8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): FEBRUARY 14, 2005

Commission File Number 1-13270

FLOTEK INDUSTRIES, INC.

Incorporated pursuant to the Laws of the State of Delaware

Internal Revenue Service-Employer Identification No. 90-0023731

7030 Empire Central Drive, Houston, Texas 77040

(713) 849-9911

TABLE OF CONTENTS

Item 2.01. Completion of Acquisition or Disposition of Assets

Item 9.01. Financial Statements and Exhibits

Signature

Exhibit Index

Financial Statements of Business Acquired

Pro Forma Financial Information

ITEM 2.01. COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS

On December 20, 2004, Flotek Industries, Inc., (“Flotek”) and the shareholders of Spidle Sales & Service, Inc. (“Spidle”) entered into a stock purchase agreement pursuant to which Flotek agreed to purchase all of the outstanding stock of Spidle. On February 14, 2005 (the “Closing Date”), Flotek completed the purchase and Spidle became a wholly-owned subsidiary of Flotek effective January 1, 2005 for financial accounting purposes. The aggregate purchase price was $8.075 million. Consideration for the purchase was comprised of $6.1 million cash, $1.275 million notes payable to the sellers, and 129,271 shares of Flotek common stock valued at the weighted average closing price for the 10 days prior to the Closing Date. The acquisition was approved by unanimous consent of our Board of Directors on November 11, 2004.

The seller notes bear a fixed 6% interest rate and are amortized over three years. A portion of the common stock issued to the sellers is subject to a collar provision which allows Flotek to repurchase 35,000 shares of common stock at $5.42 on the two year anniversary of the Closing Date. On the Closing Date, Flotek entered into employment contracts with key individuals at Spidle.

The acquisition was partially financed with a $13 million senior credit facility from Wells Fargo Commercial Banking in Houston. The senior credit facility is comprised of $8 million in term loans and a $5 million revolving credit facility. Initial borrowings under this facility were used to finance the acquisition of Spidle and repay Flotek’s existing senior credit facility. In addition to significantly increasing the Company’s working capital availability, Flotek’s senior borrowing rates were reduced approximately 300 basis points as a result of the new financing.

Spidle (www.spidle.com) is a downhole tool company with rental, sales, and manufacturing operations throughout the Rocky Mountains. Spidle serves both the domestic and international downhole tool markets with a customer base extending into Canada, Mexico, South America, Europe, Asia and Africa. Spidle operates in the energy, mining, water well and industrial drilling sectors. Spidle will be merged with Turbeco, Inc. into Flotek's Drilling Products segment.

ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.

(a)Financial statements of business acquired.

Spidle Sales & Service, Inc.

Report of Independent Auditors

Balance Sheets as of December 31, 2004 and 2003

Statements of Income for the Years Ended 2004 and 2003

Statements of Changes in Stockholders’ Equity for the Years Ended 2004 and 2003

Statements of Cash Flows for the Years Ended 2004 and 2003

Notes to Financial Statements

(b) Pro forma financial information.

Unaudited Pro Forma Combined Balance Sheet as of December 31, 2004

Unaudited Pro Forma Combined Statement of Income for the Year Ended December 31, 2004

Notes to Unaudited Pro Forma Combined Financial Statements

(c) Exhibits.

2.1    Stock Purchase Agreement dated December 20, 2004 among Flotek Industries, Inc., and the shareholders of Spidle Sales & Service, Inc. 

99.1   Financial Statements of Business Acquired 

99.2   Pro Forma Financial Information

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	FLOTEK INDUSTRIES INC.
	Registrant
Date: April 22, 2005	By:	/s/ Lisa Bromiley Meier
		Lisa Bromiley Meier
		Chief Financial Officer & Vice President

EXHIBIT INDEX

Flotek Industries, Inc.

Exhibit No.

2.1   Stock Purchase Agreement dated December 20, 2004 among Flotek Industries, Inc., and the shareholders of Spidle Sales & Service, Inc.

99.1   Financial Statements of Business Acquired - Spidle Sales & Service, Inc.

Independent Auditors’ Report

Balance Sheets as of December 31, 2004 and 2003

Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2004 and 2003

Statements of Income and Owner’s Net Investment for the Years Ended December 31, 2004 and 2003

Statements of Cash Flows for the Years Ended December 31, 2004 and 2003

Notes to Financial Statements

99.2   Pro Forma Financial Information

Unaudited Pro Forma Combined Balance Sheet as of December 31, 2004

Unaudited Pro Forma Combined Statement of Income for the Year Ended December 31, 2004

Notes to Audited Pro Forma Combined Financial Statements

EX-2.1

EXHIBIT 2.1

STOCK PURCHASE AGREEMENT

THIS STOCK PURCHASE AGREEMENT, dated as of December 20th, 2004 (the “Agreement”), is by and among Flotek Industries, Inc., a Delaware corporation (“Flotek”), Agee Spidle, Karen Spidle, and Rick Fladeland (collectively, the “Stockholders”).

WITNESSETH:

WHEREAS, the Stockholders own the number of shares of the common stock of Spidle Sales & Services, Inc., a Utah corporation (the “Company”) indicated on Schedule A (the “Spidle Shares”);

WHEREAS, Flotek desires to acquire the Spidle Shares from the Stockholders, and the Stockholders desire to sell the Spidle Shares to Flotek, upon the terms and subject to the conditions set forth herein;

NOW, THEREFORE, in consideration of the premises and the representations, warranties, covenants and agreements contained herein, the parties hereto, intending to be legally bound, agree as follows:

ARTICLE I

THE PURCHASE

Section 1.1. Sale and Purchase. At the Closing (as hereinafter defined) and in accordance with the provisions of this Agreement, Flotek shall purchase from the Stockholders, and the Stockholders shall sell to Flotek, the Spidle Shares in exchange for the consideration described in Section 1.2. At the Closing, the Stockholders shall transfer to Flotek good and marketable title to the Spidle Shares that is free and clear of all pledges, liens, claims, charges, options, calls, encumbrances, restrictions, and assessments whatsoever.

Section 1.2. Purchase Consideration. Subject to Section 1.4, the consideration (the “Consideration”) for the delivery and transfer to Flotek of the Spidle Shares shall be as follows:

(a)The payment at the Closing of an aggregate of $6,100,000 in cash or in immediately available funds, allocated among the Stockholders as indicated on Schedule A;

(b)The delivery at the Closing of Promissory Notes payable to the order of each of the Stockholders in the aggregate principal amount of $1,275,000. Each Promissory Note shall be substantially identical in form to Exhibit 1.2 and shall be in the original principal amount indicated on Schedule A; and

(c)The number of shares (the “Flotek Shares”) of the common stock of Flotek, .0001 par value per share (the “Flotek Common Stock”) determined by dividing $700,000 by the Share Value. The Flotek Shares shall be allocated among the Stockholders as indicated on Schedule A. For purposes herein, the term “Share Value” shall mean the value of the Flotek Shares based on the average for the ten business days that precede the Closing Date of daily closing trading prices of the Flotek Common Stock on the over-the-counter market, as reported by the National Quotation Bureau, Inc., or if such information is not available, as furnished by any member of the National Securities Dealers, Inc., selected by Flotek.

Notwithstanding anything to the contrary set forth herein, no part of the Consideration shall be escrowed or held back in any respect at Closing to secure the obligations of the Stockholders pursuant to this Agreement or the accuracy of the representations and warranties of the Stockholders.

Section 1.3. Other Agreements. At the Closing, (a) each Stockholder and Bruce McGovern shall execute and deliver Agreements Not To Compete substantially identical in form to Exhibit 1.3(a), and (b) Agee Spidle, Rick Fladeland and Bruce McGovern shall execute and deliver Employment Agreements substantially identical in form to Exhibit 1.3(b).

Section 1.4. Employee Bonus Pool. At the Closing, $800,000 of the Consideration shall not be paid to Agee Spidle but shall instead be placed in a separate Flotek bank account (or with respect to non-cash Consideration, in such form as Spidle shall direct), the disbursement of which shall be governed by a Bonus Pool Agreement substantially identical in form to Exhibit 1.4. Flotek and Agee Spidle shall enter into such Bonus Pool Agreement at the Closing, and shall mutually agree regarding the form of the Consideration subject to the Bonus Pool Agreement.

Section 1.5. Closing. The closing (the “Closing”) of the transactions contemplated by this Agreement (the “Transaction”) shall take place at the offices of Flotek on January 3rd, 2005 or the first subsequent date on which the last of the conditions set forth in Article V is fulfilled or waived, or at such other time and place as Flotek and the Stockholders shall agree. The date on which the Closing occurs is referred to in this Agreement as the “Closing Date.” At the Closing, each of the parties shall take such actions as shall be required pursuant to the terms hereof to be taken at the Closing, or which are otherwise reasonably required to cause the Transaction to be consummated.

ARTICLE II

REPRESENTATIONS AND WARRANTIES OF FLOTEK

Flotek represents and warrants to the Stockholders as follows:

Section 2.1. Organization and Qualification. Flotek is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation and has the requisite corporate power and authority to own, lease and operate its assets and properties and to carry on its business as it is now being conducted.

Section 2.2. Reports. Flotek has previously made available or delivered to the Company and the Stockholders copies of the Form 10-K filed by it with the Securities and Exchange Commission (the “SEC”) and its quarterly reports filed with the SEC on Form 10-Q for the periods ending March 31, 2004, June 30, 2004, and September 30, 2004 (“Flotek SEC Reports”). As of their respective dates, the Flotek SEC Reports did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Flotek has not made any other representation to the Stockholders regarding the Flotek Shares. The Flotek Shares will be restricted stock which will not be tradable on the open market under the applicable securities laws.

ARTICLE III

REPRESENTATIONS AND WARRANTIES

OF THE STOCKHOLDERS

The Stockholders jointly and severally represent and warrant to Flotek that:

Section 3.1. Capitalization. The Spidle Shares are the only issued and outstanding shares of the capital stock of the Company. The Spidle Shares are validly issued and are fully paid, nonassessable and free of preemptive rights. There are no outstanding subscriptions, options, calls, contracts, rights or warrants, including any right of conversion or exchange obligating the Company or the Stockholders to issue, deliver or sell, additional shares of the capital stock of the Company. There are no voting trusts, proxies or other agreements or understandings to which the Company or the Stockholders is a party or is bound with respect to the voting of or restricting the sale of any shares of capital stock of the Company. Each Stockholder has good, valid and marketable title to the Spidle Shares indicated as being owned by that Stockholder in Schedule A, free and clear of all pledges, liens, claims, charges, options, calls, encumbrances, restrictions, and assessments whatsoever.

Section 3.2. Non-Contravention. The execution and delivery of this Agreement by the Company and the Stockholders and the consummation by the Company and the Stockholders of the Transaction do not and will not violate or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or result in a right of termination or acceleration under, under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, or any agreement to which the Company is now a party or by which the Company or any of its respective properties or assets may be bound or affected.

Section 3.3. Financial Statements. Company has furnished Flotek with an unaudited balance sheet, income statement and statement of cash flow for Company as of September 30, 2004 (collectively, the "Financial Statements"). The Financial Statements have been prepared in accordance with generally accepted accounting principles, consistently applied (“GAAP”), and are accurate and complete (except, in the unaudited statements, for the absence of footnote disclosures and for the absence of normal year-end audit adjustments which are not material in the aggregate) and fairly present the financial condition and result of operations of the Company.

Section 3.4. Absence of Undisclosed Liabilities. Except as indicated in the attached Disclosure Schedule, the Company has not incurred any liabilities or obligations (whether absolute, accrued, contingent or otherwise) of any nature, except liabilities or obligations (a) which are provided for in the Financial Statements or reflected in the notes thereto, (b) which were incurred after September 30, 2004, and were incurred in the ordinary course of business and consistent with past practices (“Ordinary Course Liabilities”), or (c) pursuant to this Agreement.

Section 3.5. Absence of Certain Changes or Events. Since September 30, 2004 the business of the Company has been conducted in the ordinary course of business consistent with past practices, and there has not been any event, occurrence, development or state of circumstances or facts which has had, or could reasonably be anticipated to have, individually or in the aggregate, a material adverse effect with respect to the Company.

Section 3.6. Title to Assets. The Company has good and indefeasible title to all of the assets which are indicated as being owned by the Company on the Financial Statements, free and clear of all mortgages, liens, pledges, charges, or encumbrance of any nature whatsoever.

Section 3.7. Litigation. There are no claims, suits, actions, or proceedings pending or, to the knowledge of all of the Stockholders, threatened against or relating to the Company, before any court, governmental department, commission, agency, instrumentality or authority, or any arbitrator. The Company is not subject to any judgment, decree, injunction, rule or order of any court, governmental department, commission, agency, instrumentality or authority, or any arbitrator.

Section 3.8. No Violation of Law. The Company is not in violation of or has been given notice or been charged with any violation of, any law, statute, order, rule, regulation, ordinance or judgment (including, without limitation, any applicable environmental law) of any governmental or regulatory body or authority. No investigation or review by any governmental or regulatory body or authority is pending or threatened, nor has any governmental or regulatory body or authority indicated an intention to conduct the same. The attached Disclosure Schedule contains an accurate and complete description of the facts known to the Stockholders relating to the environmental issue described therein. The Stockholders have provided to Flotek copies of all written information in the possession of the Company which relates to such environmental matter.

Section 3.9. Labor Matters. There are no material controversies pending or, to the Knowledge of all of the Stockholders, threatened between the Company on the one hand and any of its employees on the other.

Section 3.10. Agency Agreements. Each agreement pursuant to which the Company is a party pursuant to which the Company is appointed to act as a sales representative or distributor is a valid, binding and enforceable agreement of the Company and, to the knowledge of all of the Stockholders, the other parties thereto. The Stockholders have provided Flotek with copies of all such agreements. Except as indicated in the attached Disclosure Schedule, there has not occurred any breach or default under any such agreement on the part of the Company or, to the knowledge of all of the Stockholders, any other parties thereto. Except as indicated in the attached Disclosure Schedule, no event has occurred which with the giving of notice or the lapse of time, or both, would constitute a default under any such agreement on the part of the Company, or, to the knowledge of all of the Stockholders, any of the other parties thereto. There is no dispute between the parties to any such agreement as to the interpretation thereof or as to whether any party is in breach or default thereunder, and no party to any such agreement has indicated its intention to, or suggested it may evaluate whether to, terminate any such agreement.

Section 3.11. Disclosure. No representation or warranty of the Company or Stockholders set forth hereunder contains any untrue statement of the material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading.

ARTICLE IV

CONDUCT OF BUSINESS PENDING THE CLOSING

Prior to the Closing, the Stockholders will cause the Company to operate its respective business in, and only in, the usual, regular and ordinary course of business in substantially the same manner as operated on the date of this Agreement. Without limiting the generality of the foregoing, during the period from the date of this Agreement to the Closing, the Company will not make or declare a dividend or other distribution to any of the Stockholders, or redeem any of its stock, or increase the compensation of any of its officers or other employees. The Stockholders will have complied with and will continue to comply with Section 8 of that certain letter of intent dated September 23, 2004.

ARTICLE V

CONDITIONS TO CLOSING

The respective obligations of each party to effect the Transaction shall be subject to the fulfillment or waiver, if permissible, on or prior to the Closing Date of the following conditions:

(a)Each party hereto shall have performed its agreements contained in this Agreement required to be performed on or prior to the Closing Date and the representations and warranties of each party contained in this Agreement shall be true and correct in all material respects (or in all respects in the case of any representation or warranty containing any materiality qualification) on and as of the date made and on and as of the Closing Date as if made at and as of such date, and the parties shall have executed and delivered executed and delivered at Closing a certificate to that effect;

(b)Since September 30, 2004, there shall have been no changes that constitute, and no event or events shall have occurred which have resulted in or constitute, a material adverse effect with respect to the Company; and

(c)Flotek shall have obtained a loan from a bank in an amount sufficient to fund the payment of the Consideration to the Stockholders.

ARTICLE VI

INDEMNIFICATION

Section 6.1. Indemnification of Flotek. The Stockholders each agree to jointly and severally indemnify Flotek and the Company (including their respective officers, directors, employees and agents) against, and hold each of them harmless from and against, any and all claims, actions, causes of action, arbitrations, proceedings, losses, damages, liabilities, judgments and expenses (including, without limitation, reasonable attorneys' fees) ("Indemnified Amounts") incurred by the indemnified party as a result of (a) any error, inaccuracy, breach or misrepresentation in any of the representations and warranties made by or on behalf of the Stockholders in this Agreement, (b) any violation or breach by any of the Stockholders of or default by any of the Stockholders under the terms of this Agreement, (c) any liability or other claims concerning the operations of the Company on or prior to the Closing Date which are not reflected in the Financial Statements or Ordinary Course Liabilities, whether or not such liability or claim is required to be accrued under GAAP, or (d) any taxes relating to the Company for periods on or before the Closing Date in excess of the amount reserved for accrued taxes in the Financial Statements. Notwithstanding anything to the contrary set forth herein, none of the Stockholders shall be required to indemnify Flotek or the Company with respect to any matters described on the attached Disclosure Schedule provided that such description is accurate and complete. The indemnified party shall be entitled to recover its reasonable and necessary attorneys' fees and litigation expenses incurred in connection with the successful enforcement of its rights under this Section. The indemnification obligations under this Section 6.1 shall apply regardless of whether any suit or action results solely or in part from the active, passive or concurrent negligence of the indemnified party

Section 6.2. Survival; Threshold and Limits of Liability. No Stockholder shall be liable under this Agreement for the breach of any representation or warranty unless the aggregate amount of such liability (for all such claims against all indemnifying parties pursuant to Section 6.1 or 6.2, as the case may be) exceeds $50,000, in which event the Stockholder shall be fully liable without regard to such threshold. The maximum liability of the Stockholders with respect to all Indemnified Amounts under Section 6.1 shall be limited to their share of $8,075,000, based on relative ownership of the Spidle Shares immediately prior to the Closing. The liability of the Stockholders with respect to their representations and warranties shall expire one (1) year after the Closing Date, except with respect to claims with respect to any such breach asserted against any of them pursuant to Section 6.1 prior to the expiration of such period.

Nothing herein shall be construed to authorize the withholding of any payment obligation referenced in Section 1.2 of this agreement.

ARTICLE VII

MISCELLANEOUS

Section 7.1. Termination. This Agreement may be terminated at any time prior to the Closing by either the Stockholders or Flotek if:

(a)the representations and warranties of the other party shall fail to be true and correct in all material respects (or in all respects in the case of any representation or warranty containing any materiality qualification) on and as of the date made or, except in the case of any such representations and warranties made as of a specified date, on and as of any subsequent date as if made at and as of the subsequent date and such failure shall not have been cured in all material respects (or in all respects in the case of any representation or warranty containing any materiality qualification) within 30 days after written notice of such failure;

(b)the Transaction is not completed by February 28, 2005 (provided that the right to terminate this Agreement under this Section 7.1(b) shall not be available to a party if the failure of that party to fulfill any obligation under or in connection with this Agreement has been the cause of or resulted in the failure of the Transaction to occur on or before such date).

Section 7.2. Effect of Termination. In the event of termination of this Agreement by either Flotek or the Stockholders pursuant to the provisions of Section 7.1, this Agreement shall forthwith become void and there shall be no further obligations on the part of the Stockholders or Flotek or their respective officers or directors, or the Stockholders. Nothing in this Section 7.2 shall relieve any party from liability for any breach of this Agreement, however.

Section 7.3. Remedies. If any legal action or other proceeding is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action or proceeding in addition to any other relief to which it or he may be entitled at law or equity.

Section 7.4. Notices. All notices, consents, demands or other communications required or permitted to be given pursuant to this Agreement shall be deemed sufficiently given: (i) when delivered personally during a business day to the appropriate location described below or telefaxed to the telefax number indicated below, or (ii) five (5) business days after the posting thereof by United States first class, registered or certified mail, return receipt requested, with postage fee prepaid and addressed:

If to Flotek:	Flotek Industries, Inc.
	7030 Empire Central Drive
	Houston, Texas 77040
	Telefax No. (713) 466-8386
With a copy to:	Casey W. Doherty
	Doherty & Doherty LLP
	1717 St. James Place, Suite 520
	Houston, Texas 77056
	Telefax No. (713) 572-1001
If to Agee Spidle or Karen Spidle:	P.O. Box 888
	256 Heritage Trail South
	Bellville, Texas 77418
	Telefax No. (979)865-8818
With a copy to:	Dana Baker
	Baker & Baker
	5 East Main Street
	Bellville, Texas 77418
	Telefax No. (979)865-0043
If to Rick Fladeland:	365 North 250 West
	Vernal, Utah 84078

Section 7.5. Successors. This Agreement shall be binding upon each of the parties upon their execution, and inure to the benefit of the parties hereto and their successors and assigns.

Section 7.6. Severability. In the event that any one or more of the provisions contained in this Agreement or in any other instrument referred to herein, shall, for any reason, be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision of this Agreement or any such other instrument.

Section 7.7. Section Headings. The section headings used herein are descriptive only and shall have no legal force or effect whatsoever. Except to the extent the context specifically indicates otherwise, all references to articles and sections refer to articles and sections of this Agreement, and all references to the exhibits and schedules refer to exhibits and schedules attached hereto, each of which is made a part hereof for all purposes.

Section 7.8. Gender. Whenever the context so requires, the masculine shall include the feminine and neuter, and the singular shall include the plural and conversely.

Section 7.9. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, U.S.A., applicable to agreements and contracts executed and to be wholly performed there, without giving effect to the conflicts of law principles thereof.

Section 7.10. Multiple Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original.

Section 7.11. Waiver. Any waiver by either party to be enforceable must be in writing and no waiver by either party shall constitute a continuing waiver.

Section 7.12. Entire Agreement. This Agreement and the other agreements referred to herein set forth the entire understanding of the parties hereto relating to the subject matter hereof and thereof and supersede all prior agreements and understandings among or between any of the parties relating to the subject matter hereof and thereof.

Section 7.13. Cross References. References in this Agreement to Articles, Sections, Exhibits, or Schedules shall be deemed to be references to Articles, Sections, Exhibits, and Schedules of this Agreement unless the context specifically and expressly requires otherwise.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first set forth above.

COMPANY: 

FLOTEK: 

FLOTEK INDUSTRIES, INC., a Delaware corporation 

By: /s/ Jerry D. Dumas, Sr.  

Name: Jerry D. Dumas, Sr. 

Title: Chairman & Chief Executive Officer 

STOCKHOLDERS: 

/s/ Agee Spidle          

Agee Spidle 

/s/ Karen Spidle          

Karen Spidle 

/s/ Rick Fladeland       

Rick Fladeland  

EX-99.1

EXHIBIT 99.1

FINANCIAL STATEMENTS OF BUSINESS ACQUIRED

SPIDLE SALES & SERVICE, INC.

Report of Independent Auditors

Balance Sheets as of December 31, 2004 and 2003

Statements of Income for the Years Ended 2004 and 2003

Statements of Changes in Stockholders’ Equity for the Years Ended 2004 and 2003

Statements of Cash Flows for the Years Ended 2004 and 2003

Notes to Financial Statements

Independent Auditors’ Report

Board of Directors
Spidle Sales & Service, Inc.
Bellville, Texas

We have audited the accompanying Balance Sheets of Spidle Sales & Service, Inc. as of December 31, 2004 and 2003 and the related Statements of Income, Changes in Stockholders’ Equity and Cash Flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Spidle Sales & Service, Inc. as of December 31, 2004 and 2003, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ WEINSTEIN SPIRA & COMPANY, P.C.

Houston, Texas

March 26, 2005

1

Spidle Sales & Service, Inc.

Balance Sheets

December 31, 2004 and 2003

	For the Years Ended December 31,
	2004			2003
ASSETS
Current assets:
Cash and cash equivalents	$	133,673		$	136,420
Accounts receivable		2,495,877			1,967,146
Inventory		1,621,735			1,878,681
Other current assets		32,325			7,211
Total current assets		4,283,610			3,989,458
Property, plant and equipment		1,714,992			984,498
Deferred income tax asset		41,675			98,061
Total assets	$	6,040,277		$	5,072,017
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Payable to stockholder	$	—		$	800,000
Accounts payable		927,436			441,749
Accrued liabilities		112,828			24,521
Federal income taxes payable		156,212			63,125
Total current liabilities		1,196,476			1,329,395
Stockholders’ equity:
Common stock; no par value, 10,000 shares
authorized and issued; 7,474 shares outstanding		7,474			7,474
Retained earnings		5,670,316			4,569,137
Less: Treasury stock, 2,526 shares, at cost		(833,989	)		(833,989	)
Total stockholders’ equity		4,843,801			3,742,622
Total liabilities and stockholders’ equity	$	6,040,277		$	5,072,017

See accompanying notes to financial statements.

2

Spidle Sales & Service, Inc.

Statements of Income

Years Ended December 31, 2004 and 2003

	For the Years Ended December 31,
	2004			2003
Revenues	$	16,201,202		$	11,380,658
Cost of sales		10,091,454			6,159,574
Gross margin		6,109,748			5,221,084
Selling, general and administrative expenses		4,608,680			4,303,808
Income from operations		1,501,068			917,276
Other income (expense):
Interest expense		(14,832	)		—
Gain on sale of property and equipment		13,323			—
Litigation settlement		198,147			—
Other income		30,202			25,458
Total other income (expense)		226,840			25,458
Income before federal income taxes		1,727,908			942,734
Federal income tax provision		589,359			331,338
Net income	$	1,138,549		$	611,396

See accompanying notes to financial statements.

3

Spidle Sales & Service, Inc.

Statements of Changes in Stockholders’ Equity

Years Ended December 31, 2004 and 2003

	Common Stock		Retained Earnings			Treasury Stock			Total
Balance -
December 31, 2002	$	7,474	$	3,995,111		$	(833,989	)	$	3,168,596
Dividends ($5 per share)				(37,370	)					(37,370	)
Net Income				611,396						611,396
Balance -
December 31, 2003		7,474		4,569,137			(833,989	)		3,742,622
Dividends ($5 per share)				(37,370	)					(37,370	)
Net Income				1,138,549						1,138,549
Balance -
December 31, 2004	$	7,474	$	5,670,316		$	(833,989	)	$	4,843,801

See accompanying notes to financial statements.

4

Spidle Sales & Service, Inc.

Statements of Cash Flows

Years Ended December 31, 2004 and 2003

	For the Years Ended December 31,
	2004			2003
Cash flows from operating activities:
Net income from continuing operations	$	1,138,549		$	611,396
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization		691,164			541,227
Deferred income tax provision (benefit)		29,272			(125,528	)
Gain on sale of property and equipment		(13,323	)		—
Change in assets and liabilities:
Accounts receivable		(528,731	)		(975,462	)
Inventories		256,946			(388,494	)
Other current assets		2,000			(7,211	)
Prepaid federal income tax		—			252,842
Accounts payable		485,687			(101,486	)
Accrued liabilities		88,307			(58,250	)
Federal income tax payable		93,087			63,125
Net cash provided by (used in) continuing operations		2,242,958			(187,841	)
Cash flows from investing activities:
Capital expenditures		(1,425,935	)		(465,897	)
Proceeds from sale of property and equipment		17,600			—
Net cash used in investing activities		(1,408,335	)		(465,897	)
Cash flows from financing activities:
Payments on payable to stockholder		(1,050,000	)		(121,800	)
Proceeds from payable to stockholder		250,000			800,000
Dividends paid		(37,370	)		(37,370	)
Net cash provided by (used in) financing activities		(837,370	)		640,830
Net decrease in cash and cash equivalents		(2,747	)		(12,908	)
Cash and cash equivalents at beginning of period		136,420			149,328
Cash and cash equivalents at end of period	$	133,673		$	136,420
Supplemental Disclosures of Cash Flow Information
Cash Paid during the year for:
Income Taxes	$	467,000		$	149,697
Interest	$	14,832

See accompanying notes to financial statements.

5

Spidle Sales & Service, Inc.

Notes to Financial Statements

December 31, 2004 and 2003

Note 1 - Description of Business and Accounting Policies

Spidle Sales & Service, Inc. (the Company) maintains its accounts on the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America. Accounting principles followed by the Company and the methods of applying those principles which materially affect the determination of financial position, results of operations and cash flow are summarized below:

Description of Business

The Company sells new and reconditioned drilling equipment used in gold mining, oil and gas exploration and water-well drilling. The Company also leases certain tools to companies in the above industries. The Company has focused on selling and renting equipment and tools to mining companies in the Rocky Mountain region of the United States of America. Operations are based in Vernal, Utah; Evanston, Wyoming and Bellville, Texas.

Revenue Recognition and Accounts Receivable

Revenues are recognized and accounts receivable are recorded at the time of shipment for equipment sales and as earned for rentals. Earnings are charged with a provision for doubtful accounts based on collection experience and review of the collectibility of accounts. Accounts deemed uncollectible are applied against the allowance for doubtful accounts. At December 31, 2004 and 2003, the Company believes that all accounts are collectible and no provision for doubtful accounts has been made.

The Company has exclusive sales agreements with two vendors. These agreements provide that the Company will sell or rent only the vendors’ products for certain types of products, as specified in the agreement. In exchange for these agreements, the Company receives a commission which is reflected as sales commissions in the accompanying financial statements.

Cash and Cash Equivalents

The Company considers all short-term investments with an original maturity of three months or less to be cash equivalents. As of December 31, 2004, the Company had no deposits in excess of federally-insured limits.

Inventory

Inventory consists principally of drilling equipment held for sale. Inventory is valued at the lower of cost on a first-in, first-out method or market.

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SPIDLE SALES & SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2004 and 2003

Property and Equipment

Depreciation is computed at amounts considered sufficient to amortize the cost of the assets over their estimated useful lives, using accelerated methods. Depreciation is based on the following estimated useful lives:

Rental tools	3 years
Furniture and fixtures	5 years
Transportation equipment	5 years
Buildings and improvements	10-20 years
Equipment	5 years

Long-lived assets are reviewed for impairment when events or changes in circumstances indicate an asset’s carrying amount may not be recoverable.

Income Taxes

The Company provides deferred income taxes for the expected future tax consequences of temporary differences between the income tax bases and financial reporting bases of assets and liabilities.

Advertising

The Company expenses advertising costs as they are incurred.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Note 2 - Payable to Stockholder

At December 31, 2003, a stockholder had advanced $800,000 to the Company. The payable was unsecured, bore interest at 6%, and was due on demand. The loan was repaid in 2004.

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SPIDLE SALES & SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2004 and 2003

Note 3 - Federal Income Taxes

A reconciliation of the federal statutory income tax rate to the effective income tax rate at December 31, 2004 and 2003, respectively, is as follows:

	2004		2003
Income tax provision at the statutory rate	$	587,489	$	320,530
Increase resulting from:
Nondeductible expenses		1,870		10,808
	$	589,359	$	331,338

The components of the deferred income tax assets as of December 31, 2004 and 2003, respectively, were as follows:

	2004		2003
Deferred income tax asset - current
State income tax accrual	$	27,114
Deferred income tax asset - non-current
Accelerated book depreciation		41,675	$	98,061
	$	68,789	$	98,061

Note 4 - Subsequent Event

On February 14, 2005, the Company was purchased by Flotek Industries, Inc. for $6,100,000 in cash, $1,275,000 in notes payable and 129,271 shares of Flotek Industries, Inc.’s common stock.

8

EX-99.2

EXHIBIT 99.2

PRO FORMA FINANCIAL INFORMATION

SPIDLE SALES & SERVIES, INC.

Unaudited Pro Forma Combined Balance Sheet as of December 31, 2004

Unaudited Pro Forma Combined Statement of Income for the Year Ended December 31, 2004

Notes to Audited Pro Forma Combined Financial Statements

FLOTEK INDUSTRIES, INC.

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma combined financial statements give effect to the Spidle acquisition as described in Flotek’s Form 8-K filed on April 22, 2005. The unaudited pro forma combined balance sheet as of December 31, 2004 is presented as if the Spidle acquisition had occurred on that date. The unaudited pro forma combined statement of income for the year ended December 31, 2004 assumes that the Spidle acquisition occurred on January 1, 2004. The purchase price for the Spidle acquisition has been allocated to the assets acquired and liabilities assumed based on estimated fair values, following the completion of an independent appraisal and other evaluations. Statement No. 141, “Accounting for Business Combinations,” was applied to the purchase and the book value of the assets purchased was reduced on a prorate basis by the amount the fair value of the net assets acquired exceeded the total purchase price of the acquisition.

The unaudited pro forma combined financial statements should be read in conjunction with (i) the historical consolidated financial statements of Flotek included in its Annual Report on Form 10-K for the year ended December 31, 2004 and (ii) the historical combined financial statements of Spidle included in this Form 8-K. The unaudited pro forma combined financial statements are not necessarily indicative of the financial position that would have been obtained or the financial results that would have occurred if the Spidle acquisition had been consummated on the dates indicated, nor are they necessarily indicative of the financial position or financial results in the future. The pro forma adjustments, as described in the Notes to Pro Forma Combined Financial Statements, are based upon available information and certain assumptions that Flotek’s management believes are reasonable.

1

FLOTEK INDUSTRIES, INC.

PRO FORMA COMBINED BALANCE SHEET

DECEMBER 31, 2004

(Unaudited)

	Flotek			Spidle			Pro Forma Adjustments				Pro Forma Combined
ASSETS
Current assets:
Cash and cash equivalents	$	321,839		$	133,673		$	(133,673	)	(a)	$	455,512
								133,673		(b)
Receivables, net		3,372,236			2,495,877			(2,495,877	)	(a)		5,868,113
								2,495,877		(b)
Inventories, net		2,447,390			1,621,735			(1,621,735	)	(a)		6,364,476
								6,528,476		(b)
								(2,611,390	)	(b)
Other current assets		39,721			32,325			(32,325	)	(a)		72,046
								32,325		(b)
Total current assets		6,181,186			4,283,610			2,295,351				12,760,147
Property, plant and equipment, at cost		4,059,630			8,068,414			(8,068,414	)	(a)		12,128,044
								8,068,414		(b)
Accumulated depreciation		(1,942,834	)		(6,353,422	)		6,353,422		(a)		(7,333,358	)
								(3,708,421	)	(b)
								(1,709,153	)	(b)
								27,050		(c)
Property, plant and equipment, net		2,116,796			1,714,992			962,898		(c)		4,794,686
Goodwill, net		7,465,725			—			—				7,465,725
Patents and other intangible assets, net		193,380			—			—				193,380
Deferred income tax asset		—			41,675			(41,675	)	(a)		41,675
								41,675		(b)
Total assets	$	15,957,087		$	6,040,277		$	3,258,249			$	25,255,613
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,641,577		$	927,436		$	(927,436	)	(a)	$	3,569,013
								927,436		(b)
Accrued liabilities		1,617,762			269,040			(269,040	)	(a)		1,886,802
								269,040		(b)
Current portion of long-term debt		1,136,467			—			—				2,356,467
								1,220,000		(b)
Amounts due to related parties		466,401			—			—				891,401
								425,000		(b)
Total current liabilities		5,862,207			1,196,476			1,645,000				8,703,683
Long-term debt		5,271,987			—			—				10,151,987
								4,880,000		(b)
Long-term debt due to related parties		—			—			850,000		(b)		850,000
Stockholders’ equity:
Common stock, $.0001 par value		667			—			13		(b)		680
Additional paid-in capital		17,082,141			—							17,782,128
								699,987		(b)
Retained earnings (accumulated deficit)		(12,259,915	)		—			6,822		(c)		(12,232,865	)
								20,228		(c)
Owner's net investment		—			4,843,801			(4,843,801	)	(a)		—
Total stockholders’ equity		4,822,893			4,843,801			(4,116,751	)			5,549,943
Total liabilities and stockholders’ equity	$	15,957,087		$	6,040,277		$	3,258,249			$	25,255,613

See Notes to Pro Forma Combined Financial Statements.

2

FLOTEK INDUSTRIES, INC.

PRO FORMA COMBINED STATEMENT OF INCOME

FOR THE YEAR ENDED DECEMBER 31, 2004

(Unaudited)

	Flotek			Spidle			Pro Forma Adjustments			Pro Forma Combined
Revenues	$	21,881,289		$	16,201,202		$	—		$	38,082,491
Cost of sales		12,529,631			10,091,454			—			22,621,085
Gross margin		9,351,658			6,109,748			—			15,461,406
Expenses:
Selling, general and administrative		5,349,594			4,608,680			—			9,958,274
Depreciation and amortization		689,901			—			(6,822	)(c)		683,079
Research and development		300,074			—			—			300,074
Total expenses		6,339,569			4,608,680			(6,822	)		10,941,427
Income (loss) from operations		3,012,089			1,501,068			6,822			4,519,979
Other income (expense):
Interest expense		(691,568	)		(14,832	)		—			(706,400	)
Other income (expense)		46,264			241,672			—			287,936
Taxes								—			—
Total other income (expense)		(645,304	)		226,840			—			(418,464	)
Income before income taxes		2,366,785			1,727,908			6,822			4,101,515
Provision for income taxes		(213,096	)		(589,359	)		—			(802,455	)
Net income applicable to common stock	$	2,153,689		$	1,138,549		$	6,822		$	3,299,060
Basic and diluted earnings (loss) per common
share from:
Continuing operations	$	0.32					$	—		$	0.49
Discontinued operations		—						—			—
Disposal of discontinued operations		—						—			—
Basic earnings (loss) per common share	$	0.32					$	—		$	0.49
										$	—
Diluted earnings (loss) per common share	$	0.31					$	—		$	0.46
Weighted average common shares used in
computing earnings (loss) per common share		6,659,395						129,271	(b)		6,788,666
Incremental common shares from stock options		353,742						—			353,742
Diluted		7,013,137						129,271			7,142,408

See Notes to Pro Forma Combined Financial Statements.

3

FLOTEK INDUSTRIES, INC.

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS

(Unaudited)

(a) To reverse the historical cost of the individual assets and liabilities of Spidle Sales & Service, Inc., and the offsetting owner’s net investment.

(b) To reflect the allocation of the purchase price to the assets acquired and liabilities assumed. All Spidle assets and liabilities, including long-term debt, were purchased in this agreement.

Flotek Industries applied Statement No. 141, “Accounting for Business Combinations,” to the acquisition of Spidle Sales & Service. Statement No. 141 requires that the reported book value of the assets of the purchased company be reduced on a prorata basis by the amount the fair value of the net assets acquired over the total purchase price for the acquisition. Any excess is recognized in income as an extraordinary gain. The appraised investment shown below is based on an independent appraisal, so no adjustments are expected. In applying Statement No. 141 to the transaction, the net value of inventories was pushed down by $2.6 million and the net value of property, plant and equipment was pushed down by $1.7 million to eliminate the excess of appraised investment over purchase price. There was no remaining excess in fair value of net assets acquired over purchase price, so it was not necessary to recognize an extraordinary gain on acquisition.

	Appraised Investment			Application of FAS 141			Recorded Investment
Cash	$	133,673					$	133,673
Receivables		2,495,877						2,495,877
Inventories		6,528,476			(2,611,390	)		3,917,086
Other current assets and prepaids		32,325						32,325
Property, plant and equipment		4,359,993			(1,709,153	)		2,650,840
Deferred income tax asset		41,675						41,675
Accounts payable		(927,436	)					(927,436	)
Accrued liabilities		(112,828	)					(112,828	)
Federal income taxes payable		(156,212	)					(156,212	)
Total purchase price		8,075,000						8,075,000
Excess of investment over purchase price	$	(4,320,543	)	$	(4,320,543	)	$	—

The total purchase price consisted of: (1) $6.1 million in cash (2) a $1.275 million note payable to the seller over three years, and (3) 129,271 shares of Flotek common stock valued at the ten day weighted average closing price, $5.42.

(c) Property and equipment is stated at appraised fair value reduced by its pro rata portion of the excess fair value of net assets acquired over the total purchase price for the acquisition. Spidle used an accelerated depreciation method and Flotek uses the straight-line method. Spidle’s useful life of transportation equipment was 5 years and Flotek’s is 3 years. Spidle’s useful life of buildings and leasehold improvements was 10-20 years and Flotek’s is 20 years. All other useful lives are the same. We reduced Spidle’s accumulated depreciation and depreciation expense by $27,050, $6,822 in the current year and $20,228 as a cumulative adjustment for prior years. Effective in 2005, Spidle’s assets will be depreciated on a straight-line basis using the following estimated useful lives, which is consistent with Flotek's accounting policies:

Buildings and leasehold improvements	20 years
Machinery and equipment	5-8 years
Furniture and fixtures	5 years
Rental tools	3 years
Transportation equipment	3 years
Computer equipment	3 years

4