CATALYST ENERGY SERVICES INC, 10KSB40, 1996-03-26

CATALYST ENERGY SERVICES INC
10KSB40, 1996-03-26
EQUIPMENT RENTAL & LEASING, NEC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB

(Mark One)

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE OF 1934 [Fee Required]

For the fiscal year ended DECEMBER 31, 1995

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]

For the transition period from ________to_____________

Commission file number 0-16618

CATALYST ENERGY SERVICES, INC.
(Name of small business issuer in its charter)

DELAWARE 72-0885519
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

3 RIVERWAY, STE 770, HOUSTON, TX 77056
(Address of principal executive offices) (Zip Code)

Issuer's telephone number (713) 623-8133

Securities registered under Section 12(b) of the Exchange Act:

Title of each class Name of each exchange on which registered

NONE

Securities registered under Section 12(g) of the Exchange Act:

COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ] No [X]

<PAGE>

Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]

State issuer's revenues for its most recent fiscal year $11,308,691

State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. (See definition of affiliate in Rule 12b-2 of the Exchange Act). Such
information is not available to the Registrant, as to the best of the
Registrant's knowledge, there has been no trading in the Registrant's voting
stock.

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.

As of 12/31/95, 12,957,223 shares of common stock were outstanding.

Transitional Small Business Disclosure Format
Yes No X
---- ----

Documents Incorporated by Reference.

None

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TABLE OF CONTENTS

PAGE
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PART I

Item 1. Description of Business. . . . . . . . . . . . . . . . . . . . . 4

Item 2. Description of Property . . . . . . . . . . . . . . . . . . . . 7

Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 8

Item 4. Submission of Matters to a Vote of Security-Holders . . . . . . 8

PART II

Item 5. Market for Common Equity and Related
Stockholder Matters. . . . . . . . . . . . . . . . . . . . . . . 8

Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . 8

Item 7. Financial Statements . . . . . . . . . . . . . . . . . . . . . . 10

Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures. . . . . . . . . . . . . 10

PART III

Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with Section 16(a)
of the Exchange Act. . . . . . . . . . . . . . . . . . . . . . . 11

Item 10. Executive Compensation . . . . . . . . . . . . . . . . . . . . . 12

Item 11. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . . . . 13

Item 12. Certain Relationships and Related Transactions . . . . . . . . . 14

PART IV

Item 13. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 15

Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>

<PAGE>

PART I

ITEM 1. DESCRIPTION OF BUSINESS.

Catalyst Energy Services, Inc. ("CESI" or the "Company") was formerly named
Catalyst Valve Services, Inc. This name change was effective November 1, 1994.
Catalyst Valve Services, Inc. was formerly named Starstream Communications
Group, Inc. ("SCGI"). This name change was effective September 1, 1994.

Historically, SCGI's operations involved the production, marketing and
distribution of (i) compact discs, audio cassettes and LPs in Poland through
Polton Records, pursuant to a distribution contract with Warner Music
International, (ii) custom music-oriented publication in the United States, and
(iii) nationally-sponsored radio promotions in the United States. SCGI had
discontinued all active business operations by May, 1993.

In anticipation of winding down its business activities, SCGI explored methods
of maximizing shareholder value through acquisitions, mergers, divestitures or
financings. Of the various proposals reviewed by SCGI, SCGI elected to pursue
an exchange transaction (the "Exchange") with Manifold Valve Services, Ltd., a
Texas limited partnership, ("MVS") pursuant to which all of the partnership
interests of MVS were exchanged for newly-issued common stock of SCGI. MVS is a
fully equipped and American Petroleum Institute certified repair facility and
remanufacturer of valves used by the oil and gas drilling industry.

In January, 1994 SCGI, MVS and the partners of MVS entered into an Exchange
Agreement, amended in March and June 1994, pursuant to which, effective August
31, 1994, SCGI issued 2,722,790 (post split) shares of its common stock,
constituting initially 91.5% of the outstanding shares (subject to a possible
subsequent upward adjustment to a maximum of 7,186,462 shares or 96.6% of the
outstanding shares based upon a subsequent evaluation of MVS assets) to the MVS
partners in exchange for all of the MVS partnership interests. The MVS
partnership interests were subsequently contributed to a wholly-owned
subsidiary, Manifold Valve Services, Inc. ("MVSI"). Pursuant to this
transaction, SCGI changed its name to Catalyst Valve Services, Inc. and
subsequently, to Catalyst Energy Services, Inc.

In June of 1995, pursuant to the Exchange Agreement and based on the realized
value of SCGI's net assets, SCGI issued an additional 2,207,174 shares to the
MVS partners, resulting in MVS partners owning 95.12% of SCGI's shares.

In February 1995, CESI entered into a non-binding letter of intent to acquire,
via merger, the assets, liabilities and operations of Compressor Dynamics, Ltd.
("CDL").

CDL is one of the larger gas compressor rental companies in the United States,
providing equipment, parts and services for land based, portable compressors.

CDL's general and limited partners, which controlled all of CDL's partnership
interests, are affiliates of CESI's largest shareholder. CDL's limited partner,
Catalyst Capital Partners I, Ltd. ("CCPI") owned 65.63% of CESI prior to the CDL
merger.

<PAGE>

The CDL merger became effective June 15, 1995, in a transaction accounted for
similar to a pooling of interests, whereby CESI issued 7,774,334 shares of its
common stock, and 319,174 shares of $.01 par, convertible preferred stock, for
all of the partnership interests in CDL. The common shares issued to CDL's
partners represented approximately 60% of CESI's common shares, post merger.
The partnership interests acquired were contributed to a newly formed wholly
owned subsidiary, Compressor Dynamics, Inc. and CDL was dissolved. The result
was, CDI became the successor to CDL's business.

Presently, CESI acts primarily as a holding company for MVSI and CDI, which hold
substantially all of the operating assets of CESI. The principal offices of
CESI are located at Three Riverway, Suite 770, Houston, Texas 77056. Its
telephone number is (713) 623-8133.

BUSINESS (Petroleum Equipment-Segment)

MVS, the predecessor to MVSI, acquired the net assets and business of the
predecessor entity in January 1992. MVSI specializes in the repair and
remanufacture of high pressure (5,000 to 15,000 PSI) valves (primarily gate),
that are principally used in oil and gas drilling applications. These valves
(either sold separately or assembled by MVSI in a piping system known as a
drilling manifold) are critical for the drilling contractor to assist in
controlling bottom hole pressures during drilling. The manifold and the
drilling blowout preventor (BOP) work in concert with one another.
Occasionally, a third discrete component (often including a separate hydraulic
control console located on the drilling rig) known as a drilling choke, is
combined to form the principal components of the pressure control system of a
drilling rig.

The three founding principals of the predecessor to MVSI, each of whom is now
employed by MVSI, have been providing services, repairs and remanufactured
valves to the oil and gas drilling industry collectively for over 38 years.
MVSI's single largest item of repair is the gate valve. MVSI offers
professional certification on its rebuilt valves which requires, among other
things, that a degreed engineer review the design, repair drawings and processes
MVSI follows during repair.

The gate valves MVSI repairs and rebuilds have orifices ranging from 1-13/16
inches to 4-1/8 inches, with working pressures up to 15,000 PSI. The valve
brands that MVSI regularly repairs and rebuilds include original equipment
manufactured by Cameron, Quality, McEvoy, Shaffer, Vetco and WKM.

In addition to gate valves and manifold packages, MVSI offers repair services
for diverter ball valves, reset relief valves, double block valves, drilling
choke controls and small amounts of BOP repair. MVSI maintains a 100%
customer satisfaction warranty policy, which states that MVSI warrants its
repair and remanufacturing work to be free from defects caused by workmanship
for one year. In June 1995, MVSI was awarded the designation of ISO-9001.

CUSTOMERS

MVSI's customers include international and domestic drilling contractors,
rental tool and supply companies and oil and gas operators. The majority of
MVSI's work is performed for offshore rig fleets, rather than land-based
drilling rigs. A small portion of its repair work is for equipment based on
production platforms. MVSI's customers operate worldwide wherever
exploration and production of oil and gas occurs.

<PAGE>

MVSI's 10 largest customers generated approximately 83%, and 71% of its
revenues for the fiscal years ended December 31, 1995, and 1994,
respectively. The largest customer represented 18%, 14% and 8% of total
revenues for the years ended December 31, 1995, and 1994, respectively.
Sales to International Chandlers, Inc. and ENSCO Offshore Company accounted
for 18% and 16% of MVSI's total 1995 revenues. Sales to Falcon Drilling,
Inc, ENSCO Offshore Company, Sundowner Offshore Service and Diamond Offshore
Drilling accounted for 14%, 14%, 12% and 12% of MVSI's total 1994 revenue.

COMPETITION

MVSI faces competition from many original equipment valve manufacturers and from
numerous independently operated repair and remanufacture facilities located in
the U.S. and abroad. MVSI believes that it is one of the larger U.S.-based
companies operating in its market, but estimates its market share is less than
15%. While the market is highly competitive, MVSI attempts to differentiate
itself on the basis of its commitment to service, extensive inventories, product
knowledge, recognized certifications and responsiveness.

INSURANCE

MVSI maintains comprehensive insurance coverage including property, liability,
automobile, medical, worker's compensation, and "key man" insurance in amounts
it believes are both necessary and customary for the industry.

EMPLOYEES

MVSI employs approximately 40 persons, eight of whom are involved in sales,
management, engineering and administration all of whom are full-time. None of
the MVSI work force is covered by collective bargaining agreements. MVSI
provides each full-time and eligible employee medical insurance, worker's
compensation coverage and participation in a company-sponsored 401(k) profit
sharing plan. MVSI believes that its relationships with its work force are
satisfactory. CESI serves primarily as a holding company and has no employees
at this time.

BUSINESS (COMPRESSION EQUIPMENT SEGMENT)

CDL, the predecessor to CDI, acquired the net assets and business of the
predecessor entity in February 1992. CDI owns and rents portable skid mounted,
land based gas compressors to operators of natural gas properties.

The majority of compression utilized by gas producers and operators in the
United States is derived from compressors they own and operate themselves.
However, independent rental and service companies similar to CDI satisfy an ever
increasing share of the compression requirements of gas producers and operators.
CDI operates from three rented facilities located in: Seminole, OK; Eastland,
TX; and Houston, TX.

The President and V.P. of Operations of CDI have worked the majority of their
careers in the compressor rental industry, and collectively possess over 25
years of experience.

CDI has over 400 units in its rental fleet, with approximately 60 units in a
state of partial completion. Additional component assembly would be required to
place these 60 units in rentable condition. CDI has predominantly all its
rental units located in TX, OK, KS, and LA.

<PAGE>

CDI provides the majority of its units on a full or major maintenance basis.
However, occasionally customers provide the equipment maintenance, allowing CDI
to provide the unit on a "bare" rent basis.

CUSTOMERS

CDI's customers are primarily smaller independent oil and gas operators, or
operators of gas gathering systems.

CDI's 10 largest customers generated approximately 44%, and 40%, of its revenues
for the fiscal years ended December 31, 1995, and 1994, respectively. Revenues
from TransTexas Gas Corporation represented 17% and 16% of its revenues for the
years ended December 31, 1995, and 1994, respectively.

COMPETITION

CDI faces competition from numerous independent equipment rental companies, many
of whom are larger and possess greater resources, broader equipment selection,
special fabricating capabilities, etc.

INSURANCE

CDI maintains comprehensive insurance coverage including property, liability,
automobile, medical, worker's compensation, and "key man" insurance in amounts
it believes are both necessary and customary for the industry.

EMPLOYEES

CDI employs approximately 45 persons on a full-time basis, twelve of whom are
involved in sales, management, engineering and administration. None of the CDI
work force is covered by collective bargaining agreements. CDI provides each
full-time and eligible employee medical insurance, worker's compensation
coverage and participation in a company-sponsored 401(k) profit sharing plan.
CDI believes that its relationships with its work force are satisfactory.

ITEM 2. DESCRIPTION OF PROPERTY

MVSI leases approximately 25,000 square feet of manufacturing, warehouse and
office space in Jennings, Louisiana from Andrew Cormier, the president of MVSI.
The monthly rental for these facilities is $5,000. Management of the Company
believes that the rental rate and other terms of the lease with Mr. Cormier were
established on terms comparable to an arms-length basis. The lease expires in
December, 1997 and has two five-year renewal options. MVSI believes that these
facilities are adequate for its current operations.

CDI leases property from unaffiliated parties in three locations, generally
proximate to its primary areas of rental activity. They include: 46,750 square
feet of repair, storage, and office space in Houston, TX.; 23,000 square feet of
repair and storage space in Eastland, TX.; and 3,660 square feet of repair and
storage space in Seminole, OK. The monthly rentals for these facilities are
$8,000, $800, and $675, respectively. In addition, CDI is responsible for real
property taxes only for the Houston leased facility in the approximate amounts
of $7,300 per annum.

<PAGE>

The leases expire April, 1998, December, 1997, and month to month,
respectively. CDI believes these facilities are adequate for its current
operations and that upon lease expiration, these facilities can be released on
comparable terms, or alternative facilities can be secured without materially
interrupting CDI's business.

ITEM 3. LEGAL PROCEEDINGS

Neither the Company nor MVSI nor CDI are presently involved in any material
pending legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.

None.

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

As of February 2, 1996 CESI ("the Company") had approximately 198 holders of
record of the Company's common stock. This number does not include shares held
in "broker" or "nominee" name. The Company's common stock was delisted from the
NASDAQ system on June 4, 1993. There is currently no public trading market for
the Company's common stock of which The Company is aware.

Quarter 1995 1994
CLOSING BID PRICE CLOSING BID PRICE
----------------- -----------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First --- --- --- ---
Second --- --- --- ---
Third --- --- --- ---
Fourth --- --- --- ---
</TABLE>

The Company has not declared or paid a dividend on its common stock in the past
three years. The Company intends to retain future earnings, if any, for use in
business operations and does not anticipate paying cash dividends on its common
stock in the near future.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

In August 1994, CESI acquired MVS. In June of 1995, CESI merged with CDL
through an Exchange offer accounted for similar to a pooling of interests
method of accounting. As a result of these developments and the related
accounting treatment of these events, CESI reports the consolidated results
for MVS and CDL for the fiscal years 1995 and 1994 in the following "Results
of Operations".

RESULTS OF OPERATIONS

FISCAL YEAR ENDED 1995 COMPARED TO FISCAL YEAR ENDED 1994.

CESI, whose operations are predominantly those of its two wholly owned
subsidiaries MVSI and CDI, had total revenues for 1995 of $11,308,691, which
represented an increase of 3.8% over 1994's $10,899,146. Separately, MVSI's
revenues for 1995 of $5,860,346, represents an increase of 20% over 1994's of
$4,877,826 resulting from increased offshore drilling activity. CDI's revenues
for 1995 of $5,448,345 represents a decrease of 9.5% from 1994's of $6,021,320
due to intense pricing pressure in the compressor rental market.

<PAGE>

CESI's cost of services and rentals for 1995 were $7,124,550 or 63% of total
revenues. This compares to 1994's cost of services and rentals of
$6,374,305, or 58.5% of total revenues. The higher cost of sales as measured
in percentage of revenues, largely reflects the competitive pressure of
rental rates at CDI, and the lower levels of profitability given the somewhat
fixed nature of many of CDI's cost of rentals and higher material costs
experienced by MVSI during 1995. Separately, MVSI's cost of services for 1995
were $4,075,150, or 69.5% of total service revenues. This compares to 1994's
cost of services of $3,265,428, or 66.9% of total sales. CDI's cost of
rentals for 1995 were $3,049,400, or 56% of total sales. This compares
unfavorably to 1994's cost of sales of $3,108,877, or 51.6% of total sales.

Selling, general and administrative ("SG&A") expenses were $2,227,998 for
1995, or 19.7% of revenues, compared to $2,123,071, or 19.5% in 1994. The
modest increase of $104,927 for 1995 is attributable to costs associated with
higher 1995 service revenues at MVSI, and increases in insurance and other
expense items. Depreciation and amortization was $847,096 for 1995, versus
$801,310 for 1994, reflecting the additional depreciation related to net
purchases of depreciable personal property principally at CDI.

Other income and expense, on a combined basis, resulted in a net expense of
$68,259 for 1995, down from 1994's net expense of $152,063. This decrease is
largely the result of a reduction in interest expense to $272,492 in 1995
from 1994's $359,884. The reduction relates primarily from the reduced level
of fixed rate indebtedness and slightly lower interest rates for variable
rate indebtedness.

Net income from operations totalled $1,109,047 for 1995 compared to
$1,600,460 for 1994. Net income before taxes was $1,040,788 for 1995, a
28.1% decrease from 1994's amount of $1,448,937. The decline in income from
operations primarily reflects the impact of lower gross margins achieved
during 1995 by both MVSI and CDI.

The Company's income tax provision for 1995 reflects results from MVSI and
the holding Company's operations for twelve months of operations. The income
tax provision for CDI reflects results subsequent to the date of the CDL
Exchange offer (June 15, 1995). Prior to the exchange, CDL was taxed as a
limited partnership and therefore, no provision for income taxes was
recognized. Upon the consummation of the exchange, CDI recorded a one time
deferred income tax expense to provide for the effect of temporary
differences between the tax and financial reporting bases of certain assets
and liabilities of CDL.

CESI, at the time of the MVSI merger, possessed a net operating loss ("NOL")
carryforward in excess of $2,000,000 and a capital loss carryforward of
approximately $500,000. As a result of the change in ownership of CESI on
August 31, 1994, the future utilization of these carryforwards may be
limited. The recognition of these carryforwards is explained in detail in
Footnote 11 of the 1995 Financial Statements contained herein.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash and cash equivalents of $321,946 at December 31, 1995
decreased $506,617 or 61.9% from year end 1994 due to the repayment of long
term debt and capital expenditures in excess of net cash provided by
operating activities for 1995.

<PAGE>

Total debt outstanding at fiscal year end 1995 was $2,758,240 compared to
$3,903,775 at fiscal year end 1994. The Company reduced its debt outstanding
by principal payments of $1,145,535 and had no additional borrowings. At
December 31, 1995, the Company had no outstanding borrowings against its
revolving credit lines and has available borrowings based on the note
agreement in force at CDI and MVSI, of $1,455,794. The Company anticipates
that it will finance its working capital needs from its net cash provided by
operating activities, and from its revolving credit facilities, if required.

In fiscal year end 1995, net cash provided by operating activities was
$1,099,725 compared to net cash provided of $2,120,838 in 1994. The decrease
was primarily due to decreases in accrued liabilities and accounts payable
and increases in inventory balances. Net cash used by investing activities
decreased from $382,830 in 1994 to $359,820 in 1995, due to decline in
purchases of property and equipment. Net cash used in financing activities
decreased from $1,532,830 in 1994 to $1,246,522 in 1995. The decrease was
attributable to a decline in partnership distributions because CDI ceased to
be a partnership in June of 1995, somewhat offset by the absence of long-term
borrowings.

The Company expects that 1996 capital expenditures will be between $350,000
and $600,000 depending upon overall market conditions. They will be funded
by a combination of net cash provided by operations and the Company's
revolving credit facilities.

NEW ACCOUNTING STANDARD

The Financial Accounting Standards Board (the "FASB") issued SFAS No. 121
entitled "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" which is effective beginning in 1996.
SFAS No. 121 specifies certain events and circumstances which indicate the
cost of an asset or assets may be impaired, the method by which the
evaluation should be performed, and the method by which writedowns, if any,
of the asset or assets are to be determined and recognized. Management does
not currently believe SFAS NO. 121 will have a material impact on the
Company's financial condition or operating results upon implementation.

The FASB also issued SFAS No. 123, "Accounting for Stock Based Compensation",
effective for fiscal years beginning after December 15, 1995. This statement
allows companies to choose to adopt the statement's new rules for accounting
for employee stock-based compensation plans. For those companies who choose
not to adopt the new rules, the statement requires disclosures as to what
earnings and earnings per share would have been if the new rules had been
adopted. Management intends to adopt the disclosure requirements of this
statement in 1996.

ITEM 7. FINANCIAL STATEMENT.

The Company's Consolidated Financial Statements required by this Item begin
at page F-1 hereof.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.

Changes in Registrant's Certified Accountant

(a) Effective November 15, 1995 by unanimous written consent in lieu of
a board meeting, the Board of Directors of Catalyst Energy Services,
Inc. engaged the accounting firm of Hein & Associates LLP as
independent accountants for the Registrant for 1995. The services of
Ernst & Young, LLP were terminated at the same meeting.

<PAGE>

(b) During the most recent fiscal year ended 1994 and in the subsequent
interim periods up through the date of their dismissal, there have been
no disagreements with Ernst & Young LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing
scope or procedure or any reportable events which if not resolved to
the satisfaction of Ernst & Young LLP would have caused Ernst & Young
LLP to make reference to the matter in their report.

(c) Ernst & Young LLP's report on the financial statements for the year
ended December 31, 1994 contained no adverse opinion or disclaimer of
opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT.

The Directors and Executive Officers of the Company are as follows:

NAME AGE OFFICE
---- --- ------
Ronald Nixon 40 President and Director
Rick Herrman 41 Chief Financial Officer, Secretary and Director
Andrew Cormier 51 Director and President of MVSI
Gary Farr 42 Director and President of CDI

RONALD NIXON has served as president and a director of the general partner of
MVS from January 1992 and of CDL from February of 1992 until the consummation
of the MVSI and CDI Exchanges. From 1990 to the present, Mr. Nixon has been
an officer and director of The Catalyst Group, Inc., an investment firm in
Houston, Texas.

RICK HERRMAN has served as vice president and a director of the general
partner of MVS from January 1992 until the consummation of the MVSI and CDI
Exchanges. From 1990 to the present, Mr. Herrman has been an officer and
director of The Catalyst Group, Inc., an investment firm in Houston, Texas.

ANDREW CORMIER has served a president of the general partner of MVS from
January 1992 until the MVSI Exchange in August of 1994. Since the Exchange,
Andrew has served as President of MVSI and a Director of CESI. Mr. Cormier
was president of the predecessor to MVS, from February 1989 to January 1992.

GARY FARR has served as president of CDL since January 1992, and has served
as President of CDI since June of 1995. Mr. Farr was general manager of the
predecessor to CDL, from January 1987 to January 1992.

Messrs. Nixon, Herrman and Cormier became Directors of the company effective
with the initial Exchange on August 16, 1994. Mr. Farr became a Director of
the Company effective with the CDL Exchange on June 15, 1995.

<PAGE>

ITEM 10. EXECUTIVE COMPENSATION.

There are no employment agreements in effect between CESI and any of its
officers. No executive compensation is paid at this time by CESI to any
current officers. However, Mr. Nixon and Mr. Herrman are 50% shareholders
in Catalyst Compressor, Inc. who provided management consulting services to
the Company in the amount of $102,000 and $108,000 in 1995 and 1994,
respectively. The Directors are not currently compensated by CESI for their
services as directors.

The following table sets forth information with respect to the chief
executive officer and other executives of MVSI and CDI who received total
annual salary and bonuses for the fiscal years ended December 31, 1995 and
December 31, 1994 in excess of $100,000 and may be deemed to be key employees
of CESI:

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>

ANNUAL COMPENSATION

Other
Name and Principal Annual
Position Year Salary Bonus Compensation
------------------ ---- ------ ----- ------------
<S> <C> <C> <C> <C>
Andrew Cormier 1995 $102,992 $111,860 -0-
President - MVSI 1994 $105,000 $ 86,263 -0-

Gary Cryer 1995 $ 60,000 $ 56,362 -0-
Secretary Treasurer-MVSI 1994 $ 60,000 $ 43,031 -0-

Harry Ardoin, Jr. 1995 $ 60,000 $ 56,362 -0-
Vice President - MVSI 1994 $ 60,000 $ 42,594 -0-

Gary Farr 1995 $101,350 $ 55,219 -0-
President - CDI 1994 $107,312 $ 61,841 -0-
</TABLE>

The Company has defined contribution 401(k) plans covering substantially all
of its employees. Employees are eligible for participation in the plans at
semi-annual dates immediately following one year of service. Employee
contributions are vested immediately and employer contributions are vested
over a period of five years. The Company, at its discretion, matches up to
50% of a participant's salary deferred up to a maximum of 6% of participant's
compensation at CDI. The amount matched is a totally discretionary
contribution at MVSI.

Effective January 1992, MVS entered into five-year employment agreements with
each of its three key executives, Messrs. Andrew Cormier, Gary Cryer and
Harry Ardoin. These employment agreements have been assumed by MVSI. In
addition to establishing certain base levels of compensation and terms and
conditions of employment, the employment contracts and agreements established
certain future payments related to the employee's agreements not to compete
for three years after the expiration of the employment agreement. The
payments are in the form of a performance bonus, based on 30% of MVSI annual
earnings before interest and taxes in excess of $500,000. The total bonus
payable by MVSI to Messrs. Cormier, Cryer and Ardoin shall not exceed an
aggregate of $800,000 during the term of the employment agreements. As of
December 31, 1995, MVSI had paid $626,579 of this bonus.

<PAGE>

Effective January 1992, CDL entered into five-year employment agreements with
each of its three then existing key executives, Messrs. Gary Farr, Stephen
Gillioz and Michael Richards. Mr. Gillioz left the employment of CDI in
September, 1995 to join The Catalyst Group, Inc.. These employment
agreements were assumed by CDI effective with the CDL exchange. In addition
to establishing base levels of compensation and terms and condition of
employment, the employment contracts provide for a payment of annual bonuses
to the officers equal to 10% (when three executives were employed; reduced to
7.5% now that there are two executives employed) (in the aggregate) of CDI's
adjusted earnings before interest and current income taxes, provided that
adjusted earnings exceed $325,000 per year. In addition, the executives have
agreed not to compete with CDI for one year subsequent to the expiration of
the agreements.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth certain information concerning beneficial
ownership of the Company's common stock as of December 31, 1995, by (i) each
shareholder who is known by the company to own beneficially more than 5% of
the outstanding shares of common stock, (ii) each director, (iii) the
President of the Company and the four most highly compensated officers of the
Company and its subsidiaries, and (iv) all Directors and Executive Officers
of the Company and its subsidiaries as a group. Except as otherwise
indicated, the shareholders listed in the table have sole voting and
investment power with respect to the shares indicated.

Name and Address Amount of Percent
of Beneficial Owner Beneficial Ownership of Class
- ------------------ -------------------- --------
<S> <C> <C>
Catalyst Capital Partners, I, Ltd. (1) 10,327,439 79.7%
Three Riverway, Suite 770
Houston, Texas 77056

Andrew Cormier (2) 492,994 3.8%
I-10 Service Road South
P.O. Box 1009
Jennings, Louisiana 70546

Gary Farr 385,417 3.0%
104 Riley Road
Houston, Texas 77047

Ronald T. Nixon (3) 0 ---
Three Riverway, Suite 770
Houston, Texas 77056

Rick Herrman (4) 0 ---
Three Riverway, Suite 770
Houston, Texas 77056

Harry Ardoin 246,497 1.9%
I-10 Service Road South
P.O. Box 1009
Jennings, Louisiana 70546
</TABLE>

<PAGE>

Gary Cryer 246,497 1.9%
I-10 Service Road South
P.O. Box 1009
Jennings, Louisiana 70546

All Directors and Executive Officers (5) 1,564,115 12.1%
as a group (7 persons)

(1) Does not include 49,300 shares owned by The Catalyst Group, Inc., the
general partner of Catalyst Capital Partners I, Ltd. or 77,743 shares
owned by Catalyst Compressor Inc., the former general partner of
Compressor Dynamics, Ltd., the beneficial ownership of which is
disclaimed by Catalyst Capital Partners I, Ltd.

(2) Does not include 123,248, shares owned by the Matthew James Cormier Trust
and 123,248 shares owned by the Paige Sonya Cormier Trust, for which
Andrew Cormier serves as trustee, beneficial ownership of which is
disclaimed by Mr. Cormier.

(3) Does not include 49,300 shares owned by The Catalyst Group, Inc., or
77,743 shares of Catalyst Compressor, Inc. of which Mr. Nixon is a
shareholder, and 10,327,439 shares owned by Catalyst Capital Partners I,
Ltd., of which The Catalyst Group, Inc. is the general partner,
beneficial ownership of which is disclaimed by Mr. Nixon.

(4) Does not include 49,300 shares owned by The Catalyst Group, Inc., or
77,743 shares of Catalyst Compressor, Inc. of which Mr. Herrman is a
shareholder, and 10,327,439 shares owned by Catalyst Capital Partners I,
Ltd., of which The Catalyst Group, Inc. is the general partner,
beneficial ownership of which is disclaimed by Mr. Herrman.

(5) Does not include shares as to which Directors and Executive Officers
disclaim beneficial ownership.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Coincident with the purchase by MVS of certain assets of the predecessor
business to MVS, in January 1992 MVSI entered into a five-year lease for
facilities owned by Mr. Cormier which were occupied by MVS. This lease has
subsequently been assumed by MVSI. MVSI leases the facilities from Mr.
Cormier at the rate of $5,000 per month. Payments under this lease were
$60,000 and $51,000 for the fiscal years ended December 31, 1995 and 1994
respectively. In the opinion of management of the company, the rent and
other lease terms are no less favorable to MVSI than would be available from
third parties.

In January 1992, MVS executed a note payable to Catalyst Capital Partners I,
Ltd. in the principal amount of $1,080,000 bearing interest at the rate of
10% per annum. In connection therewith, Catalyst Capital Partners I, Ltd.
was granted a security interest in certain property of MVS, including
inventory, equipment, contract rights, general intangible and intellectual
property. MVSI retired the note in 1995, and the security interest was
released. Mr. Nixon and Mr. Herrman are the sole shareholders of The
Catalyst Group, Inc. the general partner of Catalyst Capital Partners I, Ltd.

<PAGE>

Catalyst Compressor, Inc. ("CCI") an affiliate of The Catalyst Group, Inc.,
charged the Company fees for certain general, administrative, and management
services totaling $102,000 and $108,000 in 1995 and 1994, respectively.

The Company was a 50% partner in a joint venture from which the Company
derived $366,935 and $476,343 of rental revenues in 1995 and 1994,
respectively. At December 31, 1994, the Company had receivables from the
joint venture of $116,663. The Company acquired it's 50% joint venture
partner's interest in 1995 for $155,000, effectively dissolving the joint
venture.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

The following exhibits are filed with or incorporated by reference into this
report. The exhibits which are denoted by an asterisk (*) were previously
filed as a part of, and are hereby incorporated by reference to, the
Company's current report on Form 8-K dated June 15, 1995. The exhibit which
is denoted by a double asterisk (**) was previously filed as a part of, and
is hereby incorporated by reference to, the Company's annual report on Form
10-KSB for the year ended December 31, 1994.

Exhibit Sequential
Number Description Page Number
- ------- ----------- -----------
**2.1 Amended and Restated Exchange Agreement March
31, 1994 (Exhibit 2(a) to Form 8-K).

**2.2 Amendment to Amended and Restated Exchange
Agreement, effective June 23, 1994 (Exhibit 2(b) to
Form 8-K).

*2.3 Exchange Agreement, June 15, 1995 (Exhibit 2.1 to
Form 8-K).

**3.2 Certificate to Amendment to the Certificate to
Incorporation,effective August 18, 1994.

**3.3 Certificate to Amendment to the Certificate to
Incorporation, effective November 1, 1994

**3.4 Bylaws

**4.1 Specimen of Common Stock Certificate of Catalyst
Energy Services, Inc.

**10.1 Lease Agreement as amended dated January 27, 1994,
between Andrew Cormier and Manifold Valve Service, Ltd

**10.2 Employment Agreement between Andrew Cormier and
Manifold Valve Services, Inc.

**10.3 Employment Agreement between Harry Ardoin, Jr. and
Manifold Valve Services, Inc.

<PAGE>

**10.4 Employment Agreement between Gary Cryer and
Manifold Valve Services, Inc.

10.5 Loan Agreement and First Amendment to Loan Agreement
between Compressor Dynamics, Inc. and First Interstate
Bank of Texas dated December 1, 1995.

10.6 Loan Agreement between Manifold Valve Services, Inc. and
First Interstate Bank of Texas dated September 1, 1995

10.7 Employment Agreement between Gary Farr and Compressor
Dynamics, Inc.

21.1 Subsidiaries of Registrant.

27 Financial Data Schedules

(b) Reports on Form 8-K

Form 8-K was filed on November 15, 1995 for a change in the Registrant's
Certified Accountant.

<PAGE>

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

Catalyst Energy Services, Inc.
------------------------------------------

By /S/ Ronald T. Nixon
------------------------------------------
Ronald T. Nixon, President

Date March 22, 1996

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.

By /S/ Ronald T. Nixon
------------------------------------------
Ronald T. Nixon
President and Director

Date March 22, 1996

By /S/ Rick Herrman
------------------------------------------
Rick Herrman
Chief Financial Officer and Director

Date March 22, 1996

By /S/ Andrew Cormier
------------------------------------------
Andrew Cormier
Director

Date March 22, 1996

By
------------------------------------------
Gary Farr
Director

Date March 22, 1996

<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent auditor's report. . . . . . . . . . . . . . . . . . . . . . . F-2

Consolidated balance sheet. . . . . . . . . . . . . . . . . . . . . . . . F-5

Consolidated statements of income . . . . . . . . . . . . . . . . . . . . F-6

Consolidated statements of Partners' capital and stockholders' equity . . F-7

Consolidated statements of cash flows . . . . . . . . . . . . . . . . . . F-8

Notes to consolidated financial statements. . . . . . . . . . . . . . . . F-9
</TABLE>

F-1

<PAGE>

INDEPENDENT AUDITOR'S REPORT

To the Shareholders and Board of Directors
Catalyst Energy Services, Inc.
Houston, Texas

We have audited the accompanying consolidated balance sheet of Catalyst
Energy Services, Inc., as of December 31, 1995, and the related consolidated
statements of income, partners' capital and stockholders' equity and cash
flows for the year 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 upon our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Catalyst Energy
Services, Inc. at December 31, 1995, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.

We also audited the combination of the accompanying consolidated statements
of income, partner's capital and stockholders' equity and cash flows for the
year ended December 31, 1994, after restatement for the 1995 acquisition of
Compressor Dynamics, Ltd.; in our opinion such consolidated statements have
been properly combined on the basis described in Note 2 of the notes to
consolidated financial statements. Separate financial statements of the
companies included in the 1994 restated consolidated statements of income and
cash flows were audited and reported on separately by other auditors.

Hein + Associates, LLP
Certified Public Accountants

Houston, Texas
March 6, 1996

F-2

<PAGE>

REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Board of Directors
Catalyst Energy Services, Inc.

We have audited the consolidated statements of operations and stockholders'
equity and cash flows of Catalyst Energy Services, Inc. for the year ended
December 31, 1994 (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows
of Catalyst Energy Services, Inc. for the year ended December 31, 1994 in
conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

Houston, Texas
March 31, 1995

F-3

<PAGE>

REPORT OF INDEPENDENT AUDITORS

Partners
Compressor Dynamics, Ltd.

We have audited the related statement of operations and partners' capital and
cash flows of Compressor Dynamics, Ltd. for the year ended December 31, 1994
(not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows
of Compressor Dynamics, Ltd. for the year ended December 31, 1994 in
conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

Houston, Texas
February 23, 1995

F-4

<PAGE>

CATALYST ENERGY SERVICES, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995

ASSETS

<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 321,946
Accounts receivable-trade, net of allowance for
doubtful accounts of $92,028 1,496,133
Inventory, net 2,304,027
Prepaids and other current assets 58,653
---------
Total current assets 4,180,759

PROPERTY AND EQUIPMENT, NET 3,503,541

OTHER ASSETS:
Inventory 686,656
Notes receivable due from officers 34,800
---------
TOTAL ASSETS $8,405,756
---------
---------
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable-trade $ 507,764
Accrued liabilities 264,316
Deferred revenue 393,958
Federal and state income taxes payable 150,287
Current portion of long-term debt and notes payable 714,453
---------
Total current liabilities 2,030,778

LONG-TERM LIABILITIES:
Deferred income taxes 324,965
Long-term debt, net of current portion 2,043,787
---------
Total long-term liabilities 2,368,752

Commitments and contingencies (Note 13)

STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.01 par value:
No stated dividend, non voting and non cumulative;
5,000,000 shares authorized, 319,174 shares of Series A
issued and outstanding 3,192
Common stock, $.01 par value:
225,000,000 shares authorized, 12,957,223 shares
issued and outstanding 129,572
Additional paid-in capital 1,396,150
Retained earnings 2,478,312
---------
4,007,226
---------
Treasury stock (2,500 shares at cost) (1,000)
---------
Total stockholders' equity 4,006,226
---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $8,405,756
---------
---------
</TABLE>

See accompanying notes

F-5

<PAGE>

CATALYST ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
Years ended December 31
1995 1994
---- ----
<S> <C> <C>
Service revenues $ 5,860,346 $ 4,877,826
Rental revenues 5,448,345 6,021,320
----------- -----------
Total revenues 11,308,691 10,899,146

Cost of service revenues 4,075,150 3,265,428
Cost of rental revenues 3,049,400 3,108,877
----------- -----------
Cost of service and rental 7,124,550 6,374,305

Gross profit 4,184,141 4,524,841

Selling, general & administrative expenses:
Selling, general and administrative (Note 6) 2,227,998 2,123,071
Depreciation and amortization, net of amounts
included in cost of service and rental 847,096 801,310
----------- -----------
Total selling, general and administrative 3,075,094 2,924,381
----------- -----------
Operating income 1,109,047 1,600,460

Other income(expense):
Gain on sale of equipment 150,597 178,508
Interest income 31,154 15,332
Interest expense (Note 6) (272,492) (359,884)
Other, net 22,482 13,981
----------- -----------
Total other income(expense) (68,259) (152,063)
----------- -----------
Income before income tax 1,040,788 1,448,397

Income tax expense (Note 11) 619,370 121,782
----------- -----------

Net income $ 421,418 $ 1,326,615
----------- -----------
----------- -----------

Number of common and common equivalent shares 12,845,507 12,480,951
----------- -----------
----------- -----------

Pro Forma information (Note 14)
Historical income before tax $ 1,040,788 $ 1,448,397
Pro Forma provision for income taxes (unaudited) 401,952 559,371
----------- -----------
Pro Forma net income (unaudited) $ 638,836 $ 889,026
----------- -----------
----------- -----------
Pro Forma net income per share ( unaudited) $0.05 $0.07
----------- -----------
----------- -----------
</TABLE>

See accompanying notes

F-6

<PAGE>

CATALYST ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL AND STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994

<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
NO. OF SHARES PAR NO. OF SHARES PAR PAID-IN TREASURY RETAINED PARTNERS'
ISSUED VALUE ISSUED VALUE CAPITAL STOCK EARNINGS CAPITAL
------ ----- ------ ----- ------- ----- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 0 $0 0 $0 $0 $0 $0 $ 2,952,247

Partnership net income (through 1,193,411
August 31, 1994 for MVS)
Partnership distributions (687,201)

Effect of conversion to corporation:
Shares outstanding at date of conversion 6,320,992 63,235 31,899
Issuance of shares in exchange for MVS
partnership interests 117,665,431 1,176,654 (70,382) (1,106,272)

Purchase of treasury stock (1,000)
Effect of reverse split (119,026,966) (1,190,294) 1,190,294
Post acquisition net income 133,204
---------------------------------------------------------------------------------------
Balances at December 31, 1994 0 0 4,959,457 49,595 1,151,811 (1,000) 133,204 2,352,185

Issuance of shares in exchange for
CDL partnership interests 319,174 3,192 7,774,334 77,743 246,573 1,923,690 (2,251,198)
Additional shares issued for MVS net
asset value adjustment 223,432 2,234 (2,234)
Partnership distributions (100,987)
Net income 421,418
---------------------------------------------------------------------------------------
Balances at December 31, 1995 319,174 $3,192 12,957,223 $ 129,572 $1,396,150 ($1,000) $2,478,312 $0
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
</TABLE>

F-7

<PAGE>

CATALYST ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1995 1994
---- ----
<S> <C> <C>
Operating activities:
Net income $ 421,418 $ 1,326,615
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Deferred income taxes 288,409 36,556
Depreciation and amortization 948,071 869,721
Gain on sale of property and equipment (150,597) (178,508)

Changes in operating assets and liabilities:

Accounts receivable 105,722 (183,380)
Other assets and prepaid expenses 6,962 18,937
Inventory (210,844) (81,977)
Accounts payable & accrued liabilities (389,477) 242,648
Federal and State income tax payable 80,061 70,226
----------- -----------

Net cash provided by operating activities 1,099,725 2,120,838

Investing activities:
Net assets acquired in business combination - 95,134
Purchases of property and equipment (493,870) (672,079)
Increase in organization costs - (33,000)
Proceeds from sale of property & equipment, other 168,850 227,115
Issuance of notes receivable-officers (34,800) -
----------- -----------
Net cash used in investing activities (359,820) (382,830)

Financing activities:

Net revolving line of credit payments (1,384) (53,000)
Proceeds from issuance of long-term debt - 235,265
Principal payments on long-term debt (1,144,151) (1,026,894)
Partnership distributions (100,987) (687,201)
Purchase of treasury stock - (1,000)
----------- -----------
Net cash used in financing activities (1,246,522) (1,532,830)
Net increase (decrease) in cash and
cash equivalents (506,617) 205,178

Cash and cash equivalents at beginning of year 828,563 623,385
----------- -----------
Cash and cash equivalents at end of year $ 321,946 $ 828,563
----------- -----------
----------- -----------
</TABLE>

See accompanying notes

F-8

<PAGE>

CATALYST ENERGY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995

1. ORGANIZATION

The registrant is Catalyst Energy Services, Inc. ("CESI"), a
Delaware corporation, and its subsidiaries Manifold Valve
Services, Inc. ("MVSI") (formerly Manifold Valve Service, Ltd.
("MVS"), a Texas limited partnership), and Compressor Dynamics,
Inc. ("CDI") (formerly Compressor Dynamics, Ltd. ("CDL"), a Texas
limited partnership) (collectively known as the "Company"). MVSI
was formed by a stock exchange agreement ("Exchange Agreement")
that was effective August 31, 1994 (See Note 2). CDI was formed
by an exchange agreement that was effective June 15, 1995. (See
Note 2). CESI is a holding company formed to acquire and operate
subsidiaries engaged in the acquisition of "niche" companies,
primarily serving the worldwide energy industry.

MVSI's primary operations consist of providing valve repair and
remanufacture services to the oil and gas drilling industry, along
the U.S. Gulf Coast, and worldwide. The company specializes in
high pressure (5,000 to 15,000 PSI) valves (primarily gate), that
are principally used in oil and gas drilling applications.

CDI's primary operations consist of the rental, sale and service of
natural gas compressors to land-based independent gas producers in
the U.S. Gulf Coast and Mid-Continent regions.

2. BUSINESS COMBINATIONS

MANIFOLD VALVE SERVICES, INC.

On August 31, 1994 CESI and its subsidiary MVSI entered into the
Exchange Agreement with Starstream Communications Group, Inc.
("SCGI") whereby the Company became the successor corporation.
The transaction was accounted for as a reverse acquisition whereby
the assets and liabilities of the Company remained at their
historical cost bases and the assets and liabilities of SCGI were
restated to their fair value as of August 31, 1994, all according
to purchase accounting principles.

The Exchange Agreement was initially entered into in January, 1994
between SCGI, MVS and the partners of MVS and was subsequently
amended in March and June 1994, and became effective August 31,
1994. Pursuant to the Exchange Agreement, SCGI issued 68,069,686
shares of its common stock (subject to final adjustment to a
maximum of 179,661,558 shares, or 96.6% of the outstanding shares,
no later than June 30, 1995), constituting 91.5% of the post
issuance outstanding SCGI shares to the MVS partners in exchange
for all of the MVS partnership interests. Pursuant to the
Exchange Agreement, the exchange was adjusted upward based on the
market value of assets of SCGI, thereby increasing the MVS
partners' percentage ownership from 91.5% to 94.9%. This final
adjustment occurred June 30, 1995. All shares referred to above
were prior to a 1 for 25 reverse split of the Company's common
stock more fully described in Footnote 10.

F-9

<PAGE>

COMPRESSOR DYNAMICS, INC.

On June 15, 1995, the Company issued 7,774,334 (post split) shares
of its common stock and 319,174 shares of newly authorized Series
A Preferred Stock, $.01 par value (the "Preferred Stock"), to the
partners of CDL in exchange for all of such partners' interests in
CDL, which constituted 100% of such interests. The shares of
common stock issued in the CDL acquisition constituted
approximately 60% of the common stock of the Company then
outstanding. The CDL acquisition has been accounted for and given
effect as though it had been effective for all periods covered by
the accompanying financial statements. Because the Company and
CDL are effectively controlled by a common entity (The Catalyst
Group, Inc.) all assets and liabilities transferred in the CDL
acquisition have been accounted for at historical cost, in a
manner similar to that in a pooling of interests.

No pro forma information has been presented due to the
immateriality of SCGI's operations to the combined enterprise.

3. SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

The consolidated financial statements include the accounts of the
Company and its two wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.

RECLASSIFICATIONS

Certain 1994 amounts have been reclassified to conform to the 1995
presentation.

REVENUE RECOGNITION

Revenue on compressor rentals is recognized ratably over the term
of the rental agreements. Compressor sales are recorded upon
delivery of the equipment to the customer. Compressor service
revenue is recognized as the related services are provided with
the exception of services provided on compressors leased with a
service contract, which is recognized ratably over the term of the
contract. Revenue on valve repair and remanufacture services is
recognized upon delivery of the equipment to the customer.

Compressors are generally rented on a short-term basis, 3 to 12
months. At the end of the lease term, the customer either returns
the compressor or continues to rent the compressor on a month by
month basis. Compressor leases may require the lessee to bear all
repair and maintenance costs or the lease may provide that the
Company maintain the compressor in good working order throughout
the term of the lease.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is
recorded using the straight line method over a range of estimated
useful lives of the assets as follows:

<TABLE>
<S> <C>
Compressor rental fleet 5-10 years
Equipment 3-10 years
Vehicles 2-5 years
Furniture and fixtures 2-10 years
</TABLE>

F-10

<PAGE>

ORGANIZATION COSTS

The Company capitalizes organization costs and amortizes them on a
straight-line basis over 60 months. Amortization expense for the
years ended December 31, 1995 and 1994 was $41,097 and $40,599
respectively.

INCOME TAXES

The provision for federal income taxes is computed on the basis of
the Company filing a consolidated federal income tax return.

Effective August 31, 1994, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes" which was adopted January 1, 1993 by SCGI. Under
SFAS No. 109, the liability method is used for determining the
Company's provision for income taxes. Under this method,
deferred tax assets and liabilities are determined based on the
differences between the financial reporting and income tax bases
of the Company's assets and liabilities.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a
remaining maturity of three months or less at date of acquisition
to be cash equivalents.

USE OF ESTIMATES

The preparation of the Company's consolidated financial statements
in conformity with generally accepted accounting principles
requires the Company's management to make estimates and
assumptions that affect the amounts reported in these financial
statements and accompanying notes. Actual results could differ
from those estimates.

PRO FORMA NET INCOME PER COMMON SHARE

Net income per common share for the year ended December 31, 1994
has been computed based upon the average number of shares
outstanding for the first eight months of 1994, equivalent to the
number of shares issued in exchange for the MVSI partnership
interests as part of the business combination and the actual
number of shares outstanding for the four months subsequent to the
MVSI business combination. Net income per common share for the
years ended December 31, 1995 and 1994 has been computed based on
the average number of shares issued in exchange for the CDI
partnership interests as a part of the business combination as if
they were outstanding for all of 1995 and 1994. All calculations
retroactively reflect the reverse stock split of 1 to 25 that
occurred in November 1994 (see Note 10).

SUPPLEMENTAL CASH FLOW INFORMATION

The Company paid interest of $281,000 and $376,000 in 1995 and
1994, respectively. The Company paid income taxes of $226,500 and
$15,000 in 1995 and 1994, respectively.

F-11

<PAGE>
INVENTORY

Inventories are stated at the lower of cost or market with cost
determined using the average cost method for the compressor fleet
parts, the first-in, first-out method for the valve parts and
specific identification for valve finished goods and long-term
compressor parts. Inventory at December 31, 1995 consists of the
following:

<TABLE>
<S> <C>
Parts (compressor and valve) $1,938,406
Finished goods (valve) 560,047
Inventory reserve (194,426)
----------
Current Inventory $2,304,029
----------
----------
Long-term compressor parts $ 686,565
----------
----------
</TABLE>

NEW ACCOUNTING STANDARD

The Financial Accounting Standards Board (the "FASB") issued SFAS
No. 121 entitled "Impairment of Long-Lived Assets" which is
effective beginning in 1996. SFAS No. 121 specifies certain
events and circumstances which indicate the cost of an asset or
assets may be impaired, the method by which the evaluation should
be performed, and the method by which writedowns, if any, of the
asset or assets are to be determined and recognized. Management
does not currently believe SFAS No. 121 will have a material
impact on the Company's financial condition or operating results
upon implementation.

The FASB also issued SFAS No. 123, "Accounting for Stock Based
Compensation", effective for fiscal years beginning after December 15,
1995. This statement allows companies to choose to adopt the
statement's new rules for accounting for employee stock-based
compensation plans. For those companies who choose not to adopt the
new rules, the statement required disclosures as to what earnings and
earnings per share would have been if the new rules had been adopted.
Management intends to adopt the disclosure requirements of this
statement in 1996.

4. PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment at December 31, 1995 is stated
at cost and consists of the following:

<TABLE>
<S> <C>
Compressor Rental Fleet $4,442,791
Equipment 717,079
Vehicles 615,170
Furniture and Fixtures 157,296
----------
5,932,336

Less: Accum. Depreciation (2,428,795)
----------
$3,503,541
----------
----------
</TABLE>

Accumulated depreciation related to the compressor rental fleet
as of December 31, 1995 was $1,760,225.

F-12

<PAGE>

5. DEBT

Long-term debts consist at December 31, 1995 of the following:

<TABLE>
<S> <C>
Term note payable, bank, due in quarterly
installments of principal only of
$166,666 through October, 1999. The note
bears interest at 8%, payable quarterly. $2,666,672

Vehicle notes payable to banks, due in 36 and 48
monthly installments of varying amounts.
Interest is at fixed rates of 7% to 8% per annum.
These notes are collateralized by certain Company
vehicles. 91,568
----------
2,758,240

Less current maturities (714,453)
----------

Total long-term debt $2,043,787
----------
----------
</TABLE>

The Company has revolving credit lines at banks for both
subsidiaries. The CDI line is due January 31, 1997 and is based
on a formula of current assets not to exceed $1,000,000. Interest
is computed at bank prime plus 1/2% and is payable quarterly. The
MVSI line is due on January 7, 1997 and is based on a formula of
current assets, not to exceed $500,000. Interest is computed at
bank prime plus 3/4% and is payable monthly. At December 31, 1995,
the Company has no outstanding borrowings against its revolving
credit lines and has $1,455,794 of available borrowings.

Annual maturities of principal on notes at December 31, 1995 are
as follows:

Year Ending December 31,
<TABLE>
<S> <C>
1996 $ 714,453
1997 704,075
1998 673,032
1999 666,680
----------
$2,758,240
----------
----------
</TABLE>

The term note and revolving notes are collateralized by
substantially all of the respective subsidiary assets. No cross
pledge of assets exists, nor do parent company or subsidiary
guarantees exist. The terms of the loan agreements require the
Company to maintain certain minimum levels of working capital,
tangible net worth, and debt coverage ratios and prohibit the
payment of dividends, and restrict certain levels of capital
expenditures, asset acquisitions, dispositions, etc.

F-13

<PAGE>

6. RELATED PARTY TRANSACTIONS

On January 6, 1992 MVSI negotiated a note with Catalyst Capital
Partners I, Ltd. ("CCPI"), a substantial shareholder. MVSI paid
interest to CCPI in the amount of $13,750 and $44,556 for the
years ended December 31, 1995 and 1994, respectively. The note
was retired July of 1995.

In January of 1992 MVSI entered into a agreement with an officer
and CESI shareholder for the lease of real property located in
Jennings, Louisiana. The lease is for a primary term of five
years with two renewal options for additional five year periods.
On November 14, 1994 this lease agreement was amended due to
material additions made to the leased facilities (see Note 13).
The current lease payment is $5,000 per month. Lease payments for
any additional term will be negotiated by the parties prior to the
expiration of the existing term. Management of CESI believes the
lease terms are "arms length".

Effective January 1992, MVSI entered into separate five year
employment agreements with three of its officers. As part of the
agreement, MVSI has agreed to pay an annual performance bonus
equal to 30% of annual MVSI adjusted earnings before interest and
taxes in excess of $500,000. The bonus is not to exceed an
aggregate of $800,000 during the term of the agreements. In
addition, the officers have agreed not to compete with the Company
for the three years subsequent to the expiration of the agreement.
For the years ended December 31, 1995 and 1994 the Company has
paid $240,576, and $172,525, respectively, related to the bonus
agreement. At December 31, 1995, the maximum unearned amount
available pursuant to the original performance bonus for all three
officers is approximately $147,000.

Effective January 1992, CDI entered into separate five year
employment agreements with three of its officers. One officer has
subsequently left the employment of CDI. As part of the
agreement, CDI agreed to pay an annual performance bonus equal to
10% (reduced to 7.5% from the departure of one officer in 1995) of
CDI adjusted earnings before interest and current taxes, provided
that adjusted earnings exceed $325,000 per year. The Company has
paid $48,111 and $110,439 for the years ended December 31, 1995
and 1994 respectively, for all three officers. In addition, the
officers have agreed not to compete with the CDI for one year
subsequent to the expiration of the agreement.

In December, 1995 the Company negotiated three separate promissory
notes with each of the three original CDI's officers totalling
$34,800. The notes from the officers bear interest at 6% per annum
payable annually commencing December 15, 1996. The notes mature
on December 15, 2001 and are secured by 770,833 shares of the
Company's common stock, owned by the three officers.

Catalyst Compressor, Inc. ("CCI") an affiliate of The Catalyst
Group, Inc., charged the Company fees for certain general,
administrative, and management services totaling $102,000 and
$108,000 in 1995 and 1994, respectively.

The Company was a 50% partner in a joint venture from which the
Company derived $366,935 and $476,343 of rental revenues in both
1995 and 1994 respectively. At December 31, 1994, the Company had
receivables from the joint venture of $116,663. The Company
acquired it's 50% joint venture partner's interest in 1995 for
$155,000, effectively dissolving the joint venture. The
acquisition was accounted for under the purchase method of
accounting.

F-14

<PAGE>

7. MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK

MVSI's customers include international and domestic drilling
contractors, rental tool and supply companies and oil and gas
operators. The majority of MVSI's work is performed for offshore
rig fleets. MVSI's 10 largest customers generated approximately
83% and 71% of its revenues for the years ended December 31, 1995
and 1994 respectively. The largest customer represented 18% and
14% of total revenues for the years ended December 31, 1995 and
1994, respectively. CDI's customers include domestic independent
oil and gas producers operating in the Southwestern United States.
CDI's 10 largest customer generated approximately 44% and 40% of
its revenues for the years ended December 31, 1995 and 1994,
respectively. The largest customer represented 17% and 16% of
total revenues for the years ended December 31, 1995 and 1994,
respectively. The Company's three largest customers represented
38% of the outstanding accounts receivable at December 31, 1995.
The Company conducts ongoing evaluations of major customers to
limit its credit risk and has not historically incurred any
significant credit losses.

The Company maintains deposits in banks which may exceed the amount
of federal deposit insurance available. Management periodically
assesses the financial condition of the institutions and believes
that any possible deposit loss is minimal.

8. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist of trade receivables
and liabilities, notes receivable due from officers and various
notes payable to banks. The Company believes the carrying value
of these financial instruments approximate their estimated fair
value.

9. PROFIT SHARING PLAN

The Company has defined contribution 401(k) plans covering
substantially all of its employees. Employees are eligible for
participation in the plans at semi-annual dates immediately
following one year of service. Employee contributions are vested
immediately and employer contributions are vested over a period of
five years. The Company, at its discretion, matches up to 50% of
a participant's salary deferred up to a maximum of 6% of a
participant's compensation at CDI. The amount matched is a totally
discretionary contribution at MVSI. Total plan expense in the
form of Company contributions for the years ended December 31,
1995 and 1994 respectively was $62,916 and $62,540.

10. STOCKHOLDERS' EQUITY

On November 11, 1994 the Company effected a reverse split of its
Common Stock at a ratio of 1 to 25 shares of outstanding common
stock. Each holder of common stock is entitled to one vote for
every share held.

At December 31, 1994 the Company had 32,900 warrants outstanding
with an exercise price of $4.50 per share. The warrants were
fully vested and were exercisable but expired on December 31,
1995.

F-15

<PAGE>

On June 30, 1995, the number of shares issued in the MVS Exchange
were "adjusted", for a final time under the terms of the Exchange
Agreement, based upon the final determination of the realized
value of the assets of SSCG. As a result of the adjustments made
at December 31, 1994 and June 30, 1995, an additional 223,432
shares of common stock (reflecting the reverse split) were issued
to the former MVS partners, giving the former MVS partners a total
of 4,929,964 shares of common stock (reflecting the reverse
split), or some 95.1% of the Company, before giving effect to the
CDI merger, as described in the next paragraph.

On June 15, 1995, the Company issued 7,774,334 shares of its
common stock and 319,174 shares of newly authorized Series A
Preferred Stock, $.01 par value, to the partners of CDL in
exchange for all of such partners' interests in CDL, which
represented 100% of CDL's partnership interests.

The shares of Series A Preferred Stock have no stated dividend and
are non-voting. The Company may at any time redeem all or any
portion of the Series A Preferred Stock, although it is not
obligated, at a price of $1.00 per share. Each share has
liquidation preference in the amount of $1.00 per share before
payments shall be made to holders of any other class of the
Company's capital stock. Each share of Series A Preferred Stock
is convertible, at the option of the holder, only at the time that
the Company sells shares of its common stock in an underwritten
offering, into that number of shares of common stock determined by
dividing $1.00 by the net price per share received by the Company
in the underwritten offering. The Company may issue additional
shares of preferred stock in whatever series and with whatever
rights and privileges as determined by the Board of Directors.

11. INCOME TAXES

Effective August 31, 1994, the date the Company became a taxable
entity, the Company adopted the liability method of accounting for
income taxes required by SFAS No. 109.

The reconciliation of income tax computed at the federal statutory
tax rates to income tax expense for the years ended December 31,
is as follows:

<TABLE>
<CAPTION>
1995 1994
------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- --------- -------
<S> <C> <C> <C> <C>
Income tax at graduated statutory rate $353,868 34.00% $ 492,455 34.00%
State income tax expense 32,088 3.08 11,285 .78
Partnership income not subject to
corporate taxes (24,305) (2.33) (411,624) (28.42)
Effect of change in tax status 258,447 24.83 33,745 2.32
Pre-acquisition CESI activity and other (728) (.08) (4,079) (.28)
-------- ----- -------- ------
Income tax expense $619,370 59.50% $121,782 8.40%
-------- ----- -------- ------
-------- ----- -------- ------
</TABLE>

The predecessor partnership tax bases in their assets and
liabilities was assumed by the Company as of August 31, 1994 for
MVSI and June 15, 1995 for CDI. A deferred income tax liability
of $33,745 was established at August 31, 1994 and $258,447 at June
15, 1995, to provide for the effect of future temporary
differences between tax and financial reporting bases of certain
assets and liabilities of these two entities as of the dates
indicated.

F-16

<PAGE>

The significant components of the provision for income taxes for
the years ended December 31, 1995 were as follows:

<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Current federal tax expense $282,343 $ 68,729
Current state tax expense 48,618 16,497
Deferred tax expense 288,409 36,556
-------- --------
$619,370 $121,782
-------- --------
-------- --------
</TABLE>

Significant components of the Company's deferred tax liabilities
and assets as of December 31, are as follows:

<TABLE>
<CAPTION>
1995
-----------
<S> <C>
Deferred tax assets
Net operating loss carryforwards $ 884,144
Capital loss carryforwards 193,929
Other 9,346
-----------
Total deferred tax assets 1,087,419
Valuation Allowance (1,078,073)
-----------
Deferred tax assets (net of allowance) 9,346
Deferred tax liabilities
Tax depreciation greater than book 334,311
-----------
Total deferred tax liabilities 334,311
-----------

Net deferred tax liability $ 324,965
-----------
-----------
</TABLE>

At December 31, 1995, the Company had net operating loss
carryforwards of approximately $2.33 million for income tax
purposes that will expire from 2003 through 2007 and capital loss
carryforwards of approximately $500,000 that will expire from 1998
through 1999. As a result of the change in ownership of the
Company on August 31, 1994, the ultimate utilization of the
Company's net operating losses and capital losses are limited.

For financial reporting purposes, a valuation allowance of $1.078
million has been recognized to entirely offset the deferred tax
assets related to those loss carryforwards.

The deferred tax valuation allowance decreased from $1.095 million
at December 31, 1994 to $1.078 million at December 31, 1995. The
decrease is related to utilization of preacquisition losses
realized in 1994.

12. SEGMENT REPORTING

<TABLE>
<CAPTION>
REVENUES OPERATING EARNINGS IDENTIFIABLE ASSETS
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, DECEMBER 31,
1995 1994 1995 1994 1995 1994
----------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Petroleum Equipment $ 5,860,346 $ 4,877,826 $1,023,308 $ 881,511 $2,162,194 $2,251,737
Compression Equipment 5,448,345 6,021,320 363,076 940,989 6,048,966 6,862,442
----------- ----------- ---------- ---------- ---------- ----------
Total $11,308,691 $10,899,146 1,386,384 1,822,500 8,211,160 9,114,179
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Interest expense 272,492 359,884
General corporate 73,104 14,219 194,596 137,688
---------- ----------
Consolidated income before
income taxes $1,040,788 $1,448,397
---------- ----------
---------- ----------
---------- ----------
Total assets $8,405,756 $9,251,687
---------- ----------
---------- ----------
</TABLE>

F-17

<PAGE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994
-------- -------
<S> <C> <C>
Depreciation and Amortization net of amounts included
in cost of service and rentals:
Petroleum Drilling Equipment $ 27,204 $ 51,585
Compression Equipment 819,892 749,725
-------- --------
Total $847,096 $801,310
-------- --------
-------- --------
Capital Expenditures:
Petroleum Drilling Equipment $ 80,862 $301,529
Compression Equipment 413,008 370,550
-------- --------
Total $493,870 $672,079
-------- --------
-------- --------
</TABLE>

CESI operations are organized into two segments: Petroleum Equipment and
Compression Equipment. The Petroleum Equipment segment presently repairs,
remanufactures, and services valves, chokes and control systems, primarily
for oil and gas drilling, activities. The Compression Equipment segment
presently rents, services and sells natural gas compressors used in the
production, transmission, storage and processing of natural gas and oil
wells.

13. COMMITMENTS AND CONTINGENCIES

The Company has operating lease commitments for its primary office
and service facility, storage yards, and miscellaneous equipment.
On April 30, 1993, the Company signed a five-year renewal of its
lease for CDI's primary office and service facility. The lease
provides for the Company to pay real estate taxes and certain
other occupancy expenses. In January 1992, MVSI (formerly MVS)
entered into a five-year lease for its main facility owned by the
President of MVSI Total rental expense for the periods ended
December 31, 1995 and 1994 was approximately $193,700 and $186,000
respectively.

Future minimum rental payments required under operating leases that
have initial or remaining noncancelable lease terms in excess of
one year are as follows:

<TABLE>
<CAPTION>
Year ending December 31
<S> <C>
1996 $173,349
1997 103,749
1998 39,103
--------
$316,201
--------
--------
</TABLE>

In the normal course of business, the Company becomes a party to
legal proceedings and claims, primarily as a plaintiff relative to
collecting disputed or delinquent accounts receivables for
products or services. In the opinion of management, the outcome
of these matters will not have a material adverse effect on the
financial position of the Company.

14. PRO FORMA PROVISION FOR INCOME TAXES (UNAUDITED)

The Company's partnership status was terminated when the business
combinations discussed herein (see Note 2) were effected. To
reflect the earnings of the Company on an after-tax basis, an
unaudited pro forma provision for income tax has been included in
the accompanying statements of income. This provision was
computed as if the Company were a C corporation (taxable entity)
for all years presented.

F-18

<PAGE>

INDEX TO EXHIBITS

Exhibit Sequential
Number Description Page Number
- ------ ----------- -----------
**2.1 Amended and Restated Exchange Agreement March
31, 1994 (Exhibit 2(a) to Form 8-K).