paid to holders of Common Shares without reduction in amount or change in terms of any security or reduction in amount of cash that are components thereof), and (b) thereafter complies with all of the requirements set out in subsection 1.1(25), and provided that all Common Shares of the Corporation deposited pursuant to such Takeover Bid are taken up and paid for not later than the eleventh Business Day after the date of the Special Meeting 5.3 FIDUCIARY DUTIES OF THE BOARD OF DIRECTORS OF THE CORPORATION For clarification it is understood that nothing contained in this article 5 shall be deemed to affect the obligation of the Board of Directors to exercise its fiduciary duties. Without limiting the generality of the foregoing, nothing contained herein shall be construed to suggest or imply that the Board of Directors shall not be entitled to recommend that shareholders of the Corporation reject any Takeover Bid, or to take any other action (including, without limitation, the commencement, prosecution, defense or settlement of any litigation or regulatory proceedings and the submission of additional or alternative Takeover Bids or other proposals to the Special Meeting or otherwise) with respect to any Takeover Bid that the Board of Directors believes is necessary or appropriate in the exercise of its fiduciary duties. 5.4 FURTHER ACTS Nothing contained in this article 5 shall be construed as limiting or prohibiting the Corporation or any Offeror from proposing or engaging in any acquisition, disposition or other transfer of any securities of the Corporation, any merger, amalgamation or arrangement involving the Corporation, any sale or other transfer of assets of the Corporation, any liquidation, dissolution or winding-up of the Corporation or any other business combination or other transaction, or any other action by the Corporation or such Offeror; provided that the holders of Rights shall have the rights set forth in this Agreement with respect to any such acquisition, disposition, transfer, merger, amalgamation, arrangement, sale, liquidation, dissolution, winding-up, business combination, transaction or action. 31 - 28 - ARTICLE 6- THE RIGHTS AGENT 6.1 GENERAL (1) The Corporation hereby appoints the Rights Agent to act as agent for the Corporation and the holders of Rights in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Corporation may from time to time appoint such Co-Rights Agents as it may deem necessary or desirable. In the event the Corporation appoints one or more Co-Rights Agents, the respective duties of the Rights Agent and the Co-Rights Agents shall be as the Corporation may determine. The Corporation also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability or expense, incurred without negligence, bad faith or willful misconduct on the part of the Rights Agent, for anything done or omitted by the Right Agent in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending against any claim of liability, which right to indemnification will survive the termination of this Agreement. (2) The Rights Agent shall be protected and shall incur no liability for or in respect of any action taken, suffered or omitted by it in connection with its administration of this Agreement in reliance upon any certificate for Common Shares, Rights Certificate, certificate for other securities of the Corporation, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper Person or Persons. 6.2 MERGER OR AMALGAMATION OR CHANGE OF NAME OF RIGHTS AGENT (1) Any corporation into which the Rights Agent or any successor Rights Agent may be merged or amalgamated or with which it may be consolidated, or any corporation resulting from any merger, amalgamation or consolidation to which the Rights Agent or any successor Rights Agent is a party, or any corporation succeeding to the shareholder or stockholder services business of the Rights Agent or any successor Rights Agent, will be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto; provided that such corporation would be eligible for appointment as a successor Rights Agent under the provisions of section 6.4 hereof. In case at the time such successor Rights Agent succeeds to the agency created by this Agreement any of the Rights Certificates have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of the predecessor Rights Agent and deliver such Rights Certificates so countersigned; and in case at that time any of the Rights Certificates has not been countersigned, any successor Rights Agent may countersign such Rights Certificates either in the name of the predecessor Rights Agent or in the name of the successor Rights Agent; and in all such cases such Rights Certificates will have the full force provided in the Rights Certificates and in this Agreement. (2) In case at any time the name of the Rights Agent is changed and at such time any of the Rights Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Rights Certificates so countersigned; and in case at that 32 - 29 - time any of the Rights Certificates shall not have been countersigned, the Rights Agent may countersign such Rights Certificates either in its prior name or in its changed name; and in all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement. 6.3 DUTIES OF RIGHTS AGENT The Rights Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Corporation and the holders of Rights Certificates, by their acceptance thereof, shall be bound: (a) the Rights Agent may consult with legal counsel (who may be legal counsel for the Corporation) and the opinion of such counsel will be full and complete authorization and protection to the Rights Agent as to any action taken or omitted by it in good faith and in accordance with such opinion; (b) whenever in the performance of its duties under this Agreement the Rights Agent deems it necessary or desirable that any fact or matter be provided or established by the Corporation prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by a Person believed by the Rights Agent to be the Chairman of the Board, the President or any Vice-President and by the Treasurer or any Assistant-Treasurer or the Secretary or any Assistant-Secretary of the Corporation and delivered to the Rights Agent; and such certificate will be full authorization to the Rights Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate; (c) the Rights Agent will be liable hereunder only for its own negligence, bad faith or willful misconduct; (d) the Rights Agent will not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the certificates for Common Shares or the Rights Certificates (except its countersignature thereof) or be required to verify the same, but all such statements and recitals are and will be deemed to have been made by the Corporation only; (e) the Rights Agent will not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due authorization, execution and delivery hereof by the Rights Agent) or in respect of the validity or execution of any Common Share certificate or Rights Certificate (except its countersignature thereof); nor will it be responsible for any breach by the Corporation of any covenant or condition contained in this Agreement or in any Rights Certificate; nor will it be responsible for any change in the exercisability of the Rights [including the Rights becoming void pursuant to subsection 4.2(2)] or any adjustment required under the provisions of section 3.2 or 33 - 30 - responsible for the manner, method or amount of any such adjustment or the ascertaining of the existence of facts that would require any such adjustment (except with respect to the exercise of Rights, after receipt of the certificate contemplated by section 3.2 describing any such adjustment); nor will it by any act hereunder be deemed to make any representation or warranty as to the authorization of any Common Shares to be issued pursuant to this Agreement or any Rights or as to whether any Common Shares will, when issued, be duly and validly authorized, executed, issued and delivered as fully paid and non-assessable; (f) the Corporation agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement; (g) the Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from any Person believed by the Rights Agent to be the Chairman of the Board, the President, any Vice-President or the Secretary or any Assistant-Secretary or the Treasurer or any Assistant-Treasurer of the Corporation, and to apply to such Persons for advice or instructions in connection with its duties, and it shall not be liable for any action taken or suffered by it in good faith in accordance with instructions of any such Person; (h) the Rights Agent and any shareholder or stockholder, director, officer or employee of the Rights Agent may buy, sell or deal in Common Shares, Rights or other securities of the Corporation or become pecuniarily interested in any transaction in which the Corporation may be interested, or contract with or lend money to the Corporation or otherwise act as fully and freely as though it were not the Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Corporation or for any other legal entity; and (i) the Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent will not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys or agents or for any loss to the Corporation resulting from any such act, default, neglect or misconduct, provided reasonable care was exercised in the selection and continued employment thereof. 6.4 CHANGE OF RIGHTS AGENT The Rights Agent may resign and be discharged from its duties under this Agreement upon 90 days' notice (or such lesser notice as is acceptable to the Corporation) in writing mailed to the Corporation and to the transfer agent for the Common Shares by registered or certified mail, and to the holders of the Rights in accordance with section 7.8. The Corporation may remove the Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent and to the transfer agent for the Common Shares by registered or 34 - 31 - certified mail, and to the holders of the Rights in accordance with section 7.8. If the Rights Agent should resign or be removed or otherwise become incapable of acting, the Corporation will appoint a successor to the Rights Agent. If the Corporation fails to make such appointment within a period of 30 days after such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of any Rights (which holder shall, with such notice, submit such holder's Rights Certificate for inspection by the Corporation), then the holder of any Rights may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Corporation or by such a court, shall be a corporation incorporated under the laws of Canada or a province thereof authorized to carry on the business of a trust company in the province of British Columbia. After appointment, the successor Rights Agent will be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but if the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment, the Corporation will file notice thereof in writing with the predecessor Rights Agent and the transfer agent for the Common Shares, and mail a notice thereof in writing to the holders of the Rights. Failure to give any notice provided for in this section 6.4, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. ARTICLE 7- MISCELLANEOUS 7.1 REDEMPTION AND WAIVER (1) The Board of Directors may, at its option, at any time prior to the occurrence of a Flip-In Event, elect to redeem all but not less than all of the then outstanding Rights at a redemption price of $0.001 per Right appropriately adjusted in a manner analogous to the applicable adjustment provided for in section 3.2 if an event of the type analogous to any of the events described in section 3.2 shall have occurred (such redemption price being herein referred to as the "Redemption Price"). The redemption of the Rights by the Board of Directors may be made effective at such time, on such basis and with such condition as the Board of Directors in it sole discretion may establish. (2) The Board of Directors may, until the Stock Acquisition Date, upon written notice delivered to the Rights Agent, waive the application of section 4.1 or 4.2 to any particular Flip-Over Event or Flip-In Event. (3) The Board of Directors may prior to the Stock Acquisition Date waive the application of section 4.2 to any particular Flip-In Event, provided that both of the following condition are satisfied: (a) the Board of Directors has determined that the Acquiring Person became an Acquiring Person by inadvertence and without any intent or knowledge that he would become an Acquiring Person; and (b) such Acquiring Person has reduced his Beneficial Ownership of Voting Shares such that at the time of waiver pursuant to this subsection 7.1(3) he is no longer an Acquiring Person. 35 - 32 - (4) In the event that a Person makes a Permitted Bid which, within 120 days after the date of the Permitted Bid, has been accepted by the holders of not less than 90 percent of the then outstanding Common Shares and other than the Common Shares held at the date of the Permitted Bid by or on behalf of the Offeror or an Affiliate or Associate of the Offeror, then the Board of Directors shall, immediately upon the consummation of such acquisition, without further formality be deemed to have elected to redeem the Rights at the Redemption Price. (5) If the Board of Directors elects or is deemed to have elected to redeem the Rights, the right to exercise the Rights will thereupon, without further action and without notice, terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price. (6) Within 30 days after the Board of Directors electing or having been deemed to have elected to redeem the Rights, the Corporation shall give notice of redemption to the holders of the then outstanding Rights by mailing such notice to each such holder at his last address as it appears upon the registry books of the Rights Agent or, prior to the Separation Time, on the registry books of the transfer agent for the Common Shares. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. The Corporation may not redeem, acquire or purchase for value any Rights at any time in any manner other than that specifically set forth in this section 7.1 or, prior to the Separation Time, in connection with the purchase of Common Shares. 7.2 EXPIRATION No Person shall have any rights pursuant to this Agreement or in respect of any Right after the Expiration Time, except the Rights Agent as specified in section 6.1. 7.3 ISSUANCE OF NEW RIGHTS CERTIFICATES Notwithstanding any provision of this Agreement or of the Rights to the contrary, the Corporation may, at its option, issue new Rights Certificates evidencing Rights in such form as may be approved by the Board of Directors to reflect any adjustment or change in the number or kind or class of shares purchasable upon exercise of Rights made in accordance with the provisions of this Agreement. 7.4 FRACTIONAL RIGHTS AND FRACTIONAL SHARES (1) The Corporation shall not be required to issue fractions of Rights or to distribute Rights Certificates which evidence fractional Rights. In lieu of such fractional Rights, there shall be paid to the registered holders of the Rights Certificates with regard to which such fractional Right would otherwise be issuable, an amount in cash equal to the same fraction of the Market Price of a whole Right. (2) The Corporation shall not be required to issue fractions of Common Shares upon exercise of the Rights or to distribute certificates which evidence fractional Common Shares. In lieu of issuing fractional 36 - 33 - Common Shares, the Corporation shall pay to the registered holders of Rights Certificates at the time such Rights are exercised as herein provided, an amount in cash equal to the same fraction of the Market Price of a whole Common Share. 7.5 SUPPLEMENTS AND AMENDMENTS (1) The Corporation may from time to time supplement or amend this Agreement: (a) to make any changes, which the Board of Directors acting in good faith may deem necessary or desirable, provided that no such supplement or amendment made on or after the Stock Acquisition Date shall materially adversely affect the interests of the holders of Rights generally and provided further that no such supplement or amendment shall be made to the provisions of Article 6 except with the written concurrence of the Rights Agent to such supplement or amendment; (b) without the approval of the holders of Rights, to provide for the issuance of Rights to holders of any Voting Shares or equity securities (other than Common Shares) in the capital of the Corporation or securities convertible into Voting Shares, equity securities or Common Shares, and for the purposes of this clause 7.5(l)(b) "equity security" shall have the meaning ascribed thereto in subsection 74(1) of the Securities Act (British Columbia); and (c) without the approval of the holders of Rights, in order to cure any ambiguity or to correct or supplement any provision contained herein which may be inconsistent with any other provisions herein or otherwise defective. (2) Any supplement or amendment to this Agreement made by the Board of Directors pursuant to clause (a) of subsection 7.5(1) shall, if made prior to the Separation Time, be submitted to the shareholders of the Corporation at the next meeting of shareholders and the shareholders may, by ordinary resolution, confirm or reject such supplement or amendment; if made at or after the Separation Time such supplement or amendment shall be submitted to the holders of the Rights at a meeting to be called for on a date not later than immediately following the next meeting of shareholders and the holders of Rights may, by ordinary resolution, confirm or reject such supplement or amendment. (3) A supplement or amendment to this Agreement made by the Board of Directors pursuant to clause (a) of subsection 7.5(1) shall be effective from the date of the relevant resolution of the Board of Directors until it is confirmed or rejected under subsection 7.5(2) or until it ceases to be effective under subsection 7.5(4) and, where the supplement or amendment is confirmed, it continues in effect in the form in which it was so confirmed. (4) If a supplement or amendment to this Agreement made by the Board of Directors pursuant to clause (a) of subsection 7.5(1) is rejected by the shareholders or holders of Rights or is not submitted to the shareholders or holders of Rights as required by subsection 7.5(2), then such supplement or amendment shall cease to be effective from and after the termination of the meeting at which it was rejected or to which it should have been but was not submitted, or from and after the last date for which a meeting of holders of 37 - 34 - Rights should have been but was not called, and no subsequent resolution of the directors to supplement or amend the Agreement to substantially the same effect shall be effective until confirmed by the shareholders or holders of Rights, as the case may be. 7.6 RIGHTS OF ACTION Subject to the terms of this Agreement, all rights of action in respect of this Agreement, other than rights of action vested solely in the Rights Agent, are vested in the respective holders of the Rights; and any holder of any Right, without the consent of the Rights Agent or the holder of any other Right, may, on such holder's own behalf and for such holder's own benefit and the benefit of other holders of Rights, enforce, and may institute and maintain any suit, action or proceeding against the Corporation to enforce, or otherwise act in respect of, such holder's right to exercise Rights in the manner provided in such holder's Rights Certificate and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and will be entitled to specific performance of the obligations under, and injunctive relief against actual or threatened violations of, the obligations of any Person subject to this Agreement. 7.7 NOTICE OF PROPOSED ACTIONS In case the Corporation shall propose after the Separation Time and prior to the Expiration Time: (a) to effect or permit (in cases where the Corporation's permission is required) any Flip-In Event or Flip-Over Event; or (b) to effect the liquidation, dissolution or winding-up of the Corporation or the sale of all or substantially all of the Corporation's assets; then, in each such case, the Corporation shall give to each holder of a Right, in accordance with section 7.8, a notice of such proposed action, which shall specify the date on which such Flip-In Event or Flip-Over Event, liquidation, dissolution or winding-up is to take place, and such notice shall be so given at least 20 Business Days prior to the date of taking such proposed action. 7.8 NOTICES Notices or demands authorized or required by this Agreement to be given or made by the Rights Agent or by the holder of any Rights to or on the Corporation shall be sufficiently given or made if delivered or sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows: 38 - 35 - Flotek Industries Inc. 305 - 1285 West Pender Street Vancouver, British Columbia V6E 4B1 Canada Attention: President Any notice or demand authorized or required by this Agreement to be given or made by the Corporation or by the holder of any Rights to or on the Rights Agent shall be sufficiently given or made if delivered or sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Corporation) as follows: Pacific Corporate Trust Company 830 - 625 Howe Street Vancouver, British Columbia V6C 2T6 Canada Attention: President Notices or demands authorized or required by this Agreement to be given or made by the Corporation or the Rights Agent to or on the holder of any Rights shall be sufficiently given or made if delivered or sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as it appears upon the registry books of the Rights Agent or, prior to the Separation Time, on the registry books of the Corporation for the Common Shares. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. 7.9 COSTS OF ENFORCEMENT The Corporation agrees that if the Corporation or any other Person the securities of which are purchasable upon exercise of Rights fails to fulfill any of its obligations pursuant to this Agreement, then the Corporation or such Person will reimburse the holder of any Rights for the costs and expenses (including legal fees) incurred by such holder in actions to enforce his rights pursuant to any Rights or this Agreement. 7.10 SUCCESSORS All the covenants and provisions of this Agreement by or for the benefit of the Corporation or the Rights Agent shall bind and ensure to the benefit of their respective successors and assigns hereunder. 39 - 36 - 7.11 BENEFITS OF THIS AGREEMENT Nothing in this Agreement shall be construed to give to any Person other than the Corporation, the Rights Agent and the holders of the Rights any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Corporation, the Rights Agent and the holders of the Rights. 7.12 GOVERNING LAW This Agreement and each Right issued hereunder shall be deemed to be a contract made under the laws of the Province of British Columbia and for all purposes shall be governed by and construed in accordance with the laws of such province applicable to contracts to be made and performed entirely within such province. 7.13 COUNTERPARTS This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. 7.14 SEVERABILITY If any section, clause, term or provision hereof or the application thereof to any circumstance shall, in any jurisdiction and to any extent, be invalid or unenforceable, such section, clause, term or provision shall be ineffective as to such jurisdiction to the extent of such invalidity or unenforceability without invalidating or rendering unenforceable the remaining sections, clauses, terms and provisions hereof or the application of such section, clause, term or provision to circumstances other than those as to which it is held invalid or unenforceable. 7.15 EFFECTIVE DATE This Agreement is in full force and effect in accordance with its terms from the date hereof. 7.16 DETERMINATIONS AND ACTIONS BY THE BOARD OF DIRECTORS The Board of Directors shall have the exclusive power and authority to administer and amend this Agreement in accordance with the terms hereof and to exercise all rights and powers specifically granted to the Board of Directors or the Corporation, or as may be necessary or advisable in the administration of this Agreement, including, without limitation, the right and power to (a) interpret the provisions of this 40 - 37 - Agreement (including a determination to terminate or not to terminate the Rights or to amend the Agreement in accordance with the terms hereof). All such actions, calculations, interpretations and determinations (including, for purposes of clause (ii) below, all omissions with respect to the foregoing) which are done or made by the Board of Directors, in good faith, shall (i) be final, conclusive and binding on the Corporation, the Rights Agent, the holders of the Rights Certificates and all other parties and (ii) not subject the Board of Directors to any liability to the holders of the Rights Certificates. 7.17 SUCCESSOR CORPORATIONS The Corporation shall not consummate or permit or suffer to occur any consolidation, amalgamation, merger or transfer of the undertaking or assets of the Corporation as an entirety or substantially as an entirety to another Corporation (the "Successor Corporation") unless the Successor Corporation resulting from such consolidation, amalgamation, merger or transfer (if not the Corporation) shall expressly assume, by supplemental agreement in form satisfactory to the Rights Agent and executed and delivered to the Rights Agent, the due and punctual performance and observance of each and every covenant and condition of this Agreement to be performed and observed by the Corporation. 7.18 MEETINGS OF HOLDERS OF RIGHTS Any meeting of holders of Rights required or permitted to be held hereunder shall be called, convened and held, as nearly as may be possible, as if it were, and subject to the rules and regulations that would govern, a meeting of the holder of Common Shares. 7.19 SHAREHOLDER REVIEW At the first annual meeting (the "Annual Meeting") of shareholders of the Corporation held after July 28, 1993 or at a special meeting (the "Special Meeting") called thereafter and before the close of business on the fifth anniversary of the date hereof for such purpose, provided that a Flip-In Event has not occurred prior to such meeting, the Board of Directors may submit a resolution to the holders of Voting Shares of the Corporation for their consideration and, if thought advisable, approval ratifying the continued existence of the Rights. If a majority of the votes cast on such resolution, excluding votes cast by any Grandfathered Person or Grandfathered Person Transferee who as at the record date for voting at such meeting Beneficially Owns 20 percent or more of the outstanding Voting Shares of the Corporation then outstanding, are voted against such resolution, the close of business on the day of such meeting shall be and be deemed for all purposes to be the Expiration Time. 41 - 38 - 7.20 TIME OF THE ESSENCE Time shall be of the essence in this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. FLOTEK INDUSTRIES INC. By: /s/ Wm. R. McKAY c/s --------------------------- Wm. R. McKay President PACIFIC CORPORATE TRUST COMPANY By: /s/ Illegible c/s ------------------------------------ Authorized Signatory By: /s/ Illegible ------------------------------------ Authorized Signatory 42 EXHIBIT "A" [FORM OF RIGHTS CERTIFICATE] Certificate No. _______________ _______________ Rights THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE CORPORATION, ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES (SPECIFIED IN SUBSECTION 4.2(2) OF THE RIGHTS AGREEMENT), RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR ITS AFFILIATES OR ASSOCIATES OR ANY PERSON ACTING JOINTLY OR IN CONCERT WITH AN ACQUIRING PERSON OR ANY AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON OR ANY TRANSFEREES OF RIGHTS HELD BY THE FOREGOING (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) SHALL BECOME VOID WITHOUT ANY FURTHER ACTION. RIGHTS CERTIFICATE This certifies that _________________________________ , or registered assigns, is the registered holder of the number of Rights set forth above, each of which entitles the registered holder thereof, subject to the terms, provisions and conditions of the Shareholder Protection Rights Plan Agreement dated as of the 28th day of July, 1993, (the "Rights Agreement") between Flotek Industries Inc., a corporation incorporated under the Company Act (B.C.) (the "Corporation"), and Pacific Corporate Trust Company, a trust company incorporated under the laws of British Columbia, as rights agent (the "Rights Agent" which term shall include any successor Rights Agent under the Rights Agreement) to purchase from the Corporation at any time after the Separation Time (as such term is defined in the Rights Agreement) and prior to the close of business on the 31st day of July, 1998, or any earlier Expiration Date (as such term is defined in the Rights Agreement, one fully paid common share of the Corporation (a "Common Share") at the Exercise Price referred to below, upon presentation and surrender of this Rights Certificate together with the Form of Election to Exercise and Declaration of Ownership duly executed and submitted to the Rights Agent at its principal office in Vancouver. The Exercise Price shall initially be $10.00 per Right and shall be subject to adjustment in certain events as provided in the Rights Agreement. In certain circumstances described in the Rights Agreement, each Right evidenced hereby may entitle the registered holder thereof to purchase or receive more than one Common Share or to purchase and receive securities of an entity other than the Corporation or securities or assets of the Corporation other than Common Shares, all as provided in the Rights Agreement. This Rights Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Rights Agent, the Corporation and the holders of the Rights Certificates. 43 - 2 - The Rights Certificate, with or without other Rights Certificates, upon surrender at any of the offices of the Rights Agent designated for such purpose, may be exchanged for another Rights Certificate or Rights Certificates of like tenor and date evidencing an aggregate number of Rights equal to the aggregate number of Rights evidenced by the Rights Certificate or Rights Certificates surrendered. If this Rights Certificate shall be exercised in part, the registered holder shall be entitled to receive, upon surrender hereof, another Rights Certificate or Rights Certificates for the number of whole Rights not exercised. Subject to the provisions of the Rights Agreement, the Rights evidenced by this Rights Certificate (i) may be, and under certain circumstances are required to be, redeemed by the Corporation at a redemption price of $0.001 per Right and (ii) may be exchanged at the option of the Corporation for debt or other equity securities or assets of the Corporation. No fractional Common Shares will be issued upon the exercise of any Right or Rights evidenced hereby, but in lieu thereof a cash payment will be made, as provided in the Rights Agreement. A holder of this Rights Certificate who wishes to exercise the Rights evidenced hereby must complete, sign and deliver a Declaration of Ownership in the form attached hereto. No holder of this Rights Certificate, as such, shall be entitled to vote or receive dividends or be deemed for any purpose the holder of Common Shares or of any other shares of the Corporation which may at any time be issuable upon the exercise hereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a shareholder of the Corporation or any right to vote for the election of directors or upon any matter submitted to shareholders of the Corporation at any meeting thereof, or to give or withhold consents to any corporate action, or to receive notice of meetings or other actions affecting shareholders of the Corporation (except as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Rights evidenced by this Rights Certificate shall have been exercised as provided in the Rights Agreement. This Rights Certificate shall not be valid or obligatory for any purpose until it shall have been manually countersigned by the Rights Agent. WITNESS the facsimile signature of the proper officer of the Corporation and of its corporate seal. Date: ____________________________________ FLOTEK INDUSTRIES INC. By: ______________________________ c/s President 44 - 3 - Countersigned: PACIFIC CORPORATE TRUST COMPANY By: _________________________________ Authorized Signatory 45 FORM OF ASSIGNMENT (To be attached to each Rights Certificate) (to be executed by the registered holder if such holder desires to transfer the Rights Certificate) FOR VALUE RECEIVED ____________________________________________________________ hereby sells, assigns and transfers unto ---------------------------------------- (Please print name and address of transferee) -------------------------------------------- -------------------------------------------- -------------------------------------------- the Rights represented by this Rights Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ____________________________________ , as attorney, to transfer the within rights on the books of the Corporation, with full power of substitution. Date: _________________________ Signature Guaranteed: ___________________________________ Signature (Signature must correspond to name as written upon the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever.) Signature must be guaranteed by a member firm of a recognized stock exchange in Canada or a commercial bank or trust company having an office or correspondent in Canada. - -------------------------------------------------------------------------------- (to be completed if true) The undersigned hereby represents, for the benefit of all holders of Rights and Common Shares, that the Rights evidenced by this Rights Certificate are not, and, to the knowledge of the undersigned, have never been, Beneficially Owned by an Acquiring Person or an Affiliate or Associate thereof or any Person acting jointly or in concert with any of the foregoing (as defined in the Rights Agreement). ----------------------------------- Signature 46 (To be attached to each Rights Certificate) FORM OF ELECTION TO EXERCISE TO: The undersigned hereby irrevocably elects to exercise _________________________ whole Rights represented by the attached Rights Certificate to purchase the Common Shares issuable upon the exercise of such Rights and requests that certificates for such Common Shares be issued to: ------------------------------------------------ (Name) ------------------------------------------------ (Address) ------------------------------------------------ (City, Province and Postal Code) ------------------------------------------------ (Social Insurance, Social Security or other Taxpayer Identification Number) If such number of Rights shall not be all the Rights evidenced by this Rights Certificate, a new Rights Certificate for the balance of such Rights shall be registered in the name of and delivered to: ------------------------------------------------ (Name) ------------------------------------------------ (Address) ------------------------------------------------ (City, Province and Postal Code) Date: _________________________ Signature Guaranteed: ___________________________________ Signature (Signature must correspond to name as written upon the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever.) 47 - 2 - Signature must be guaranteed by a member firm of a recognized stock exchange in Canada or a commercial bank or trust company having an office or correspondent in Canada. - -------------------------------------------------------------------------------- (to be completed if true) The undersigned hereby represents, for the benefit of all holders of Rights and Common Shares, that the Rights evidenced by this Rights Certificate are not, and, to the knowledge of the undersigned, have never been, Beneficially Owned by an Acquiring Person or an Affiliate or Associate thereof or any Person acting jointly or in concert with any of the foregoing (as defined the Rights Agreement). ----------------------------------- Signature - -------------------------------------------------------------------------------- NOTICE In the event the certification set forth above in the Forms of Assignment and Election is not completed, the Company will deem the Beneficial Owner of the Rights evidenced by this Rights Certificate to be an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement) and accordingly such Rights will be null and void. 48 (To be attached to each Rights Certificate) FLOTEK INDUSTRIES INC. DECLARATION OF OWNERSHIP IN RESPECT OF CANADIAN* STATUS - ------------------------------------------------ - ------------------------------------------------ - ------------------------------------------------ - ------------------------------------------------ (name and address for which registration has been requested) A request has been received to register _______________________ common shares of Flotek Industries Inc. in your name on the exercise of the Rights represented by the attached Rights Certificate. In order for these shares to be registered in your name, it will be necessary for you to complete and return this declaration to PACIFIC CORPORATE TRUST COMPANY, Transfer Agent for Flotek Industries Inc. - ------------------------------------------------------------------------------- TO: FLOTEK INDUSTRIES INC. The person whose name appears above make this declaration for the purpose of enabling the directors of Flotek Industries Inc. to establish the Canadian status of the proposed shareholder: 1. The person whose name appears above ________ is to be the beneficial owner ________ will hold such shares of the shares of Flotek for a beneficial owner Industries Inc.
2. The beneficial owner is a(n) _______ individual _______ corporation _____ partnership _______ trust _______ other (describe) ______________________________ 3. The beneficial owner _______ is Canadian* _____ is not Canadian*
49 - 2 - 4. The beneficial owner ______ is an associate _____ is not an associate* of one or more other shareholders 5. The associate shareholder(s) ______ is/are Canadian* ______ is not/are not Canadian*
DATED _____________________ , 19 ____ ___________________________ Signature of the person whose name and address appears above
If the signatory is other than an individual, this declaration must be signed in the name of the signatory by a person whose office or authority must be shown. * Applicable definitions of Canadian and associate accompany this form. 50 - 3 - Definition of Canadian Canadian means: (a) a resident Canadian, (b) a partnership of which a majority of the members are resident Canadians and in which interests representing in value more than 50% of the total value of the partnership property are owned by resident Canadians, (c) a trust established by a resident Canadian (i) a majority of the trustees of which are resident Canadians, or (ii) in which beneficial interest representing in value more than 50% of the total value of the trust property are owned by resident Canadians, or (d) a body corporate (i) incorporated under the laws of Canada or a province, (ii) of which a majority of the directors are Canadian, and (iii) of which more than 50% of the voting shares are beneficially owned or over which control or direction is exercised by Canadians. Definition of Associate Associate, when used to indicate a relationship with any shareholder, means: (a) a corporation of which that shareholder beneficially owns or controls, directly or indirectly, shares carrying more than 10% of the voting rights (or securities convertible into such shares or an option or right to purchase such shares), (b) a partner of that shareholder acting on behalf of the partnership of which they are partners, (c) a trust or estate in which that shareholder has a substantial beneficial interest or in respect of which he serves as a trustee or in a similar capacity, (d) a spouse or child of that shareholder, and (e) a relative of that shareholder or of his spouse if that relative has the same residence as that shareholder. EX-10.1 5 DISTRIBUTORSHIP AGREEMENT - DOWNHOLE PRODUCTS 1 EXHIBIT 10.1 DISTRIBUTORSHIP AGREEMENT (EXCLUSIVE) THIS DISTRIBUTORSHIP AGREEMENT, hereinafter referred to as "this Agreement", BETWEEN DOWNHOLE PRODUCTS (UK), LTD., a company incorporated under the Companies Acts (registered number 145401) and having a place of business at 144 North Deeside Road, Peterculter, Aberdeen AB14 OUD, hereinafter referred to as "the Supplier", and , TURBECO INC., having its Registered Office at, 7030 Empire Central Drive, Houston, Texas 77O4O, hereinafter referred to as "the Customer". WHEREAS, the Supplier is in the business of manufacturing the Products; and the Customer carries on the business of selling and servicing the Products in the Territory and wishes to purchase the Products from the supplier for that business and the Supplier is willing to supply the Products to the Customer on the terms set out in this Agreement; and WHEREAS, the Supplier and the Customer have agreed that the Customer shall be the exclusive and sole distributor for the products in the Territory for the duration of this Agreement. NOW THEREFORE, it is hereby contracted upon and agreed between the parties as follows: 1 DEFINITIONS 1.1 In this Agreement and Schedule the following words shall have the following meanings attributed to them unless otherwise specified. 1.1.1 COMMENCEMENT DATE means JUNE 7, 1996. 1.1.2 AMOUNT means the amount set forth in Schedule 1 of this Agreement. 1.1.3 ORDER(S) means a written order for Products in such form as the Supplier may prescribe from time to time. 1.1.4 PRODUCTS means Spir-o-lizer, Spir-o-lizer Stop collars, and related products as manufactured by the Supplier as listed in Schedule 1 of this Agreement. 1.1.5 SCHEDULE means the schedules and their constituent parts annexed hereto and forming part of this Agreement. 1.1.6 TERRITORY means The North American Continent, specifically excluding Alaska, and others to be mutually agreed. DISTRIBUTORSHIP AGREEMENT PAGE 1 2 1.2 The headings are inserted for convenience only and shall not affect the construction or interpretation of this Agreement. 2 SUPPLY OF THE PRODUCTS 2.1 Subject to the provisions of this Clause, the Supplier shall accept Orders from the Customer to buy the Products from the start of business on the Commencement Date. 2.2 Acceptance by the Supplier of any Order shall result in a contract for the sale of the Products which are the subject of such Order. 2.3 The Customer agrees to submit its Order(s) as far as possible in advance of the required delivery dates. 2.4 The Supplier will use its best efforts to fill the Order(s) of the Customer promptly upon receipt. All deliveries shall be made and delivered to the Customer F.O.B. point of shipment. The Customer is responsible for all shipment costs and customs duties and taxes payable on the product. The Customer may return any Products which are defective at the expense of the Supplier. The Supplier will replace such defective Products at its own expense as soon as practicable. 3 RISK AND TITLE 3.1 Risk or damage to or loss of the Products shall pass to the Customer at the date and time of delivery of the Products to the Customer in Houston, USA. 3.2 Notwithstanding delivery and the passing of risk in the Products, or any other provision of this agreement, the property in and title to the Products shall not pass to the Customer until the Supplier has received in cash or cleared funds payment in full of all sums then due from the Customer to the Supplier. 4 CONDITIONS OF SALE 4.1 On the date of shipment of the Products to the Customer, the Supplier shall send to the Customer an invoice specifying the products shipped. 4.2 The Customer shall pay to the Supplier for the products within thirty (30) days of the products arrival in Houston, USA, or such other location as the Customer may from time to time designate. DISTRIBUTORSHIP AGREEMENT PAGE 2 3 4.3 Any standard casing size Products not required by the Customer may be returned to the Supplier for refund. Notwithstanding the foregoing all shipment and transport costs shall be the sole responsibility of the Customer. All products must be returned within or before the termination period, if any credit or refund is to be received. All products must be in a resaleable condition. 5 EXCLUSIVITY 5.1 For the duration of this Agreement: 5.1.1 The Supplier shall be the exclusive supplier to the Customer in the Territory of the Products; 5.1.2 The Customer shall be the sole exclusive customer of the Supplier in the Territory for the sale of the Products; and 5.2 Except as otherwise agreed between the parties, for a period of three (3) months following the termination of this Agreement; 5.2.1 The Supplier shall continue to be the exclusive supplier to the Customer (or any party nominated by TURBECO INC.) in the Territory of the Products; 5.2.2 The Customer (or the nominee of TURBECO INC.) under Clause 5.2.1 shall continue to be the exclusive customer of the Supplier in the Territory for the sale of the Products; and 5.2.3 The Customer shall not resell the Products outside of the Territory, but each party shall retain the rights and ability to sell the products in the Territory on a non exclusive basis after the three (3) month period has expired. Inquiries from outside the Territory will always be discussed, without exception, between the Supplier and the Customer, prior to any action. 6 CUSTOMER RESPONSIBILITIES, DUTIES AND OBLIGATIONS 6.1 The Customer covenants and agrees, for the benefit of the Supplier, that the Customer shall: 6.1.1 Provide all after sales and services for parties to whom it has sold the Products; 6.1.2 Sell the Products as a principal and not on behalf of, or in the name of, the Supplier; DISTRIBUTORSHIP AGREEMENT PAGE 3 4 6.1.3 Be responsible for, and at risk for, the collection of all payment from its customers for the sale of the Products; 6.1.4 Notify the Supplier of any invention or improvement it may make relating to any of the Products and promptly enter into negotiations in good faith to transfer all rights to the invention or improvement to the Supplier on such terms as may be agreed. Any new products invented by the Customer which are not related to the Supplier's products covered by this Agreement shall belong to the Customer. 6.1.5 Keep the Supplier informed of any complaint or dispute concerning the Products; 6.1.6 Inform customers of the Supplier's requirements regarding the installation, use and maintenance of the Products set out in the Supplier's instruction manuals as from time to time amended; and 6.1.7 Not make any modification to the Products save as the Supplier may from time to time authorize in writing. 6.2 The Customer shall not be authorized to make any representations or warranties on behalf of the Supplier with respect to the Products and any representations or warranties made or agreements entered into by the Customer in relation to the Products or otherwise shall be its exclusive responsibility. 6.3 The Supplier sells the Products with the intent that they are free of defects in manufacture and workmanship at the time of sale. The Supplier warrants that each of its Products will be free of defects in material and workmanship under normal use and service. The obligation of the Supplier under this warranty shall be limited to the requirement that it make good at the Supplier's place of business any part or parts which are returned to the Supplier by the Customer. If any Products are determined to be defective, all costs associated with regard to the return of the products shall be paid by the Supplier. The Supplier does not warrant any products which are or have been the subject of misuse, accident, repair or alteration which affects the Products' stability or reliability. 6.4 The Supplier agrees to defend, indemnify, and protect the Customer and hold It harmless from any loss or claim which arises out of any defect in the Products which exist at the time the Products are sold to the Customer. DISTRIBUTORSHIP AGREEMENT PAGE 4 5 The Customer shall give the Supplier immediate notice of any such loss or claim and cooperate fully with the Supplier in the handling of such loss or claim. The Customer agrees to defend, indemnify, and hold the Supplier harmless from any loss or claim which arises out of its negligence or that of it agents, employees or representatives in the installation, sale, servicing or use of the Products. 7 INTELLECTUAL PROPERTY AND MARKETING MATERIAL 7.1 All drawings, notebooks, operating data, specifications, intellectual property, patent rights, and other information, data, and materials concerning the Products furnished to the Customer by the Supplier ("Know-how") shall remain the proprietary and confidential property of the Supplier and shall be used by the Customer only with respect to the sale of the Products pursuant to this Agreement and shall not be used by the Customer in connection with any other project. Such proprietary and confidential information and data shall not be shown or otherwise made available to any third party at any time without the Supplier's prior written consent nor shall any third party be permitted to measure or otherwise technically examine or test the Products without the Suppliers prior written consent. Any such proprietary and confidential information which the Customer determines must be disclosed to its employees shall only be disclosed to its employees on a need-to- know basis for the sale of the Products. Intellectual property or patent rights as may be obtained on the basis of the Know-how given or made available to the Customer or with respect to the Products shall remain the exclusive property of the Supplier. 7.2 The Customer may use such of the Supplier's trademarks and logos as the Supplier may from time to time authorize in writing. 7.3 The Customer shall not apply any such trademarks or logos to any item other than a Product or supply or offer to supply any other item in such a way as to mislead purchasers or prospective purchasers into thinking that it is a Product. 7.4 The Customer shall promptly notify the Supplier of any infringement of the Know-how or trademarks of the Supplier of which it becomes and of any claim that the sale of the Products infringes on any person's rights of which it may become aware and shall at the request and expense of the Supplier take such action in respect of the infringement or claim as the Supplier may request. DISTRIBUTORSHIP AGREEMENT PAGE 5 6 7.5 The Supplier will provide the Customer with sufficient quantities of catalogues, advertising materials, service and technical guides relating to the products during the duration of this Agreement. 7.6 The provisions of this Clause 7 shall remain in full force and effect after the termination of this Agreement. 8 NO AGENCY 8.1 Nothing in this Agreement shall be deemed in any way or for any purpose to constitute any party an agent of any other party in the conduct of such party's business. The Supplier and the Customer are independent contractors and the Customer is not and shall not represent itself to be an agent, employee, or representative of the Supplier. The Customer will be entitled to describe itself as a distributor of the Products. 9 MODIFICATION AND WAIVER 9.1 This Agreement may be amended, modified, supplemented, or changed in whole or in part only by an agreement in writing making specific reference to this Agreement executed by each of the parties hereto. No waiver of any term or breach hereof shall be effective unless in writing and executed by the party whose rights are waived thereby. 10 DURATION 10.1 This Agreement shall continue in full force and effect for a minimum of 2 years, automatically renewable on an annual basis thereafter, until the parties terminate this Agreement by mutual agreement or for good cause. 10.2 Without prejudice to the provisions of Clause 10.1, either party shall be entitled: 10.2.1 By giving no less than ninety (90) days' notice to the other to terminate this Agreement, if the other party fails to make any payment in accordance with this Agreement or commits any other material breach of this Agreement; or 10.2.2 The Supplier shall have the right to terminate forthwith this agreement on the serving of ninety (90) days notice in writing to the Customer if within three (3) months of the date or dates hereof the Customer has not secured orders with the Supplier. DISTRIBUTORSHIP AGREEMENT PAGE 6 7 10.2.3 Forthwith to terminate this Agreement if any distress or execution shall be levied upon any of the other party's goods or if the other party offers to make an arrangement with its creditors or the other party is unable to pay its debts as they fall due or any resolution or petition to wind up the other party (other than for the purpose of reorganization without insolvency) shall be passed or presented or if a receiver or manager shall be involuntarily appointed over the whole or any part of the other party's business or assets or if the other party shall suffer any analogous proceedings under foreign law. 10.3 Any rights to terminate this Agreement shall be without prejudice to the other rights of the parties. 11 GOVERNING LAW 11.1 This Agreement shall be governed by the Law of The State of Texas, USA, and the parties hereby submit to the nonexclusive jurisdiction of the Law of The State of Texas, USA. 12 SEVERABILITY 12.1 If any part of this Agreement is void, voidable, or unenforceable for any reason, this Agreement shall then be considered divisible as to such part with the remainder of this Agreement remaining as valid and binding as though such part were not included in this Agreement. 13 ASSIGNMENT 13.1 Neither party to this Agreement may assign any right or interest in this Agreement without the written consent of the other party. 14 ARBITRATION 1 4.1 Any or all controversies or claims arising out of or relating to the breach of this Agreement shall be settled by arbitration at a mutually convenient location in The State of Texas, in accordance with the rules of the American Arbitration Association. Judgment on the award entered by the arbitrators is binding and may be entered in any court having jurisdiction thereof. 15 BINDING EFFECT 1 5.1 This Agreement shall benefit and be binding upon the successors in interest and permitted assignees of the parties. DISTRIBUTORSHIP AGREEMENT PAGE 7 8 16 NOTICES 16.1 Unless otherwise requested by either party, all notices required or permitted to be made under this Agreement shall be made in writing and shall be sent to the name and addresses indicated below: SUPPLIER: CUSTOMER: 144 North Deeside Road 7030 Empire Central Drive Peterculter, Aberdeen Houston, AB14 OUD Texas 77040 17 SIGNING 17.1 Each person who signs this Agreement warrants that he or she does so with the full and legal authority to execute this Agreement on behalf of the respective parties. IN WITNESS WHEREOF these presents consisting of this and the preceding pages are executed in the following manner: They are subscribed for and on behalf of DOWNHOLE PRODUCTS (UK), LTD. at Peterculter, Aberdeen, on the 7 th day of June 1996, by: /s/ ALISTAR CLARK -------------------------------- Director /s/ NOT LEGIBLE -------------------------------- Director They are subscribed for and on behalf of TURBECO INC. at Peterculter, Aberdeen, on the 7 th day of June 1996, by /s/ STEWART A. SIMPSON -------------------------------- Division Operations Manager /s/ BILL JAYROE -------------------------------- President - CEO DISTRIBUTORSHIP AGREEMENT PAGE 8 EX-10.2 6 WALLACE ROBERTSON, INC. CONSULTING AGREEMENT 1 EXHIBIT 10.2 REPRESENTATIVE AGREEMENT This Agreement ("Agreement") is dated effective January 1, 1998 between Turbeco, Inc., a Texas corporation with its principal place of business at 7030 Empire Central Drive, Houston, Texas 77040 (hereafter referred to as "Turbeco"), and W. R. Inc., a Texas corporation with its principal place of business at 12615 Pebble Springs, Houston 77066 , (hereafter referred to as "Representative"). RECITALS Turbeco is a supplier and distributor of oilfield service equipment which provides centralization equipment for the oil and gas industry. Turbeco and Representative desire that Representative act as a non-exclusive independent representative for the promotion and sale of Turbeco's product lines under the terms and conditions of this Agreement. In consideration of the promises and representations hereinafter made by the parties hereto, it is agreed as follows: 2 ARTICLE I TERM OF CONTRACT 1.1 TERM OF CONTRACT: This Agreement will become effective on January 1, 1998 and will continue in effect for a period of twelve (12) months unless sooner terminated. 1.2 AUTOMATIC RENEWAL: This Agreement shall be renewed automatically for succeeding terms of twelve (12) months each unless either party gives notice to the other at least sixty (60) days prior to the expiration of any term of its intention not to renew. 1.3 "CONTRACT TERM" DEFINED: As used herein, the phrase "contract term" refers to the entire period during which Representative renders services to Turbeco hereunder, whether for the period provided above, or whether terminated earlier as hereinafter provided or extended by mutual agreement between Turbeco and Representative. ARTICLE II APPOINTMENT AND TERRITORY 2.1 APPOINTMENT AND TERRITORY: Turbeco hereby appoints and grants Representative the nonexclusive and non- assignable right to sell the products of Turbeco anywhere in the world. A list of the products of Turbeco (the "Products") is set forth and described in Exhibit A attached hereto, and may be modified from time to time by Turbeco upon thirty (30) days written notice to Representative. 2 3 2.2 INDEPENDENT CONTRACTORS: The relationship of Turbeco and Representative will be that of independent contractors, and nothing contained in this Agreement will constitute the parties as partners, joint ventures, employer and employee, or otherwise as agents or participants in a joint undertaking. In all matters relating to this Agreement, neither Representative nor its employees or agents are or will act as employees of Turbeco within the meaning or application of any federal or state unemployment insurance laws, old age benefit laws, social security laws, workers' compensation or industrial accident laws, or under any other laws or regulations which may impute any obligations or liability to Turbeco by reason of an employment relationship. 2.3 REPRESENTATIVE'S FINANCIAL OBLIGATIONS: Representative will not create or assume any financial obligations on behalf of Turbeco, and all financial obligations associated with Representative's business will be the sole responsibility of the Representative. Representative will be solely responsible for damages or lawsuits (including reasonable attorneys' fees) arising out of the acts or omissions of Representative, its employees and agents. ARTICLE III RESPONSIBILITIES OF REPRESENTATIVE 3.1 PROMOTE SALES: The Representative shall make his best efforts to diligently promote the sale and general acceptance of the Products, to provide coverage for existing accounts, and to pursue new or potential accounts on a regular basis consistent with good business practice, and bear all expenses incurred by it with respect thereto. 3 4 3.2 COOPERATE IN ADVERTISING: Representative will cooperate with and assist Turbeco in advertising and merchandising campaigns. 3.3 MAINTAIN OFFICE: Representative will maintain an office which will be open during normal business hours, and may employ such personnel, if any, at such compensation and on such other conditions as Representative deems appropriate to sell and promote the Products. 3.4 SELL COMPETING PRODUCTS: Representative will refuse any agency or representative position to sell, and will prohibit any of its employees from selling, any product or products of another manufacturer, dealer, or distributor which will directly or indirectly compete or conflict with the Products, without obtaining prior written consent from Turbeco. 3.5 CUSTOMER-RELATED RESPONSIBILITIES: Representative will assist Turbeco in locating prospective customers of the Products and provide all pertinent information concerning the Products to prospective customers; promptly transmit to Turbeco all customer inquiries, complaints and other important information Representative obtains from or with respect to such customers; assist customers in placing orders for the Products, promptly transmit such orders to Turbeco, and assist in expediting deliveries of the Products to customers of the Products. 3.6 MEETINGS AND TRADE SHOW ATTENDANCE: Representative will attend, and promote the Products in, such trade shows, conventions and exhibits as Turbeco reasonably requests, and attend any sales meetings held by Turbeco to which Turbeco invites Representative with reasonable notice. 4 5 3.7 GENERAL COVENANTS: Representative will conduct business in a manner that reflects favorably at all times on the Products and on the good name, goodwill and reputation of Turbeco; avoid deceptive, misleading or unethical practices that are or might be detrimental to Turbeco, the Products or the public; make no false or misleading representations with regard to Turbeco or the Products; not publish or employ, or cooperate in the publication or employment of, any misleading or deceptive advertising material with regard to Turbeco or the Products; make no representations, warranties or guarantees to customers or to the trade with respect to the specifications, features or capabilities of the Products that are inconsistent with the literature distributed by Turbeco; and not enter into any contract or engage in any practice detrimental to the interests of Turbeco. 3.8 MARKET CONDITIONS: Representative will advise Turbeco promptly concerning any market information that comes to Representative's attention respecting Turbeco, the Products, Turbeco's market position or the continued competitiveness of the Products in the marketplace, and confer with Turbeco from time to time at the request of Turbeco, on matters relating to market conditions, sales forecasting and product planning relating to the Products. 5 6 ARTICLE IV RESPONSIBILITIES OF TURBECO 4.1 SALES INFORMATION: Turbeco will provide Representative with Turbeco's standard sales and technical information and literature regarding the Products. 4.2 PRODUCT ASSISTANCE: Turbeco will provide reasonable sales and service assistance with respect to the Products. 4.3 TERMS AND CONDITIONS: Turbeco will establish and revise, from time to time, Product pricing, terms, conditions of sale, and sales programs, including such credit arrangements as may be deemed appropriate by Turbeco, and promptly furnish Representative with copies of all such terms and conditions, price lists, and Product price schedules, as then in effect. 4.4 PROMOTIONAL MATERIAL: Turbeco will furnish Representative, at no charge, with reasonable amounts of Turbeco's standard promotional sales and technical information, literature and brochures and, to the extent reasonably practicable, provide such information in advance of initial introduction or sales of new or redesigned products. ARTICLE V REPRESENTATIVE COMPENSATION 5.1 FLAT RATE: Representative's sole compensation under this Agreement shall be a monthly payment of Twelve Thousand Five Hundred Dollars ($12,500.00), payable by the end of each month of the term. 6 7 ARTICLE VI ORDERS, PRICES AND TERMS 6.1 TURBECO CONTROL OF TERMS, CONDITIONS AND ORDERS: Turbeco will establish and have exclusive control over all prices, discounts, specifications, terms and conditions concerning sales of the Products, all of which may be changed from time to time by Turbeco, with or without notice. All sales will be F.O.B. Turbeco's warehouse in Houston, Texas. 6.2 CREDIT RISKS AND COLLECTIONS: Turbeco will be responsible for all credit risks and collections; however, Representative will provide reasonable assistance to Turbeco in the collection of sums owed by customers whose orders were solicited by Representative. 6.3 SHIPMENT AND PAYMENT: All Products for which orders under this Agreement are accepted by Turbeco will be shipped and billed by Turbeco directly to the customer. All invoice payments are to be made directly to Turbeco by the customer. If any payments are received by Representative in error, Representative will immediately forward such payments to Turbeco in full. 7 8 ARTICLE VII PROPRIETARY INFORMATION 7.1 REPRESENTATIVE'S CONFIDENTIALITY OBLIGATION: Representative acknowledges that in the course of performing its obligations under this Agreement, it may obtain information relating to Turbeco and the Products which is confidential to Turbeco (the "Proprietary Information"). The Proprietary Information includes without limitation trade secrets, know-how, inventions, techniques, processes, programs, diagrams, schematics, customer and financial information and sales and marketing plans. Representative will (a) use the Proprietary Information only in connection with fulfilling its obligations under this Agreement, (b) during the term of this Agreement and for a period of two (2) years thereafter, hold the Proprietary Information in strict confidence and exercise due care with respect to its handling and protection of the Proprietary Information, at a minimum complying with its own policies concerning protection of its own proprietary and/or trade secret information and (c) disclose, divulge or publish the same only to such of its employees or representatives who (i) have a need to know or have access to Turbeco's Proprietary Information in order for such employees or representatives to carry out the purposes of this Agreement, and (ii) have executed nondisclosure agreements binding them not to use or disclose the Proprietary Information except as permitted herein and to no other person or entity, whether for its own benefit or for the benefit of any other person or entity. Representative further agrees to return all copies of all Proprietary Information in its possession, control or custody immediately upon termination or expiration of this Agreement. 8 9 7.2 USE TURBECO TRADEMARKS AND TRADE NAMES: During the term of this Agreement, Representative is authorized by Turbeco to use the trademarks, trade names, logos and designations used by Turbeco for the Products in connection with Representative's advertisement and promotion of the Products. Representative's use of such trademarks, trade names, logos and designations will be in accordance with Turbeco's policies in effect from time to time, including but not limited to trademark usage and cooperative advertising policies. 7.3 REPRESENTATIVE DOES NOT ACQUIRE RIGHTS: Representative has paid no consideration for the use of Turbeco's trademarks, trade names, logos, designations or copyrights, and nothing contained in this Agreement will give Representative any right, title or interest in any of them. Representative acknowledges that Turbeco, either as an actual owner or licensee, owns and retains all trade names, trademarks, logos, designations, copyrights and other proprietary rights in or associated with all the Products, and agrees that it will not at any time during or after this Agreement assert or claim any interest in or do anything that may adversely affect the validity or enforceability of any trademark, trade name, logo, designation or copyright and other proprietary rights belonging to or licensed to Turbeco. 9 10 7.4 OBLIGATION TO PROTECT: Representative agrees to use reasonable efforts to protect Turbeco's proprietary rights and to cooperate in Turbeco's efforts to protect its proprietary rights. Representative agrees to notify Turbeco of any known or suspected breach of Turbeco's proprietary rights that comes to Representative's attention. Representative acknowledges that only Turbeco has the right to sue for infringement of Turbeco's proprietary rights. ARTICLE VIII INDEMNIFICATION 8.1 NO INDEMNIFICATION OF REPRESENTATIVE: Turbeco will not be liable for any losses, injuries, damages or claims of any nature whatsoever which Representative may be subject to or incur as a result of any of its activities in connection with this Agreement. 8.2 INDEMNIFICATION BY REPRESENTATIVE: Representative will indemnify Turbeco and hold it harmless from any claims, losses or damages, including court costs and fees of attorneys and other professionals, for personal injury, tangible or intangible property damage or any other liability, arising from (i) the negligence or fault of Representative, its employees or agents, (ii) any use by Representative, its employees or agents of any trademarks, trade names, logos, designations, copyrights, patents or other proprietary rights relating to the Products, or (iii) any warranty made by Representative, its employees or agents relating to the Products. 10 11 ARTICLE IX TERMINATION 9.1 TERMINATION: This Agreement may be terminated at any time by either party hereto upon sixty (60) days written notice to the other party with or without cause. 9.2 COMPENSATION UPON TERMINATION: The Representative shall be entitled to receive its full flat rate monthly compensation prorated to the date of final termination of this agreement. Such pro-ration shall be based on a thirty (30) day month. 9.3 DUTIES AND RESPONSIBILITIES UPON TERMINATION. Upon termination or expiration of this Agreement: (i) Representative will cease to use any Turbeco trademark, trade name, logo or designation; and (ii) Representative will return all materials provided by Turbeco pursuant this Agreement and all materials containing any Proprietary Information. 9.4 DISCLAIMER OF FURTHER LIABILITY: In the event of termination by either party in accordance with any of the provisions of this Agreement, neither party will be liable to the other because of such termination for compensation, reimbursement or damages on account of the loss of prospective profits or anticipated sales or on account of expenditures, investments, leases or commitments in connection with the business or good will of Turbeco or Representative. Turbeco's sole liability under the terms of this Agreement will be for any unpaid compensation as specified in paragraph 9.2 above. 11 12 ARTICLE X GENERAL PROVISIONS 10.1 ASSIGNMENT: This Agreement is not assignable by Representative and Representative may not delegate its duties hereunder without the prior written consent of Turbeco. Any attempted assignment in violation of this provision will be void and the provisions hereof will be binding upon and inure to the benefit of the parties, their successors and permitted assigns. 10.2 NOTICES: All notices and demands hereunder will be in writing and will be served by personal service, facsimile transmission or mail at the address of the receiving party set forth in this Agreement (or at such different address as may be designated by such party by written notice to the other party). All notices or demands by mail will be by certified or registered mail, return receipt requested, and will be deemed complete five (5) days after mailing. 10.3 SECTION HEADINGS AND LANGUAGE INTERPRETATION: The section headings contained herein are for reference only and will not be considered substantive parts of this Agreement. The use of the singular or plural form will include the other form, and the use of masculine, feminine or neuter genders will include the other genders. 10.4 GOVERNING LAW AND CHOICE OF FORUM: The laws of the State of Texas will govern all disputes arising out of or relating to this Agreement. 12 13 10.5 CLAIMS AGAINST TURBECO: Representative will notify Turbeco in writing of all claims arising from or in any way relating to this Agreement within three (3) months of the existence of such claims. If Representative fails to provide such written notice, such claims will be barred. This provision will survive any termination or expiration of this Agreement. 10.6 FORCE MAJEURE: Neither Turbeco nor Representative will be responsible for any failure to perform due to unforeseen circumstances or to causes beyond Turbeco's or Representative's control, including but not limited to acts of nature, war, riot, embargoes, acts of civil or military authorities, fire, floods, accidents, strikes, or shortages of transportation, facilities, fuel, energy, labor or materials. 10.7 EQUITABLE RELIEF: Representative acknowledges that any breach of its obligations under this Agreement with respect to the proprietary rights or confidential information of Turbeco will cause Turbeco irreparable injury for which there are inadequate remedies at law, and therefore Turbeco will be entitled to receive in any court of competent jurisdiction injunctive, preliminary or other equitable relief in addition to damages, including court costs and fees of attorneys and other professionals, to remedy any actual or threatened violations of its rights with respect to such matters. 10.8 WAIVER: The waiver by Turbeco of any default by Representative will not waive subsequent defaults by Representative of the same or a different kind. By acceptance of this Agreement, Representative waives and releases any and all claims against Turbeco arising under prior agreements, whether oral or in writing. 13 14 10.9 ATTORNEYS' FEES: In the event any litigation is brought by either party in connection with this Agreement, the substantially prevailing party in such litigation will be entitled to recover from the other party all the costs, attorneys' fees and other expenses incurred by such party in the litigation, and need not bring a suit to final judgment to substantially prevail. 10.10 SEVERABILITY: In the event any of the provisions of this agreement is held by a court or other tribunal of competent jurisdiction to be unenforceable, the other provisions of this Agreement will remain in full force and effect. 10.11 ENTIRE AGREEMENT: This Agreement, together with its exhibits, constitutes the entire agreement between the parties pertaining to the subject matter hereof, and supersedes in their entirety any and all written or oral agreements previously existing between the parties with respect to such subject matter. Representative acknowledges that it is not entering into this Agreement on the basis of any representations not expressly contained herein. Any modifications of this Agreement must be in writing and signed by both parties hereto, except as provided in Section 2.1 of this Agreement. 10.12 EFFECTIVENESS: This Agreement will become effective only after it has been signed by Representative, and it has been accepted by Turbeco at its principal place of business. 14 15 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the effective date set forth above. TURBECO REPRESENTATIVE By: /s/ WILLIAM G. JAYROE By: /s/ WALLACE ROBERTSON --------------------- --------------------- William G. Jayroe Wallace Robertson President and CEO President 15 16 EXHIBIT A TURBECO PRODUCTS 16 EX-10.3 7 BILL JAYROE EMPLOYMENT AGREEMENT 1 EXHIBIT 10.3 EMPLOYMENT AGREEMENT This employment agreement is effective as of September 16, 1997, between FLOTEK INDUSTRIES, INC., an ALBERTA, CANADA corporation (hereafter known as "Flotek") and BILL JAYROE. RECITALS 1. Flotek desires assurance of the continued association and services of Bill Jayroe in order to retain his experience, abilities, and knowledge, and is therefore willing to engage his services on the terms and conditions set forth below. 2. Bill Jayroe desires to continue in the employ of Flotek and is willing to do so on the terms and conditions set forth below. THEREFORE, in consideration of the above recitals and of the mutual promises and conditions in this agreement, it is agreed as follows: ARTICLE I TERM, PLACE, AND DUTIES OF EMPLOYMENT 1.1 TERM OF EMPLOYMENT: Subject to earlier termination as provided in this agreement, Bill Jayroe shall be employed for a three (3) year term beginning September 16, 1997, and ending September 16, 2000. 1.2 AUTOMATIC RENEWAL: This agreement shall be renewed automatically for succeeding terms of one (1) year each unless either party gives notice to the other at least ninety (90) days prior to the expiration of any term of his or its intention not to renew this agreement. 1.3 EMPLOYMENT TERM DEFINED: As used herein, the phrase "employment term" refers to the entire period of employment of Bill Jayroe by Flotek hereunder, whether for the periods provided above, or whether terminated earlier as hereinafter provided or extended by mutual agreement between Flotek and Bill Jayroe. 2 1.4 PLACE OF EMPLOYMENT: Unless the parties agree otherwise in writing, during the employment term Bill Jayroe shall perform the services he is required to perform under this agreement at Flotek's offices, located at 7030 Empire Central Drive, Houston, Texas 77040; provided, however, that Flotek may from time to time require Bill Jayroe to travel temporarily to other locations on Flotek's business. 1.5 DUTIES AND AUTHORITY: Bill Jayroe shall be the President and Chief Executive Officer of Flotek, with full power and authority to manage and conduct all the business of Flotek, subject to the directions and policies of Flotek and its board of directors as they may be, from time to time, stated either orally or in writing. ARTICLE II EMPLOYEE RESTRICTIONS AND OBLIGATIONS 2.1 RESTRICTIONS ON OUTSIDE BUSINESS ACTIVITY: During his employment, Bill Jayroe shall devote his full business time, energy, and ability exclusively to the business and interests of Flotek, and shall not, without Flotek's prior written consent, render to others services of any kind for compensation, or engage in any other business activity that would materially interfere with the performance of his duties under this agreement, provided, however, that he may continue to serve as a director of Nevada Gold and Casinos and to receive compensation for that service, and, with the Board's approval, may accept similar positions and receive compensation therefor. a. No Other Commitments: Bill Jayroe represents to Flotek that he has no other outstanding commitments inconsistent with any of the terms of this agreement or the services to be rendered under it. b. Passive Investments: This agreement shall not be interpreted to prohibit Bill Jayroe from making passive personal investments or conducting private business affairs if those activities do not interfere with the services required under this agreement. However, Bill Jayroe shall not directly or indirectly acquire, hold, or retain any interest in any business competing with or similar in nature to the business of Flotek. 2 3 2.2 COVENANT NOT TO COMPETE DURING TERM: During the employment term, Bill Jayroe shall not, directly or indirectly, whether as partner, employee, creditor, shareholder, or otherwise, promote, participate, or engage in any activity or other business competitive with Flotek's business. ARTICLE III COMPENSATION 3.1 BASE SALARY: During the term of this agreement, Flotek agrees to pay Bill Jayroe a Base Salary of One Hundred Fifty Thousand Dollars ($150,000.00). The Base Salary shall be payable as current salary, in semimonthly installments subject to all applicable withholdings and deductions. 3.2 ANNUAL BASE SALARY REVIEW: Flotek's board of directors shall review Bill Jayroe's Base Salary and additional benefits then being paid to Bill Jayroe not less frequently than every twelve (12) months, such review to coincide with the board's review of annual performance goals, which normally will occur on or about the month of May. Following such review, the board may in its discretion increase (but shall not be required to increase) Bill Jayroe's Base Salary or any other benefits, but may not decrease Bill Jayroe's Base Salary during the term of this agreement. 3.3 INCENTIVE COMPENSATION: In addition to the Base Salary provided for above, Flotek shall pay to Bill Jayroe as incentive compensation for each fiscal year of Flotek a graduated bonus which shall be tied to the net profits of Flotek. The bonus shall be calculated as a percentage of Bill Jayroe's annual base salary up to a maximum bonus of one hundred percent (100%) of such base salary. Bonuses shall be calculated and paid as follows: 3 4 GRADUATED BONUS SCHUDULE - NET INCOME - FISCAL 97/98
Total Bonus as a Total Dollar value of Net Income (CDN) % of Base Salary Bonus in U.S. Dollars ---------------- ---------------- --------------------- 1,200,000 or more 20% $ 30,000 1,500,000 or more 30% $ 45,000 1,800,000 or more 40% $ 60,000 2,100,000 or more 50% $ 75,000 2,400,000 or more 60% $ 90,000 2,700,000 or more 70% $105,000 3,000,000 or more 80% $120,000 3,300,000 or more 90% $135,000 3,600,000 or more 100% $150,000
If earned, all such bonuses shall be paid to Bill Jayroe in full within ninety (90) days after final board approval of the year end financial statements. For each succeeding year of Bill Jayroe's contract, new performance goals, as proposed by management and agreed to by the Board, will be set. Based on such goals, a similar bonus schedule will be established through a formal budget process developed by management and approved by the board of directors. a. The term "Net Profits" for purposes of this section shall be defined as follows: "Net profits before taxes, resulting from all operations and from all product lines, excluding extraordinary or unusual items, as set forth in Flotek's annual audited consolidated financial statements of operations and income." b. The incentive compensation payable to Bill Jayroe under this paragraph shall be prorated for any partial fiscal year that occurs during the employment term. The incentive compensation shall be prorated by multiplying the total net profits for the fiscal year within which such partial fiscal year occurs by (a) the above mentioned percentage and by (b) a number equal to the number of months during any such partial fiscal year in which Bill Jayroe is employed by Flotek within the meaning of this agreement, divided by twelve. 3.4 NON-QUALIFIED STOCK OPTION #1: As previously approved by the Board of Directors of Flotek in January, 1997, and as part of the consideration for this agreement, Flotek granted Bill Jayroe a non-qualified stock option to purchase 4 5 Four Hundred Thousand (400,000) shares of Flotek's common stock at a purchase price of fifty cents ($0.50 CDN) Canadian per share. The terms and conditions of the option grant are memorialized in a separate option agreement previously executed and approved by the VSE. 3.5 NON-QUALIFIED STOCK OPTION #2: As further consideration for this agreement, Flotek wishes to grant Bill Jayroe an additional non-qualified stock option to purchase Three Hundred Thousand (300,000) shares of Flotek's common stock at a purchase price equal to the market price per share (in Canadian dollars) on the close of business as of the date of this agreement. 3.6 FUTURE STOCK OPTION GRANT: As previously approved by the Board of Directors of Flotek in January, 1997, and as part of the consideration for this agreement, Flotek has agreed to grant Bill Jayroe two (2) additional non-qualified stock options to purchase common stock of Flotek on the following terms and conditions: A. YEAR ONE OF TERM: Provided Bill Jayroe meets or exceeds the minimum net income performance goal necessary to earn a twenty percent (20%) or greater incentive bonus in fiscal 97/98 (as set forth above in paragraph 3.3 of this Article III), Flotek will grant Bill Jayroe a non-qualified stock option to purchase Three Hundred Thousand (300,000) shares of Flotek's common stock at the then current market price. Such option to be granted within thirty (30) days after final Board approval of the year end financial statements. B. YEAR TWO OF TERM: Provided Bill Jayroe meets or exceeds the minimum net income performance goals in fiscal 98/99 as shall be agreed by the parties as required in paragraph 3.3 of this Article III, Flotek will grant Bill Jayroe an additional non-qualified stock option to purchase another Three Hundred Thousand (300,000) shares of Flotek's common stock at the then current market price. Such option to be granted within thirty (30) days after final Board approval of the year end financial statements. 5 6 In the event Bill Jayroe does not achieve the agreed upon minimum performance goals for either or both fiscal 97/98 or fiscal 98/99, Bill Jayroe shall forfeit his absolute rights to such non-qualified stock option(s). However, if, in the opinion of the compensation committee, the failure to achieve the minimum performance goal(s) was caused by unforeseen events which could not have been reasonably anticipated, the compensation committee shall retain the discretion to authorize the grant to Bill Jayroe of a similar non-qualified stock option for either or both fiscal 97/98 or fiscal 98/99, for any number of shares (for each grant) up to, but not exceeding three hundred thousand (300,000). Assuming the performance goals are achieved, or if not, options are granted at the compensation committee's discretion, the terms and conditions of each grant, which the parties agree shall be subject to VSE and all other appropriate regulatory approvals, shall be as follows: 1. Each stock option shall be subject to a twenty-four (24) month vesting schedule beginning on the date of each grant, with the total number of shares to vest at the rate of 1/24th per month until full vesting is obtained. 2. The number of shares subject to each option shall be proportionately adjusted for any change in the stock structure of Flotek because of share dividends, recapitalizations, reorganizations, mergers, or otherwise. Each option may be exercised in whole or in part, but may only be exercised in lots of Ten Thousand (10,000) shares or more. Bill Jayroe shall not have any of the rights of, nor be treated as, a shareholder with respect to the shares subject to this option until he has exercised the option and has become the shareholder of record of those shares. 3. Each option shall not be assignable. 4. Each option shall have a maximum five (5) year term and may only be exercised by Bill Jayroe during the term of his employment hereunder. However, in the event that the employment term is terminated by Flotek for reasons other than for cause, Bill Jayroe shall retain the right to exercise any unused portion of either option until the last day of the employment term as specified herein. 6 7 ARTICLE IV COMPANY BENEFITS 4.1 PARTICIPATION IN COMPANY PLANS: During the employment term, Bill Jayroe shall be entitled to receive all other benefits of employment generally available to Flotek's other executive and managerial employees when and as he becomes eligible for them, including, but not limited to, medical, dental, life and disability insurance benefits, and participation in Flotek's pension plan and profit sharing plan(s). In the event Flotek is unable to provide medical coverage on a company-wide basis, Flotek will, until such benefits are made generally available, purchase a separate medical insurance policy covering Bill Jayroe and his family. At such time as Flotek is able to offer medical insurance coverage on a company-wide basis, Flotek's obligation to pay for the separate medical insurance coverage on Bill Jayroe and his family shall terminate. a. Flotek reserves the right to modify, suspend or discontinue any and all of the above benefit plans, policies, and practices at any time without notice to or recourse by Bill Jayroe, so long as such action is taken generally with respect to other similarly situated persons and does not single out Bill Jayroe. 4.2 VACATION: Bill Jayroe shall be entitled to five (5) weeks of paid vacation for each twelve month period of employment, which shall accrue on a prorata basis from the date employment commences under this agreement. However, as of the date of this agreement, Bill Jayroe shall be deemed to have accrued twelve (12) days of paid vacation in consideration of his having worked without a contract from November 1, 1996, to the date of this agreement. a. Vacation time will continue to accrue so long as Bill Jayroe's total accrued vacation does not exceed ten (10) weeks. Should Bill Jayroe's accrued vacation time reach ten (10) weeks, Bill Jayroe will cease to accrue further vacation until Bill Jayroe's accrued vacation time falls below that level. 4.3 PAID HOLIDAYS: ADHERE TO STANDARD COMPANY POLICY. 4.4 SICK PAY: ADHERE TO STANDARD COMPANY POLICY. 7 8 4.5 EXPENSE REIMBURSEMENT: During the employment term, to the extent that such expenditures satisfy the criteria under the Internal Revenue Code for deductibility by Flotek (whether or not fully deductible) for federal income tax purposes as ordinary and necessary business expenses, Flotek shall reimburse Bill Jayroe promptly for reasonable business expenses, including travel, entertainment, parking, business meetings, and professional dues, made and substantiated in accordance with the policies and procedures established from time to time by Flotek with respect to Flotek's other executive and managerial employees. 4.6 CAR ALLOWANCE: During the employment term, Flotek shall furnish to Bill Jayroe an automobile owned or leased by Flotek. Within reasonable limits, or as approved by the board, Bill Jayroe may select any car or truck he deems appropriate. The terms and conditions of Bill Jayroe's use of such automobile and the extent to which Flotek shall defray the costs of its operation shall be generally in line with those pertaining to automobiles presently being furnished other executives and managerial personnel of Flotek, with allowance being made for Bill Jayroe's position as CEO. At such time as Flotek may choose to dispose of or return any such vehicle, Flotek shall first offer Bill Jayroe the opportunity to purchase said vehicle at its then fair market value. 4.7 LIFE INSURANCE: In addition to any standard coverage provided on a company-wide basis, Flotek agrees to obtain a twenty (20) year level-term life insurance policy on the life of Bill Jayroe in the face amount of One Million Dollars ($1,000,000). Flotek further agrees to make the insurance policy payable to the beneficiary or beneficiaries designated from time to time by Bill Jayroe. Flotek agrees to pay all premiums on the policy during the term of employment provided herein. a) In the event Bill Jayroe terminates his employment with Flotek for any reason whatsoever, Flotek shall have no further obligation to maintain the policy in any manner or pay the premiums therefore. However, Flotek agrees, upon Bill Jayroe's termination, that it will assign the ownership of said policy to Bill Jayroe and allow Bill Jayroe to continue said policy in force for so long as Bill Jayroe continues to pay the premiums. 8 9 b) Bill Jayroe agrees to submit to a physical examination at any time requested by Flotek for the purpose of Flotek's obtaining "key man" life insurance on the life of Bill Jayroe for the benefit of Flotek; provided, however, that Flotek shall bear the entire cost (if any) of such examination. 4.8 DISABILITY INSURANCE: In addition to, or as a supplement of, any standard coverage provided on a company-wide basis, Flotek agrees to purchase and maintain a disability insurance policy for Bill Jayroe which will, after ninety (90) days of full or partial disability, provide him with an income of not less than sixty percent (60%) of his then annual base salary. ARTICLE V EXCESSIVE COMPENSATION, INTANGIBLES, AND INDEMNIFICATION 5.1 REPAYMENT OF EXCESSIVE COMPENSATION: If any part of the salary or other compensation paid by Flotek to Bill Jayroe, or of any amount paid by Flotek for travel or entertainment expenses incurred by Bill Jayroe, is finally determined not to be allowable as a federal or state income tax deduction to Flotek, the part disallowed shall be repaid to Flotek by Bill Jayroe. 5.2 FLOTEK'S OWNERSHIP OF INTANGIBLES: All processes, inventions, patents, copyrights, trademarks, and other intangible rights that may be conceived or developed by Bill Jayroe, either alone or with others, during the term of Bill Jayroe's employment, whether or not conceived or developed during Bill Jayroe's working hours, and with respect to which the equipment, supplies, facilities, or trade secret information of Flotek was used, or that relate at the time of conception or reduction to practice of the invention to the business of the Flotek or to Flotek's actual or demonstrably anticipated research and development, or that result from any work performed by Bill Jayroe for Flotek, shall be the sole property of Flotek. Bill Jayroe shall disclose to Flotek all inventions conceived during the term of employment and for one year thereafter, whether or not the property of Flotek under the terms of the preceding sentence, provided that such disclosure shall be received by Flotek in confidence. Bill Jayroe shall execute all documents, including patent applications and assignments, required by Flotek to establish Flotek's rights under this Section. 9 10 5.3 INDEMNIFICATION BY FLOTEK: Flotek shall, to the maximum extent permitted by law and its bylaws, indemnify and hold Bill Jayroe harmless for any acts or decisions made in good faith while performing services for Flotek. To the same extent, Flotek will pay, and subject to any legal limitations, advance all expenses, including reasonable attorney fees and costs of court approved settlements and any judgments, actually and necessarily incurred by Bill Jayroe in connection with the defense of any action, suit or proceeding and in connection with any appeal, which has been brought against Bill Jayroe by reason of his service as an officer or agent of Flotek. 5.4 INDEMNIFICATION INSURANCE: Flotek shall use its best efforts to obtain coverage for Bill Jayroe (provided it may be obtained at a reasonable cost) under any liability insurance policy or policies now in force or hereafter obtained during the term of this agreement that cover other officers of Flotek having comparable or lesser status and responsibility. ARTICLE VI TERMINATION 6.1 TERMINATION FOR CAUSE: Flotek reserves the right to terminate this agreement if Bill Jayroe willfully breaches or habitually neglects the duties which he is required to perform under the terms of this agreement; or commits such acts of dishonesty, fraud, misrepresentation or other act of moral turpitude as would prevent the effective performance of his duties. a) Flotek may at its option terminate this agreement for the reasons stated in this section by giving written notice of termination to Bill Jayroe without prejudice to any other remedy to which Flotek may be entitled either at law, in equity, or under this agreement. b) The notice of termination required by this section shall specify the ground(s) for termination and shall be supported by a statement of all relevant facts. 10 11 c) Termination under this section shall be considered "for cause" for the purposes of this agreement. 6.2 TERMINATION ON RESIGNATION: Bill Jayroe may terminate this agreement at any time by giving Flotek six (6) months' prior written notice of such resignation. 6.3 TERMINATION ON DISABILITY: If, at the end of any calendar month during the initial term or any renewal term of this agreement, Bill Jayroe is and has been for the three (3) consecutive full calendar months then ending, or for fifty percent (50%) or more of the normal working days during the six (6) consecutive full calendar months then ending, unable due to mental or physical illness or injury to perform his duties under this agreement in his normal and regular manner, this agreement may then be terminated. a) Any termination pursuant to this paragraph shall be effected by giving fifteen (15) days written notice of termination to Bill Jayroe. Termination pursuant to this provision shall not prejudice Bill Jayroe's rights to continued compensation pursuant to Article IV of this agreement. b) Termination under this section shall not be considered "for cause" for the purposes of this agreement. 6.4 TERMINATION ON DEATH: If Bill Jayroe dies during the initial term or during any renewal term of this agreement, this agreement shall be terminated on the last day of the calendar month of his death. 6.5 RIGHTS AND OBLIGATIONS AFTER NOTICE OF TERMINATION: If Bill Jayroe gives notice of termination of this agreement under Section 6.2, or if it becomes known that this agreement will otherwise terminate in accordance with its provisions, Flotek may, in its sole discretion and subject to its other obligations under this agreement, relieve Bill Jayroe of his duties under this agreement and assign Bill Jayroe other reasonable duties and responsibilities to be performed until the termination becomes effective. 11 12 ARTICLE VII BUSINESS COMBINATION OR DISSOLUTION 7.1 AGREEMENT TO SURVIVE COMBINATION OR DISSOLUTION: This agreement shall not be terminated by Flotek's voluntary or involuntary dissolution or by any merger in which Flotek is not the surviving or resulting corporation, or on any transfer of all or substantially all of Flotek's assets. In the event of any such merger or transfer of assets, the provisions of this agreement shall be binding on and inure to the benefit of the surviving business entity or the business entity to which such assets shall be transferred. ARTICLE VIII UNFAIR COMPETITION, CONFIDENTIALITY 8.1 UNFAIR COMPETITION PROHIBITED: Because of his employment by Flotek, Bill Jayroe will have access to trade secrets and confidential information about Flotek, its products, its customers, and its methods of doing business. In consideration of his access to this information, Bill Jayroe agrees that for a period of one (1) year after termination of his employment, he will not, directly or indirectly, compete with Flotek in a similar or related oil field services business, located in the State of Texas or doing business in the Gulf of Mexico, which shall deal in the manufacture, distribution, or servicing of products similar to, or in competition with, any of Flotek's then current product lines and services. a) Bill Jayroe understands and agrees that direct competition means the design, development, production, promotion, or sale of products or services competitive with those of Flotek. Indirect competition means employment by any competitor or third party providing products competing with Flotek's products, for whom Bill Jayroe will perform the same or similar function as he performs for Flotek. b) Bill Jayroe acknowledges and agrees that the sale or unauthorized use or disclosure of any of Flotek's trade secrets or confidential information obtained by Bill Jayroe during his employment with Flotek, including information 12 13 concerning "Inventions," "Proprietary Information," and "Rights," all as defined below, would constitute unfair competition. Bill Jayroe promises and agrees not to engage in any unfair competition with Flotek either during the term or this agreement or at any time thereafter. c) For purposes of the agreement, the terms "Inventions," Proprietary Information," and "Rights," shall have the following meanings: 1. "Inventions" means all discoveries, developments, designs, improvements, inventions, formulas, software programs, processes, techniques, know how, negative know how, data, research, techniques, and technical data (whether or not patentable or registrable under patent, copyright or similar statutes and including all rights to obtain, register, perfect, and enforce those proprietary interests) that are related to or useful in Flotek's present or future business or result from use of property owned, leased, or contracted for by Flotek. "Inventions" shall also include anything that derives actual or potential economic value from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use. 2. "Proprietary Information" means information (a) that is not known by actual or potential competitors of Flotek or is generally unavailable to the public, (b) that has been created, discovered, developed, or otherwise become known to Flotek or in which property rights have been assigned or otherwise conveyed to Flotek, and (c) that has material economic value or potential material economic value to Flotek's present or future business. "Proprietary Information" shall include trade secrets {as defined under Texas Penal Code Section 31.05 (a) (4)} and all other discoveries, developments, designs, improvements, inventions, formulas, software programs, processes, techniques, know how, negative know how, data, research, techniques, technical data, customer and supplier lists, and any modifications or enhancements of any of the foregoing, and all program, marketing, sales, or other financial or business information disclosed to Bill Jayroe by Flotek, either directly or indirectly, in writing or orally or by drawings or observation, which has actual or potential economic value to Flotek. 3. "Rights" means all patents, trademarks, service marks and copyrights, and other rights pertaining to Proprietary Information, Inventions, or both. 8.2 CUSTOMER INFORMATION AND SOLICITATION OF EMPLOYEES: In the course of his employment, Bill Jayroe will have access to confidential 13 14 records and data pertaining to Flotek's customers and to the relationship between these customers and Flotek's account executives. Such information is considered secret and is disclosed to Bill Jayroe in confidence. During his employment by Flotek and for two (2) years after termination of that employment, Bill Jayroe shall not directly or indirectly disclose or use any such information except as required in the course of his employment by Flotek. In addition, for a period of two (2) years after termination of his employment, Bill Jayroe shall not induce or attempt to induce any account executive of Flotek to discontinue representing Flotek for the purpose of representing any competitor of Flotek. ARTICLE IX GENERAL AND CONCLUDING PROVISIONS 9.1 ARBITRATION: Any controversy or claim arising out of or relating to this agreement, or breach of this agreement, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction. There shall be three arbitrators, one to be chosen directly by each party at will, and the third arbitrator to be selected by the two arbitrators so chosen. The prevailing party shall be entitled to reasonable attorney's fees, costs, and necessary disbursements in addition to any other relief to which that party may be entitled. 9.2 INJUNCTION: Bill Jayroe is obligated under this agreement to render services of a special, unique, unusual, extraordinary, and intellectual character, which give this agreement peculiar value. The loss of these services cannot be reasonably or adequately compensated in damages in an action at law. Accordingly, in addition to other remedies provided by law or this agreement, Flotek shall have the right during the term or any renewal term of this agreement to obtain injunctive relief against the breach of this contract by Bill Jayroe or the performance of services elsewhere by Bill Jayroe, or both. 14 15 9.3 ENTIRE AGREEMENT: This agreement supersedes any and all other agreements, either oral or in writing, between the parties hereto with respect to the employment of Bill Jayroe by Flotek and contains all of the covenants and agreements between the parties with respect to that employment in any manner whatsoever. Each party to this agreement acknowledges that no representation, inducements, promises, or agreements, orally or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not embodied herein, and that no other agreement, statement, or promise not contained in this agreement shall be valid or binding on either party. 9.4 AMENDMENT AND MODIFICATION: This Agreement may be supplemented, amended, or modified only by the mutual agreement of the parties. No supplement, amendment, or modification of this Agreement shall be binding unless it is in writing and signed by the party to be charged. 9.5 EFFECT OF WAIVER: The failure of either party to insist on strict compliance with any of the terms, covenants, or conditions of this agreement by the other party shall not be deemed a waiver of that term, covenant, or condition, nor shall any waiver or relinquishment of any right or power at any one time or times be deemed a waiver or relinquishment of that right or power for all or any other times. 9.6 CHOICE OF LAW: The formation, construction, and performance of this agreement shall be construed in accordance with the laws of the State of Texas. 9.7 NOTICES: Any notice to Flotek required or permitted under this agreement shall be given in writing to Flotek, either by personal service or by registered or certified mail, postage prepaid, addressed to the Corporate Secretary, at Flotek's then principal place of business. Any such notice to Bill Jayroe shall be given in a like manner and, if mailed, shall be addressed to Bill Jayroe at his home address then shown in Flotek's files. For the purpose of determining compliance with any time limit in this agreement, a notice shall be deemed to have been duly given (a) on the date of service, if served personally on the party to whom notice is to be given, or (b) on the second business day after mailing, if mailed to the party to whom the notice is to be given in the manner provided in this section. 15 16 9.8 SEVERABILITY: If any provision of this agreement is held invalid or unenforceable, the remainder of this agreement shall nevertheless remain in full force and effect. If any provision is held invalid or unenforceable with respect to particular circumstances, it shall nevertheless remain in full force and effect in all other circumstances. 9.9 SUCCESSORS AND ASSIGNS: This Agreement shall be binding on and shall inure to the benefit of the parties to this Agreement and their respective heirs, executors, assigns, and administrators. 9.10 VANCOUVER STOCK EXCHANGE APPROVAL: The obligations of Flotek are subject to execution and delivery of formal documentation relating to the Employment Agreement in a form acceptable to Flotek and its solicitors, acting reasonably, and to the acceptance of such documentation for filing by the Vancouver Stock Exchange (the "Exchange"). EXECUTION This agreement is executed by the parties as of the day and year first above written. Flotek Industries, Inc. By /s/ HECTOR DOMINGUEZ ------------------------------------- Hector Dominguez Chairman of the Board Employee /s/ BILL JAYROE ------------------------------------- Bill Jayroe 16 EX-10.4 8 CONVERTIBLE LOAN AGREEMENT - DATED 10/16/97 1 EXHIBIT 10.4 CONVERTIBLE LOAN AGREEMENT THIS CONVERTIBLE LOAN AGREEMENT is made and entered into as of October 16, 1997, by and between Flotek Industries Inc., an Alberta corporation, whose principal executive offices are located at 7030 Empire Central Drive, Houston, Texas 77040 (the "Borrower") and TOSI, L. P., a Texas limited partnership, whose principal executive offices are located at 3900 Thanksgiving Tower, 1601 Elm Street, Dallas, Texas 75201 (the "Lender"). In consideration of the mutual covenants and agreements herein contained and of the loan hereinafter referred to, the Borrower and the Lender hereby agree as follows: ARTICLE 1 GENERAL TERMS Section 1.01 Certain Definitions. As used in this Agreement, the following terms shall have the meanings respectively ascribed to them below unless the context clearly requires otherwise: "Agreement" shall mean this Convertible Loan Agreement, as the same may from time to time be amended or supplemented. "Ancillary Documents" shall mean collectively the Security Instruments, the Guaranties and the Registration Rights Agreement. "Balance Sheet" shall mean the audited consolidated balance sheet of the Borrower and its Subsidiaries for the Borrower's fiscal year ended February 28, 1997. "Business Day" shall mean any day other than a Saturday, Sunday or day on which commercial banks are authorized or required to be closed under the laws of the State of Texas. "Commission" shall mean the United States Securities and Exchange Commission. "Code" shall mean the United States Internal Revenue Code of 1986, as amended. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "Event of Default" shall mean the occurrence of any of the events specified in Section 6.01 hereof, provided that any requirement for notice or lapse of time or any other condition precedent has been satisfied. "Excepted Liens" shall mean: (i) Liens for taxes, assessments or other governmental charges or levies not yet due and payable or that are being diligently contested in good faith by 2 appropriate action by or on behalf of the Borrower or any Subsidiary and for which adequate reserves have been established; (ii) Liens in connection with worker's compensation, unemployment insurance or other social-security, old-age-pension or public-liability obligations; (iii) legal or equitable encumbrances deemed to exist by reason of negative pledge covenants and other covenants or undertakings of like nature; (iv) legal or equitable encumbrances deemed to exist by reason of the existence of any litigation or other legal proceeding or arising out of a judgment or award with respect to which an appeal is being diligently prosecuted in good faith by appropriate action; (v) vendors', carriers', warehousemen's, repairmen's, mechanics, workers', materialmen's, construction or other like Liens arising by operation of law in the ordinary course of business or incident to the construction or improvement of any Property in respect of obligations that are not yet due and payable or that are being diligently contested in good faith by appropriate proceedings by or on behalf of the Borrower or any Subsidiary and for which adequate reserves have been established; and (vi) servitudes, easements, restrictions, rights of way and other similar rights in real or immovable Property or any interests therein that, in each case, do not materially impair the use of such Property for the purposes for which it is held by the Borrower or any Subsidiary. "Existing Security Agreement" shall mean that certain Security Agreement dated September 18, 1997 between the Borrower and the Lender pursuant to which the Borrower granted first priority security interest in the collateral specified therein as security for the Existing TOSI Loan. "Existing TOSI Loan" shall mean all indebtedness and obligations of the Borrower to the Lender pursuant to the loan evidenced by that certain promissory note dated September 18, 1997 in the original principal amount of US$293,000.00 made by the Borrower in favor of the Lender and secured pursuant to the Existing Security Agreement. "Expenses" shall include, without limitation, any and all court costs, attorneys' fees (including, without limitation, for trial, appeal or other proceedings), fees of auditors and accountants and investigation and pre-litigation expenses that the Lender may incur, directly or indirectly, together with interest at the post-maturity rate specified in the Note on each such amount from the date of written demand or request by the Lender for reimbursement until the date of reimbursement to the Lender. "Financial Statements" shall mean the audited consolidated annual financial statements of the Borrower and its Subsidiaries for the Borrower's fiscal year ended February 28, 1997, and the unaudited consolidated interim financial statements of the Borrower and its Subsidiaries for the Borrower's fiscal quarter ended August 31, 1997 (including all related schedules and notes thereto). "GAAP" shall mean United States generally-accepted accounting principles. "Governmental Requirement" shall mean any law, statute, code, ordinance, order, rule, regulation, judgment, decree, injunction, franchise, permit, certificate, license, authorization or 2 3 other direction or requirement (including, without limitation, any of the foregoing which relate to environmental standards or controls, energy regulations and occupational, safety and health standards or controls) of any (domestic or foreign) federal, state, county, municipal or other government, department, commission, board, court, agency or any other instrumentality of any of them, which exercises jurisdiction over the Borrower or any of its Property or of any Subsidiary or any of such Subsidiary's Property. "Guaranty" shall mean each and every guaranty instrument or agreement executed and delivered to the Lender by any Subsidiary to secure any Indebtedness. "Indebtedness" shall, mean any and all amounts owing or to be owing by the Borrower to the Lender in connection with this Agreement, the Note and any Security Instruments, whether principal, interest or otherwise, and all other liabilities and obligations of the Borrower to the Lender from time to time existing, whether in connection with this or any other transaction. "Judgment" shall have the meaning ascribed to it in Borrower's promissory note evidencing the Existing TOSI Loan. "Lien" shall mean any security agreement, financing statement filed with an appropriate governmental authority, conditional sale or other title retention agreement, lease, consignment or bailment given for security purposes, lien, mortgage, pledge, option, preemptive right (whether contractual or statutory), right of first refusal, encumbrance, adverse interest, constructive trust or other trust, claim, attachment, exception to or defect in title or other ownership interest (including, without limitation, reservations, rights of entry, possibilities of reverter, encroachments, easements, rights of way, restrictive covenants, leases and licenses) of any kind, that (i) creates or confers an interest in property to secure payment or performance of a liability, obligation or claim, or that retains or reserves such an interest for such purpose; (ii) grants to any Person the right to purchase or otherwise acquire, or obligates any Person to sell or otherwise dispose of, or otherwise results or may result in any Person acquiring, any property or interest therein; (iii) restricts the transfer of, or the exercise of any rights or the enjoyment of any benefits arising by reason of ownership of, any property; or (iv) otherwise constitutes an interest in or claim against property arising pursuant to common law or to any law, statute, contract, judgment, order or decree. "Loan" shall mean the US$750,000.00 loan made by the Lender to the Borrower pursuant to this Agreement and the Note. "Material Adverse Effect" shall mean any material and adverse effect on (i) the assets, liabilities, financial condition, business, operations, affairs or circumstances of the Borrower or any Subsidiary individually or of the Borrower and its Subsidiaries on a consolidated basis from those reflected in the Financial Statements or from the facts represented or warranted in this Agreement or any Security Instrument, or (ii) the ability of the Borrower or any Subsidiary individually or of the Borrower and its Subsidiaries on a consolidated basis to carry out its business as at the date of this Agreement or as proposed at the date of this Agreement to be 3 4 conducted or meet its obligations under this Agreement, the Note and the Security Instruments on a timely basis. "Note" shall mean the convertible promissory note made by the Borrower in favor of the Lender in the form attached as Exhibit 1.01 hereto, together with any and all renewals, extensions for any period, increases or rearrangements thereof. "Person" shall mean any individual, corporation, partnership, limited partnership, limited liability company, joint venture, joint stock company, association, trust, unincorporated organization, or federal, state or local government (domestic or foreign) or any agency or political subdivision thereof, or any other form of entity. "Plan" shall mean any plan subject to Title IV of ERISA and maintained by the Borrower or any Subsidiary, or any such plan to which the Borrower or any Subsidiary is required to contribute on behalf of its employees. "Potential Default" shall mean the occurrence of any of the events specified in Section 6.01 hereof, whether or not any requirement for notice or lapse of time or other condition precedent has been satisfied. "Private Placement" shall mean the Borrower's private placement of 11,666,667 units (each consisting of one common share and one warrant exercisable to purchase one additional common share) for an aggregate of US$1,250,000.00 that the Borrower announced on September 14, 1997. "Property" shall mean any interest in any kind of property or asset, whether real, personal or mixed, tangible or intangible. "Registration Rights Agreement" shall mean that certain registration rights agreement of even date herewith by and among, inter alia, the Lender and the Borrower that provides registration rights for the Shares issuable upon conversion of the principal amount of the Loan and upon exercise of the Warrant. "Security Instruments" shall mean collectively the Existing Security Agreement and any and all other agreements or instruments now or hereafter executed and delivered by the Borrower, any Subsidiary or any other Person in connection with, or as security for the payment or performance of, any Indebtedness (including, without limitation, the Existing TOSI Loan, the Note or this Agreement and any and all financing, continuation and termination statements related thereto), as such agreements may be amended or supplemented from time to time. "Shareholder Protection Rights Plan" shall mean the shareholder protection rights plan evidenced by that certain Shareholder Protection Rights Plan dated as of July 28, 1993 between the Borrower and Pacific Corporate Trust Company, as Rights Agent. 4 5 "Shares" shall mean the Borrower's common shares. "Subsidiary" shall mean any Person of which more than fifty percent (50%) of the issued and outstanding securities having ordinary voting power for the election of directors or others with analogous power and authority is owned or controlled, directly or indirectly, by the Borrower and/or one or more of its subsidiaries. "VSE" shall mean the Vancouver Stock Exchange. "Warrant" shall mean that certain Warrant of even date herewith pursuant to which the Borrower has granted to the Lender the right to purchase up to 7,000,000 shares of the Borrower's common shares on the terms and conditions set forth therein. Section 1.02 Accounting Principles. Any and all determinations of the character or amount of any asset or liability or item of income or expense required to be determined or any consolidation or other accounting computation required to be made under this Agreement shall be made in accordance with GAAP applied on a basis consistent with the Financial Statements, except to the extent that such principles are inconsistent with the requirements of this Agreement. All determinations of financial amounts on the consolidated basis of the Borrower and its Subsidiaries shall make due allowance for any minority stock interest in such Subsidiaries. Section 1.03 Currency. Except where a reference to Canadian currency is indicated by the use "CDN," all currency references in this Agreement are references to the lawful moneys of the United States of America and where, for any purpose in connection with the Loan, it is necessary to refer to the lawful moneys of Canada, a deemed exchange rate of CDN$1.40 per US$1.00 shall apply so that, for example, the original principal amount of the Loan expressed in Canadian funds is CDN$1,050,000.00. ARTICLE 2 AMOUNT AND TERMS OF LOAN Section 2.01 Term Loan. Subject to the terms and conditions and relying on the representations and warranties contained in this Agreement, the Lender agrees to make, on the date hereof, the Loan, which shall be evidenced by the Borrower's issuance, execution and delivery of the Note. Section 2.02 Payment Procedures. All payments and prepayments made by the Borrower under the Note or this Agreement shall be made to the Lender at its principal executive offices in immediately available funds before 5:00 p.m., Dallas, Texas time, on the date that such payment is required to be made. Any payment received and accepted by the Lender after such time shall be considered for all purposes (including the calculation in interest, to the extent permitted by law) as having been made on the Lender's next following Business Day. Section 2.03 Business Day. If the date for any Loan payment or prepayment hereunder falls on a day that is not a Business Day, then for all purposes of the Note and this Agreement the same shall be 5 6 deemed to have fallen on the next following Business Day, and such extension of time shall in such case be included in the computation of payments of interest. Section 2.04 Conversion of Loan Principal. The principal amount of the Loan shall be convertible into the common shares of the Borrower on the terms and conditions set forth in Schedule 2.04 hereto. ARTICLE 3 REPRESENTATIONS AND WARRANTIES To induce the Lender to enter into this Agreement, the Borrower represents and warrants to the Lender (with each such representation and warranty's being deemed material and relied upon by the Lender irrespective of whether such materiality and/or reliance actually exists) as follows: Section 3.01 Corporate Existence. Each of the Borrower and each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and is duly qualified to transact business as a foreign corporation in all jurisdictions in which the Property owned or leased, or the business transacted by, it makes such qualification necessary or desirable. Section 3.02 Corporate Power and Authorization. The Borrower is duly authorized and empowered to create and issue the Note and the Warrant, to execute, deliver and perform its obligations under this Agreement, and to execute, deliver and perform its obligations under the Ancillary Documents to which it is a party. Each Subsidiary is duly authorized and empowered to execute, deliver and perform its obligations under the Ancillary Documents to which it is a party. All corporate action on the Borrower's part necessary for the due creation and issuance of the Note and the Warrant and for the due execution, delivery and performance of this Agreement and of the Ancillary Documents has been duly and effectively taken. All corporate action on each Subsidiary's part necessary for the due execution, delivery and performance of the Ancillary Documents to which it is a party has been duly and effectively taken. Section 3.03 Binding Obligations. This Agreement, the Note, the Warrant and the Ancillary Documents to which the Borrower is a party constitute valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms (except to the extent that enforcement may be subject to any applicable bankruptcy, insolvency or similar laws of general application affecting the enforcement of creditors' rights). Each Ancillary Document to a Subsidiary is a party constitutes the valid and binding obligations of such Subsidiary, enforceable against such Subsidiary in accordance with its terms (except to the extent that enforcement may be subject to any applicable bankruptcy, insolvency or similar laws of general application affecting the enforcement of creditors' rights). Section 3.04 No Legal Bar or Resultant Lien. The Borrower's execution, delivery and performance of the Note, the Warrant, this Agreement and the Ancillary Documents to which the Borrower is a party does not and shall not violate any provisions of its articles or certificate of incorporation or charter, bylaws or any contract, agreement, instrument or Governmental Requirement to which the Borrower is subject 6 7 (other than any Governmental Requirement the violation of which, either individually or in the aggregate, would not have a Material Adverse Effect), or result in the creation or imposition of, or obligation to create, any Lien upon any Property of the Borrower, other than any Lien permitted by this Agreement. Each Subsidiary's execution, delivery and performance of the Ancillary Documents to which it is a party does not and shall not violate any provisions of such Subsidiary's articles or certificate of incorporation or charter, bylaws or any contract, agreement, instrument or Governmental Requirement to which such Subsidiary is subject (other than any Governmental Requirement the violation of which, either individually or in the aggregate, would not have a Material Adverse Effect), or result in the creation or imposition of, or obligation to create, any Lien upon any Property of such Subsidiary, other than any Lien permitted by this Agreement. Section 3.05 No Consents. Neither the Borrower's execution, delivery and performance of the Note, the Warrant, this Agreement and the Ancillary Documents to which it is a party, nor each Subsidiary's execution, delivery and performance of the Ancillary Documents to which such Subsidiary is a party, requires the consent or approval of any other Person. Section 3.06 Financial Condition. The Financial Statements have been delivered to the Lender, have been prepared in accordance with GAAP, consistently applied on a basis consistent with past practice, and fully and accurately present the financial condition and changes in financial position of the Borrower and its Subsidiaries as at the date or dates and for the period or periods therein stated, subject only to typical year-end audit adjustments. Since the date of the Balance Sheet, no event has occurred with respect to the Property, operations, business, condition (financial or otherwise) or prospects of the Borrower or any Subsidiary that could have a Material Adverse Effect. Section 3.07 Investments and Guaranties. At the date of this Agreement, neither the Borrower nor any Subsidiary has made any investment in, advance to or guarantee of the obligations of any Person except those the material details of which are disclosed in the Financial Statements. Section 3.08 Liabilities; Litigation. Except for liabilities incurred in the ordinary course of business, neither the Borrower nor any Subsidiary has any material (individually or in the aggregate) liabilities, direct or contingent, except those the material details of which are set forth in the Financial Statements. There is no litigation, legal, administrative or arbitral proceeding, investigation or other action of any nature pending or threatened against or affecting the Borrower or any Subsidiary that involves the possibility of any judgment or liability not fully covered by insurance, and which could have a Material Adverse Effect. No unusual or unduly burdensome restriction, restraint, or hazard exists by contract, law or governmental regulation or otherwise relating to the business or Property of the Borrower or any Subsidiary. Section 3.09 Taxes; Governmental Charges. The Borrower and its Subsidiaries have filed all tax returns and reports required to be filed and have paid all taxes, assessments, fees and other governmental charges levied upon any of them or upon any of their respective Property or income that are due and payable, including interest and penalties. 7 8 Section 3.10 Liens. The Borrower and its Subsidiaries have good and marketable title to their respective (individually or in the aggregate) Property, free and clear of all Liens except for (i) Liens the material details of which have been set forth in the Financial Statements, (ii) Liens that do not materially interfere with the occupation, use and enjoyment by the Borrower or any Subsidiary of any of their respective Property in the ordinary course of business as presently conducted or materially impair the value thereof and (iii) Liens in favor of the Lender or otherwise specifically permitted or contemplated by this Agreement or the Security Instruments. Section 3.11 Defaults. Neither the Borrower nor any Subsidiary is in default, nor has any event or circumstance occurred that, with the passage of time or the giving of notice or both would constitute a default, under any loan or credit agreement, indenture, mortgage, deed of trust, security agreement or other agreement or instrument evidencing or pertaining to any obligation for the payment of money of the Borrower or any Subsidiary, or under any material agreement or other instrument to which the Borrower or any Subsidiary is a party or by which the Borrower or any Subsidiary or any of their respective Property is or may be bound. Section 3.12 Casualties; Taking of Property. Since the date of the Balance Sheet, neither the business nor the Property of the Borrower or any Subsidiary have been materially and adversely affected as a result of any fire, explosion, earthquake, flood, drought, windstorm, accident, strike or other labor disturbance, embargo, requisition or taking of Property or cancellation of contracts, permits or concessions by any domestic or foreign government or any agency thereof, riot, activities of armed forces or acts of God or of any public enemy. Section 3.13 Compliance with the Law. Neither the Borrower nor any Subsidiary: (a) is in violation of any Governmental Requirement (other than any Governmental Requirement the failure to be in compliance with which, either individually or in the aggregate, would not have a Material Adverse Effect); or (b) has failed to obtain any license, permit, franchise or other governmental authorization necessary to the ownership of any of its Property or the conduct of its business; which violation or failure could have (in the event such violation or failure were asserted by any Person through appropriate action) a Material Adverse Effect. Section 3.14 ERISA. The Borrower and its Subsidiaries are in compliance with the applicable provisions of ERISA, and no "reportable event," as such term is defined in Section 4043 of ERISA, has occurred with respect to any Plan of the Borrower or any Subsidiary. 8 9 Section 3.15 Capitalization. (a) The Borrower's issued and outstanding capital stock consists solely of the capital stock set forth in Schedule 3.15 hereto. The Borrower has not issued, or agreed to issue, any Shares or any securities convertible into, or exchangeable with, Shares or entered into, issued or granted, or agreed to enter into, issue or grant, any rights, plans, options, warrants or agreements for the purchase or acquisition (whether or not contingent) of any capital stock (collectively, "Stock Rights") other than as set forth in such Schedule 3.15. All of the Borrower's issued and outstanding capital stock was duly authorized and validly issued and is fully-paid and nonassessable. All of the Borrower's issuances of its capital stock and Stock Rights were made in compliance with all applicable laws and with VSE rules and regulations. (b) Except as to Petrovalve International (Barbados) Inc., of which the Borrower owns beneficially and of record 98% of the issued and outstanding capital stock, the Borrower owns, directly or indirectly, 100% of the issued and outstanding capital stock of all of the Subsidiaries. All of the capital stock of each Subsidiary was duly authorized and validly issued and is fully-paid and nonassessable. The capital stock of Petrovalve International Inc., an Alberta corporation, Petrovalve, Inc., a Delaware corporation, USA Petrovalve, Inc., a Texas corporation, and Turbeco, Inc., a Texas corporation, that has been pledged to the Lender as part of the security for the Loan constitutes all of the capital stock of such corporations. No Subsidiary has issued, or agreed to issue, any shares of capital stock or any securities convertible into, or exchangeable with, shares of capital stock or entered into, issued or granted, or agreed to enter into, issue or grant, any Stock Rights. Section 3.16 Trade Rights. There are no pending or threatened claims against the Borrower or any Subsidiary alleging infringement of, or conflict with the rights of others under, any patent, patent application, trademark, service mark, copyright, trade secret or similar intangible franchise, license or right (collectively, "Trade Rights") and, to the best of the Borrower's knowledge, no reasonable basis exists for any such allegation. Section 3.17 Necessary Approvals. The Borrower and each Subsidiary validly holds all permits, licenses, approvals and Trade Rights necessary or desirable to enable it to conduct its business as it is currently conducted. Section 3.18 No Material Misstatements. No information that the Borrower or any Subsidiary has furnished to the Lender in any form in connection with the negotiation of this Agreement contained or contains any material misstatement of fact or omitted or omits to state a material fact or any fact necessary to make the statements contained therein not misleading. ARTICLE 4 AFFIRMATIVE COVENANTS The Borrower shall at all times comply with the covenants contained in this Article 4 for so long as any part of the Indebtedness remains outstanding: Section 4.01 Financial Statements and Reports. The Borrower shall promptly furnish to the Lender from time to time such information regarding the business and affairs and financial condition of the Borrower and its Subsidiaries as the Lender may reasonably request, and shall also furnish to the Lender the following: 9 10 (a) Annual Reports. Promptly after becoming available and in any event within 140 days after the close of each fiscal year of the Borrower (or such shorter period of time within which the Borrower must file such information with the Commission), the audited consolidated and consolidating balance sheets of the Borrower and its Subsidiaries as at the end of such year, the audited consolidated and consolidating statements of profit and loss of the Borrower and its Subsidiaries for such year and the audited consolidated and consolidating statements of reconciliation of capital accounts of the Borrower and its Subsidiaries for such year, setting forth in each case in comparative form the corresponding figures for the preceding fiscal year, accompanied by the related report of the Borrower's independent public accountants, which report shall be to the effect that such statements have been prepared in accordance with GAAP consistently applied throughout the period indicated except to the extent stated therein; and (b) Quarterly Reports. Promptly after becoming available and in any event within 60 (or such shorter period of time within which the Borrower must file such information with the Commission) days after the end of each of the first three quarterly periods in each fiscal year of the Borrower, the consolidated and consolidating balance sheets of the Borrower and its Subsidiaries as at the end of such period, the consolidated and consolidating statements of profit and loss of the Borrower and its Subsidiaries for such quarter and for the period from the beginning of the fiscal year to the close of such quarter, and the consolidated and consolidating statements of reconciliation of capital accounts of the Borrower and its Subsidiaries for such quarter and for the period from the beginning of the fiscal year to the close of such quarter, setting forth in each case in comparative form the corresponding figures for the corresponding period of the immediately-preceding fiscal year, certified by the principal financial officer of the Borrower to have been prepared in accordance with GAAP consistently applied throughout the period indicated except to the extent stated therein, subject to typical changes resulting from year-end adjustments; and (c) Audit Reports. Promptly upon receipt thereof, one copy of each other report submitted to the Borrower or any Subsidiary by independent accountants in connection with any annual, interim or special audit made by them of the books of the Borrower or any Subsidiary. (d) Commission and Other Reports. Promptly upon their becoming available, one copy of each financial statement, report, notice or proxy statement sent by the Borrower to stockholders generally, and of each regular or periodic report and any registration statement, prospectus or written communication (other than transmittal letters) in respect thereof filed by the Borrower with, or received by the Borrower in connection therewith from, any securities exchange or the Commission. Section 4.02 Certificates of Compliance. Concurrently with the furnishing of the annual and quarterly financial statements pursuant to Subsections 4.01(a) and (b) hereof, the Borrower shall furnish or cause to be furnished to the Lender a certificate in form and substance satisfactory to the Lender signed by the principal financial officer of the Borrower stating (i) that the Borrower has fulfilled its obligations under this Agreement, the Note, the Warrant and the Security Instruments; and (ii) that all representations made herein and therein continue to be true and correct (or specifying the nature of any change), or, if any Potential Default shall have occurred and be continuing, specifying such Potential Default and the nature and status thereof; and (iii) containing or accompanied by such financial or other details, information and material as the Lender reasonably may request to evidence such compliance. 10 11 Section 4.03 Taxes and Other Liens. The Borrower shall pay and discharge promptly all taxes, assessments and governmental charges or levies imposed upon the Borrower or any Subsidiary or upon the income or any Property of the Borrower or any Subsidiary as well as all claims of any kind (including claims for labor, materials, supplies and rent) that, if unpaid, might become a Lien upon any or all of the Property of the Borrower or any Subsidiary; provided, however, that neither the Borrower nor any Subsidiary shall be required to pay any such tax, assessment, charge, levy or claim if the amount, applicability or validity thereof shall currently be contested in good faith by appropriate proceedings diligently conducted by or on behalf of the Borrower or its Subsidiary, and if the Borrower or its Subsidiary shall have set up reserves therefor adequate under GAAP. Section 4.04 Maintenance of Rights and Property. The Borrower shall and shall cause each Subsidiary to (i) maintain its corporate existence, rights and franchises; (ii) observe and comply with all Governmental Requirements (other than any Governmental Requirement the violation of which, either individually or in the aggregate, would not have a Material Adverse Effect); and (iii) maintain its Property in good operating condition at all times and make all repairs, replacements, additions, betterments and improvements to its Property as are necessary or appropriate to enable the Borrower and each Subsidiary to conduct their respective businesses properly and efficiently at all times. Section 4.05 Payment of the Lender's Costs. Fees and Expenses. Promptly upon the Lender's written request, the Borrower shall pay (or shall reimburse the Lender for) all Expenses that the Lender may incur, directly or indirectly, in connection with: (a) the preparation and negotiation of this Agreement and all other documents and instruments contemplated hereby (including without limitation, all Security Instruments), and any and all amendments hereto or thereto and consents or waivers hereunder or thereunder); (b) the Lender's satisfaction of any of the Borrower's obligations under this Agreement or any Security Instrument; (c) the collection of the Note, or the enforcement of the Lender's rights under this Agreement, the Warrant or any of the Ancillary Documents; and (d) the recording or filing of Security Instruments. Section 4.06 Insurance. The Borrower and its Subsidiaries now maintain (and the Borrower shall, and shall cause each Subsidiary to, continue to maintain), with financially sound and reputable insurers, insurance with respect to their respective Property and businesses against such liabilities, casualties, risks and contingencies and in such types and amounts as is customary for Persons engaged in the same or similar businesses and similarly situated. Upon the Lender's request, the Borrower shall furnish, or cause to be furnished, to the Lender from time to time a summary of the insurance coverage of the Borrower and its Subsidiaries in form and substance satisfactory to the Lender and, if requested, shall furnish the Lender with true and complete copies of the applicable policies. In the case of any fire, accident or other casualty causing loss or damage to any Property of the Borrower or a Subsidiary, the proceeds of such policies shall be used (i) to repair or replace the damaged Property or (ii) to prepay the Indebtedness. 11 12 Section 4.07 Accounts and Records. The Borrower shall keep, and shall cause each Subsidiary to keep, books of record and account in which full, true and correct entries shall be made of all dealings or transactions in relation to their respective business and activities, in accordance with GAAP, consistently applied except for changes in accounting principles or practices with which the Borrower's independent public accountants concur. Section 4.08 Right of Inspection. The Borrower shall permit any officer, employee or agent of the Lender to visit and inspect any of the Borrower's Property, to examine the Borrower's books of record and accounts and to take copies and extracts therefrom, and to discuss the Borrower's affairs, finances and accounts with the Borrower's officers, accountants and auditors, all at such times and places as the Lender reasonably may require. The Borrower shall cause each Subsidiary to permit any officer, employee or agent of the Lender to visit and inspect any of such Subsidiary's Property, to examine such Subsidiary's books of record and accounts and to take copies and extracts therefrom, and to discuss such Subsidiary's affairs, finances and accounts with such Subsidiary's officers, accountants and auditors, all at such times and places as the Lender reasonably may require. Section 4.09 Notice of Certain Events. The Borrower shall notify the Lender promptly if the Borrower learns of the occurrence of: (a) any event that constitutes a Potential Default, and shall in such case provide with the notice a detailed statement by a responsible officer of the Borrower of the steps being taken to cure the effect of such Potential Default; or (b) the receipt of any notice from, or the taking of any other action by, the holder of any promissory note, debenture or other evidence of indebtedness of the Borrower or any Subsidiary or of any security (as defined in the Securities Act of 1933, as amended) of the Borrower or any Subsidiary with respect to a claimed default, and shall in such case provide with the notice a detailed statement by a responsible officer of the Borrower specifying the notice given or other action taken by such holder and the nature of the claimed default and what action the Borrower or its Subsidiary is taking or proposes to take with respect thereto; or (c) any legal, judicial or regulatory proceedings affecting the Borrower or any Subsidiary or any of their respective Property in which the amount involved is material and is not covered by insurance or that, if adversely determined, could have a Material Adverse Effect; or (d) any pending or threatened dispute between the Borrower or any Subsidiary and any governmental or regulatory body or any other Person that, if adversely determined, could have a Material Adverse Effect. 12 13 Section 4.10 ERISA Information and Compliance. The Borrower shall promptly furnish to the Lender (i), if the Lender requests, copies of each annual and other report with respect to each Plan or any trust created thereunder promptly after the filing thereof with the United States Secretary of Labor or the Pension Benefit Guaranty Corporation and (ii), immediately upon becoming aware of the occurrence of any "reportable event," as such term is defined in Section 4043 of ERISA, or of any "prohibited transaction," as such term is defined in Section 4975 of the Code, in connection with any Plan or any trust created thereunder, a written notice signed by the President or the principal financial officer of the Borrower specifying the nature thereof, what action the Borrower or any of its Subsidiaries is taking or proposes to take with respect thereto and, when known, any action taken by the Internal Revenue Service with respect thereto. The Borrower shall fund, or shall cause its Subsidiaries to fund, all current service pension liabilities as they are incurred under the provisions of all Plans from time to time in effect for the benefit of employees of the Borrower or any of its Subsidiaries, and comply with all applicable provisions of ERISA. Section 4.11 Use of Proceeds. The proceeds of the Note shall be applied by the Borrower only for the following purposes and only in the following order: (a) to pay all of the Lender's Expenses in connection with the Existing TOSI Loan; (b) to pay all of the Lender's Expenses described in Section 4.05; (c) to pay all amounts due under the Existing TOSI Loan; (d) to pay the Borrower's indebtedness as set forth in Schedule 4.11 hereto; and (e) for working capital and other general corporate purposes. Section 4.12 VSE Listing. The Borrower shall ensure at all times that: (a) the maximum number of Shares then-issuable upon conversion of the principal amount of the Loan and upon exercise of the Warrant are listed on the VSE; (b) the Borrower is not in default of its listing agreement with the VSE; and (c) trading in the Shares is not suspended for any reason. Section 4.13 Reservation of Shares. The Borrower shall ensure that, at all times, the Borrower has duly reserved for issuance out of its authorized capital the maximum number of Shares issuable upon conversion of the principal amount of the Loan and upon exercise of the Warrant. Section 4.14 Status of Warrant upon Issuance. The Lender shall take delivery of the Warrant at the Closing free and clear of all Liens. Section 4.15 Status of Shares upon Issuance. All Shares issued upon conversion of the principal amount of the Loan, upon exercise of the Warrant and in payment of the finder's fee described in Section 7.02(b) shall 13 14 be duly authorized, validly issued, fully paid and nonassessable, and free and clear of all Liens. Section 4.16 Lender's Right of First Refusal with respect to Future Borrower Financings. The Borrower hereby grants to the Lender a right of first refusal with respect to future Borrower financings on the terms and conditions set forth in Schedule 4.16 hereto. ARTICLE 5 NEGATIVE COVENANTS The Borrower shall at all times comply with the covenants contained in this Article 5 so long as any part of the Indebtedness remains outstanding: Section 5.01 Indebtedness. The Borrower shall not, and shall not permit any Subsidiary to, incur, create, assume or suffer to exist any indebtedness or obligation for payment of money (including obligations for the payment of rentals) other than the Indebtedness, or to guarantee or in any way to be or become liable in respect of, or to be responsible for, any such indebtedness or obligation of any other Person in any way other than in the ordinary course of business. Section 5.02 Liens. The Borrower shall not, and shall not permit any Subsidiary to, incur, create, assume or suffer to exist any Lien on any of its Property (now held or hereafter acquired) other than (a) Liens securing the payment of any Indebtedness and (b) Excepted Liens. Section 5.03 Investments, Loans and Advances. The Borrower shall not, and shall not permit any Subsidiary to, make or permit to remain outstanding any loans or advances to or investments in any Person other than in the ordinary course of business. Section 5.04 Dividends. Distributions and Redemptions. The Borrower shall not declare or pay any dividend or distribution, or purchase, redeem, retire or otherwise acquire for value any of its capital stock now or hereafter outstanding, return any capital to its stockholders, or make any distribution of its assets to its stockholders as such, or permit any of its Subsidiaries to purchase or otherwise acquire for value any capital stock of the Borrower. Section 5.05 Fundamental Corporate Transactions. The Borrower shall not merge or consolidate with, or sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all, substantially all or an integral portion of its Property (whether now owned or hereafter acquired) to, any Person, or permit any Subsidiary to do so, except that any Subsidiary may merge into or consolidate with or transfer Property to any other Subsidiary and any Subsidiary may merge into or transfer Property to the Borrower; provided, however, that, in each case, immediately thereafter and giving effect thereto, no event shall occur and be continuing that constitutes a Potential Default or an Event of Default and that, in the case of any such merger or consolidation to which the Borrower is a party, the Borrower is the surviving corporation. 14 15 Section 5.06 Sales and Leasebacks. The Borrower shall not, and shall not permit any subsidiary to, enter into any arrangement, directly or indirectly, with any Person whereby the Borrower or any Subsidiary shall sell or transfer any Property, whether now owned or hereafter acquired, and whereby the Borrower or any Subsidiary shall then or thereafter rent or lease as lessee such Property or any part thereof or other Property which the Borrower or any Subsidiary intends to use for substantially the same purpose or purposes as the Property sold or transferred. Section 5.07 ERISA Compliance. The Borrower shall not at any time permit any Plan maintained by it or any Subsidiary to: (a) engage in any "prohibited transaction," as such term is defined in Section 4975 of the Code, as amended; (b) incur any "accumulated funding deficiency," as such term is defined in Section 302 of ERISA; or (c) terminate any such Plan in a manner which could result in the imposition of a Lien on the Property of the Borrower or any Subsidiary pursuant to Section 4068 of ERISA. Section 5.08 Nature of Business. The Borrower shall not, and shall not permit any Subsidiary to, materially change the character of its business as carried on at the date hereof. Section 5.09 Margin Stock. Neither the Borrower nor any Subsidiary shall take any action that might cause the Note, this Agreement or any of the Security Instruments to violate Regulation U of the Board of Governors of the United States Federal Reserve System (12 C.F.R. Part 221) (the "Federal Reserve Board") or any other regulation of the Federal Reserve Board or to violate Section 7 of the Exchange Act of 1934 or any rule or regulation thereunder, in each case as now in effect or as the same may hereinafter be in effect. Section 5.10 VSE Listing. The Borrower shall not de-list, or allow the de-listing of, the Shares from the VSE unless such de-listing occurs at a time when such Shares are listed on the NASDAQ Stock Market or other nationally-recognized United States stock market. ARTICLE 6 EVENTS OF DEFAULT Section 6.01 Events. Any of the following events shall be considered an "Event of Default:" (a) the Borrower fails to pay when due any installment of principal or interest on the Note or other Indebtedness; or (b) any of the Borrower's representations or warranties set forth herein, in the Note, in the Warrant or in any Ancillary Document to which it is a party, or any Subsidiary's representations or 15 16 warranties set forth in any Ancillary Document to which it is a party, proves to have been incorrect in any material respect as of the date hereof or thereof; or any representation, statement (including financial statement), certificate, request or other document furnished pursuant to or under this Agreement, the Note, the Warrant or any Ancillary Document proves to have been incorrect in any material respect as of the date when made or deemed made; or (c) the Borrower fails duly, timely and fully to perform or observe any of its covenants or agreements set forth in Section 4.11, Article S and Section 7.04 of this Agreement; or (d) the Borrower fails duly, timely and fully to perform or observe any of its covenants or agreements set forth in this Agreement (other than any such covenants and agreements set forth in Section 4.11, Article 5 or Section 7.04 hereof), and such failure continues unremedied for a period of 10 days after the earlier of (i) the Lender's notice thereof to the Borrower and (ii) such failure otherwise becomes known to the Borrower; or (e) the Borrower defaults in any of its obligations under the Warrant or any of the Ancillary Documents to which it is a party and such default is not cured within the grace period, if any, provided therein, or a Subsidiary defaults in any of its obligations under any of the Ancillary Documents to which it is a party and such default is not cured within the grace period, if any, provided therein; or (f) an involuntary case or other proceeding is commenced against the Borrower that seeks liquidation, reorganization or other relief with respect to it or its debts or other liabilities under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its Property, and such involuntary case or other proceeding shall remain undismissed or unstayed for a period of 30 days; or an order for relief against the Borrower shall be entered in any such case under the Federal Bankruptcy Code; or (g) the Borrower commences a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts or other liabilities under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its Property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to, or shall admit in writing its inability to, pay its debts generally as they become due, or shall take any corporate action to authorize or effect any of the foregoing; or (h) the Borrower or any Subsidiary discontinues or materially alters its usual business; or (i) the Borrower fails to make any payment due on any other indebtedness or obligation for the payment of money; or any event shall occur or any condition shall exist in respect of any such indebtedness or obligation, or under any agreement or instrument under or by which any such indebtedness or obligation is created, evidenced or secured, the effect of which, with notice, lapse of time, or both, is to 16 17 cause or to permit any holder of such indebtedness or obligation to cause such indebtedness or obligation, or a portion thereof, to become due prior to its stated maturity or prior to its regularly scheduled dates of payment; or (j) the Borrower shall fail within 30 days to pay, bond or otherwise discharge any judgment or order for the payment of money in excess of $50,000 that is not otherwise being satisfied in accordance with its terms or is not stayed on appeal; or (k) any Subsidiary takes, suffers or permits to exist as to such Subsidiary any of the events or conditions referred to in Subsections 6.01(f), (g), (h), (i) or (j) hereof; or (1) any Security Instrument shall for any reason, except to the extent permitted by the terms thereof, cease to be in full force and effect and valid, binding enforceable in accordance with its terms (except to the extent that enforcement may be subject to any applicable bankruptcy, insolvency or similar laws of general application affecting the enforcement of creditors' rights), or cease to create a valid and perfected Lien of the priority required thereby on any of the collateral purported to be covered thereby, or the Borrower shall so state in writing; or (m) the Lender notifies the Borrower that the Lender in good faith has a sound reason to be insecure with respect to the Note or any other Indebtedness, giving the Lender's reason for such insecurity in such notice, and the Lender continues to have a sound reason to be insecure for a period of 30 days after the delivery of such notice; or (n) the Judgment has not been satisfied and released in full; or (o) the liens securing the indebtedness that was the subject of the Judgment have not been released in full and the evidences of such releases properly recorded; or (p) any receivership ordered by the court in connection with the Judgment has not been dissolved; or (q) the Lender ceases at any time to have at least one person that it has designated serving on the Borrower's Board of Directors (each a "Lender-designated Director"); or (r) the Borrower increases the size of its Board of Directors without the consent of each Lender-designated Director. Section 6.02 Remedies. Upon the occurrence of any Event of Default described in Subsection 6.01(f) or (g), hereof, or in Subsection 6.01(k) to the extent that such Subsection refers to Subsection 6.01(f) or (g) hereof, the obligations, if any, of the Lender hereunder shall immediately terminate, and the entire amount of all Indebtedness then outstanding shall become automatically and immediately due and payable, all without written notice and without presentment, demand, protest, notice of protest or dishonor, notice of intention to accelerate, notice of acceleration or any other notice of default of any kind, all of which are hereby expressly waived by the Borrower. Upon the occurrence and at any time during the 17 18 continuance of any other Event of Default, by written notice to the Borrower the Lender may (i) declare all Indebtedness to be immediately due and payable without presentment, demand, protest, notice of protest or dishonor, notice of intention to accelerate or other notice of default of any kind, all of which are hereby expressly waived by the Borrower, and/or (ii) terminate the obligations, if any, of the Lender hereunder unless and until the Lender shall reinstate same in writing. Section 6.03 Right of Set-off. Upon the occurrence and during the continuance of any Event of Default, or if the Borrower becomes insolvent, however evidenced, the Lender is hereby authorized at any time and from time to time, without notice to the Borrower (any such notice being expressly waived by the Borrower), to set-off and apply any and all moneys at any time held and other indebtedness at any time owing by the Lender to the Borrower against any and all of the Indebtedness of the Borrower, irrespective of whether or not the Lender shall have made any demand under this Agreement or the Note and although such obligations may be unmatured. The Lender agrees promptly to notify the Borrower after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Lender under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) that the Lender may have. ARTICLE 7 CONDITIONS OF LENDING The obligation of the Lender to make the Loan is subject to the conditions precedent stated in this Article 7 wherein each document to be delivered to the Lender shall be in form and substance satisfactory to it. Section 7.01 Closing. The closing of the Loan (the "Closing") shall take place contemporaneously with the execution of this Agreement; provided, however, that the Borrower's issuance of any securities in connection with the Closing shall not occur until the VSE has granted formal approval of the transactions contemplated hereby. Section 7.02 Conditions Precedent to the Loan. As conditions precedent to Lender's making of the Loan, the following shall occur prior to or at the Closing: (a) the Borrower shall have duly and validly issued, executed and delivered the Note and the Warrant to the Lender; (b) the Borrower shall have paid to David S. Hunt a finder's fee of CDN$52,200.00 (US$37,500.00) in the form of 350,000 Shares issued to him at a deemed price of CDN$0.15 per Share; (c) the Borrower shall have effected the appointment or election of one Lender-designated person to the Borrower's Board of Directors; (d) the Borrower shall have entered into a three-year employment agreement with William G. Jayroe on terms and conditions acceptable to the Lender; 18 19 (e) the Borrower shall have consummated the Private Placement on terms and conditions acceptable to the Lender; (f) the Borrower shall have terminated the Shareholder Protection Rights Plan; (g) Hector Dominguez and Camuri Holding LLP shall have entered into an agreement not to reduce their respective holdings of Shares on terms and conditions acceptable to the Lender; (h) the Borrower shall have paid in full the Expenses specified in Section 4.11(a) and (b) in cash by wire transfer of such funds to such account as the Lender shall have designated; (i) the Borrower shall have repaid in full all amounts owing under the Existing TOSI Loan in cash by wire transfer of such funds to such account as the Lender shall have designated; and (j) the Borrower shall have made the following additional deliveries to the Lender: (i) to the extent that the Province of Alberta issues such documents or their respective analogues, certificates of existence and good standing of the Borrower in the Province of Alberta; (ii) a certificate of the Secretary or Assistant Secretary of the Borrower certifying (A) the Borrower's charter and bylaws, (B) duly adopted resolutions of the Borrower's board of directors in form and substance satisfactory to the Lender with respect to the authorization of this Agreement, the Note, the Warrant and the Ancillary Documents to which the Borrower is a party, and the officers of the Borrower authorized to sign such instruments, and (C) specimen signatures of the officers so authorized; (iii) a certificate of the Secretary or Assistant Secretary of each Subsidiary that is guaranteeing the Loan certifying (A) such Subsidiary's charter and bylaws, (B) duly adopted resolutions of such Subsidiary's board of directors in form and substance satisfactory to the Lender with respect to the authorization of the Ancillary Documents to which such Subsidiary is a party, and the officers of such Subsidiary authorized to sign such instruments, and (C) specimen signatures of the officers so authorized; (iv) a legal opinion of the Borrower's legal counsel addressed to the Lender in form and substance satisfactory to the Lender; (v) duly-executed originals (in such number as the Lender reasonably shall request) of the Registration Rights Agreement; and (vi) such other documents and things as the Lender reasonably shall request in writing at least three (3) days prior to the Closing. Section 7.03 Closing Deliveries of the Lender. At the Closing and following the satisfaction or waiver of the conditions precedent set forth in Section 7.02, the Lender shall deliver the proceeds of the Loan by wire transfer to such account as the Borrower reasonably shall request. 19 20 Section 7.04 Subsequent Deliveries. Notwithstanding anything to the contrary in this Article 7, the parties acknowledge and agree that, due to the necessity of having the Closing occur at the earliest possible time, the Borrower may not be able to satisfy all of the conditions precedent to the Closing required by Section 7.02 prior to or at the Closing. In consideration of the Lender's willingness to close the Loan without such satisfaction, the Borrower covenants and agrees that the Borrower shall satisfy all of such conditions precedent required pursuant to Section 7.02 but not satisfied prior to or at the Closing as soon as possible following the Closing, but in any event no later than fifteen (15) Business Days thereafter, except that consummation of the Private Placement referenced in Section 7.02(e) must occur in any event no later than thirty (30) Business Days thereafter. ARTICLE 8 MISCELLANEOUS Section 8.01 Proof of Indebtedness. The Lender's records shall be prima facie proof as to: (a) the amount of principal, interest or other moneys under the Loan owing at any time; (b) the existence of any default in the payment of any moneys under the Note; and (c) whether any demand for payment under the Note has been made. Section 8.02 Time of Essence. Time shall be of the essence of each and every provision hereof and of the Note. Section 8.03 Notices. Any notice required or permitted to be given under or in connection with this Agreement, the Security Instruments or the Note shall (except as may otherwise be expressly required therein) be in writing and shall be delivered (a) by certified mail, return receipt requested, (b) by overnight delivery service, (c) by facsimile transmission, confirmed telephonically or (d) personally to an executive officer of the receiving party. All such communications shall be mailed, sent or delivered as follows: If to the Borrower: Flotek Industries Inc. 7030 Empire Central Drive Houston TX 77040 Attention: President Telephone: 713/849-9911 Facsimile: 713/896-4511 20 21 If to the Lender: TOSI, L. P. c/o J. W. Beavers, Jr. 3900 Thanksgiving Tower 1601 Elm Street Dallas TX 75201 Telephone: 214/922-0135 Facsimile: 214/880-7101 Any communication delivered in accordance with this Section shall be deemed received (a), if delivered by certified mail, return receipt requested, on the date of delivery indicated on the return receipt, (b), if delivered by overnight delivery service, on the following Business Day, (c), if delivered by facsimile transmission, on the date that the transmission is confirmed telephonically or (d), if personally to an executive officer of the receiving party, on the date of such delivery. Section 8.04 Amendments and Waivers. This Agreement may not be modified, amended or terminated orally and no waiver of compliance with any provision or condition hereof and no consent provided for herein shall be effective unless evidenced by an instrument in writing duly executed by the party hereto sought to be charged with such waiver or consent. No course of dealing on the part of the Lender, its officers, employees, consultants or agents, nor any failure or delay by the Lender with respect to exercising any right, power or privilege of the Lender under this Agreement, the Note or any Security Instrument shall operate as a waiver thereof. No waiver of any term or provision hereof shall be construed as a further or continuing waiver of such term or provision or any other term or provision. Section 8.05 Severability. If any provision of this Agreement or the application thereof to any Person or circumstance shall be invalid or unenforceable to any extent, the remainder of this Agreement and the application of such provision to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law as long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Section 8.06 Survival. All covenants and agreements of the Borrower herein, in the Note, the Warrant and in the Ancillary Documents not fully performed before the date hereof or thereof and all representations and warranties of the Borrower herein or therein shall survive the execution and delivery hereof and thereof. Section 8.07 Successors and Assigns. All of the Borrower's covenants and agreements set forth in this Agreement, the Note and the Security Instruments shall bind its successors and assigns and shall inure to the benefit of the Lender and its successors and assigns; provided, however, that the Borrower may not assign its rights or obligations under this Agreement or any interest herein, without in each instance the Lender's prior written consent. Section 8.08 Renewal, Extension or Rearrangement. All provisions of this Agreement and of the Security Instruments relating to the Note or other Indebtedness shall apply with equal force and effect to each and 21 22 all promissory notes hereafter executed that represent, in whole or in part, a renewal, extension for any period, increase or rearrangement of any part of the Indebtedness originally represented by the Note or of any part of such other Indebtedness. Section 8.09 Cumulative Rights. The Lender's rights and remedies under this Agreement, the Note and each Security Instrument shall be cumulative, and the exercise or partial exercise of any such right or remedy shall not preclude the exercise of any other right or remedy. Section 8.10 Further Assurances. At the Borrower's sole cost and expense, each of the Lender, the Borrower and each Subsidiary covenants and agrees to execute any and all such further documents and instruments and to do such further things as the Lender in its sole discretion may deem necessary or appropriate to implement fully and carry out the intent of this Agreement, the Note, the Warrant and the Ancillary Documents. Section 8.11 Governing Law. This Agreement and the Note are contracts made under, and shall be construed in accordance with and governed by, the laws of the Province of Alberta (exclusive of any such laws that pertain to conflicts of laws). Section 8.12 Entire Agreement. This Agreement, the Note, the Warrant and the Ancillary Documents embody the entire agreement and understanding between the Lender and the Borrower with respect to the subject matter hereof and thereof and supersede all prior agreements and understandings between such parties in such regard. Section 8.13 Schedules and Exhibits. The schedules and exhibits attached to this Agreement are incorporated herein and shall be considered a part of this Agreement for the purposes stated herein, except that in the event of any conflict between any of the provisions of such schedules and exhibits and the provisions of the text of this Agreement, the provisions of the text of this Agreement shall prevail. Section 8.14 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be an original and all of which taken together shall constitute one and the same instrument. Signatures exchanged by facsimile transmission shall be deemed to constitute original, manually-executed signatures and shall be fully binding. Section 8.15 Headings. Headings of the Articles and Sections of this Agreement are for the convenience of the parties only, and shall be given no substantive or interpretive effect whatsoever. 22 23 IN WITNESS WHEREOF, the parties hereto have entered into this Convertible Loan Agreement as of the date first above written. BORROWER: FLOTEK INDUSTRIES INC. By: /s/ WILLIAM G. JAYROE ------------------------------------ William G. Jayroe, President and Chief Executive Officer By: /s/ SCOTT COOK ------------------------------------ Name: Scott Cook ---------------------------------- Title: Vice President --------------------------------- LENDER: TOSI, L.P., a Texas limited partnership By: Pitman Property Corp., a Texas Corporation, General Partner By: /s/ J. W. BEAVERS, JR ------------------------------------ J. W. Beavers, Jr., President 23 24 Exhibit 1.01 Form of Promissory Note FORM OF PROMISSORY NOTE October ___, 1997 US$750,000.00 FOR VALUE RECEIVED, FLOTEK INDUSTRIES INC., an Alberta corporation ("Borrower"), promises to pay to the order of TOSI, L.P., a Texas limited partnership ("Lender"), on or before October ___, 1998, at its office at 3900 Thanksgiving Tower, 1601 Elm Street, Dallas, Texas 75201, or at such other location as Lender may designate, in immediately available funds, SEVEN HUNDRED FIFTY THOUSAND AND NO/100 UNITED STATES DOLLARS (US$750,000.00). Borrower will also pay interest on the unpaid principal balance outstanding from time to time at a fixed rate of ten percent (10%) per annum, payable quarterly in arrears. Interest will be computed on the basis of the actual number of days elapsed and a year comprising 360 days, unless such calculation would result in a usurious interest rate, in which case such interest will be calculated on the basis of a 365 or 366 day year, as the case may be. All past due principal and interest on this Note will, at Lender's option, bear interest at the maximum nonusurious rate of interest ("Highest Lawful Rate") or, if applicable law does not provide for a maximum nonusurious rate of interest, at a rate per annum equal to 18%. Borrower covenants to apply the total amount advanced by Lender hereunder only in the manner set forth in that certain Convertible Loan Agreement of even date herewith between Borrower and Lender (the "Loan Agreement"). Borrower understands and acknowledges that Lender would not be willing to make the loan evidenced hereby but for Borrower's covenant set forth in the immediately- preceding sentence. All undefined capitalized terms used in this Note shall have the meanings respectively ascribed to them in the Loan Agreement. In addition to all principal and accrued interest on this Note, Borrower agrees to pay: (a) all reasonable costs and expenses incurred by or on behalf of Lender and all owners and holders of this Note in attempting to collect this Note through probate, reorganization, bankruptcy or any other proceeding; and (b) reasonable attorneys fees if and when this Note is placed in the hands of an attorney for collection. The outstanding principal amount of the Loan evidenced by this Note shall be convertible into common shares of Borrower in the manner and to the extent set forth in the Loan Agreement. Exhibit 1.01-1 25 Borrower and Lender intend to conform strictly to applicable usury laws. Therefore, the total amount of interest (as defined under applicable law) contracted for, charged or collected under this Note will never exceed the Highest Lawful Rate. If Lender contracts for, charges or receives any excess interest, it will be deemed a mistake. Lender will automatically reform the contract or charge to conform to applicable law and, if excess interest has been received, Lender will either refund the excess to Borrower or credit the excess on the unpaid principal amount of this Note. All amounts constituting interest will be spread throughout the full term of this Note in determining whether interest exceeds lawful amounts. The unpaid principal balance of this Note at any time will be the total amount advanced by Lender, less the amount of all payments of principal. Borrower may at any time pay the full amount of this Note without the payment of any premium, penalty or fee. "Loan Document" means this Note and any document or instrument evidencing, securing, guaranteeing or given in connection with this Note including, without limitation, the Loan Agreement, the Warrant and the Registration Rights Agreement. "Obligations" means all principal, interest and other amounts which are or become owing under this Note or any other Loan Document. "Obligor" means Borrower and any guarantor, surety, co-signer, or other person who may now or hereafter be obligated to pay all or any part of the Obligations. Where appropriate, the masculine gender includes the feminine and the neuter and the singular number includes the plural number. Each Obligor severally waives notice, demand, presentment for payment, notice of nonpayment, notice of intent to accelerate, notice of acceleration, protest, notice of protest and the filing of suit and diligence in collecting this Note and all other demands and notices, and consents and agrees that its liabilities and obligations will not be released or discharged by any or all of the following, whether with or without notice to it or any other Obligor, and whether before or after the stated maturity hereof: (i) extensions of the time of payment; (ii) renewals; (iii) acceptances of partial payments; (iv) releases or substitutions of any collateral or any Obligor; and (v) failure, if any, to perfect or maintain perfection of any security interest in any collateral. Each Obligor agrees that acceptance of any partial payment will not constitute a waiver and that waiver of any default will not constitute waiver of any prior or subsequent default. This Note is governed by the laws of the Province of Alberta (exclusive of any such laws that pertain to conflicts of laws). If any provision of this Note is illegal or unenforceable, that illegality or unenforceability will not affect the remaining provisions of this Note. BORROWER(S) AND LENDER AGREE THAT THIS NOTE WILL BE PERFORMED IN DALLAS COUNTY, TEXAS, AND THAT SUCH COUNTY IS PROPER VENUE FOR ANY ACTION OR PROCEEDING BROUGHT BY BORROWER(S) OR LENDER, WHETHER IN CONTRACT, TORT, OR OTHERWISE. ANY ACTION OR PROCEEDING AGAINST BORROWER(S) MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT IN SUCH COUNTY TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW. TO THE EXTENT PERMITTED BY APPLICABLE LAW, BORROWER(S) HEREBY IRREVOCABLY (A) SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS, AND (B) WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT OR THAT ANY SUCH COURT IS AN INCONVENIENT FORUM. Exhibit 1.01-2 26 BORROWER(S) AGREES THAT SERVICE OF PROCESS UPON IT MAY BE MADE BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, AT ITS ADDRESS SPECIFIED BELOW. LENDER MAY SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW AND MAY BRING ANY ACTION OR PROCEEDING AGAINST BORROWER(S) OR WITH RESPECT TO ANY OF ITS PROPERTY IN COURTS IN OTHER PROPER JURISDICTIONS OR VENUES. For purposes of this Note, any assignee or subsequent holder of this Note will be considered the "Lender," and any successor or successors to Borrower will be considered, jointly and severally, the "Borrower." Payment of this Note is secured pursuant to the Existing Security Agreement and other Security Instruments. Debtor's signature below may delivered to Lender by facsimile transmission, and any such facsimile signature shall be deemed for all purposes to constitute an original, manually-executed signature and shall be fully binding to the same extent as if it were in fact Debtor's original, manually- executed signature. NO COURSE OF DEALING BETWEEN BORROWER AND LENDER, NO COURSE OF PERFORMANCE, NO TRADE PRACTICES AND NO EXTRINSIC EVIDENCE OF ANY NATURE MAY BE USED TO CONTRADICT OR MODIFY ANY TERM OF THIS NOTE OR ANY OTHER LOAN DOCUMENT. THIS NOTE IS SUBJECT TO ALL OF THE TERMS AND CONDITIONS SET FORTH IN THE LOAN AGREEMENT. THIS NOTE AND THE OTHER LOAN DOCUMENTS COLLECTIVELY REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THEM. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. Exhibit 1.01-3 27 IN WITNESS WHEREOF, Borrower has executed this Note effective as of October ___ 1997. BORROWER: FLOTEK INDUSTRIES INC., an Alberta Corporation 7030 Empire Central Drive Houston, TX 77040 By: -------------------------------- William G. Jayroe, President and Chief Executive Officer By: -------------------------------- Name: ------------------------------ Title: ----------------------------- Exhibit 1.01-4 28 Schedule 2.04 Conversion 1. Conversion Right. The Borrower hereby grants to the Lender the sole and exclusive right and option (the "Conversion Right") to convert, at any time and from time to time until 4:00 p.m. Vancouver, British Columbia, Canada time on the maturity date of the Note, in whole or in part, the then-outstanding principal amount of the Note (the "Principal Balance") into a maximum of 7,000,000 Shares at the price of CDN$0.15 per Share (the "Conversion Price"), subject to adjustment as hereinafter provided. 2. Manner of Exercise of Conversion Right. (a) On each occasion on which the Lender desires to convert all or a portion of the Principal Balance into Shares, the Lender shall deliver a written notice (the "Notice of Exercise") to the Borrower specifying: (i) the amount of the Principal Balance to be converted, expressed in Canadian dollars; and (ii) , with respect to each Person in whose name the Lender wishes Shares to be issued, such Person's exact name, address, telephone number and social security number or taxpayer identification number and, if such Person is other than a natural person, the name of a natural person authorized to act on such Person's behalf. (b) Upon receipt of a Notice of Exercise, the Borrower shall promptly: (i) direct its transfer agent to issue one or more certificates representing the Shares into which the portion of the Principal Balance referenced in subsection (a)(i) above is then convertible to the respective Persons and in the respective amounts set forth in the Notice of Exercise; (ii) deliver such certificates to such Persons at the addresses specified in the Notice of Exercise; and (iii) if applicable, deliver to the Lender a check for any amount payable in lieu of fractional shares pursuant to Section 4 below. 3. Capital Adjustments. The Shares issuable upon conversion of part or all of the original principal amount of the Note is subject to the following adjustments: (a) Recapitalization, Reclassification and Succession. If any recapitalization of the Borrower or reclassification of its Shares or any merger or consolidation of the Borrower into or with a corporation or other business entity, or the sale or transfer of all or substantially all of the Borrower's assets or of any successor corporation's assets to any other corporation or business entity (any such corporation or other Schedule 2.04-1 29 business entity's being included within the meaning of the term "successor corporation") shall be effected at any time while any principal amount of the Note remains outstanding then, as a condition of such recapitalization, reclassification, merger, consolidation, sale or transfer, lawful and adequate provision shall be made whereby the Lender thereafter shall have the right to receive upon the conversion of the principal amount of the Note then outstanding (at a given time, the "Principal Balance") and in lieu of the Shares immediately theretofore issuable upon the conversion of the Principal Balance, such shares of capital stock, securities or other property as may be issued or payable with respect to or in exchange for a number of outstanding Shares equal to the number of Shares immediately theretofore issuable upon the conversion of the Principal Balance had such recapitalization, reclassification, merger, consolidation, sale or transfer not taken place and, in each such case, the terms of the Loan Agreement shall be applicable to the shares of capital stock or other securities or property receivable upon the conversion of the Principal Balance after such consummation. (b) Subdivision or Combination of Shares. If, at any time while any principal amount of the Note remains outstanding, the Borrower shall subdivide or combine its Shares, the number of Shares purchasable upon conversion of the Principal Balance shall be proportionately adjusted. (c) Certain Dividends and Distributions. If, at any time while any principal amount of the Note remains outstanding, the Borrower shall take a record of the holders of Shares for the purpose of entitling them to receive a dividend payable in, or other distribution of, Shares, then the number of Shares purchasable upon conversion of the Principal Balance shall be adjusted to that number determined by multiplying the number of Shares so purchasable immediately prior to such record date by a fraction (i) the numerator of which shall be the sum of (A) the total number of outstanding Shares immediately prior to such record date and (B) the total number of Shares issuable pursuant to such dividend or distribution, and (ii) the denominator of which shall be the total number of Shares outstanding immediately prior to such record date. (d) Corresponding Conversion Price Adjustment. Whenever the number of Shares purchasable upon the conversion of the Principal Balance is increased or decreased as provided in subsections (b) or (c) above, the Conversion Price shall be adjusted by multiplying the Conversion Price immediately prior to such adjustment by a fraction, the numerator of which shall be the number of Shares purchasable upon the conversion of the Principal Balance immediately prior to such adjustment, and the denominator of which shall be the number of Shares purchasable immediately thereafter. (e) Certain Shares Excluded. The number of Shares outstanding at any given time for purposes of the adjustments set forth in this Section shall exclude any shares then directly or indirectly held in the treasury of the Borrower. (f) Deferral and Cumulation of De Minimis Adjustments. The Borrower shall not be required to make any adjustment of the Conversion Price pursuant to this Section if the amount of such adjustment would be less than one percent (1%) of the Conversion Price in effect immediately before the event that would otherwise have given rise to such adjustment. In such case, however, any adjustment that otherwise would have been required to be made shall be made at the time of and together with the next subsequent adjustment which, Schedule 2.04-2 30 together with any adjustment or adjustments so carried forward, shall amount to not less than one percent (1%) of the Conversion Price in effect immediately before the event giving rise to such next subsequent adjustment. (g) Duration of Adjusted Conversion Price. Following each computation or readjustment of an adjusted Conversion Price as provided in this Section, the new adjusted Conversion Price shall remain in effect until a further computation or readjustment thereof is required. 4. Notices to Lender. (a) Notice of Record Date. In case: (i) the Borrower shall take a record of the holders of Shares (or other capital stock or securities at the time receivable upon the exercisable of the Principal Balance) for the purpose of entitling them to receive any dividend (other than a cash dividend payable out of earned surplus of the Borrower) or other distribution, or any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; or (ii) of any capital reorganization of the Borrower, any reclassification of the capital stock of the Borrower, any consolidation with or merger of the Borrower into another corporation, or any conveyance of all or substantially all of the assets of the Borrower to another corporation; or (iii) of any voluntary dissolution, liquidation or winding-up of the Borrower; then, and in each such case, the Borrower shall mail or cause to be mailed to the Lender a notice specifying, as the case may be, (1) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right or (2) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any, is to be fixed, as of which the record holders of Shares shall be entitled to exchange their Shares (or such other capital stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up. Such notice shall be mailed at least 30 days prior to the record date therein specified or, if no record date shall have been specified, at least 30 days prior to such other specified date. (b) Notice of Adjustments. Whenever any Conversion Price shall be adjusted pursuant to Section 3 hereof, the Borrower shall promptly deliver to the Lender a certificate signed by its President or by any Vice President, and by its Treasurer or any Assistant Treasurer or its Secretary or any Assistant Secretary, setting forth in reasonable detail the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated and the Conversion Price after giving effect to such adjustment. Schedule 2.04-3 31 5. No Requirement to Issue Fractional Shares. The Borrower shall not be required to issue fractional Shares upon conversion of part or all of the Principal Balance pursuant to the Lender's exercise of the Conversion Right. In lieu thereof, the Borrower shall be entitled to pay to the Lender in cash an amount equal (to the nearest cent) to the appropriate fraction of the value (which shall be the last reported sale price if a sale took place within 60 days of the applicable Notice of Exercise or, if none, a deemed value of CDN$0.15 per Share) of a Share on the date that the Borrower receives the Notice of Exercise. Schedule 2.04-4 32 Schedule 3.15 Capitalization as of October 7, 1997 Common Shares Issued and Outstanding 25,757,297 Reserved for exercise of outstanding Warrants 3,274,000 Reserved for exercise of outstanding Options 2,140,000 Reserved for exercise of Options not yet approved(*) 935,000 ----------- Common Shares Fully Diluted before Private Placement and 32,106,297 Related Matters Announced September 14, 1997 Reserved for issuance in settlement of outstanding indebtedness 5,000,000 Reserved for issuance in consideration of Turbeco option 2,500,000 Issuable as part of Unit Private Placement 11,666,667 Reserved for issuance upon exercise of Warrants granted 11,666,667 as part of Unit Private Placement Reserved for issuance upon exercise of Detachable Warrants 7,000,000 granted as part of Convertible Loan Private Placement Reserved for issuance upon conversion of Convertible Loan 7,000,000 made as part of Convertible Loan Private Placement Reserved for finders' fees in connection with Unit Private 808,333 Placement and Convertible Loan Private Placement ----------- Common Shares Fully Diluted After All of the Above 77,747,964
(*) An option to purchase up to 300,000 shares is to be granted to William Jayroe in connection with his proposed employment agreement and, under that agreement, he may by meeting certain performance goals, become entitled to grants of additional options exercisable to purchase a maximum of an additional 600,000 shares. In addition, options to purchase up to an aggregate of an additional 35,000 shares are reserved for grants to employees. These options are subject to acceptance by the Vancouver Stock Exchange. Schedule 4.11 33 Indebtedness to be Paid with the Proceeds of the Loan (all amounts expressed in Canadian dollars) Lender's Expenses in connection with the September 18, 1997 TOSI, L. P. $410,200 loan undetermined September 18, 1997 TOSI, L.P. loan $410,200 Lender's Expenses specified in Section 4.05 hereof undetermined Suppliers: Downhole Products 164,900 BHP 89,700 A-1 Carbide 69,000 Wallace Robertson 40,020 Karnin 10,000 H & 0 Grindless 9.000 ----------- Total Suppliers 382,620 Other Accounts Payable 200,000 Working Capital (including inventory) remainder, if any, after payment of the above
Schedule 4.16 34 Right of First Refusal with respect to Future Borrower Financings 1.01 The Borrower will give written notice (in each case, a "Notice") to the Lender of the terms of any further financing (in each case, a "Financing") that it requires or proposes to obtain by way of a public or private offering of its securities (including, without limitation, equity, debt or derivative securities) during the twenty-four (24) months (the "Term") next following the Closing Date. 1.02 Each Notice will contain the material terms and conditions of the proposed Financing, including without limitation the proposed price and the nature and size thereof. 1.03 The Lender will have the right of first refusal to provide up to 37.5% (the "Lender's Proportionate Share") of any Financing during the Term. 1.04 The right of first refusal must in each instance be exercised by the Lender within thirty (30) days next following receipt of the applicable Notice by giving the Borrower written notice (an "Exercise Notice') that the Lender will provide the Lender's Proportionate Share of the Financing, in whole or in part, on the terms set forth in the Notice. 1.05 Immediately upon receipt of any Exercise Notice, the Borrower will: (a) provide a copy of same to each of Marlin Investors, L.L.C. and Charles Dickinson (the "Other Rightholders"), who have been granted rights of first refusal pursuant to agreements (the "Other Agreements") made between the Other Rightholders and the Borrower in connection with the financing announced by the Borrower on September 14, 1997 to provide up to 50.0% and 12.5% (the "Other Rightholders' Proportionate Shares"), respectively, of any Financing proposed during the Term; and (b) provide copies of the exercise notices (the "Other Exercise Notices") given to the Borrower by the Other Rightholders pursuant to the Other Agreements; and in the event that the Borrower does not receive an Exercise Notice or one or both of the Other Exercise Notices in respect of a Financing, the Borrower will give notice (in each case a "Second Notice") to such effect to the Lender and/or one or both of the Rightholders, as circumstances require. 1.06 If the Lender fails to give an Exercise Notice within thirty (30) days next following receipt of the applicable Notice or elect in an Exercise Notice to provide less than the Lender's Proportionate Shares of such Financing, the Borrower will then be free for a period of (3) months (subject to the rights of the Other Rightholders to provide the Other Rightholders' Proportionate Shares of such proposed Financing as a result of the timely giving of notice of their intention to do so and their rights under the Other Agreements) to make other arrangements to obtain the unfunded portion of the proposed Financing from Schedule 4.16-1 35 another source, including the Other Rightholders, on the same terms or on terms no less favorable to the Borrower than are set forth in the applicable Notice. 1.07 In the event that one or both of the Other Rightholders elects not to provide all such Other Rightholder's Proportionate Share of such Financing, the Lender may, by further notice to the Borrower given not later than ten (10) days after the Lender's receipt of the Other Exercise Notices or Second Notices, as the case may be, elect to provide some or all of that portion of the Financing (the "Remaining Financing") which one or both of the Other Rightholders (a "Non-participating Rightholder") has not elected to provide; provided, however, that if one of the Other Rightholders (the "Participating Rightholder") also elects to provide some or all of the Remaining Financing, and if the additional elections of the Lender and the Participating Rightholder are greater in the aggregate than the Remaining Financing, then the Lender and the Participating Rightholder shall share in the Remaining Financing pro rata according to their percentage interests set forth herein. 1.08 The failure by Lender in any one or more instances to provide all or any portion of the Lender's Proportionate Share of any Financing shall not deprive the Lender of its right of first refusal in any other instances. 1.09 The right of first refusal granted hereunder is conditional upon consummation of the Closing. 1.10 The right of first refusal granted hereunder will not affect the Borrower's right to obtain fiscal agency or investment banking services that it requires or proposes to obtain during the Term, whether or not in connection with any Financing or any proposed amalgamation, merger, acquisition, takeover, plan of arrangement or other restructuring, including, without limitation, the preparation of fairness opinions and the like. 1.11 The Borrower will not amend the terms of or grant extensions of time in respect of any rights of first refusal previously granted or which may hereafter be granted to either of the Other Rightholders pursuant to the Other Agreement without, at the option of the Lender, amending the terms of or granting extensions of time in respect of the right of first refusal granted to the Lender hereunder in the same manner and to the same extent as the Borrower has agreed to amend the terms of one or both of the Other Agreements or to grant any extension of time in respect of one or both of the Other Agreements. Schedule 4.16-2 36 PROMISSORY NOTE October 16, 1997 US$750,000.00 FOR VALUE RECEIVED, FLOTEK INDUSTRIES INC., an Alberta corporation ("Borrower"), promises to pay to the order of TOSI, L.P., a Texas limited partnership ("Lender"), on or before October 16, 1998, at its office at 3900 Thanksgiving Tower, 1601 Elm Street, Dallas, Texas 75201, or at such other location as Lender may designate, in immediately available funds, SEVEN HUNDRED FIFTY THOUSAND AND NO/100 UNITED STATES DOLLARS (US$750,000.00). Borrower will also pay interest on the unpaid principal balance outstanding from time to time at a fixed rate of ten percent (10%) per annum, payable quarterly in arrears. Interest will be computed on the basis of the actual number of days elapsed and a year comprising 360 days, unless such calculation would result in a usurious interest rate, in which case such interest will be calculated on the basis of a 365 or 366 day year, as the case may be. All past due principal and interest on this Note will, at Lender's option, bear interest at the maximum nonusurious rate of interest ("Highest Lawful Rate") or, if applicable law does not provide for a maximum nonusurious rate of interest, at a rate per annum equal to 18%. Borrower covenants to apply the total amount advanced by Lender hereunder only in the manner set forth in that certain Convertible Loan Agreement of even date herewith between Borrower and Lender (the "Loan Agreement"). Borrower understands and acknowledges that Lender would not be willing to make the loan evidenced hereby but for Borrower's covenant set forth in the immediately- preceding sentence. All undefined capitalized terms used in this Note shall have the meanings respectively ascribed to them in the Loan Agreement. In addition to all principal and accrued interest on this Note, Borrower agrees to pay: (a) all reasonable costs and expenses incurred by or on behalf of Lender and all owners and holders of this Note in attempting to collect this Note through probate, reorganization, bankruptcy or any other proceeding; and (b) reasonable attorneys fees if and when this Note is placed in the hands of an attorney for collection. The outstanding principal amount of the Loan evidenced by this Note shall be convertible into common shares of Borrower in the manner and to the extent set forth in the Loan Agreement. PROMISSORY NOTE MADE BY FLOTEK INDUSTRIES INC. IN FAVOR OF TOSI, L. P. OCTOBER 16, 1997 - PAGE 1 OF 4 37 Borrower and Lender intend to conform strictly to applicable usury laws. Therefore, the total amount of interest (as defined under applicable law) contracted for, charged or collected under this Note will never exceed the Highest Lawful Rate. If Lender contracts for, charges or receives any excess interest, it will be deemed a mistake. Lender will automatically reform the contract or charge to conform to applicable law and, if excess interest has been received, Lender will either refund the excess to Borrower or credit the excess on the unpaid principal amount of this Note. All amounts constituting interest will be spread throughout the full term of this Note in determining whether interest exceeds lawful amounts. The unpaid principal balance of this Note at any time will be the total amount advanced by Lender, less the amount of all payments of principal. Borrower may at any time pay the full amount of this Note without the payment of any premium, penalty or fee. "Loan Document" means this Note and any document or instrument evidencing, securing, guaranteeing or given in connection with this Note including, without limitation, the Loan Agreement, the Warrant and the Registration Rights Agreement. "Obligations" means all principal, interest and other amounts which are or become owing under this Note or any other Loan Document. "Obligor" means Borrower and any guarantor, surety, co-signer, or other person who may now or hereafter be obligated to pay all or any part of the Obligations. Where appropriate, the masculine gender includes the feminine and the neuter and the singular number includes the plural number. Each Obligor severally waives notice, demand, presentment for payment, notice of nonpayment, notice of intent to accelerate, notice of acceleration, protest, notice of protest and the filing of suit and diligence in collecting this Note and all other demands and notices, and consents and agrees that its liabilities and obligations will not be released or discharged by any or all of the following, whether with or without notice to it or any other Obligor, and whether before or after the stated maturity hereof: (i) extensions of the time of payment; (ii) renewals; (iii) acceptances of partial payments; (iv) releases or substitutions of any collateral or any Obligor; and (v) failure, if any, to perfect or maintain perfection of any security interest in any collateral. Each Obligor agrees that acceptance of any partial payment will not constitute a waiver and that waiver of any default will not constitute waiver of any prior or subsequent default. This Note is governed by the laws of the Province of Alberta (exclusive of any such laws that pertain to conflicts of laws). If any provision of this Note is illegal or unenforceable, that illegality or unenforceability will not affect the remaining provisions of this Note. BORROWER(S) AND LENDER AGREE THAT THIS NOTE WILL BE PERFORMED IN DALLAS COUNTY, TEXAS, AND THAT SUCH COUNTY IS PROPER VENUE FOR ANY ACTION OR PROCEEDING BROUGHT BY BORROWER(S) OR LENDER, WHETHER IN CONTRACT, TORT, OR OTHERWISE. ANY ACTION OR PROCEEDING AGAINST BORROWER(S) MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT IN SUCH COUNTY TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW. TO THE EXTENT PERMITTED BY APPLICABLE LAW, PROMISSORY NOTE MADE BY FLOTEK INDUSTRIES INC. IN FAVOR OF TOSI, L. P. OCTOBER 16, 1997 - PAGE 2 OF 4 38 BORROWER(S) HEREBY IRREVOCABLY (A) SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS, AND (B) WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT OR THAT ANY SUCH COURT IS AN INCONVENIENT FORUM. BORROWER(S) AGREES THAT SERVICE OF PROCESS UPON IT MAY BE MADE BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, AT ITS ADDRESS SPECIFIED BELOW. LENDER MAY SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW AND MAY BRING ANY ACTION OR PROCEEDING AGAINST BORROWER(S) OR WITH RESPECT TO ANY OF ITS PROPERTY IN COURTS IN OTHER PROPER JURISDICTIONS OR VENUES. For purposes of this Note, any assignee or subsequent holder of this Note will be considered the "Lender," and any successor or successors to Borrower will be considered, jointly and severally, the "Borrower." Payment of this Note is secured pursuant to the Existing Security Agreement and other Security Instruments. Debtor's signature below may delivered to Lender by facsimile transmission, and any such facsimile signature shall be deemed for all purposes to constitute an original, manually-executed signature and shall be fully binding to the same extent as if it were in fact Debtor's original, manually-executed signature. NO COURSE OF DEALING BETWEEN BORROWER AND LENDER, NO COURSE OF PERFORMANCE, NO TRADE PRACTICES AND NO EXTRINSIC EVIDENCE OF ANY NATURE MAY BE USED TO CONTRADICT OR MODIFY ANY TERM OF THIS NOTE OR ANY OTHER LOAN DOCUMENT. THIS NOTE IS SUBJECT TO ALL OF THE TERMS AND CONDITIONS SET FORTH IN THE LOAN AGREEMENT. THIS NOTE AND THE OTHER LOAN DOCUMENTS COLLECTIVELY REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THEM. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. PROMISSORY NOTE MADE BY FLOTEK INDUSTRIES INC. IN FAVOR OF TOSI, L. P. OCTOBER 16, 1997 - PAGE 3 OF 4 39 IN WITNESS WHEREOF, Borrower has executed this Note effective as of October 16, 1997. BORROWER: FLOTEK INDUSTRIES INC., an Alberta Corporation 7030 Empire Central Drive Houston, TX 77040 By: /s/ WILLIAM G. JAYROE -------------------------------- William G. Jayroe, President and Chief Executive Officer By: /s/ SCOTT COOK -------------------------------- Name: Scott Cook ------------------------------ Title: Vice President ----------------------------- PROMISSORY NOTE MADE BY FLOTEK INDUSTRIES INC. IN FAVOR OF TOSI, L. P. OCTOBER 16, 1997 - PAGE 4 OF 4 EX-10.5 9 FORM OF WARRANT AGREEMENT - MARLIN INVESTORS, LLC 1 Exhibit 10.5 WARRANT TO PURCHASE COMMON STOCK OF FLOTEK INDUSTRIES INC. VOID AFTER 4:00 P.M. VANCOUVER TIME ON THE EXPIRATION DATE 9,333,334 Shares of Warrant No. 2 Warrant Stock THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ISSUED PURSUANT TO A CLAIM OF EXEMPTION FROM THE REGISTRATION OR QUALIFICATION PROVISIONS OF FEDERAL AND STATE SECURITIES LAWS BASED, IN PART, ON AN INVESTMENT REPRESENTATION OF THE PART OF THE PURCHASER THEREOF. THESE SECURITIES MAY NOT BE SOLD, PLEDGED, HYPOTHECATED, DONATED OR OTHERWISE TRANSFERRED WITHOUT COMPLIANCE WITH THE REGISTRATION OR QUALIFICATION PROVISIONS OF APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM. FLOTEK INDUSTRIES INC. (the "Company"), a corporation organized under the laws of the Province of Alberta, Canada, for value received, hereby agrees to sell upon the terms and on the conditions hereinafter set forth to Marlin Investors, L.L.C., the registered holder hereof (the "Holder"), having an address set forth in the Warrant Register maintained by the Company, under the terms as hereinafter set forth, Nine Million Three Hundred Thirty-Three Thousand Three Hundred Thirty-Four (9,333,334) fully paid and non-assessable shares of the Company's Common Stock, no par value (the "Warrant Stock"), at a purchase price per share of Fifteen Canadian Cents (CDN $0.15) at any time prior to 4:00 p.m., Vancouver Time, on September 14, 1998, and at a purchase price per share of Seventeen Canadian Cents (CDN $0.17) at any time thereafter, but no later than 4:00 p.m., Vancouver Time, on the Expiration Date (as hereinafter defined) (as adjusted as provided herein, the "Warrant Price") pursuant to this Warrant (the "Warrant"). The number of shares of Warrant Stock to be so issued and the Warrant Price are subject to adjustment as hereinafter set forth. The term "Common Stock" shall mean, when used herein, unless the context otherwise requires, the stock and other securities and property at the time receivable upon the exercise of this Warrant. 1. Exercise of Warrant. (a) The Holder may exercise this Warrant according to its terms by surrendering this Warrant to the Company at the address set forth in Section 10, the subscription form attached hereto having then been duly executed by the Holder, accompanied by cash, certified check or 2 - 2 - bank draft in payment of the purchase price for the number of shares of the Warrant Stock specified in the subscription form, or as otherwise provided in this Warrant prior to 4:00 p.m., local Vancouver time, on the Expiration Date. The Expiration Date shall be September 14, 1999. (b) This Warrant may be exercised in whole or in part so long as any exercise in part hereof would not involve the issuance of fractional shares of Warrant Stock. If exercised in part, the Company shall deliver to the Holder a new Warrant, identical in form, in the name of the Holder, evidencing the right to purchase the number of shares of Warrant Stock as to which this Warrant has not been exercised, which new Warrant shall be signed by the Chairman and CEO or the President and the Secretary or the Assistant Secretary of the Company. The term Warrant as used herein shall include any subsequent Warrant issued as provided herein. (c) No fractional share or scrip representing fractional shares shall be given upon the exercise of this Warrant. The Company shall pay cash in lieu of fractions with respect to the Warrants based upon the Warrant Price at the time of exercise of this Warrant. (d) In the event of any exercise of the rights represented by this Warrant, a certificate or certificates for the Warrant Stock so purchased, registered in the name of the Holder, shall be delivered to the Holder within a reasonable time after such rights shall have been so exercised. The person or entity in whose name any certificate for the Warrant Stock is issued upon exercise of the rights represented by this Warrant shall for all purposes be deemed to have become the holder of record of such shares immediately prior to the close of business on the date on which the Warrant was surrendered and payment of the Warrant Price and any applicable taxes was made, irrespective of the date of delivery of such certificate, except that, if the date of such surrender and payment is a date when the stock transfer books of the Company are closed, such person shall be deemed to have become the holder of such shares at the opening of business on the next succeeding date on which the stock transfer books are open. 2. Disposition of Warrant Stock and Warrant. (a) By the acceptance of this Warrant, the Holder hereby acknowledges and covenants that this Warrant and any Warrant Stock purchased pursuant thereto are and will be held for investment and not for distribution; provided that: (i) the Warrant and/or Warrant Stock may not be transferred by the Holder, (A) unless an exemption is available under the Securities Act of 1933, as amended, and the rules and regulations promulgated by the Securities and Exchange Commission thereunder (collectively the "Act"), and to a person who, in the opinion of counsel to the Company, is a person to whom the Warrant and/or Warrant Stock may be transferred legally without registration and without the delivery of a current prospectus under the Act with respect thereto and then only against receipt of (x) an agreement of such person to comply with the provisions of this Section 2 with respect to any resale or other disposition of such securities and (y) an agreement by 3 - 3 - such person that he is acquiring such securities for investment and not for distribution except in compliance with the Act; or (B) except to a person upon delivery of a prospectus relating to the Warrant and/or Warrant Stock then meeting the requirements of the Act; (ii) the Warrant Stock shall be issued upon exercise of this Warrant only in compliance with the Act; (iii) so long as the Warrant Stock is listed on the Vancouver Stock Exchange, the Warrant may not be transferred without the consent of the Vancouver Stock Exchange, except that the Holder, which is a Delaware limited liability company, may make an in kind distribution of the Warrant to its members in proportion to their membership interests, provided that such members take the Warrant subject to all the transfer restrictions set forth herein; and (iv) This Warrant and the Warrant Stock may be pledged to a lender to secure the debt of the Holder. (b) If, at the time of issuance of the shares issuable upon exercise of this Warrant, no registration statement is in effect with respect to such shares under applicable provisions of the Act, the Company may at its election require that the Holder provide the Company with written reconfirmation of the Holder's investment intent and that any stock certificate delivered to the Holder of a surrendered Warrant shall bear legends reading substantially as follows: "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"). THE HOLDER HEREOF, BY PURCHASING SUCH SECURITIES, AGREES FOR THE BENEFIT OF THE ISSUER THAT SUCH SHARES MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (a) TO THE ISSUER, (b) OUTSIDE THE UNITED STATES IN ACCORDANCE WITH RULE 904 OF REGULATION S UNDER THE 1933 ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAW, (c) PURSUANT TO THE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE 1933 ACT PROVIDED BY RULE 144 THEREUNDER, IF AVAILABLE, AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS, OR (d) IN A TRANSACTION THAT DOES NOT REQUIRE REGISTRATION UNDER THE 1933 ACT OR ANY APPLICABLE STATE LAWS AND REGULATIONS GOVERNING THE OFFER AND SALE OF SECURITIES, AND THE HOLDER HAS, PRIOR TO SUCH SALE, FURNISHED TO THE ISSUER AN OPINION OF COUNSEL, OF RECOGNIZED STANDING, OR OTHER EVIDENCE OF EXEMPTION, REASONABLY SATISFACTORY TO THE ISSUER. DELIVERY OF THIS CERTIFICATE MAY NOT 4 - 4 - CONSTITUTE "GOOD DELIVERY" IN SETTLEMENT OF TRANSACTIONS ON STOCK EXCHANGES IN CANADA. A NEW CERTIFICATE, BEARING NO LEGEND, DELIVERY OF WHICH WILL CONSTITUTE "GOOD DELIVERY," MAY BE OBTAINED FROM THE REGISTRAR AND TRANSFER AGENT OF THE ISSUER UPON DELIVERY OF THIS CERTIFICATE AND A DULY EXECUTED DECLARATION, IN A FORM SATISFACTORY TO THE ISSUER AND ITS REGISTRAR AND TRANSFER AGENT, TO THE EFFECT THAT THE SALE OF THE SECURITIES REPRESENTED HEREBY IS BEING MADE IN COMPLIANCE WITH RULE 904 OF REGULATION S UNDER THE 1933 ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS." In addition, so long as the foregoing legend may remain on any stock certificate delivered to the Holder, the Company may maintain appropriate "stop transfer" orders with respect to such certificates and the shares represented thereby on its books and records and with those to whom it may delegate registrar and transfer functions. (c) If this Warrant is exercised prior to 4:00 p.m. local Vancouver time on September 14, 1998, any stock certificate delivered to the Holder of a surrendered Warrant shall bear a legend reading substantially as follows: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A HOLD PERIOD AND MAY NOT BE TRADED IN BRITISH COLUMBIA UNTIL THE EXPIRY OF THE HOLD PERIOD, EXCEPT AS PERMITTED BY THE SECURITIES ACT (BRITISH COLUMBIA) AND RULES MADE UNDER THE ACT. THE HOLD PERIOD EXPIRES AT 12:00 A.M. (MIDNIGHT) ON SEPTEMBER 14, 1998." 3. Reservation of Shares. The Company hereby agrees that at all times there shall be reserved for issuance upon the exercise of this Warrant such number of shares of its Common Stock as shall be required for issuance upon exercise of this Warrant and that the par value of such shares will at all times be less than or equal to the applicable Warrant Price. The Company further agrees that all shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be validly issued, fully paid and non-assessable, free from all taxes, liens and charges with respect to the issuance thereof other than taxes, if any, in respect of any transfer occurring contemporaneously with such issuance and other than transfer restrictions imposed by federal and state securities laws. 4. Capital Adjustments. This Warrant is subject to the following further provisions: 5 - 5 - (a) Recapitalization, Reclassification and Succession. If any recapitalization of the Company or reclassification of its Common Stock or any merger or consolidation of the Company into or with a corporation or other business entity, or the sale or transfer of all or substantially all of the Company's assets or of any successor corporation's assets to any other corporation or business entity (any such corporation or other business entity being included within the meaning of the term "successor corporation") shall be effected, at any time while this Warrant remains outstanding and unexpired, then, as a condition of such recapitalization, reclassification, merger, consolidation, sale or transfer, lawful and adequate provision shall be made whereby the Holder of this Warrant thereafter shall have the right to receive upon the exercise hereof as provided in Section 1 and in lieu of the shares of Common Stock immediately theretofore issuable upon the exercise of this Warrant, such shares of capital stock, securities or other property as may be issued or payable with respect to or in exchange for a number of outstanding shares of Common Stock equal to the number of shares of Common Stock immediately theretofore issuable upon the exercise of this Warrant had such recapitalization, reclassification, merger, consolidation, sale or transfer not taken place, and in each such case, the terms of this Warrant shall be applicable to the shares of stock or other securities or property receivable upon the exercise of this Warrant after such consummation. (b) Subdivision or Combination of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its Common Stock, the number of shares of Warrant Stock purchasable upon exercise of this Warrant shall be proportionately adjusted. (c) Certain Dividends and Distributions. If the Company at any time while this Warrant is outstanding and unexpired shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of, Common Stock, then the number of shares of Warrant Stock purchasable upon exercise of this Warrant shall be adjusted to that number determined by multiplying the number of shares of Warrant Stock so purchasable immediately prior to such record date by a fraction (i) the numerator of which shall be the sum of (A) the total number of outstanding shares of Common Stock immediately prior to such record date and (B) the total number of shares of Common Stock issuable pursuant to such dividend or distribution, and (ii) the denominator of which shall be the total number of shares of Common Stock outstanding immediately prior to such record date. (d) Corresponding Warrant Price Adjustment. Whenever the number of shares of Warrant Stock purchasable upon the exercise of the rights granted to the Holder herein is increased or decreased as provided in Section 4(b) or (c), the Warrant Price payable for the exercise of such rights shall be adjusted by multiplying such Warrant Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of shares of Warrant Stock purchasable upon the exercise of such rights immediately prior to such adjustment, and of which the denominator shall be the number of shares of Warrant Stock purchasable immediately thereafter. 6 - 6 - (e) Certain Shares Excluded. The number of shares of Common Stock outstanding at any given time for purposes of the adjustments set forth in this Section 4 shall exclude any shares then directly or indirectly held in the treasury of the Company. (f) Deferral and Cumulation of De Minimis Adjustments. The Company shall not be required to make any adjustment of the Warrant Price pursuant to this Section 4 if the amount of such adjustment would be less than one percent (1%) of the Warrant Price in effect immediately before the event that would otherwise have given rise to such adjustment. In such case, however, any adjustment that would otherwise have been required to be made shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment or adjustments so carried forward, shall amount to not less than one percent (1%) of the Warrant Price in effect immediately before the event giving rise to such next subsequent adjustment. (g) Duration of Adjusted Warrant Price. Following each computation or readjustment of an adjusted Warrant Price as provided in this Section 4, the new adjusted Warrant Price shall remain in effect until a further computation or readjustment thereof is required. 5. Notices to Holders. (a) Notice of Record Date. In case: (i) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time receivable upon the exercisable of this Warrant) for the purpose of entitling them to receive any dividend (other than a cash dividend payable out of earned surplus of the Company) or other distribution, or any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; or (ii) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation with or merger of the Company into another corporation, or any conveyance of all or substantially all of the assets of the Company to another corporation; or (iii) of any voluntary dissolution, liquidation or winding-up of the Company; then, and in each such case, the Company will mail or cause to be mailed to the Holder hereof at the time outstanding a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any, is to be fixed, as of which the holders of record of Common Stock (or such stock or securities at the time receivable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, 7 - 7 - merger, conveyance, dissolution, liquidation or winding-up. Such notice shall be mailed at least 30 days prior to the record date therein specified, or if no record date shall have been specified therein, at least 30 days prior to such other specified date. (b) Notice of Adjustments. Whenever any Warrant Price shall be adjusted, pursuant to Section 4 hereof, the Company shall promptly make a certificate signed by its Chairman, its CEO, its President or a Vice President and by its Treasurer or Assistant Treasurer or its Secretary or Assistant Secretary, setting forth in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated and the Warrant Price after giving effect to such adjustment, and shall promptly cause copies of such certificates to be mailed (by first class mail, postage prepaid) to the Holder of this Warrant. 6. Loss, Theft, Destruction or Mutilation. Upon receipt by the Company of evidence satisfactory to it, in the exercise of its reasonable discretion, of the ownership and the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, of indemnity reasonably satisfactory to the Company and, in the case of mutilation, upon surrender and cancellation thereof, the Company will execute and deliver in lieu thereof, without expense to the Holder, a new Warrant of like tenor dated the date hereof. 7. Warrant Holder Not a Stockholder. The Holder of this Warrant, as such, shall not be entitled by reason of this Warrant to any rights whatsoever as a stockholder of the Company. 8. Transfer; Register. Subject to the provisions of Section 2 above, this Warrant is transferable in the same manner and with the same effect as in the case of a negotiable instrument payable to a specified person. This Warrant shall be issued in registered form only and the Company shall keep a register (the "Warrant Register") in which provisions shall be made for the registration of this Warrant and the registration of transfers thereof. Such Register shall be kept at the principal office of the Company and the Company is hereby appointed the "Warrant Registrar" for the purpose of registering the Warrants and transfers of the Warrants. Subject to compliance with the provisions of Section 2 hereof by a transferee, upon surrender for registration of transfer of any Warrant at the principal office of the Company and compliance with the provisions of Section 2 hereof, if applicable, the Company shall execute and deliver, in the name of the designated transferee, a new Warrant. The Company shall treat the individual or entity in whose name each Warrant is registered on the Warrant Register as the sole and absolute owner thereof, notwithstanding any contrary notice. 8 - 8 - 9. Registration Rights. The Holder shall have certain registration rights with respect to the Warrant Shares, all as set forth in a Registration Rights Agreement of even date herewith among the Company, the Holder and certain other Holders. 10. Notices. Any notice required or contemplated by this Warrant shall be deemed to have been duly given if transmitted by registered or certified mail, return receipt requested, to the Company at 7030 Empire Central Drive, Houston, Texas, 77040, Attention: President, or to the Holder at the name and address set forth in the Warrant Register maintained by the Company. 11. Choice of Law. This Warrant shall be governed by the local laws of the State of Texas. IN WITNESS WHEREOF, the undersigned has duly signed this Warrant and Pacific Corporate Trust Company has caused this Warrant Certificate to be countersigned by an authorized officer as of this 14th day of September, 1997. FLOTEK INDUSTRIES INC. By: /s/ William G. Jayroe ---------------------------- Name: William G. Jayroe Title: President and CEO 9 - 9 - This Warrant Certificate is not valid until and unless countersigned by Pacific Corporate Trust Company. Countersigned: PACIFIC CORPORATE TRUST COMPANY Per: - ---------------------------------- Authorized Signatory This is page 9 of a Warrant Certificate issued by Flotek Industries Inc. in favour of Marlin Investors, L.L.C. for up to 9,333,334 common shares in the capital of Flotek Industries Inc. 10 ASSIGNMENT FORM FOR VALUE RECEIVED, the Undersigned Holder of the attached Warrant, hereby sells, assigns and transfers unto _______________________________ the right to purchase ______________________________ shares of Common Stock of FLOTEK INDUSTRIES INC. evidenced by the attached Warrant, and does hereby irrevocably constitute and appoint _________________________________ Attorney to transfer the said Warrant on the books of the Company with full power of substitution. HOLDER: Name: Dated: , --------------------- ------- In the presence of: - ------------------------------------ Name: (NOTE: The signature of the Holder on the foregoing Assignment must correspond exactly to the name as written on the face of the Warrant, without any alteration, enlargement or change whatsoever.) 11 SUBSCRIPTION FORM The Undersigned, the Holder of the attached Warrant, hereby irrevocably elects to exercise purchase rights represented by such Warrant for, and to purchase thereunder, the following shares of Common Stock of FLOTEK INDUSTRIES INC.: Number of Shares Purchase Price Per Share ---------------- ------------------------ The undersigned herewith makes payment of $_____________________ therefor, and requests that certificates for such shares (and any warrants or other property issuable upon such exercise) be issued in the name of and delivered to ____________________________________ whose address is ___________________________________________ and, if such shares shall not include all of the shares issuable under such Warrant, that a new Warrant of like tenor and date for the balance of the shares issuable thereunder be delivered to the undersigned. HOLDER: Name: Dated: , --------------------- ------- EX-10.6 10 FORM OF WARRANT AGREEMENT - CHARLES . DICKINSON 1 Exhibit 10.6 WARRANT TO PURCHASE COMMON STOCK OF FLOTEK INDUSTRIES INC. VOID AFTER 4:00 P.M. VANCOUVER TIME ON THE EXPIRATION DATE 2,333,333 Shares of Warrant No. 3 Warrant Stock THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ISSUED PURSUANT TO A CLAIM OF EXEMPTION FROM THE REGISTRATION OR QUALIFICATION PROVISIONS OF FEDERAL AND STATE SECURITIES LAWS BASED, IN PART, ON AN INVESTMENT REPRESENTATION OF THE PART OF THE PURCHASER THEREOF. THESE SECURITIES MAY NOT BE SOLD, PLEDGED, HYPOTHECATED, DONATED OR OTHERWISE TRANSFERRED WITHOUT COMPLIANCE WITH THE REGISTRATION OR QUALIFICATION PROVISIONS OF APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM. FLOTEK INDUSTRIES INC. (the "Company"), a corporation organized under the laws of the Province of Alberta, Canada, for value received, hereby agrees to sell upon the terms and on the conditions hereinafter set forth to CHARLES A. DICKINSON, the registered holder hereof (the "Holder"), having an address set forth in the Warrant Register maintained by the Company, under the terms as hereinafter set forth, Two Million Three Hundred Thirty-Three Thousand Three Hundred Thirty-Three (2,333,333) fully paid and non-assessable shares of the Company's Common Stock, no par value (the "Warrant Stock"), at a purchase price per share of Fifteen Canadian Cents (CDN $0.15) at any time prior to 4:00 p.m., Vancouver Time, on September 14, 1998, and at a purchase price per share of Seventeen Canadian Cents (CDN $0.17) at any time thereafter, but no later than 4:00 p.m., Vancouver Time, on the Expiration Date (as hereinafter defined) (as adjusted as provided herein, the "Warrant Price") pursuant to this Warrant (the "Warrant"). The number of shares of Warrant Stock to be so issued and the Warrant Price are subject to adjustment as hereinafter set forth. The term "Common Stock" shall mean, when used herein, unless the context otherwise requires, the stock and other securities and property at the time receivable upon the exercise of this Warrant. 2 - 2 - 1. Exercise of Warrant. (a) The Holder may exercise this Warrant according to its terms by surrendering this Warrant to the Company at the address set forth in Section 10, the subscription form attached hereto having then been duly executed by the Holder, accompanied by the purchase price for the number of shares of the Warrant Stock specified in the subscription form, or as otherwise provided in this Warrant prior to 4:00 p.m., local Vancouver time, on the Expiration Date. The Expiration Date shall be September 14, 1998. The purchase price of the shares of Warrant Stock as to which this Warrant shall be exercised shall be paid to the Company at the time of exercise either in cash, in Common Stock of the Company already owned by the Holder, by the relinquishment of a portion of this Warrant having a total fair market value equal to the purchase price, or any combination of the foregoing. For purposes of this Section, the fair market value of the portion of this Warrant that is relinquished shall be the excess of (x) the fair market value at the time of exercise of the number of shares of Warrant Stock subject to the portion of this Warrant that is relinquished over (y) the aggregate exercise price specified in this Warrant with respect to such shares. The fair market value of the Warrant Stock shall be equal to the most recent sales price of the Company's Common Stock on the Vancouver Stock Exchange or on any other stock exchange or market on which the Company's Common Stock is then traded. If the exchange or market does not report sales prices, the fair market value of the Warrant Stock shall be equal to the average of the most recent bid and ask prices of the Company's Common Stock. If the Company's Common Stock is then traded on more than one exchange or market, the fair market value shall be the highest of such sales prices or averages of the bid and ask prices. (b) This Warrant may be exercised in whole or in part so long as any exercise in part hereof would not involve the issuance of fractional shares of Warrant Stock. If exercised in part, the Company shall deliver to the Holder a new Warrant, identical in form, in the name of the Holder, evidencing the right to purchase the number of shares of Warrant Stock as to which this Warrant has not been exercised, which new Warrant shall be signed by the Chairman and CEO or the President and the Secretary or the Assistant Secretary of the Company. The term Warrant as used herein shall include any subsequent Warrant issued as provided herein. (c) No fractional share or scrip representing fractional shares shall be given upon the exercise of this Warrant. The Company shall pay cash in lieu of fractions with respect to the Warrants based upon the Warrant Price at the time of exercise of this Warrant. (d) In the event of any exercise of the rights represented by this Warrant, a certificate or certificates for the Warrant Stock so purchased, registered in the name of the Holder, shall be delivered to the Holder within a reasonable time after such rights shall have been so exercised. 3 - 3 - The person or entity in whose name any certificate for the Warrant Stock is issued upon exercise of the rights represented by this Warrant shall for all purposes be deemed to have become the holder of record of such shares immediately prior to the close of business on the date on which the Warrant was surrendered and payment of the Warrant Price and any applicable taxes was made, irrespective of the date of delivery of such certificate, except that, if the date of such surrender and payment is a date when the stock transfer books of the Company are closed, such person shall be deemed to have become the holder of such shares at the opening of business on the next succeeding date on which the stock transfer books are open. 2. Disposition of Warrant Stock and Warrant. (a) By the acceptance of this Warrant, the Holder hereby acknowledges and covenants that this Warrant and any Warrant Stock purchased pursuant thereto are and will be held for investment and not for distribution; provided that: (i) the Warrant and/or Warrant Stock may not be transferred by the Holder, (A) unless an exemption is available under the Securities Act of 1933, as amended, and the rules and regulations promulgated by the Securities and Exchange Commission thereunder (collectively the "Act"), and to a person who, in the opinion of counsel to the Company, is a person to whom the Warrant and/or Warrant Stock may be transferred legally without registration and without the delivery of a current prospectus under the Act with respect thereto and then only against receipt of (x) an agreement of such person to comply with the provisions of this Section 2 with respect to any resale or other disposition of such securities and (y) an agreement by such person that he is acquiring such securities for investment and not for distribution except in compliance with the Act; or (B) except to a person upon delivery of a prospectus relating to the Warrant and/or Warrant Stock then meeting the requirements of the Act; (ii) the Warrant Stock shall be issued upon exercise of this Warrant only in compliance with the Act; (iii) so long as the Warrant Stock is listed on the Vancouver Stock Exchange, the Warrant may not be transferred without the consent of the Vancouver Stock Exchange, except that the Holder , which is a Delaware limited liability company, may make an in kind distribution of the Warrant to its members in proportion to their membership interests, provided that such members take the Warrant subject to all the transfer restrictions set forth herein; and (iv) this Warrant and the Warrant Stock may be pledged to a lender to secure the debt of the Holder. 4 - 4 - (b) If, at the time of issuance of the shares issuable upon exercise of this Warrant, no registration statement is in effect with respect to such shares under applicable provisions of the Act, the Company may at its election require that the Holder provide the Company with written reconfirmation of the Holder's investment intent and that any stock certificate delivered to the Holder of a surrendered Warrant shall bear legends reading substantially as follows: "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"). THE HOLDER HEREOF, BY PURCHASING SUCH SECURITIES, AGREES FOR THE BENEFIT OF THE ISSUER THAT SUCH SHARES MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (a) TO THE ISSUER, (b) OUTSIDE THE UNITED STATES IN ACCORDANCE WITH RULE 904 OF REGULATION S UNDER THE 1933 ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAW, (c) PURSUANT TO THE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE 1933 ACT PROVIDED BY RULE 144 THEREUNDER, IF AVAILABLE, AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS, OR (d) IN A TRANSACTION THAT DOES NOT REQUIRE REGISTRATION UNDER THE 1933 ACT OR ANY APPLICABLE STATE LAWS AND REGULATIONS GOVERNING THE OFFER AND SALE OF SECURITIES, AND THE HOLDER HAS, PRIOR TO SUCH SALE, FURNISHED TO THE ISSUER AN OPINION OF COUNSEL, OF RECOGNIZED STANDING, OR OTHER EVIDENCE OF EXEMPTION, REASONABLY SATISFACTORY TO THE ISSUER. DELIVERY OF THIS CERTIFICATE MAY NOT CONSTITUTE "GOOD DELIVERY" IN SETTLEMENT OF TRANSACTIONS ON STOCK EXCHANGES IN CANADA. A NEW CERTIFICATE, BEARING NO LEGEND, DELIVERY OF WHICH WILL CONSTITUTE "GOOD DELIVERY", MAY BE OBTAINED FROM THE REGISTRAR AND TRANSFER AGENT OF THE ISSUER UPON DELIVERY OF THIS CERTIFICATE AND A DULY EXECUTED DECLARATION, IN A FORM SATISFACTORY TO THE ISSUER AND ITS REGISTRAR AND TRANSFER AGENT, TO THE EFFECT THAT THE SALE OF THE SECURITIES REPRESENTED HEREBY IS BEING MADE IN COMPLIANCE WITH RULE 904 OF REGULATION S UNDER THE 1933 ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS." In addition, so long as the foregoing legend may remain on any stock certificate delivered to the Holder, the Company may maintain appropriate "stop transfer" orders with respect to such certificates and the shares represented thereby on its books and records and with those to whom it may delegate registrar and transfer functions. 5 - 5 - (c) If this Warrant is exercised prior to 4:00 p.m. local Vancouver time on September 14, 1998, any stock certificate delivered to the Holder of a surrendered Warrant shall bear a legend reading substantially as follows: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A HOLD PERIOD AND MAY NOT BE TRADED IN BRITISH COLUMBIA UNTIL THE EXPIRY OF THE HOLD PERIOD, EXCEPT AS PERMITTED BY THE SECURITIES ACT (BRITISH COLUMBIA) AND RULES MADE UNDER THE ACT. THE HOLD PERIOD EXPIRES AT 12:00 A.M. (MIDNIGHT) ON SEPTEMBER 14, 1998." 3. Reservation of Shares. The Company hereby agrees that at all times there shall be reserved for issuance upon the exercise of this Warrant such number of shares of its Common Stock as shall be required for issuance upon exercise of this Warrant and that the par value of such shares will at all times be less than or equal to the applicable Warrant Price. The Company further agrees that all shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be validly issued, fully paid and non-assessable, free from all taxes, liens and charges with respect to the issuance thereof other than taxes, if any, in respect of any transfer occurring contemporaneously with such issuance and other than transfer restrictions imposed by federal and state securities laws. 4. Capital Adjustments. This Warrant is subject to the following further provisions: (a) Recapitalization, Reclassification and Succession. If any recapitalization of the Company or reclassification of its Common Stock or any merger or consolidation of the Company into or with a corporation or other business entity, or the sale or transfer of all or substantially all of the Company's assets or of any successor corporation's assets to any other corporation or business entity (any such corporation or other business entity being included within the meaning of the term "successor corporation") shall be effected, at any time while this Warrant remains outstanding and unexpired, then, as a condition of such recapitalization, reclassification, merger, consolidation, sale or transfer, lawful and adequate provision shall be made whereby the Holder of this Warrant thereafter shall have the right to receive upon the exercise hereof as provided in Section 1 and in lieu of the shares of Common Stock immediately theretofore issuable upon the exercise of this Warrant, such shares of capital stock, securities or other property as may be issued or payable with respect to or in exchange for a number of outstanding shares of Common Stock equal to the number of shares of Common Stock immediately theretofore issuable upon the exercise of this Warrant had such recapitalization, reclassification, merger, consolidation, sale or transfer not taken place, and in each such case, the terms of this Warrant shall be applicable to the shares of stock or other securities or property receivable upon the exercise of this Warrant after such consummation. 6 - 6 - (b) Subdivision or Combination of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its Common Stock, the number of shares of Warrant Stock purchasable upon exercise of this Warrant shall be proportionately adjusted. (c) Certain Dividends and Distributions. If the Company at any time while this Warrant is outstanding and unexpired shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of, Common Stock, then the number of shares of Warrant Stock purchasable upon exercise of this Warrant shall be adjusted to that number determined by multiplying the number of shares of Warrant Stock so purchasable immediately prior to such record date by a fraction (i) the numerator of which shall be the sum of (A) the total number of outstanding shares of Common Stock immediately prior to such record date and (B) the total number of shares of Common Stock issuable pursuant to such dividend or distribution, and (ii) the denominator of which shall be the total number of shares of Common Stock outstanding immediately prior to such record date. (d) Corresponding Warrant Price Adjustment. Whenever the number of shares of Warrant Stock purchasable upon the exercise of the rights granted to the Holder herein is increased or decreased as provided in Section 4(b) or (c), the Warrant Price payable for the exercise of such rights shall be adjusted by multiplying such Warrant Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of shares of Warrant Stock purchasable upon the exercise of such rights immediately prior to such adjustment, and of which the denominator shall be the number of shares of Warrant Stock purchasable immediately thereafter. (e) Certain Shares Excluded. The number of shares of Common Stock outstanding at any given time for purposes of the adjustments set forth in this Section 4 shall exclude any shares then directly or indirectly held in the treasury of the Company. (f) Deferral and Cumulation of De Minimis Adjustments. The Company shall not be required to make any adjustment of the Warrant Price pursuant to this Section 4 if the amount of such adjustment would be less than one percent (1%) of the Warrant Price in effect immediately before the event that would otherwise have given rise to such adjustment. In such case, however, any adjustment that would otherwise have been required to be made shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment or adjustments so carried forward, shall amount to not less than one percent (1%) of the Warrant Price in effect immediately before the event giving rise to such next subsequent adjustment. (g) Duration of Adjusted Warrant Price. Following each computation or readjustment of an adjusted Warrant Price as provided in this Section 4, the new adjusted Warrant Price shall remain in effect until a further computation or readjustment thereof is required. 7 - 7 - 5. Notices to Holders. (a) Notice of Record Date. In case: (i) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time receivable upon the exercisable of this Warrant) for the purpose of entitling them to receive any dividend (other than a cash dividend payable out of earned surplus of the Company) or other distribution, or any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; or (ii) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation with or merger of the Company into another corporation, or any conveyance of all or substantially all of the assets of the Company to another corporation; or (iii) of any voluntary dissolution, liquidation or winding-up of the Company; then, and in each such case, the Company will mail or cause to be mailed to the Holder hereof at the time outstanding a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any, is to be fixed, as of which the holders of record of Common Stock (or such stock or securities at the time receivable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up. Such notice shall be mailed at least 30 days prior to the record date therein specified, or if no record date shall have been specified therein, at least 30 days prior to such other specified date. (b) Notice of Adjustments. Whenever any Warrant Price shall be adjusted, pursuant to Section 4 hereof, the Company shall promptly make a certificate signed by its Chairman, its CEO, its President or a Vice President and by its Treasurer or Assistant Treasurer or its Secretary or Assistant Secretary, setting forth in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated and the Warrant Price after giving effect to such adjustment, and shall promptly cause copies of such certificates to be mailed (by first class mail, postage prepaid) to the Holder of this Warrant. 8 - 8 - 6. Loss, Theft, Destruction or Mutilation. Upon receipt by the Company of evidence satisfactory to it, in the exercise of its reasonable discretion, of the ownership and the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, of indemnity reasonably satisfactory to the Company and, in the case of mutilation, upon surrender and cancellation thereof, the Company will execute and deliver in lieu thereof, without expense to the Holder, a new Warrant of like tenor dated the date hereof. 7. Warrant Holder Not a Stockholder. The Holder of this Warrant, as such, shall not be entitled by reason of this Warrant to any rights whatsoever as a stockholder of the Company. 8. Transfer; Register. Subject to the provisions of Section 2 above, this Warrant is transferable in the same manner and with the same effect as in the case of a negotiable instrument payable to a specified person. This Warrant shall be issued in registered form only and the Company shall keep a register (the "Warrant Register") in which provisions shall be made for the registration of this Warrant and the registration of transfers thereof. Such Register shall be kept at the principal office of the Company and the Company is hereby appointed the "Warrant Registrar" for the purpose of registering the Warrants and transfers of the Warrants. Subject to compliance with the provisions of Section 2 hereof by a transferee, upon surrender for registration of transfer of any Warrant at the principal office of the Company and compliance with the provisions of Section 2 hereof, if applicable, the Company shall execute and deliver, in the name of the designated transferee, a new Warrant. The Company shall treat the individual or entity in whose name each Warrant is registered on the Warrant Register as the sole and absolute owner thereof, notwithstanding any contrary notice. 9. Registration Rights. The Holder shall have certain registration rights with respect to the Warrant Shares, all as set forth in a Registration Rights Agreement of even date herewith among the Company, the Holder and certain other Holders. 9 - 9 - 10. Notices. Any notice required or contemplated by this Warrant shall be deemed to have been duly given if transmitted by registered or certified mail, return receipt requested, to the Company at 7030 Empire Central Drive, Houston, Texas, 77040, Attention: President, or to the Holder at the name and address set forth in the Warrant Register maintained by the Company. 11. Choice of Law. This Warrant shall be governed by the local laws of the State of Texas. IN WITNESS WHEREOF, the undersigned has duly signed this Warrant and Pacific Corporate Trust Company has caused this Warrant Certificate to be countersigned by an authorized officer as of this 14th day of September, 1997. FLOTEK INDUSTRIES INC. By: /s/ William G. Jayroe Name: William G. Jayroe Title: President and CEO This Warrant Certificate is not valid until and unless countersigned by Pacific Corporate Trust Company. Countersigned: PACIFIC CORPORATE TRUST COMPANY Per: - ----------------------------------- Authorized Signatory 10 ASSIGNMENT FORM FOR VALUE RECEIVED, the Undersigned Holder of the attached Warrant, hereby sells, assigns and transfers unto _______________________________ the right to purchase ______________________________ shares of Common Stock of FLOTEK INDUSTRIES INC. evidenced by the attached Warrant, and does hereby irrevocably constitute and appoint _________________________________ Attorney to transfer the said Warrant on the books of the Company with full power of substitution. HOLDER: Name: Dated: , -------------------- ------- In the presence of: - ------------------------------------ Name: (NOTE: The signature of the Holder on the foregoing Assignment must correspond exactly to the name as written on the face of the Warrant, without any alteration, enlargement or change whatsoever.) 11 SUBSCRIPTION FORM The Undersigned, the Holder of the attached Warrant, hereby irrevocably elects to exercise purchase rights represented by such Warrant for, and to purchase thereunder, the following shares of Common Stock of FLOTEK INDUSTRIES INC.: Number of Shares Purchase Price Per Share ---------------- ------------------------ The undersigned herewith makes payment of $_____________________ therefor, and requests that certificates for such shares (and any warrants or other property issuable upon such exercise) be issued in the name of and delivered to ____________________________________ whose address is ___________________________________________ and, if such shares shall not include all of the shares issuable under such warrant, that a new warrant of like tenor and date for the balance of the shares issuable thereunder be delivered to the undersigned. HOLDER: Name: Dated: , -------------------- ------- EX-10.7 11 HARLAN KING LICENSE AGREEMENT 1 EXHIBIT 10.7 LICENSE AGREEMENT This Agreement, effective December 15,1997, is made between Harlan King ("King"), whose address is Route 1, Box 329, Stringer, Mississippi, and Turbeco Inc., an affiliate of Flotek Industries Inc. ("Turbeco"), having a principal place of business and mailing address at 7030 Empire Central Drive, Houston, Texas 77040. King holds patent rights and other technology rights regarding a downhole apparatus and method for cleaning the exterior surface of a pipe, and Turbeco desires a license to use such patent and technology rights. Accordingly, the parties have agreed as follows: 1. The term "King Technology" means all patent, trademark, copyright, and trade secrets pertaining to downhole apparatus and methods for the exterior surface cleaning of pipe. King Technology specifically includes rights under United States Patent No.5,641,018 (1997), attached as Exhibit A, and all other patent applications filed by King in the United States and other countries. King Technology also includes all rights in trademarks and copyrights associated with the subject matter of apparatus and methods disclosed in the referenced patent rights. King Technology also includes all business and technical information known or developed by King and disclosed to Turbeco. 2. King grants Turbeco an exclusive, worldwide license to develop, commercialize, and to make, use and sell products covered by King Technology ("Products"). Turbeco may authorize other parties to make, sell, and use Products incorporating King Technology, and to otherwise commercialize King Technology subject to the terms of this Agreement. Turbeco will inform King of all agreements between Turbeco and third parties, or between Turbeco and Turbeco Affiliates, related to the manufacture, sale and use of Products incorporating King Technology, and will deliver to King copies of all such agreements. Consistent with the license granted hereunder, Turbeco will have the right to use all copyright and trademark rights comprising King Technology. 3. Following execution of this Agreement, Turbeco will immediately pay King a nonrefundable $1,000.00 for a ninety day test period for an exclusive option to evaluate the King Technology. On or before the end of such ninety day test period, Turbeco may elect to terminate this Agreement, and to reject the license granted in Paragraph 2, provided that all Products covered by United States Patent No.5,641,018 are delivered to King free of charge or are rendered non- infringing. If Turbeco elects to accept the license granted in Paragraph 2, Turbeco will pay King an additional nonrefundable fee of $9,000.00, before the expiration of the ninety day test period, as partial consideration for the license granted in Paragraph 2. 4. In addition to the fee stated above, Turbeco will pay King a royalty of $2.00 for each single Product made, sold or used by Turbeco or other parties authorized by Turbeco, which incorporates King Technology. Royalty payments for each Product will be due upon the sale of the Product. Multiple seals within a single centralizer will be treated as one Product for the 1 2 calculation of royalty payments. Turbeco's obligation to make royalty payments for making, selling or using a Product in each country will cease upon the expiration of the last patent in a country, or upon the expiration of twenty years from the date of first commercialization in a country which has not issued a patent for the King Technology. 5. Turbeco will account for all royalties due at the end of each calendar year quarter, and will pay King or his designee all royalties due within thirty days following the end of each calendar year quarter. Turbeco will maintain accurate records to support all royalties due, will require third parties authorized to commercialize King Technology to keep accurate records, and will make such records available to King at all reasonable times for the purpose of verifying royalty payments due and paid. 6. King and Turbeco will maintain in confidence and will not disclose to other persons information held confidential by the other party. 7. King will own all trademark and copyrights associated with the commercialization of King Technology. Turbeco will execute all documents reasonably necessary to confer and to record such technology rights. 8. Turbeco will grant King a royalty free, perpetual license to practice all improvements to King Technology developed by Turbeco. Such license grant will survive any termination of this Agreement. 9. The exclusive license under this Agreement will terminate upon any of the following events: (a) Turbeco elects to cease activity during the ninety day test period; (b) Turbeco fails to properly account for royalty payments due, or does not mail such royalty payments within the specified periods; (c) Turbeco breaches the confidentiality obligations in this Agreement; (d) Turbeco does not promptly notify King of other persons authorized by Turbeco to make, sell and use Products covered by King Technology; or (e) the total royalty paid King for each calendar year, including calendar year 1998, does not equal or exceed $10,000.00. Beginning July 1,1998, Turbeco will pay King a minimum royalty payment of $2,500.O0 for each calendar year quarter. If the royalty payments due from the sale of Products in a particular calendar year quarter do not meet or exceed $2,500.00, Turbeco may take credit for previous quarterly royalty payments in excess of $2,500.00 per quarter and paid in the same calendar year period, provided that the average royalty payment through the applicable calendar year meets or exceeds $2,500.00 per quarter. Following any breach of sections (b-e) above, King will provide written notice to Turbeco of King's intent to terminate the license granted under this Agreement, and Turbeco will have thirty days following receipt of such notice to cure Turbeco's breach of this Agreement. 2 3 10. King and Turbeco will cooperatively work to secure intellectual property rights for the King Technology, and will negotiate in good faith regarding responsibility for the development of such rights and the obligation to pay costs associated with such rights. 11. THIS AGREEMENT WILL BE INTERPRETED AND GOVERNED PURSUANT TO THE LAWS OF THE STATE OF TEXAS, AND VENUE FOR ANY DISPUTE WILL BE IN HARRIS COUNTY, TEXAS. 12. This Agreement comprises the complete understanding between the parties regarding the subject matter herein, and expressly supersedes and cancels all prior agreements or understandings, whether oral or written. The parties have executed this Agreement to be effective the date first written above. HARLAN KING TURBECO INC. /s/ HARLAN KING By /s/ STEWART A. SIMPSON - --------------------------- ------------------------ Date 12-17-97 Title DIV OPS MGR ----------------------- ------------------------ Date 12-17-97 ------------------------ 3 EX-10.8 12 PRIVATE PLACEMENT SUBSCRIPTION AGREEMENT 1 EXHIBIT 10.8 THE SECURITIES TO WHICH THIS AGREEMENT RELATES HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT") OR ANY STATE SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES OR TO A U.S. PERSON (AS DEFINED IN REGULATION S UNDER THE 1933 ACT) WITHOUT REGISTRATION UNDER THE 1933 ACT AND ANY APPLICABLE STATE SECURITIES LAWS, UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE. PRIVATE PLACEMENT SUBSCRIPTION AGREEMENT [Section 55(2)(4) - Securities Act - Corporate and Individual Subscribers] THIS SUBSCRIPTION AGREEMENT made as of the 14th day of September, 1997 BETWEEN: FLOTEK INDUSTRIES INC., of 7030 Empire Central Drive, Houston, Texas, U.S.A. 77040 [Facsimile Number: (713) 896-4511] (the "Issuer") AND: MARLIN INVESTORS, L.L.C., in care of Trevor Turbidy, 1000 Louisiana, Suite 4900, Houston Texas 77002 [Facsimile Number: (______) ____________] (the "Subscriber") WITNESSES THAT WHEREAS: A. The Issuer requires capital for its business and for working capital purposes; and B. The Subscriber wishes to subscribe for 9,333,333 Units at the Subscription Price of Cdn. $0.15 per Unit (the "Subscription Price") on the terms and conditions set forth in this Agreement; THEREFORE in consideration of the premises and of the mutual covenants and agreements set forth herein, the parties hereto covenant and agree as follows: ARTICLE 1 DEFINITIONS AND INTERPRETATION Definitions 1.01 In this Agreement, including the recitals and schedules hereto, unless the context otherwise requires: 2 - 2 - (a) "Closing" means the completion of the transactions contemplated by this Agreement; (b) "Closing Date" means the fifth business day next following the day on which the Issuer receives written notice from the Exchange of final acceptance of the Issuer's filing in respect of the transactions contemplated by this Agreement; (c) "Exchange" means the Vancouver Stock Exchange; (d) "Executive Director" means the Executive Director appointed under the Securities Act; (e) "Securities Act" means the Securities Act, S.B.C. 1985, c.83, as amended from time to time; (f) "Securities Rules" means the Securities Rules, B.C. Reg. 479/95, as amended from time to time; (g) "Share" means a common share in the capital stock of the Issuer; (h) "Subscription Funds" means the funds paid by the Subscriber to the Issuer for Units to be purchased by the Subscriber pursuant to this Agreement; (i) "Unit" means one Share and one Warrant; (j) "Warrant" means a non-transferable share purchase warrant entitling the holder to purchase one additional Share for the Subscription Price at any time before 4:00 p.m. (Vancouver time) on the first anniversary of the date of this Agreement and thereafter for 115% of the Subscription Price at any time until 4:00 p.m. (Vancouver time) on the second anniversary of the date of this Agreement. Captions and Section Numbers 1.02 The captions, section numbers and article numbers appearing in this Agreement are inserted for convenience of reference only and shall in no way define, limit, construe or describe the scope or intent of this Agreement nor in any way affect this Agreement. Governing Law 1.03 This Agreement and all matters arising hereunder shall be governed by, construed and enforced in accordance with the laws of British Columbia and all disputes hereunder shall be referred to the courts of British Columbia. Number and Gender 1.04 In this Agreement, wherever the context requires, words importing the singular number shall include the plural and vice versa, words importing the masculine gender shall include the feminine and neuter genders and words importing persons shall include firms and corporations and vice versa. 3 - 3 - Section References 1.05 Unless otherwise stated, a reference in this Agreement to a numbered or lettered article, section, paragraph or clause refers to the article, section, paragraph or clause bearing that number or letter in this Agreement. Severability of Clauses 1.06 If any covenant or other provision of this Agreement is invalid, illegal or incapable of being enforced by reason of any rule of law or public policy, such covenant or other provision shall be severed; all other conditions and provisions of this Agreement shall, nevertheless, remain in full force and effect and no covenant or provision shall be deemed dependant upon any other covenant or provision unless so expressed herein. Currency 1.07 All references to dollar amounts in this Agreement are references to Canadian funds (CDN$) unless otherwise indicated, and where for any purpose in connection with this Agreement it is necessary to convert Canadian funds into United States funds (US$), a deemed exchange rate of CDN$1.40 per US$1.00 shall apply. ARTICLE 2 SUBSCRIPTION FOR SHARES Subscription 2.01 The Subscriber hereby irrevocably subscribes for that number of Units referenced on page one of this Agreement, agrees to pay the Issuer the Subscription Funds therefor at the Closing on the terms and conditions set forth in this Agreement, and agrees to advance the Subscription Funds in accordance with Article 3. Acceptance 2.02 The Issuer hereby accepts the Subscriber's subscription and agrees to allot and issue the Shares and Warrants subscribed for hereunder to the Subscriber on the Closing Date as fully paid and non-assessable, and to cause certificates representing such Shares and Warrants to be delivered to the Subscriber at the Closing; provided that if the Subscriber chooses not to be present at the Closing, but has otherwise fulfilled all of the Subscriber's obligations hereunder, including payment in full of the Subscription Funds, the Subscriber's Units will be delivered to the Subscriber by hand, by courier or by registered mail as the Issuer may deem reasonable in the circumstances. Warrants 2.03 The terms and conditions which govern the Warrants will be set forth on the certificates representing the Warrants and will contain, among other things, provisions for exercise of the Warrants 4 - 4 - and appropriate adjustments in the class, number and price of the Shares to be issued on the exercise of the Warrants upon the occurrence of certain events, including any subdivision, consolidation or reclassification of the Shares. 2.04 Subject to section 2.10, the issue of the Warrants will not restrict or prevent the Issuer from obtaining any other debt or equity financing, or from issuing additional securities or rights during the period within which the Warrants are exercisable. 2.05 So long as the Issuer's common shares remain listed on the Exchange, the Warrants may not be transferred without the consent of the Exchange, except that the Subscriber may make an in kind distribution of the Warrants to its members in proportion to their membership interests, provided that such members take the Warrants subject to all the transfer restrictions set forth herein. 2.06 The Shares and Warrants and the certificates representing the Shares and Warrants may be pledged to a lender to secure debt of the Subscriber. Acknowledgement 2.07 The Subscriber acknowledges that none of the Units, the Shares or the Warrants have been registered under the 1933 Act or under any state securities or "blue sky" laws, and that they may not therefore be offered or sold in the United States without registration under the 1933 Act and the securities laws of all applicable states of the United States unless an exemption from registration is available or registration is not required pursuant to Regulation S under the 1933 Act, and, subject to any obligations it may have pursuant to any registration rights which have been or may in the future be granted by the Issuer to the Subscriber, the Issuer has no obligation or present intention of filing a registration statement under the 1933 Act in respect of the securities. Right of First Refusal 2.08 The Issuer will give written notice (in each case, a "Notice") to the Subscriber of the terms of any further financing (in each case, a "Financing") that it requires or proposes to obtain by way of a public or private offering of its securities (including, without limitation, equity, debt or derivative securities, but specifically excluding bank financing and any commercial line of credit) during the forty-two (42) months (the "Term") next following the Closing Date. 2.09 Each Notice will contain the material terms and conditions of the proposed Financing, including without limitation the proposed price and the nature and size of the proposed offering. 2.10 The Subscriber will have the right of first refusal to provide up to 50% (the "Subscriber's Proportionate Share") of any Financing during the Term. 2.11 The right of first refusal must in each instance be exercised by the Subscriber within thirty (30) days next following receipt of the applicable Notice by giving the Issuer written notice (an "Exercise Notice") that the Subscriber will provide the Subscriber's Proportionate Share of the Financing, in whole or in part, on the terms set forth in the Notice. 2.12 Immediately upon receipt of any Exercise Notice, the Issuer will: 5 - 5 - (a) provide a copy of same to each of TOSI, L.P. and Charles Dickinson (the "Other Rightholders"), who have been granted rights of first refusal pursuant to agreements (the "Other Agreements") made between the Other Rightholders and the Issuer in connection with the financing announced by the Issuer on September 14, 1997 to provide up to 37.5% and 12.5% [the "Other Rightholders' Proportionate Shares"], respectively, of any Financing proposed during the Term; and (b) provide copies of the exercise notices (the "Other Exercise Notices") given to the Issuer by the Other Rightholders pursuant to the Other Agreements; and in the event that the Issuer does not receive an Exercise Notice or one or both of the Other Exercise Notices in respect of a Financing, the Issuer will give notice (in each case a "Second Notice") to such effect to the Subscriber and/or one or both of the Other Rightholders, as circumstances require. 2.13 If the Subscriber fails to give an Exercise Notice within thirty (30) days next following receipt of the applicable Notice or elects in an Exercise Notice to provide less than the Subscriber's Proportionate Share of such Financing, the Issuer will then be free for a period of three (3) months (subject to the rights of the Other Rightholders to provide the Other Rightholders' Proportionate Shares of such proposed Financing as a result of the timely giving of notice of their intention to do so and their rights under the Other Agreements) to make other arrangements to obtain the unfunded portion of the proposed Financing from another source, including the Other Rightholders, on the same terms or on terms no less favourable to the Issuer than are set forth in the applicable Notice. 2.14 In the event that one or both of the Other Rightholders elects not to provide all of such Other Rightholder's Proportionate Share of such Financing, the Subscriber may, by further notice to the Issuer given not later than ten (10) days after the Subscriber's receipt of the Other Exercise Notices or Second Notices, as the case may be, elect to provide some or all of that portion of the Financing (the "Remaining Financing") which one or both of the Other Rightholders (a "Non-participating Rightholder") has not elected to provide; provided that if one of the Other Rightholders (the "Participating Rightholder") also elects to provide some or all of the Remaining Financing, and if the additional elections of the Subscriber and the Participating Rightholder are greater in the aggregate than the Remaining Financing, then the Subscriber and the Participating Rightholder shall share in the Remaining Financing pro rata according to their percentage interests set forth herein. 2.15 The failure by the Subscriber in any one or more instances to provide all or any portion of the Subscriber's Proportionate Share of any Financing shall not deprive the Subscriber of its right of first refusal in any other instances. 2.16 The right of first refusal granted hereunder is conditional upon completion of the subscription contemplated by this Agreement. 2.17 The right of first refusal granted hereunder will not affect the Issuer's right to obtain fiscal agency or investment banking services that it requires or proposes to obtain during the Term, whether or not in connection with any Financing or any proposed amalgamation, merger, acquisition, takeover, plan of arrangement or other restructuring, including, without limitation, the preparation of fairness opinions and the like. 6 - 6 - 2.18 No finder's fee will be payable in connection with any portion of any Financing in respect of which the Subscriber exercises its right of first refusal. ARTICLE 3 SUBSCRIPTION FUNDS AND CLOSING Advance of Subscription Funds 3.01 The Subscriber will, concurrently with the execution and delivery of this Agreement and the private placement documents described in subsection 4.02(h) of this Agreement, pay the Subscription Funds either to the Issuer or to the Subscriber's solicitor "in trust", in which latter case such solicitor will, in the absence of written instructions to the contrary, be deemed for all purposes to have been irrevocably instructed by the Subscriber to pay the Subscription Funds to the Issuer at the Closing. Closing 3.02 The Closing will take place at the office of the Issuer at its address first set forth above at 10:00 a.m. (local Houston time) on the Closing Date, or at such other time and place as the parties may agree in writing; provided that if there is a delay affecting the Issuer's ability to deliver certificates representing the Shares and Warrants resulting from acts or omissions by or of third parties or any other event of force majeure, then the Closing will take place on a date specified by the Issuer by not less than two-days' prior written notice to the Subscriber. Withdrawal of Subscription 3.03 The Subscriber will have the right to cancel this Agreement by notice in writing to the Issuer if Closing does not take place within six months next following the date of this Agreement and the Issuer will have the right to cancel this Agreement by notice in writing to the Subscriber if it is not reasonably able to obtain written notice of final acceptance of its filing in respect of the private placement contemplated hereby from the Exchange within six months next following the date of this Agreement or if the Subscription Funds are not paid by the Subscriber in accordance with section 3.01 within ten days next following the date of this Agreement. Subscription Funds May be Used by the Issuer Pending Regulatory Approval 3.04 Any Subscription Funds paid to the Issuer before the Closing Date may be used by the Issuer for its corporate purposes pending Closing and any interest income from such Subscription Funds shall be for the account of the Issuer. Should Closing not take place because the Exchange has not accepted the Issuer's filing in respect of the contemplated private placement within six months next following the date of this Agreement, this Agreement shall, upon receipt by the Issuer of notice of withdrawal pursuant to section 3.03, be converted into a demand loan agreement and an amount equal to the Subscription Funds shall thereafter be payable to the Subscriber on demand without interest. Any interest income from the Subscription Funds shall be for the account of the Issuer regardless of whether the private placement contemplated by this Agreement is accepted by the Exchange. 7 - 7 - Delivery of Certificates 3.05 The certificates representing the Shares and Warrants subscribed for will be issued in the name of the Subscriber and will, in the absence of written instructions from the Subscriber, be delivered by the Issuer to the Subscriber at its address first set forth above. Representation on the Board of Directors 3.06 At or before Closing, the Issuer will effect the appointment to its board of directors and its Compensation Committee of a person designated by the Subscriber and deliver to the Subscriber a certified copy of a resolution of the directors of the Issuer appointing such person to the board of directors of the Issuer and its Compensation Committee. ARTICLE 4 REPRESENTATIONS, WARRANTIES AND COVENANTS Representations, Warranties and Covenants of the Issuer 4.01 The Issuer hereby represents and warrants to and covenants with the Subscriber that: (a) the Issuer is a company duly continued into and validly subsisting under the laws of Alberta; (b) the Shares comprised in each Unit are, and will be, at the time of delivery to the Subscriber of certificates therefor, part of a class of shares that is presently listed and posted for trading on the Exchange; (c) the Shares for which certificates are delivered to the Subscriber pursuant to this Agreement will, at the time of such delivery, be duly authorized, validly issued, fully paid and non-assessable; (d) this Agreement has been duly authorized by all necessary corporate action on the part of the Issuer and constitutes a legal obligation of the Issuer enforceable in accordance with its terms; (e) the Issuer is a "foreign issuer" as defined in Rule 902(f) of Regulation S under the United States Securities Act of 1933 (the "1933 Act") (in that it is a corporation incorporated under the laws of a country other than the United States and less than 50% of its outstanding voting securities are held of record by persons for whom a U.S. Address appears on the records of the Issuer and its transfer agent) and will be a "foreign issuer" as so defined at the time of Closing (f) the authorized and issued capital of the Issuer and a description of all securities allotted or otherwise reserved for issuance (on a fully diluted basis) by the Issuer are set forth in Schedule "A" hereto; 8 - 8 - (g) the Issuer is the registered and beneficial owner of all the issued and outstanding shares in the capital of Petrovalve International Inc. and 98% of the issued and outstanding shares in the capital of Petrovalve International (Barbados) Inc. free and clear of all liens, charges, encumbrances and security interests and other rights of others of any kind or nature whatsoever (including assignments, voting agreements, voting trusts, shareholder agreements, rights of first refusal and rights under proxies); (h) except for the Units to be issued to the Subscriber pursuant to this Agreement and any securities which may be issued pursuant to or in connection with that certain loan agreement (the "Loan Agreement") made as of September 14, 1997 between the Issuer and TOSI, L.P., and except as disclosed in Schedule "A" hereto, there are no outstanding rights, plans, options, warrants, conversion rights or agreements for the purchase or acquisition from the Issuer of any shares or any securities convertible to shares of the Issuer other than as set forth in the Issuer's financial statements; (i) there are no pending or threatened claims against the Issuer alleging that the conduct of the Issuer's business infringes or conflicts with the rights of others under patents, trademarks, copyrights, and trade secrets and, to the best of the Issuer's knowledge, no reasonable basis exists for belief that any such claim is probable or capable of successful exertion; (j) to the best of the Issuer's knowledge, the Issuer's business as now conducted and as proposed to be conducted does not infringe or conflict with the rights of others, including rights under patents, trademarks, copyrights, trade secrets and other industrial or intellectual property; (k) the Issuer owns or possesses all of the patents, copyrights, trademarks, trade names, service marks, licenses, permits, regulatory approvals and other rights necessary for the operation of its businesses as now conducted or as proposed to be conducted; (l) the Issuer and Petrovalve International Inc. are duly incorporated and validly subsisting under the laws of the Province of Alberta, and Petrovalve International (Barbados) Inc. is duly incorporated and validly subsisting under the laws of Barbados; (m) the Issuer does not have any material assets located in any jurisdiction other than Texas except for assets owned by Petrovalve International Inc. which are located in Alberta; (n) the Issuer has the power and authority to enter into and perform its obligations under this Agreement and all instruments and agreements delivered by the Issuer pursuant hereto; (o) there are no claims, actions, suits or proceedings pending or threatened against or affecting the Issuer at law or in equity which would result in any material adverse change in the business, operations, prospects, properties, assets or conditions, financial or otherwise, of the Issuer, or in the ability of the Issuer to perform its obligations under this Agreement or any agreement or instrument delivered pursuant hereto, and the Issuer is not aware of any existing grounds on which any claim might be made or any such 9 - 9 - action, suit or proceeding might be commenced with any reasonable likelihood of success; (p) neither the execution nor the delivery of this Agreement or any agreements or instruments delivered pursuant hereto, nor the performance thereof, conflicts with, or results or will result in any breach of, or constitutes a default under, any of the provisions of the constating documents of the Issuer or any agreements or instrument to which the Issuer is a party or by which the Issuer or any of its property and assets are bound; (q) no event has occurred which constitutes, or with notice or lapse of time or both would constitute, an "Event of Default", as that phrase is defined in the Loan Agreement; (r) the Issuer has accurately prepared and timely filed all income tax returns and other tax returns which are required to be filed, and have paid or made provisions for the payment of, all taxes which have or may have become due pursuant to said returns or pursuant to any assessment which has been or may be received from any taxing authority for the period through the date of this Agreement; (s) the Issuer's financial statements have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with prior years, are true and substantially correct in every material respect and present fairly and accurately the financial condition and position of the Issuer as at their respective dates; and (t) since May 31, 1997: (i) no dividends of any kind or other distribution on any shares have been declared or paid by the Issuer; (ii) there has been no material adverse change in the financial condition or position of the Issuer and no damage, loss or destruction materially affecting the Issuer or its assets or its right or capacity to carry on business; (iii) the Issuer has conducted its business in their usual and normal manner; (iv) the Issuer has not waived or surrendered any right of material value; (u) the information contained in the Issuer's most recently filed Form 20F Annual Report is true and substantially correct in every material respect; (v) the Issuer and its subsidiaries are currently meeting their obligations under that certain joint venture agreement made as of June 17, 1991 between Alberta Research Council and Rod Pump Specialty Valve Ltd., and no royalties are due to Alberta Research Council under that agreement. 10 - 10 - Representations, Warranties and Covenants of Subscriber 4.02 The Subscriber hereby represents and warrants to and covenants with the Issuer that: (a) it is a "U.S. Person", as defined in Regulation S under the Securities Act of 1933 (United States) (as amended) (the "1933 Act"); (b) it has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the investment and it is able to bear the economic risk of loss of the investment; (c) it is purchasing the Shares and Warrants for investment only and not with a view to resale or distribution and, in particular, it has no intention to distribute (subject to any distribution it might make pursuant to section 2.5), either directly or indirectly, any of the Shares or Warrants in the United States or to "U.S. Persons"; provided however that the Subscriber may sell or otherwise dispose of any of the Shares or Warrants pursuant to registration thereof pursuant to the 1933 Act and any applicable State securities laws, or pursuant to an exemption from such registration requirements or if registration is not required pursuant to Regulation S under the 1933 Act (at that time obtaining); (d) it understands that the Shares and Warrants have not been and will not be registered under the 1933 Act and that the sale contemplated hereby is being made in reliance on an exemption from such registration requirement; (e) it is an "accredited investor" as defined in Rule 501 of Regulation D under the 1933 Act and, accordingly, satisfies one or more of the categories indicated below (PLEASE PLACE AN "X" ON THE APPROPRIATE LINE): Category 1. A "bank" as defined under Section (3)(a)(2) - ------- of the 1933 Act or savings and loan association or other institution as defined in Section 3(a)(5)(A) of the 1933 Act acting in its individual or fiduciary capacity; a broker dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934 (the "1934 Act"); an insurance Issuer as defined in Section 2(13) of the 1933 Act; an investment Issuer registered under the Investment Issuer Act of 1940 (United States)or a business development Issuer as defined in Section 2(a)(48) of such act; a Small Business Investment Issuer licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958 (United States); a plan with total assets in excess of U.S.$5,000,000 established and maintained by a state, a political subdivision thereof, or an agency or instrumentality of a state or a political subdivision thereof, for the benefit of its employees; an employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 (United States) whose investment decisions are made by a plan fiduciary, as defined in Section 3(21) of such 11 - 11 - act, which is either a bank, savings and loan association, insurance Issuer or registered investment adviser or, if the employee benefit plan has total assets in excess of U.S.$5,000,000 or, if a self-directed plan, whose investment decisions are made solely by persons that are accredited investors; Category 2. A private business development company as defined - ------- in section 202(a)(22) of the Investment Advisers Act of 1940 (United States); Category 3. An organization described in Section 501(c)(3) of - ------- the United States Internal Revenue Code, corporation, Massachusetts or similar business trust or partnership, not formed for the specific purpose of acquiring the Securities, with total assets in excess of US $5,000,000; Category 4. A director, executive officer, or general partner - ------- of the Issuer; Category 5. A natural person whose individual net worth, or - ------- joint net worth with that person's spouse, on the date of purchase exceeds US $1,000,000; Category 6. A natural person who had an individual income in - ------- excess of US $200,000 in each of the two most recent years or joint income with that person's spouse in excess of US $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year; Category 7. A trust with total assets in excess of - ------- U.S.$5,000,000, not formed for the specific purpose of acquiring the Securities, whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii) under the 1933 Act; or X Category 8. An entity in which all of the equity owners satisfy - ------- the requirements of one or more of the foregoing categories such that they are all "accredited investors"; (f) it acknowledges that it has not purchased the Shares and Warrants as a result of any form of general solicitation or general advertising including advertisements, articles, notices or other communications published in any newspaper, magazine or similar media or broadcast over radio, or television, or any seminar or meeting whose attendees have been invited by general solicitation or general advertising; (g) it agrees that if it decides to offer, sell or otherwise transfer any of the Shares, it will not offer, sell or otherwise transfer any of such Shares, directly or indirectly, unless: 12 - 12 - (i) the sale is to the Issuer; (ii) the sale is made outside the United States in a transaction meeting the requirements of Rule 904 of Regulation S under the 1933 Act and in compliance with applicable local laws and regulations; (iii) the sale is made pursuant to the exemption from the registration requirements under the 1933 Act provided by Rule 144 thereunder, if available, and in accordance with any applicable state securities or "Blue Sky" laws; (iv) the Shares are sold in a transaction that does not require registration under the 1933 Act or any applicable U.S. state laws and regulations governing the offer and sale of securities, and it has prior to such sale furnished to the Issuer an opinion of counsel reasonably satisfactory to the Issuer; or (v) such sale is made under a registration statement or prospectus filed by the Issuer, including any registration statement or prospectus filed by the Issuer pursuant to any registration rights which have been or may in the future be granted by the Issuer to the Subscriber; (h) intentionally deleted.; and (i) it understands and acknowledges that upon the issuance thereof, and until such time as the same is no longer required under the applicable requirements of the 1933 Act or applicable U.S. State laws and regulations, the certificates representing any of the Shares will bear a legend in substantially the following form: "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"). THE HOLDER HEREOF, BY PURCHASING SUCH SECURITIES, AGREES FOR THE BENEFIT OF THE ISSUER THAT SUCH SHARES MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (a) TO THE ISSUER, (b) OUTSIDE THE UNITED STATES IN ACCORDANCE WITH RULE 904 OF REGULATION S UNDER THE 1933 ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAW, (c) PURSUANT TO THE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE 1933 ACT PROVIDED BY RULE 144 THEREUNDER, IF AVAILABLE, AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS, OR (d) IN A TRANSACTION THAT DOES NOT REQUIRE REGISTRATION UNDER THE 1933 ACT OR ANY APPLICABLE STATE LAWS AND REGULATIONS GOVERNING THE OFFER AND SALE OF SECURITIES, AND THE HOLDER HAS, PRIOR TO SUCH SALE, FURNISHED TO THE ISSUER AN OPINION OF COUNSEL, OF RECOGNIZED STANDING, OR OTHER EVIDENCE OF EXEMPTION, REASONABLY SATISFACTORY TO THE ISSUER. DELIVERY OF THIS CERTIFICATE MAY NOT CONSTITUTE "GOOD DELIVERY" IN SETTLEMENT OF TRANSACTIONS ON STOCK EXCHANGES IN CANADA; A NEW CERTIFICATE, BEARING NO LEGEND, DELIVERY OF WHICH WILL 13 - 13 - CONSTITUTE "GOOD DELIVERY", MAY BE OBTAINED FROM THE REGISTRAR AND TRANSFER AGENT OF THE ISSUER UPON DELIVERY OF THIS CERTIFICATE AND A DULY EXECUTED DECLARATION, IN A FORM SATISFACTORY TO THE ISSUER AND ITS REGISTRAR AND TRANSFER AGENT, TO THE EFFECT THAT THE SALE OF THE SECURITIES REPRESENTED HEREBY IS BEING MADE IN COMPLIANCE WITH RULE 904 OF REGULATION S UNDER THE 1933 ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS." provided that if the Shares are being sold under clause (g)(ii) above, the legend may be removed by providing a declaration to the registrar and transfer agent of the Issuer in the following form or in such other form as the Issuer may reasonably prescribe from time to time; "The Undersigned (A) acknowledges that the sale of the securities to which this declaration relates is being made in reliance on Rule 904 of Regulation S under the United States Securities Act of 1933, as amended (the "1933 Act") and (B) certifies that: (1) the seller is not an affiliate of the Issuer as defined in the 1933 Act (other than solely by virtue of his position as an officer or director of the Issuer); (2) the offer of such securities was not made to a person in the United States and either (a) at the time the buy order was originated, the buyer was outside the United States"; or (b) the transaction was executed on or through the facilities of the Vancouver Stock Exchange or any other designated offshore securities market and neither the seller nor any person acting on its behalf knows that the transaction has been pre-arranged with a buyer in the United States; (3) neither the seller nor any affiliate of the seller nor any person acting on its or their behalf has engaged or will engage in any directed selling efforts in connection with the offer and sale of such securities; (4) the sale is bona fide and not for the purpose of "washing off" the resale restrictions imposed because the securities are "restricted securities" (as such term is defined in Rule 144(a)(3) under the 1933 Act); (5) the seller does not intend to replace the securities sold in reliance on Rule 904 of the 1933 Act with fungible unrestricted securities; and (6) the contemplated sale is not a transaction, or part of a series of transactions which, although in technical compliance with Regulation S, is part of a plan or scheme to evade the registration provisions of the 1933 Act. Terms used herein have the meanings given to them by Regulation S under the 1933 Act." (j) it consents to the Issuer making a notation on its records or giving instruction to the registrar and transfer agent of the Issuer in order to implement the restrictions on transfer set forth and described herein; (k) it, if an individual, is a resident of the state or other jurisdiction in its address on the signature page of the Subscription Agreement or, if the Subscriber is not an individual, the office of the Subscriber at which the Subscriber received and accepted the offer to purchase the Shares is the address set forth in the Subscription Agreement; (l) the Subscriber is purchasing the Units subscribed for pursuant to this Agreement as principal for its own account and not for the benefit of, or with a view to immediate 14 - 14 - resale or other distribution to, any other person except a person (i) whose aggregate investment in the Subscriber (and such person's corresponding entitlement to Units) is not less than CDN $97,000 (ii) who is an "accredited investor"; (m) the securities being purchased by the Subscriber pursuant to this Agreement have an aggregate acquisition cost to the Subscriber of not less than CDN $97,000; (n) the Subscriber understands that the trade contemplated by this Agreement is being conducted under the exemption set out in Section 55(2)(4) of the Securities Act and in accordance with the Exchange's Policy No. 16, as revised and supplemented, and that, accordingly: (i) it is restricted from using most of the civil remedies otherwise available under the Securities Act; (ii) it may not receive information that would otherwise be required to be provided to it under the Securities Act and Securities Rules; (iii) the Issuer is relieved from certain obligations that would otherwise apply under the Securities Act and Securities Rules; (iv) the Securities Rules provide that the first trade by the Subscriber in such Units or any part thereof will be deemed to be a "distribution", as that term is defined in the Securities Act unless, among other things, twelve months have elapsed from the date of execution of this Agreement by the Issuer and that, as a result, the Subscriber is prohibited from disposing of such Units or any part thereof for such period of twelve months unless the Subscriber files a prospectus with the Executive Director in accordance with the provisions of the Securities Act or otherwise qualifies the disposition of such Units or any part thereof pursuant to an exemption set out in the Securities Act or Securities Rules; (o) the Subscriber is not aware of any advertisement of the securities and the Subscriber's usual business does not involve trading in securities as those terms are defined in the Securities Act; (p) the Subscriber validly subsists under the laws of the State of Delaware and has the legal capacity and competence to execute this Agreement, and all necessary approvals by directors and shareholders of the Subscriber have been given to authorize the execution and delivery of this Agreement by the Subscriber; (q) the Subscriber is not purchasing the Units as a result of having any material information about the Issuer's affairs which has not been generally disclosed or as a result of any advertisement in printed media of general and regular paid circulation, radio or television, or as a result of any oral or written representation by any person in addition to or contrary to the representations set forth in materials published by the Issuer, including any offering memorandum; 15 - 15 - (r) the Subscriber will, concurrently with execution of this Agreement, execute and deliver to the Issuer a Form Appendix 16A - Private Placement Questionnaire and Undertaking; (s) the Subscriber has been provided with all material and information requested by it or by others representing it, including information requested to verify information furnished, and there have been direct communications between the Subscriber and representatives of the Issuer; (t) there has been made available to both the Subscriber and its advisors the opportunity to ask questions of, and to receive answers from, a representative of the Issuer concerning the terms and conditions of this investment and to obtain financial information to verify the accuracy of the information given; (u) no person has made to the Subscriber any written or oral representations that any person will purchase the Subscriber's Units, Shares or Warrants, or any of them, that any person will refund any portion of the Subscription Funds, as to the future price or value of the Shares, or that the Shares will be listed and posted for trading or otherwise quoted on any exchange or quotation system other than the Exchange. Legending of Certificates 4.03 The certificates representing any Shares issued hereunder and any Shares issued upon exercise of any Warrants will bear an endorsement to the following effect: "The securities represented by this certificate are subject to a hold period and may not be traded in British Columbia until the expiry of the hold period, except as permitted by the Securities Act (British Columbia) and rules made under the Act. The hold period expires at 12:00 a.m. (midnight) on September 14, 1998." 4.04 The certificates representing any Warrants issued hereunder and any Shares issued upon exercise of any Warrants will bear an endorsement or legend as set forth in subsection 4.02(i). ARTICLE 5 GENERAL PROVISIONS Time 5.01 Time is of the essence of this Agreement and of every part hereof. 16 - 16 - Notices 5.02 Unless otherwise provided herein, any notice, payment or other communication to a party under this Agreement may be made, given or served by hand delivery or by registered mail postage prepaid and addressed to the parties at their respective addresses set forth above. Any written notice, payment or other communication delivered personally shall be deemed to have been given or made at the time of such delivery. Any notice, payment or other communication so mailed shall be deemed to have been given or made on the fifth business day following its mailing. In the event of a postal strike affecting mail delivery, any notice by mail shall be deemed to have been given when actually received. Each party may change their address for service at any time by providing notice in writing of such change to the other party in accordance herewith. Entire Agreement 5.03 This Agreement constitutes the entire agreement between the parties and supersedes all previous negotiations, communications, agreements or understandings between the parties in any way relating to the subject matter hereof, including without limitation all negotiations, communications, agreements or understandings respecting any other private placement or related matter. It is expressly understood and agreed that the Issuer has made not representations, inducements, warranties or promises concerning this Agreement or the matters referred to herein which are not embodied in this Agreement. Further Documents 5.04 Each party hereto will execute, deliver and undertake such other documents, transfers, deeds, assurances and procedures as are in the opinion of counsel for the Issuer necessary for the purpose of giving effect to or completing the transactions contemplated by this Agreement. Assignment 5.05 Neither this Agreement nor any of the Subscriber's rights hereunder may be assigned by the Subscriber without the prior written consent of the Issuer. Effective Date 5.06 This Agreement shall be dated as of and shall be effective from and after the date first set forth above. Regulatory Approval and Enurement 5.07 The obligations of the parties hereunder are subject to receipt of all required regulatory acceptances and approvals, including written notice of final acceptance of the Issuer's filing in respect of the transactions contemplated by this Agreement by the Exchange, and thereafter this Agreement shall enure to the benefit of and shall be binding upon the parties hereto and their respective successors. 17 - 17 - Execution in Counterparts 5.08 This Agreement may be executed in counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to form one and the same document. IN WITNESS WHEREOF this Agreement has been executed by the Issuer and the Subscriber as of the date first set forth above. FLOTEK INDUSTRIES INC. Per: /s/ BILL JAYROE - ---------------------------- Authorized Signatory MARLIN INVESTORS, L.L.C. Per: /s/ WILLIAM R. ZIEGLER - ---------------------------- Authorized Signatory EX-10.9 13 PRVT PLACEMENT SUBSCRIP AGMT-CHARLES A. DICKINSON 1 EXHIBIT 10.9 THE SECURITIES TO WHICH THIS AGREEMENT RELATES HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT") OR ANY STATE SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES OR TO A U.S. PERSON (AS DEFINED IN REGULATION S UNDER THE 1933 ACT) WITHOUT REGISTRATION UNDER THE 1933 ACT AND ANY APPLICABLE STATE SECURITIES LAWS, UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE. PRIVATE PLACEMENT SUBSCRIPTION AGREEMENT [Section 55(2)(4) - Securities Act - Corporate and Individual Subscribers] THIS SUBSCRIPTION AGREEMENT made as of the 14th day of September, 1997 BETWEEN: FLOTEK INDUSTRIES INC., of 7030 Empire Central Drive, Houston, Texas, U.S.A. 77040 [Facsimile Number: (713) 896-4511] (the "Issuer") AND: CHARLES A. DICKINSON, of 44 Crescent Avenue, Waldwick, New Jersey, 07463, U.S.A. (the "Subscriber") WITNESSES THAT WHEREAS: A. The Issuer requires capital for its business and for working capital purposes; and B. The Subscriber wishes to subscribe for 2,333,333 Units at the Subscription Price of Cdn. $0.15 per Unit (the "Subscription Price") on the terms and conditions set forth in this Agreement; THEREFORE in consideration of the premises and of the mutual covenants and agreements set forth herein, the parties hereto covenant and agree as follows: ARTICLE 1 DEFINITIONS AND INTERPRETATION Definitions 1.01 In this Agreement, including the recitals and schedules hereto, unless the context otherwise requires: 2 - 2 - (a) "Closing" means the completion of the transactions contemplated by this Agreement; (b) "Closing Date" means the fifth business day next following the day on which the Issuer receives written notice from the Exchange of final acceptance of the Issuer's filing in respect of the transactions contemplated by this Agreement; (c) "Exchange" means the Vancouver Stock Exchange; (d) "Executive Director" means the Executive Director appointed under the Securities Act; (e) "Securities Act" means the Securities Act, S.B.C. 1985, c.83, as amended from time to time; (f) "Securities Rules" means the Securities Rules, B.C. Reg. 479/95, as amended from time to time; (g) "Share" means a common share in the capital stock of the Issuer; (h) "Subscription Funds" means the funds paid by the Subscriber to the Issuer for Units to be purchased by the Subscriber pursuant to this Agreement; (i) "Unit" means one Share and one Warrant; (j) "Warrant" means a non-transferable share purchase warrant entitling the holder to purchase one additional Share for the Subscription Price at any time before 4:00 p.m. (Vancouver time) on the first anniversary of the date of this Agreement and thereafter for 115% of the Subscription Price at any time until 4:00 p.m. (Vancouver time) on the second anniversary of the date of this Agreement. Captions and Section Numbers 1.02 The captions, section numbers and article numbers appearing in this Agreement are inserted for convenience of reference only and shall in no way define, limit, construe or describe the scope or intent of this Agreement nor in any way affect this Agreement. Governing Law 1.03 This Agreement and all matters arising hereunder shall be governed by, construed and enforced in accordance with the laws of British Columbia and all disputes hereunder shall be referred to the courts of British Columbia. Number and Gender 1.04 In this Agreement, wherever the context requires, words importing the singular number shall include the plural and vice versa, words importing the masculine gender shall include the feminine and neuter genders and words importing persons shall include firms and corporations and vice versa. 3 - 3 - Section References 1.05 Unless otherwise stated, a reference in this Agreement to a numbered or lettered article, section, paragraph or clause refers to the article, section, paragraph or clause bearing that number or letter in this Agreement. Severability of Clauses 1.06 If any covenant or other provision of this Agreement is invalid, illegal or incapable of being enforced by reason of any rule of law or public policy, such covenant or other provision shall be severed; all other conditions and provisions of this Agreement shall, nevertheless, remain in full force and effect and no covenant or provision shall be deemed dependant upon any other covenant or provision unless so expressed herein. Currency 1.07 All references to dollar amounts in this Agreement are references to Canadian funds (CDN$) unless otherwise indicated, and where for any purpose in connection with this Agreement it is necessary to convert Canadian funds into United States funds (US$), a deemed exchange rate of CDN$1.40 per US$1.00 shall apply. ARTICLE 2 SUBSCRIPTION FOR SHARES Subscription 2.01 The Subscriber hereby irrevocably subscribes for that number of Units referenced on page one of this Agreement, agrees to pay the Issuer the Subscription Funds therefor at the Closing on the terms and conditions set forth in this Agreement, and agrees to advance the Subscription Funds in accordance with Article 3. Acceptance 2.02 The Issuer hereby accepts the Subscriber's subscription and agrees to allot and issue the Shares and Warrants subscribed for hereunder to the Subscriber on the Closing Date as fully paid and non-assessable, and to cause certificates representing such Shares and Warrants to be delivered to the Subscriber at the Closing; provided that if the Subscriber chooses not to be present at the Closing, but has otherwise fulfilled all of the Subscriber's obligations hereunder, including payment in full of the Subscription Funds, the Subscriber's Units will be delivered to the Subscriber by hand, by courier or by registered mail as the Issuer may deem reasonable in the circumstances. Warrants 2.03 The terms and conditions which govern the Warrants will be set forth on the certificates representing the Warrants and will contain, among other things, provisions for exercise of 4 - 4 - the Warrants and appropriate adjustments in the class, number and price of the Shares to be issued on the exercise of the Warrants upon the occurrence of certain events, including any subdivision, consolidation or reclassification of the Shares. 2.04 Subject to section 2.10, the issue of the Warrants will not restrict or prevent the Issuer from obtaining any other debt or equity financing, or from issuing additional securities or rights during the period within which the Warrants are exercisable. 2.05 So long as the Issuer's common shares remain listed on the Exchange, the Warrants may not be transferred without the consent of the Exchange. 2.06 The Shares and Warrants and the certificates representing the Shares and Warrants may be pledged to a lender to secure debt of the Subscriber. Acknowledgement 2.07 The Subscriber acknowledges that none of the Units, the Shares or the Warrants have been registered under the 1933 Act or under any state securities or "blue sky" laws, and that they may not therefore be offered or sold in the United States without registration under the 1933 Act and the securities laws of all applicable states of the United States unless an exemption from registration is available or registration is not required pursuant to Regulation S under the 1933 Act, and, subject to any obligations it may have pursuant to any registration rights which have been or may in the future be granted by the Issuer to the Subscriber, the Issuer has no obligation or present intention of filing a registration statement under the 1933 Act in respect of the securities. Right of First Refusal 2.08 The Issuer will give written notice (in each case, a "Notice") to the Subscriber of the terms of any further financing (in each case, a "Financing") that it requires or proposes to obtain by way of a public or private offering of its securities (including, without limitation, equity, debt or derivative securities, but specifically excluding bank financing and any commercial line of credit) during the forty-two (42) months (the "Term") next following the Closing Date. 2.09 Each Notice will contain the material terms and conditions of the proposed Financing, including without limitation the proposed price and the nature and size of the proposed offering. 2.10 The Subscriber will have the right of first refusal to provide up to 12.5% (the "Subscriber's Proportionate Share") of any Financing during the Term. 2.11 The right of first refusal must in each instance be exercised by the Subscriber within thirty (30) days next following receipt of the applicable Notice by giving the Issuer written notice (an "Exercise Notice") that the Subscriber will provide the Subscriber's Proportionate Share of the Financing, in whole or in part, on the terms set forth in the Notice. 5 - 5 - 2.12 Immediately upon receipt of any Exercise Notice, the Issuer will: (a) provide a copy of same to each of TOSI, L.P. and Marlin Investors, L.L.C. (the "Other Rightholders"), who have been granted rights of first refusal pursuant to agreements (the "Other Agreements") made between the Other Rightholders and the Issuer in connection with the financing announced by the Issuer on September 14, 1997 to provide up to 37.5% and 50.0% [the "Other Rightholders' Proportionate Shares"], respectively, of any Financing proposed during the Term; and (b) provide copies of the exercise notices (the "Other Exercise Notices") given to the Issuer by the Other Rightholders pursuant to the Other Agreements; and in the event that the Issuer does not receive an Exercise Notice or one or both of the Other Exercise Notices in respect of a Financing, the Issuer will give notice (in each case a "Second Notice") to such effect to the Subscriber and/or one or both of the Other Rightholders, as circumstances require. 2.13 If the Subscriber fails to give an Exercise Notice within thirty (30) days next following receipt of the applicable Notice or elects in an Exercise Notice to provide less than the Subscriber's Proportionate Share of such Financing, the Issuer will then be free for a period of three (3) months (subject to the rights of the Other Rightholders to provide the Other Rightholders' Proportionate Shares of such proposed Financing as a result of the timely giving of notice of their intention to do so and their rights under the Other Agreements) to make other arrangements to obtain the unfunded portion of the proposed Financing from another source, including the Other Rightholders, on the same terms or on terms no less favourable to the Issuer than are set forth in the applicable Notice. 2.14 In the event that one or both of the Other Rightholders elects not to provide all of such Other Rightholder's Proportionate Share of such Financing, the Subscriber may, by further notice to the Issuer given not later than ten (10) days after the Subscriber's receipt of the Other Exercise Notices or Second Notices, as the case may be, elect to provide some or all of that portion of the Financing (the "Remaining Financing") which one or both of the Other Rightholders (a "Non-participating Rightholder") has not elected to provide; provided that if one of the Other Rightholders (the "Participating Rightholder") also elects to provide some or all of the Remaining Financing, and if the additional elections of the Subscriber and the Participating Rightholder are greater in the aggregate than the Remaining Financing, then the Subscriber and the Participating Rightholder shall share in the Remaining Financing pro rata according to their percentage interests set forth herein. 2.15 The failure by the Subscriber in any one or more instances to provide all or any portion of the Subscriber's Proportionate Share of any Financing shall not deprive the Subscriber of its right of first refusal in any other instances. 2.16 The right of first refusal granted hereunder is conditional upon completion of the subscription contemplated by this Agreement. 2.17 The right of first refusal granted hereunder will not affect the Issuer's right to obtain fiscal agency or investment banking services that it requires or proposes to obtain during the Term, whether or not in connection with any Financing or any proposed amalgamation, merger, acquisition, takeover, plan 6 - 6 - of arrangement or other restructuring, including, without limitation, the preparation of fairness opinions and the like. 2.18 No finder's fee will be payable in connection with any portion of any Financing in respect of which the Subscriber exercises its right of first refusal. ARTICLE 3 SUBSCRIPTION FUNDS AND CLOSING Advance of Subscription Funds 3.01 The Subscriber will, concurrently with the execution and delivery of this Agreement and the private placement documents described in subsection 4.02(h) of this Agreement, pay the Subscription Funds either to the Issuer or to the Subscriber's solicitor "in trust", in which latter case such solicitor will, in the absence of written instructions to the contrary, be deemed for all purposes to have been irrevocably instructed by the Subscriber to pay the Subscription Funds to the Issuer at the Closing. Closing 3.02 The Closing will take place at the office of the Issuer at its address first set forth above at 10:00 a.m. (local Houston time) on the Closing Date, or at such other time and place as the parties may agree in writing; provided that if there is a delay affecting the Issuer's ability to deliver certificates representing the Shares and Warrants resulting from acts or omissions by or of third parties or any other event of force majeure, then the Closing will take place on a date specified by the Issuer by not less than two-days' prior written notice to the Subscriber. Withdrawal of Subscription 3.03 The Subscriber will have the right to cancel this Agreement by notice in writing to the Issuer if Closing does not take place within six months next following the date of this Agreement and the Issuer will have the right to cancel this Agreement by notice in writing to the Subscriber if it is not reasonably able to obtain written notice of final acceptance of its filing in respect of the private placement contemplated hereby from the Exchange within six months next following the date of this Agreement or if the Subscription Funds are not paid by the Subscriber in accordance with section 3.01 within ten days next following the date of this Agreement. Subscription Funds May be Used by the Issuer Pending Regulatory Approval 3.04 Any Subscription Funds paid to the Issuer before the Closing Date may be used by the Issuer for its corporate purposes pending Closing and any interest income from such Subscription Funds shall be for the account of the Issuer. Should Closing not take place because the Exchange has not accepted the Issuer's filing in respect of the contemplated private placement within six months next following the date of this Agreement, this Agreement shall, upon receipt by the Issuer of notice of withdrawal pursuant to section 3.03, be converted into a demand loan agreement and an amount equal to the Subscription Funds shall thereafter be payable to the Subscriber on demand without interest. Any interest income from the 7 - 7 - Subscription Funds shall be for the account of the Issuer regardless of whether the private placement contemplated by this Agreement is accepted by the Exchange. Delivery of Certificates 3.05 The certificates representing the Shares and Warrants subscribed for will be issued in the name of the Subscriber and will, in the absence of written instructions from the Subscriber, be delivered by the Issuer to the Subscriber at its address first set forth above. ARTICLE 4 REPRESENTATIONS, WARRANTIES AND COVENANTS Representations, Warranties and Covenants of the Issuer 4.01 The Issuer hereby represents and warrants to and covenants with the Subscriber that: (a) the Issuer is a company duly continued into and validly subsisting under the laws of Alberta; (b) the Shares comprised in each Unit are, and will be, at the time of delivery to the Subscriber of certificates therefor, part of a class of shares that is presently listed and posted for trading on the Exchange; (c) the Shares for which certificates are delivered to the Subscriber pursuant to this Agreement will, at the time of such delivery, be duly authorized, validly issued, fully paid and non-assessable; (d) this Agreement has been duly authorized by all necessary corporate action on the part of the Issuer and constitutes a legal obligation of the Issuer enforceable in accordance with its terms; (e) the Issuer is a "foreign issuer" as defined in Rule 902(f) of Regulation S under the United States Securities Act of 1933 (the "1933 Act") (in that it is a corporation incorporated under the laws of a country other than the United States and less than 50% of its outstanding voting securities are held of record by persons for whom a U.S. Address appears on the records of the Issuer and its transfer agent) and will be a "foreign issuer" as so defined at the time of Closing 8 - 8 - (f) the authorized and issued capital of the Issuer and a description of all securities allotted or otherwise reserved for issuance (on a fully diluted basis) by the Issuer are set forth in Schedule "A" hereto; (g) the Issuer is the registered and beneficial owner of all the issued and outstanding shares in the capital of Petrovalve International Inc. and 98% of the issued and outstanding shares in the capital of Petrovalve International (Barbados) Inc. free and clear of all liens, charges, encumbrances and security interests and other rights of others of any kind or nature whatsoever (including assignments, voting agreements, voting trusts, shareholder agreements, rights of first refusal and rights under proxies); (h) except for the Units to be issued to the Subscriber pursuant to this Agreement and any securities which may be issued pursuant to or in connection with that certain loan agreement (the "Loan Agreement") made as of September 14, 1997 between the Issuer and TOSI, L.P., and except as disclosed in Schedule "A" hereto, there are no outstanding rights, plans, options, warrants, conversion rights or agreements for the purchase or acquisition from the Issuer of any shares or any securities convertible to shares of the Issuer other than as set forth in the Issuer's financial statements; (i) there are no pending or threatened claims against the Issuer alleging that the conduct of the Issuer's business infringes or conflicts with the rights of others under patents, trademarks, copyrights, and trade secrets and, to the best of the Issuer's knowledge, no reasonable basis exists for belief that any such claim is probable or capable of successful exertion; (j) to the best of the Issuer's knowledge, the Issuer's business as now conducted and as proposed to be conducted does not infringe or conflict with the rights of others, including rights under patents, trademarks, copyrights, trade secrets and other industrial or intellectual property; (k) the Issuer owns or possesses all of the patents, copyrights, trademarks, trade names, service marks, licenses, permits, regulatory approvals and other rights necessary for the operation of its businesses as now conducted or as proposed to be conducted; (l) the Issuer and Petrovalve International Inc. are duly incorporated and validly subsisting under the laws of the Province of Alberta, and Petrovalve International (Barbados) Inc. is duly incorporated and validly subsisting under the laws of Barbados; (m) the Issuer does not have any material assets located in any jurisdiction other than Texas except for assets owned by Petrovalve International Inc. which are located in Alberta; (n) the Issuer has the power and authority to enter into and perform its obligations under this Agreement and all instruments and agreements delivered by the Issuer pursuant hereto; (o) there are no claims, actions, suits or proceedings pending or threatened against or affecting the Issuer at law or in equity which would result in any material adverse 9 - 9 - change in the business, operations, prospects, properties, assets or conditions, financial or otherwise, of the Issuer, or in the ability of the Issuer to perform its obligations under this Agreement or any agreement or instrument delivered pursuant hereto, and the Issuer is not aware of any existing grounds on which any claim might be made or any such action, suit or proceeding might be commenced with any reasonable likelihood of success; (p) neither the execution nor the delivery of this Agreement or any agreements or instruments delivered pursuant hereto, nor the performance thereof, conflicts with, or results or will result in any breach of, or constitutes a default under, any of the provisions of the constating documents of the Issuer or any agreements or instrument to which the Issuer is a party or by which the Issuer or any of its property and assets are bound; (q) no event has occurred which constitutes, or with notice or lapse of time or both would constitute, an "Event of Default", as that phrase is defined in the Loan Agreement; (r) the Issuer has accurately prepared and timely filed all income tax returns and other tax returns which are required to be filed, and have paid or made provisions for the payment of, all taxes which have or may have become due pursuant to said returns or pursuant to any assessment which has been or may be received from any taxing authority for the period through the date of this Agreement; (s) the Issuer's financial statements have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with prior years, are true and substantially correct in every material respect and present fairly and accurately the financial condition and position of the Issuer as at their respective dates; and (t) since May 31, 1997: (i) no dividends of any kind or other distribution on any shares have been declared or paid by the Issuer; (ii) there has been no material adverse change in the financial condition or position of the Issuer and no damage, loss or destruction materially affecting the Issuer or its assets or its right or capacity to carry on business; (iii) the Issuer has conducted its business in their usual and normal manner; (iv) the Issuer has not waived or surrendered any right of material value; (u) the information contained in the Issuer's most recently filed Form 20F Annual Report is true and substantially correct in every material respect; (v) the Issuer and its subsidiaries are currently meeting their obligations under that certain joint venture agreement made as of June 17, 1991 between Alberta Research Council and Rod Pump Specialty Valve Ltd., and no royalties are due to Alberta Research Council under that agreement. 10 - 10 - Representations, Warranties and Covenants of Subscriber 4.02 The Subscriber hereby represents and warrants to and covenants with the Issuer that: (a) he is a "U.S. Person", as defined in Regulation S under the Securities Act of 1933 (United States) (as amended) (the "1933 Act"); (b) he has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the investment and it is able to bear the economic risk of loss of the investment; (c) he is purchasing the Shares and Warrants for investment only and not with a view to resale or distribution and, in particular, it has no intention to distribute, either directly or indirectly, any of the Shares or Warrants in the United States or to "U.S. Persons"; provided however that the Subscriber may sell or otherwise dispose of any of the Shares or Warrants pursuant to registration thereof pursuant to the 1933 Act and any applicable State securities laws, or pursuant to an exemption from such registration requirements or if registration is not required pursuant to Regulation S under the 1933 Act (at that time obtaining); (d) he understands that the Shares and Warrants have not been and will not be registered under the 1933 Act and that the sale contemplated hereby is being made in reliance on an exemption from such registration requirement; (e) he is an "accredited investor" as defined in Rule 501 of Regulation D under the 1933 Act and, accordingly, satisfies one or more of the categories indicated below (PLEASE PLACE AN "X" ON THE APPROPRIATE LINE): Category 1. A "bank" as defined under Section (3)(a)(2) of the - ------- 1933 Act or savings and loan association or other institution as defined in Section 3(a)(5)(A) of the 1933 Act acting in its individual or fiduciary capacity; a broker dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934 (the "1934 Act"); an insurance Issuer as defined in Section 2(13) of the 1933 Act; an investment Issuer registered under the Investment Issuer Act of 1940 (United States)or a business development Issuer as defined in Section 2(a)(48) of such act; a Small Business Investment Issuer licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958 (United States); a plan with total assets in excess of U.S.$5,000,000 established and maintained by a state, a political subdivision thereof, or an agency or instrumentality of a state or a political subdivision thereof, for the benefit of its employees; an employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 (United States) whose investment decisions 11 - 11 - are made by a plan fiduciary, as defined in Section 3(21) of such act, which is either a bank, savings and loan association, insurance Issuer or registered investment adviser or, if the employee benefit plan has total assets in excess of U.S.$5,000,000 or, if a self-directed plan, whose investment decisions are made solely by persons that are accredited investors; Category 2. A private business development company as defined - ------- in section 202(a)(22) of the Investment Advisers Act of 1940 (United States); Category 3. An organization described in Section 501(c)(3) of - ------- the United States Internal Revenue Code, corporation, Massachusetts or similar business trust or partnership, not formed for the specific purpose of acquiring the Securities, with total assets in excess of US $5,000,000; Category 4. A director, executive officer, or general partner - ------- of the Issuer; Category 5. A natural person whose individual net worth, or - ------- joint net worth with that person's spouse, on the date of purchase exceeds US $1,000,000; Category 6. A natural person who had an individual income in - ------- excess of US $200,000 in each of the two most recent years or joint income with that person's spouse in excess of US $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year; Category 7. A trust with total assets in excess of - ------- U.S.$5,000,000, not formed for the specific purpose of acquiring the Securities, whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii) under the 1933 Act; or Category 8. An entity in which all of the equity owners satisfy - ------- the requirements of one or more of the foregoing categories such that they are all "accredited investors"; (f) he acknowledges that it has not purchased the Shares and Warrants as a result of any form of general solicitation or general advertising including advertisements, articles, notices or other communications published in any newspaper, magazine or similar media or broadcast over radio, or television, or any seminar or meeting whose attendees have been invited by general solicitation or general advertising; (g) he agrees that if it decides to offer, sell or otherwise transfer any of the Shares, it will not offer, sell or otherwise transfer any of such Shares, directly or indirectly, unless: 12 - 12 - (i) the sale is to the Issuer; (ii) the sale is made outside the United States in a transaction meeting the requirements of Rule 904 of Regulation S under the 1933 Act and in compliance with applicable local laws and regulations; (iii) the sale is made pursuant to the exemption from the registration requirements under the 1933 Act provided by Rule 144 thereunder, if available, and in accordance with any applicable state securities or "Blue Sky" laws; (iv) the Shares are sold in a transaction that does not require registration under the 1933 Act or any applicable U.S. state laws and regulations governing the offer and sale of securities, and it has prior to such sale furnished to the Issuer an opinion of counsel reasonably satisfactory to the Issuer; or (v) such sale is made under a registration statement or prospectus filed by the Issuer, including any registration statement or prospectus filed by the Issuer pursuant to any registration rights which have been or may in the future be granted by the Issuer to the Subscriber; (h) intentionally deleted.; and (i) he understands and acknowledges that upon the issuance thereof, and until such time as the same is no longer required under the applicable requirements of the 1933 Act or applicable U.S. State laws and regulations, the certificates representing any of the Shares will bear a legend in substantially the following form: "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"). THE HOLDER HEREOF, BY PURCHASING SUCH SECURITIES, AGREES FOR THE BENEFIT OF THE ISSUER THAT SUCH SHARES MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (a) TO THE ISSUER, (b) OUTSIDE THE UNITED STATES IN ACCORDANCE WITH RULE 904 OF REGULATION S UNDER THE 1933 ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAW, (c) PURSUANT TO THE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE 1933 ACT PROVIDED BY RULE 144 THEREUNDER, IF AVAILABLE, AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS, OR (d) IN A TRANSACTION THAT DOES NOT REQUIRE REGISTRATION UNDER THE 1933 ACT OR ANY APPLICABLE STATE LAWS AND REGULATIONS GOVERNING THE OFFER AND SALE OF SECURITIES, AND THE HOLDER HAS, PRIOR TO SUCH SALE, FURNISHED TO THE ISSUER AN OPINION OF COUNSEL, OF RECOGNIZED STANDING, OR OTHER EVIDENCE OF EXEMPTION, REASONABLY SATISFACTORY TO THE ISSUER. DELIVERY OF THIS CERTIFICATE MAY NOT CONSTITUTE "GOOD DELIVERY" IN SETTLEMENT OF TRANSACTIONS ON STOCK EXCHANGES IN CANADA; A 13 - 13 - NEW CERTIFICATE, BEARING NO LEGEND, DELIVERY OF WHICH WILL CONSTITUTE "GOOD DELIVERY", MAY BE OBTAINED FROM THE REGISTRAR AND TRANSFER AGENT OF THE ISSUER UPON DELIVERY OF THIS CERTIFICATE AND A DULY EXECUTED DECLARATION, IN A FORM SATISFACTORY TO THE ISSUER AND ITS REGISTRAR AND TRANSFER AGENT, TO THE EFFECT THAT THE SALE OF THE SECURITIES REPRESENTED HEREBY IS BEING MADE IN COMPLIANCE WITH RULE 904 OF REGULATION S UNDER THE 1933 ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS." provided that if the Shares are being sold under clause (g)(ii) above, the legend may be removed by providing a declaration to the registrar and transfer agent of the Issuer in the following form or in such other form as the Issuer may reasonably prescribe from time to time; "The Undersigned (A) acknowledges that the sale of the securities to which this declaration relates is being made in reliance on Rule 904 of Regulation S under the United States Securities Act of 1933, as amended (the "1933 Act") and (B) certifies that: (1) the seller is not an affiliate of the Issuer as defined in the 1933 Act (other than solely by virtue of his position as an officer or director of the Issuer); (2) the offer of such securities was not made to a person in the United States and either (a) at the time the buy order was originated, the buyer was outside the United States"; or (b) the transaction was executed on or through the facilities of the Vancouver Stock Exchange or any other designated offshore securities market and neither the seller nor any person acting on its behalf knows that the transaction has been pre-arranged with a buyer in the United States; (3) neither the seller nor any affiliate of the seller nor any person acting on its or their behalf has engaged or will engage in any directed selling efforts in connection with the offer and sale of such securities; (4) the sale is bona fide and not for the purpose of "washing off" the resale restrictions imposed because the securities are "restricted securities" (as such term is defined in Rule 144(a)(3) under the 1933 Act); (5) the seller does not intend to replace the securities sold in reliance on Rule 904 of the 1933 Act with fungible unrestricted securities; and (6) the contemplated sale is not a transaction, or part of a series of transactions which, although in technical compliance with Regulation S, is part of a plan or scheme to evade the registration provisions of the 1933 Act. Terms used herein have the meanings given to them by Regulation S under the 1933 Act." (j) he consents to the Issuer making a notation on its records or giving instruction to the registrar and transfer agent of the Issuer in order to implement the restrictions on transfer set forth and described herein; (k) he is a resident of the state or other jurisdiction in its address on the signature page of the Subscription Agreement or, if the Subscriber is not an individual, the office of the Subscriber at which the Subscriber received and accepted the offer to purchase the Shares is the address set forth in the Subscription Agreement; 14 - 14 - (l) the Subscriber is purchasing the Units subscribed for pursuant to this Agreement as principal for his own account and not for the benefit of, or with a view to immediate resale or other distribution to, any other person except a person (i) whose aggregate investment in the Subscriber (and such person's corresponding entitlement to Units) is not less than CDN $97,000 and (ii) who is an "accredited investor"; (m) the securities being purchased by the Subscriber pursuant to this Agreement have an aggregate acquisition cost to the Subscriber of not less than CDN $97,000; (n) the Subscriber understands that the trade contemplated by this Agreement is being conducted under the exemption set out in Section 55(2)(4) of the Securities Act and in accordance with the Exchange's Policy No. 16, as revised and supplemented, and that, accordingly: (i) he is restricted from using most of the civil remedies otherwise available under the Securities Act; (ii) he may not receive information that would otherwise be required to be provided to him under the Securities Act and Securities Rules; (iii) the Issuer is relieved from certain obligations that would otherwise apply under the Securities Act and Securities Rules; (iv) the Securities Rules provide that the first trade by the Subscriber in such Units or any part thereof will be deemed to be a "distribution", as that term is defined in the Securities Act unless, among other things, twelve months have elapsed from the date of execution of this Agreement by the Issuer and that, as a result, the Subscriber is prohibited from disposing of such Units or any part thereof for such period of twelve months unless the Subscriber files a prospectus with the Executive Director in accordance with the provisions of the Securities Act or otherwise qualifies the disposition of such Units or any part thereof pursuant to an exemption set out in the Securities Act or Securities Rules; (o) the Subscriber is not aware of any advertisement of the securities and the Subscriber's usual business does not involve trading in securities as those terms are defined in the Securities Act; (p) intentionally deleted; (q) the Subscriber is not purchasing the Units as a result of having any material information about the Issuer's affairs which has not been generally disclosed or as a result of any advertisement in printed media of general and regular paid circulation, radio or television, or as a result of any oral or written representation by any person in addition to or contrary to the representations set forth in materials published by the Issuer, including any offering memorandum; 15 - 15 - (r) the Subscriber will, concurrently with execution of this Agreement, execute and deliver to the Issuer a Form Appendix 16A - Private Placement Questionnaire and Undertaking and a Form 20A (IP); (s) the Subscriber has been provided with all material and information requested by him or by others representing him, including information requested to verify information furnished, and there have been direct communications between the Subscriber and representatives of the Issuer; (t) there has been made available to both the Subscriber and his advisors the opportunity to ask questions of, and to receive answers from, a representative of the Issuer concerning the terms and conditions of this investment and to obtain financial information to verify the accuracy of the information given; (u) no person has made to the Subscriber any written or oral representations that any person will purchase the Subscriber's Units, Shares or Warrants, or any of them, that any person will refund any portion of the Subscription Funds, as to the future price or value of the Shares, or that the Shares will be listed and posted for trading or otherwise quoted on any exchange or quotation system other than the Exchange. Legending of Certificates 4.03 The certificates representing any Shares issued hereunder and any Shares issued upon exercise of any Warrants will bear an endorsement to the following effect: "The securities represented by this certificate are subject to a hold period and may not be traded in British Columbia until the expiry of the hold period, except as permitted by the Securities Act (British Columbia) and rules made under the Act. The hold period expires at 12:00 a.m. (midnight) on September 14, 1998." 4.04 The certificates representing any Warrants issued hereunder and any Shares issued upon exercise of any Warrants will bear an endorsement or legend as set forth in subsection 4.02(i). ARTICLE 5 GENERAL PROVISIONS Time 5.01 Time is of the essence of this Agreement and of every part hereof. Notices 5.02 Unless otherwise provided herein, any notice, payment or other communication to a party under this Agreement may be made, given or served by hand delivery or by registered mail postage prepaid and addressed to the parties at their respective addresses set forth above. Any written notice, payment or other communication delivered personally shall be deemed to have been given or made at the time of 16 - 16 - such delivery. Any notice, payment or other communication so mailed shall be deemed to have been given or made on the fifth business day following its mailing. In the event of a postal strike affecting mail delivery, any notice by mail shall be deemed to have been given when actually received. Each party may change their address for service at any time by providing notice in writing of such change to the other party in accordance herewith. Entire Agreement 5.03 This Agreement constitutes the entire agreement between the parties and supersedes all previous negotiations, communications, agreements or understandings between the parties in any way relating to the subject matter hereof, including without limitation all negotiations, communications, agreements or understandings respecting any other private placement or related matter. It is expressly understood and agreed that the Issuer has made not representations, inducements, warranties or promises concerning this Agreement or the matters referred to herein which are not embodied in this Agreement. Further Documents 5.04 Each party hereto will execute, deliver and undertake such other documents, transfers, deeds, assurances and procedures as are in the opinion of counsel for the Issuer necessary for the purpose of giving effect to or completing the transactions contemplated by this Agreement. Assignment 5.05 Neither this Agreement nor any of the Subscriber's rights hereunder may be assigned by the Subscriber without the prior written consent of the Issuer. Effective Date 5.06 This Agreement shall be dated as of and shall be effective from and after the date first set forth above. Regulatory Approval and Enurement 5.07 The obligations of the parties hereunder are subject to receipt of all required regulatory acceptances and approvals, including written notice of final acceptance of the Issuer's filing in respect of the transactions contemplated by this Agreement by the Exchange, and thereafter this Agreement shall enure to the benefit of and shall be binding upon the parties hereto and their respective successors. 17 - 17 - Execution in Counterparts 5.08 This Agreement may be executed in counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to form one and the same document. IN WITNESS WHEREOF this Agreement has been executed by the Issuer and the Subscriber as of the date first set forth above. FLOTEK INDUSTRIES INC. Per: /s/ BILL JAYROE - --------------------- Authorized Signatory SIGNED, SEALED AND DELIVERED by CHARLES A. DICKINSON in the presence of: /s/ ELIZABETH ILLEGIBLE /s/ CHARLES A. DICKINSON - ----------------------- ------------------------ Signature of Witness CHARLES A. DICKINSON 44 Crescent New Jersey, - ---------------------- Address Accountant - --------------------- Occupation EX-21.1 14 LIST OF OPERATING SUBSIDIARIES 1 EXHIBIT 21.1 LIST OF OPERATING SUBSIDIARIES FLOTEK INDUSTRIES, INC. ALBERTA CORPORATION PUBLICLY OWNED CORPORATE STRUCTURE PETROVALVE INTERNATIONAL PETROVALVE INT'L (BARBADOS) INC. ALBERTA CORPORATION BARBADOS CORPORATION 100% OWNED BY FLOTEK 98% OWNED BY FLOTEK PETROVALVE CANADA LIMITED ALBERTA CORPORATION 100% OWNED BY PETROVALVE INT'L INC. PETROVALVE, INC. DELAWARE CORPORATION 100% OWNED BY PETROVALVE INT'L INC. USA PETROVALVE, INC. TEXAS CORPORATION 100% OWNED BY PETROVALVE, INC. TURBECO, INC. TEXAS CORPORATION 100% OWNED BY PETROVALVE, INC. EX-27 15 FINANCIAL DATA SCHEDULE
5 CANADIAN DOLLARS 9-MOS FEB-28-1998 MAR-01-1997 NOV-30-1997 .72 1,511,827 0 809,943 0 2,108,622 4,430,392 334,627 0 4,974,539 1,837,608 0 0 0 23,912,352 (20,810,226) 4,974,539 3,557,419 3,557,419 1,955,133 4,648,667 0 0 86,619 (1,164,393) 0 (1,164,393) 0 0 0 (1,164,393) (.04) (.04)
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