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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(x) Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended February 28, 1999
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (no fee required)
Commission file number 1-13270
FLOTEK INDUSTRIES INC.
(Name of small business issuer in its charter)
Alberta 77-0709256
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7030 Empire Central Drive, Houston, Texas 77040
(Address of principal executive offices) (zip code)
Issuer's telephone number, including area code: (713) 849-9911
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
Common Stock, no par Vancouver Stock Exchange
OTC Bulletin Board
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes (x) No ( )
Check if there is no 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 statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. ( )
Revenues for the Company's 1999 fiscal year were $1,793,709
The aggregate market value of Common Stock held by nonaffiliates as of June 9,
1999, determined using the share closing price on the OTC of $.06 (United States
Dollar) on that date was $2,740,848.
There were 45,680,795 shares of the Registrant's Common Stock outstanding on
February 28, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement issued in connection with the
Registrant's 1999 Annual Meeting of Stockholders are incorporated by reference
into Part III hereof.
Transitional Small Business Disclosure Format (check one):
Yes ( ) No (x)
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PART I
General
This Form 10-KSB includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. The words "anticipate," "believe,"
"expect," "plan," "intend," "project," "forecasts," "could" and similar
expressions are intended to identify forward-looking statements. All statements
other than statements of historical facts included in this Form 10-KSB regarding
the Company's financial position, business strategy, budgets and plans and
objectives of management for future operations are forward-looking statements.
Although the Company believes that the expectations reflected in such forward-
looking statements are reasonable, no assurance can be given that actual results
may not differ materially from those in the forward-looking statements herein
for reasons including the effect of competition, the level of petroleum industry
exploration and production expenditures, world economic conditions, prices of,
and the demand for crude oil and natural gas, drilling activity, weather, the
legislative environment in the United States and other countries, the condition
of the capital and equity markets, and other risk factors identified herein.
ITEM 1. - DESCRIPTION OF BUSINESS.
Business
Flotek Industries Inc. (hereafter the "Company" or "Flotek") was
originally incorporated under the laws of the Province of British Columbia on
May 17, 1985. Effective September 7, 1995, the Company transferred its
corporate status by continuing under the laws of the Province of Alberta.
Flotek is headquartered in Houston, Texas and its common shares have been listed
on the Vancouver Stock Exchange and the OTC Bulletin Board market. On April 7,
1999, the Company received notice from the Vancouver Stock Exchange regarding
the acceptance of the Company's request to voluntarily delist and that the last
day of trading of the common shares of the Company on the Vancouver Stock
Exchange was April 21, 1999. The Company's common stock continues to be traded
in the United States on the OTC Bulletin Board market.
The Company's product lines are divided into two separate segments in the
industry: drilling products and production equipment. The production equipment
division develops, manufactures and markets the Petrovalve + Plus(R) Pump Valve
and the Petrovalve Gas Breaker Valve, which are valves for downhole sucker-rod
pumps used in oil wells. The drilling products division manufactures and
distributes centralizers, which are spiraled vane cementing sleeves and stand
off tools that improve mud and cementation displacement in drilled oil wells.
Production Equipment
The Company has focused on the development of its proprietary and
patented technologies: the Petrovalve + Plus(R) Pump Valve and the Petrovalve
Gas Breaker Valve. Both patented products are valves used in down-hole sucker-
rod pumps. The Petrovalve
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Gas Breaker Valve provides a solution to gas lock problems. Both valves offer
producers operating advantages by performing more efficiently and lasting longer
than the traditional ball and seat valves. Flotek's original technology was
developed in concert with several university research departments, including the
University of Alberta and is the subject of various patents and patent
applications. The Company's primary production equipment customers are the 400
North American oil producers, including 30 major oil companies.
The Company's competition in the production equipment market is comprised
of ball-and-seat manufacturers as well as rod-pump manufacturers. There is
substantial competition in the oilfield industry, which the Company assumes will
remain at current levels for the foreseeable future; however, there is no other
significant proprietary artificial lift technology in the downhole sucker-rod
pump market. The pump manufacturers manufacture the same type of equipment and
can only set themselves apart by better service, delivery and pricing.
Presently, ball-and-seat manufacturers produce the majority of ball-and-seat
valves for manufacturers of rod-pumps, yet, the rod-pump manufacturer is not
considered to be in competition with the ball-and-seat manufacturer. While the
Petrovalve Plus valve product line is manufactured by leading ball-and-seat
manufacturers, it is the rod-pump manufacturer that assumes the competitive
posture. This competition is a direct result of who controls the distribution
of ball-and-seat valves, i.e. the rod-pump manufacturer.
The Company's largest competitors with respect to its production
equipment product line engage primarily in the manufacturing and direct sale of
new equipment. These large manufacturers include Harbison Fischer, Halliburton,
Continental EMSCO, and Weatherford International, Inc. within the United States.
These companies tend to concentrate on the sale of new equipment, (down-hole
sucker rod pumps and associated equipment), with sales to the customers through
their regional and local pump repair facilities.
The Company utilizes outside manufactures under license arrangements to
manufacture its patented products. The Company currently uses: A-1 Carbide in
California, Reinhold Industries in Edmonton, Alberta and Aves Industries in
North Texas to manufacture the Petrovalve components. The Company's valve
products are sold directly to the end user, the oil company, and distributed
through pump repair facilities and regional oilfield supply stores. The Company
uses agents and distributors in the international arena to market its products.
Drilling Products
Flotek's drilling products division distributes and services several
products that enhance oil and gas well cementing programs and the safety and
effectiveness of the drilling process. Its primary product is the Cementing
Turbulator, which the Company began distributing in March of 1994, when it
acquired Turbeco Inc., an oilfield service company. The Turbulator is a steel
sleeve, which is placed over pipe before the cementation process of pipe or
casing. This pipe or casing is commonly cemented in the open hole section of a
recently drilled oil well. The main purpose of this tool is to provide maximum
standoff and improve mud displacement to obtain the best cement
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bond. The Company was one of the first companies to distribute spiral vaned
cementing turbulators. The Turbulator has gained widespread acceptance through
its proven ability to improve oil and gas well cementing programs and is
effective in deep, directional and horizontal well applications.
The Company's Drilling Products customers are made up of the 400 North
American oil producers, including 30 major oil companies that are involved in
exploration and the drilling and cementation of oil wells. The Company's active
customer base is well distributed between major oil companies and smaller
independent operators. The Company's marketing area includes the Gulf of
Mexico. As a result of the addition of the patented D-Mudder technology, the
Company has negotiated the distribution and representation of its drilling
products on a global basis with several major oil-field service providers that
have existing world-wide distribution. Currently the Company's primary
competitors with respect to its drilling products are: Weatherford
International, Inc., Franks Casing Crews, Ray Oil Tools and Milam Tool Company.
Product Demand
Currently, the worldwide price of oil has declined, with prices having
recently dropped as much as 40% to under $13 per barrel for spot deliveries.
The North American and international rig counts are at historical or near
historical lows. Our operations were materially affected by the decline in the
rig count during 1998 and 1999 to date. A continuation of the rig count at its
current level for a prolonged period of time will adversely affect our results
as demand for oil related products and services would continue to fall because
of the uncertainty relating to the future. In addition, any further declines in
the current worldwide rig count or drilling activity will further reduce the
demand for our drilling products and services and will have a material adverse
effect on the Company's financial condition and results of operations.
Even with the current uncertainty related to drilling activity, we
believe the principal factor behind a recovery will be a reduction in the supply
of oil and natural gas as production rates decline due to the current reduction
in drilling activity. Recent proposed production cuts by the oil producing
countries may also result in improved market conditions to the extent those cuts
are actually implemented. However, the extreme volatility of our markets makes
predictions regarding results for 1999-2000 difficult to make.
Patents
The Company has followed a policy of seeking patent protection both
inside and outside the United States for products and methods that appear to
have commercial significance. The Company believes its patents and trademarks
to be adequate for the conduct of its business.
International Operations
The Company's operations are subject to the risks inherent in doing
business in multiple countries with various legal and political policies. These
risks include war,
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boycotts, political changes, and changes in currency exchange rates. Although it
is impossible to predict the likelihood of such occurrences or their effect on
the Company, management believes these risks to be acceptable. Even though the
majority of the Company's operations are located in the United States, there can
be no assurance that an occurrence of any one of these events in our
international operations would not have a material adverse effect on its
operations.
Employees
As of February 28, 1999, the Company employed approximately 12 employees.
The Company considers its relations with its employees to be generally
satisfactory. The reduction in the number of employees from the prior year was
attributable to the down turn in the industry and our attempts to control costs.
Operating Risks and Insurance
The Company's products are used for the exploration and production of oil
and natural gas. Such operations are subject to hazards inherent in the oil and
gas industry, such as fires, explosions, blowouts and oil spills, that can cause
personal injury or loss of life, damage to or destruction of property,
equipment, the environment and marine life, and suspension of operations.
Litigation arising from an occurrence at a location where the Company's products
or services are used or provided may in the future result in the Company being
named as a defendant in lawsuits asserting potentially large claims. The
Company maintains insurance coverage that it believes to be customary in the
industry against these hazards.
Year 2000 Issue
The Year 2000 issue is the risk that information systems, computers,
equipment and products using date-sensitive software or containing computer
chips with two-digit date fields will be unable to correctly process the Year
2000 date change. If not identified and corrected prior to the Year 2000,
failures could occur in the software, hardware, equipment and products of the
Company and its suppliers, vendors and customers that could result in
interruptions of the Company's business. Any of such failures could have a
material impact on the Company.
The Company is currently assessing the cost and uncertainties related to
the Year 2000 issue using internal and external resources. Based on preliminary
information, the Company currently believes that it has substantially addressed
the Year 2000 issues with respect to its software, hardware and products without
significant impact on its operations. The estimated costs associated with
achieving Year 2000 compliance are not expected to have a material impact on the
Company's financial condition or results of operations. There is inherent
uncertainty in the Year 2000 problem due to the possibility of unanticipated
failures by third party customers and suppliers. Accordingly, the Company is
unable, at this time, to assess the extent and resulting materiality of the
impact of possible Year 2000 failures on its operations, liquidity or financial
position. The Company has designated personnel responsible to identify and
respond to these
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issues and once all identifications and reviews are completed, a contingency
plan will be developed to mitigate the risk of business interruption.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases 12,964 square feet of space at 7030 Empire Central
Drive, in Houston, Texas, where the Company's headquarters are located. In
addition, the Company leases a 2,000 square foot sales office and warehouse in
Lafayette, Louisiana. The Company believes that its distribution and sales
facilities are adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of business, the Company became the subject of
various claims and litigation. The following suits against the Company are
pending:
Milam Tools, Inc. and its owner, Jack Milam, have filed a federal court
suit against Flotek Industries Inc. and its wholly-owned subsidiary Turbeco,
Inc., alleging infringement of the complainant's patent. The complaint filed is
not specific about the claimed infringements, and general counsel for the
respondents has stated that more details of the claim will be elicited though
discovery procedures. General counsel believes the claim to be without merit
and will proceed with the defense for the Companies.
William Jayroe, former President and Chief Executive Officer, has filed a
request for arbitration of his dispute with the company relating to his
employment agreement. General counsel is handling the arbitration. General
counsel believes any outcome from any arbitration will not have a material
effect on the financial condition and operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's 1999 fiscal year.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock has been traded on the Vancouver Stock
Exchange in Vancouver, British Columbia, under the symbol "FTK", and the OTC
Bulletin Board markets in the United States, under the symbol "FOTDF." On April
7, 1999, the Company received notice from the Vancouver Stock Exchange regarding
the acceptance of the Company's request to voluntarily delist and that the last
day of trading of the common shares of the Company on the Vancouver Stock
Exchange was April 21, 1999. The Company's common stock will continue to be
traded in the United States on the OTC Bulletin Board market. The Company's
common shares commenced trading on the Vancouver Stock Exchange in June 1986.
The high and low closing sale prices as
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quoted in Canadian dollars as reported by the Vancouver Stock Exchange, were as
follows for the quarterly periods indicated:
<TABLE>
<CAPTION>
Year Ended February 28, 1999 High Low
----------- ------------
<S> <C> <C>
Fiscal Quarter Ended May 31, 1998 0.28 0.11
Fiscal Quarter Ended August 31, 1998 0.15 0.05
Fiscal Quarter Ended November 30, 1998 0.18 0.04
Fiscal Quarter Ended February 28, 1999 0.14 0.03
Year Ended February 28, 1998
Fiscal Quarter Ended May 31, 1997 0.40 0.24
Fiscal Quarter Ended August 31, 1997 0.34 0.13
Fiscal Quarter Ended November 30, 1997 0.50 0.14
Fiscal Quarter Ended February 28, 1998 0.23 0.11
0.05
</TABLE>
Holders of Record
At February 28, 1999, the Company had approximately 125 holders of record
of the Company's common stock.
Dividends
The Company has not declared a cash dividend during the last two fiscal
years. In addition, there is a convertible loan agreement dated October 16,
1997 from TOSI LLP which prohibits the Company from declaring or paying any
dividends.
Recent Sales of Unregistered Securities
None
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Business Environment
Flotek consists of two divisions, which provide products and services
used in the drilling and production of oil and gas wells. The business
environment for oilfield operations and its corresponding operating results are
affected significantly by petroleum industry exploration and production
expenditures. Low oil prices have reduced the funds available to our clients to
explore for and produce oil and gas and have made the exploration and production
of oil reserves in various locations uneconomical. The capital budgets of our
customers have been reduced and delayed because of industry consolidations and
market uncertainties as to future oil prices. The reduction in exploration and
production activity during 1998 and 1999 to date has impacted our businesses
through lower revenues, pricing pressures and reduced margins. Reduced
exploration activity has reduced the demand for the products and services
provided by us
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serving the drilling markets. Our drilling products have been the most
significantly affected.
In addition, our production equipment was severely affected by the recent
declines in oil prices. These declines were particularly felt in our North
American and South American operations where historically our customers are
located. We expect that oil production and demand for our products in North and
South America will not likely return to prior levels as a result of the recent
declines in oil prices and associated reduction in drilling for and production
of oil.
RESULTS OF OPERATIONS
Revenue by Operating Segment:
<TABLE>
<CAPTION>
Year Ended February 28,
-------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
REVENUES
Drilling products segment $1,451,519 $2,700,245
Production equipment segment 342,190 481,423
---------- ----------
Consolidated Revenues $1,793,709 $3,181,668
========== ==========
</TABLE>
Consolidated revenues were down 44% for the year ended February 28, 1999,
as compared to the same period in 1998. Revenues from the drilling products
segment decreased 46% as compared to the same period in 1998. The North
American rig counts are at historical or near historical lows due to recent
declines in oil prices. Our operations were materially affected by the decline
in the rig count during 1998 and 1999. This reduction in exploration activity
has reduced the demand for the Company's drilling products and services.
Revenues from the production equipment segment were down 29% for the year as
compared to the same period in 1998. The Company's production equipment revenue
was severely affected by the recent declines in oil prices. These declines were
particularly felt in our North American and South American operations where
historically our customers are located. In addition, the Company's lack of
sufficient working capital for inventory requirements and marketing hindered the
sales effort. The Company's ability to benefit from the increased acceptance of
its technologies will depend on its ability to maintain adequate working
capital.
Costs and Expenses
Consolidated gross margins increased from 23% in 1998 to 36% in 1999.
However, in the fourth quarter of 1998, the Company wrote-down the cost of a
portion of its Petrovalve inventory due to the redesign and improvement of its
Petrovalve technology. The Company incurred a charge of $604,765, which was
included in the Company's consolidated cost of goods sold in 1998. Excluding
the write-down of Petrovalve inventory during 1998, the Company's consolidated
gross margins decreased from 42% in 1998 to 36% in 1999. The overall decline in
gross margin percentages is attributed to pricing pressures, primarily in the
Company's drilling products and freight
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charges that were written-off in the Company's drilling products segment as a
result of the termination of its exclusive distribution agreement with Downhole
Products Plc., the Company's supplier of its Spir-O-Lizer line of products. As
stated in the distribution agreement, Downhole Products Plc. was required to
repurchase the Company's entire Spir-O-Lizer inventory at the original invoice
price, excluding all transportation costs incurred by the Company for
transporting the inventory from Scotland to its Houston facility. As a result of
the termination of the distribution agreement, $98,170 in freight costs were
charged against cost of sales during the quarter. In addition, reduced
exploration activity due to the recent declines in oil prices has reduced the
demand for the products and services provided by us serving the drilling
markets. Accordingly, the Company has had to reduce the selling prices on its
drilling products. Despite this pricing pressure, the Company expects that the
combination of changes in product mix, continued improvements in asset
management, reductions in the cost of certain inventory items, and higher
margins on new products will allow Flotek to maintain relatively stable gross
margin levels in fiscal year 2000.
Selling expenses, which consist primarily of the salaries, wages, and
benefits of the Company's salesmen, rent, insurance, and other direct selling
costs, were down 34%, as compared to the same period in 1998. This decrease was
primarily attributed to an overall reduction in the Company's workforce in
response to the reduction in exploration activity as a result of the recent
decline in oil prices. This reduction in exploration activity has reduced the
demand for the Company's drilling products and services.
General and administrative expenses were down 47% as compared to the same
period in 1998. This decrease was primarily attributed to an overall reduction
in the Company's workforce in response to the reduction in exploration activity
as a result of the recent decline in oil prices. The Company anticipates that
in fiscal year 2000, general and administrative expense will decrease in
absolute dollars due to an expected full years benefit of the Company's current
cost reduction programs.
Non-recurring Charges
1999
In the second quarter of fiscal year 1999, the Company incurred a non-
recurring charge related to freight that was written-off in the Company's
drilling products segment as a result of the termination of its exclusive
distribution agreement with Downhole Products Plc., the Company's supplier of
it's Spir-O-Lizer line of products. As stated in the distribution agreement,
Downhole Products Plc. was required to repurchase the Company's entire Spir-O-
Lizer inventory at the original invoice price, excluding all transportation
costs incurred by the Company for transporting the inventory from Scotland to
its Houston facility. As a result of the termination of the distribution
agreement, $98,170 in freight costs were charged against cost of sales during
the quarter.
In the second quarter of fiscal year 1999, the Company made a severance
provision of $80,635 for the departure of William G. Jayroe, the Company's
former President and Chief Executive Officer. During the fourth quarter of
fiscal year 1999,
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William G. Jayroe filed a request for arbitration of his dispute with the
company relating to his employment agreement. General counsel is handling the
arbitration. General counsel believes any outcome from arbitration will not have
a material effect on the financial condition and operations of the Company, and
that the provision that the Company has accrued will adequately cover any
outcome from the arbitration proceeding.
1998
In the fourth quarter of fiscal year 1998, the Company decided to write-
down the cost of a portion of its Petrovalve inventory due to the redesign and
improvement of its Petrovalve technology. The majority of the Petrovalve
inventory consisted of components to be utilized in the old design of the
Petrovalve. The inventory components that could not be utilized in the newly
redesigned valve were written down in the fourth quarter of fiscal year 1998.
In connection with this decision, the Company incurred a charge of $604,765,
which was included in the Company's consolidated cost of goods sold. Effective
March 8, 1994, the Company acquired 100% of the outstanding common shares of
Turbeco. The Turbeco purchase agreement contained a repurchase option, which
could be triggered upon the occurrence of certain events. During fiscal year
1998, the Company reached an agreement to purchase the repurchase option for
2,500,000 shares of the Company's common stock and has accrued $264,085 at
February 28, 1998, which was included in general and administrative expense. In
the fourth quarter of fiscal year 1998, the Company adopted a plan to close its
Edmonton facility. The Company incurred a charge of approximately $73,000 with
this closure.
Interest Expense
Interest expense for 1999 was $134,819 compared to $123,562 for 1998, an
increase of 9%. The increase in interest expense in 1999, as compared to 1998,
is a result of an overall increase in the Company's indebtedness in 1999.
NEW ACCOUNTING PRONOUNCEMENTS
In 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), Earnings
per Share, which replaces primary earnings per share with basic earnings per
share and requires dual presentation of basic and diluted earnings per share.
The Company adopted SFAS No. 128 in the fourth quarter of fiscal year 1998.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 ("SFAS No. 130"), Reporting Comprehensive Income. SFAS No. 130
establishes standards for the reporting of comprehensive income and its
components in a full set of general-purpose financial statements and are
effective for years beginning after December 15, 1997. The Company adopted SFAS
No. 130 in the fourth quarter of fiscal year 1999.
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In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("SFAS No. 131"), Disclosures About Segments of an Enterprise and
Related Information. SFAS No. 131, effective for years beginning after December
15, 1997, requires segment information to be reported on a basis consistent with
that used internally for evaluating segment performance and deciding how to
allocate resources to segments. The Company adopted SFAS No. 131 in fiscal year
1998.
CAPITAL RESOURCES AND LIQUIDITY
The Company has financed its operations to date from stock offerings,
subordinated borrowings and internally generated funds. The principal use of
its cash has been to fund the working capital needs of the Company.
Operating Activities
Substantially all of the Company's customers are engaged in the energy
industry. This concentration of customers may impact the Company's overall
exposure to credit risk, either positively or negatively, in that customers may
be similarly affected by changes in economic and industry conditions. The
Company performs ongoing credit evaluations of its customers and does not
generally require collateral in support of its trade receivables. The Company
maintains reserves for potential credit losses, and actual losses have
historically been within the Company's expectations.
The Company's cash and cash equivalents decreased to $50,492 at February
28, 1999, from $634,511 at February 28, 1998, primarily due to working capital
needs. Overall, cash flows used in operating activities decreased from
$1,098,712 to $690,804. Accounts receivable decreased to $138,357 at February
28, 1999, from $427,466 at February 28, 1998, primarily as a result of improved
asset management and an overall reduction in sales. Inventory levels decreased
to $785,639 at February 28, 1999, from $1,181,104 at February 28, 1998,
primarily as a result of the Company's decision to terminate the exclusive
distribution agreement with Downhole Products Plc. As stated in the
distribution agreement, Downhole Products Plc. was required to repurchase the
Company's entire Spir-O-Lizer inventory at the original invoice price, excluding
all transportation costs incurred by the Company for transporting the inventory
from Scotland to it's Houston facility. As a result of the termination of this
distribution agreement, approximately $327,000 of Spir-O-Lizer inventory was
returned.
The Company expects to fund liquidity needs from a combination of available cash
balances, internally generated funds and future financing arrangements.
Investing Activities
The Company does not intend to make any material capital expenditures
during the upcoming fiscal year. However, any capital expenditures that are
made will be funded with available cash, cash flow from operations, or future
financing arrangements.
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Financing Activities
Cash flows from financing activities decreased from $1,671,204 in fiscal
year 1998 to $118,190 in fiscal year 1999. This decrease is primarily
attributed to the private placement of $1,250,000 and the $750,000 convertible
loan that were closed in fiscal year 1998.
At February 28, 1999, the Company had a working capital deficit of
$438,797 and cash of $50,492, as compared to positive working capital of
$427,621 and cash of $634,511 at February 28, 1998. The overall decrease in the
Company's working capital during the current fiscal year is attributed to an
overall decrease in cash, accounts receivable and inventory and an increase in
short-term debt. The Company has sustained substantial operating losses in
recent years. In addition, the Company has used substantial amounts of working
capital in its operations. Further, the company has a debt payment of $750,000
due in July 1999. In view of these matters, realization of a major portion of
the assets in the accompanying balance sheet is dependent upon continued
operations of the Company, which in turn is dependent upon the Company's ability
to meet its financing requirements, and the success of its future operations.
Management believes that actions presently being taken to revise the Company's
operating and financial requirements provide the opportunity for the Company to
continue as a going concern. Management is taking the following steps to
provide the Company with adequate working capital:
. Management continues to reduce selling, general and administrative expenses.
. Management is adding complementary product lines to help diversify the
Company's product mix, without increasing supporting expenditures.
. Management intends to secure new long-term equity financing for working
capital purposes.
. Management intends to convert the existing $900,000 debt obligation to
equity.
. Management plans to seek potential acquisition candidates that will be
accretive to earnings and diversify the Company's market.
Risk Factors
The following risk factors, among others, may cause the Company's
operating results and/or financial position to be adversely affected:
. The Company's ability to raise additional working capital could be limited
due to future operating losses and the existing level of short-term debt.
Without the ability to raise operating capital, there would be substantial
doubt about the Company's ability to continue as a going concern.
. Competitive factors including, but not limited to, the Company's limitations
with respect to financial resources and its ability to compete against
companies with substantially greater resources.
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. The Company's ability to control the amount of operating expenses.
. A continuation of the rig count at its current level for a prolonged period
of time will adversely affect the Company's results of operations as demand
for oil related products and services would continue to fall because of the
uncertainty relating to the future. In addition, any further declines in the
current worldwide rig count or drilling activity will further reduce the
demand for our drilling products and services and will have a material
adverse effect on the Company's financial condition and results of
operations.
. In managing inventory requirements, the Company must forecast customer demand
for our products. Should the Company underestimate the supplies needed to
meet demand, it could be unable to meet customer demand. Should the Company
overestimate the supplies needed to meet customer demand, its working capital
could be adversely affected. If the Company is unable to manage purchases and
utilization of its inventory to maintain low inventory levels immediately
prior to major price declines, the Company could be unable to take immediate
advantage of such declines to lower product costs, which could adversely
affect its sales and gross margins.
. The Year 2000 issue (i.e., the ability of computer systems to accurately
identify and process dates beginning with year 2000 and beyond) affects
virtually all companies and organizations. Recognizing the need to limit
problems associated with year 2000 software failures; the Company has
developed a plan to address this potential exposure. Key financial
information and operational systems are being assessed and detailed plans
have been developed. The Company is also communicating with its suppliers to
determine their plans to limit problems associated with the year 2000 issue.
Despite these efforts, the year 2000 issue is complex and may present
unforeseen problems in the Company's systems and from third parties with
which the Company deals, such as third party payers.
13
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
The following documents are filed as a part of this report:
Page
----
Report of Independent Public Accountants 15
Consolidated Financial Statements:
Consolidated Balance Sheets 17
Consolidated Statements of Operations and Comprehensive Loss 18
Consolidated Statement of Stockholder's (Deficit) Equity 19
Consolidated Statements of Cash Flows 20
Notes to Consolidated Financial Statements 21
14
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Flotek Industries Inc. and Subsidiaries
We have audited the consolidated balance sheets of Flotek Industries Inc.
and Subsidiaries as of February 28, 1998 and 1997, and the related consolidated
statements of operations, 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 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 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 consolidated financial position of Flotek
Industries Inc. and Subsidiaries as of February 28, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company has experienced recurring operating losses.
This factor and others discussed in Note B, raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note B. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Grant Thornton LLP
Houston, Texas
April 24, 1998
15
<PAGE>
FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
FEBRUARY 28, 1999 AND 1998
16
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Board of Directors and Stockholders
Flotek Industries Inc. and Subsidiaries
We have audited the consolidated balance sheets of Flotek Industries Inc.
and Subsidiaries as of February 28, 1999 and 1998, and the related consolidated
statements of operations and comprehensive loss, stockholders' (deficit) 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 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 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 consolidated financial position of Flotek
Industries Inc. and Subsidiaries as of February 28, 1999 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
15
<PAGE>
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company has experienced recurring operating losses
resulting in a stockholders' deficit at February 28, 1999. These factors, and
others discussed in Note B, raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note B. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Houston, Texas
April 30, 1999
18
<PAGE>
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28,
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 50,492 $ 634,511
Accounts receivable, less allowance for doubtful
accounts of $54,431 and $25,569 138,357 427,466
Inventory 785,639 1,181,104
------------ ------------
Total current assets 974,488 2,243,081
FURNITURE AND EQUIPMENT 117,863 186,611
OTHER ASSETS 137,186 144,370
------------ ------------
$ 1,229,537 $ 2,574,062
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 30,000 $ 40,000
Current portion of long-term debt 930,012 771,719
Accounts payable and accrued liabilities 432,273 739,656
Accrued repurchase option - 264,085
Due to related party 21,000 -
------------ ------------
Total current liabilities 1,413,285 1,815,460
LONG-TERM DEBT 10,061 19,338
COMMITMENTS - -
SHAREHOLDERS' (DEFICIT) EQUITY
Common stock no par value; 100,000,000 shares
authorized; 45,680,795 and 43,180,795 issued
and outstanding in 1999 and 1998 18,134,295 17,870,210
Additional paid in capital 163,813 149,113
Accumulated other comprehensive income (284,086) (285,636)
Accumulated deficit (18,207,831) (16,994,423)
------------ ------------
(193,809) 739,264
------------ ------------
$ 1,229,537 $ 2,574,062
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE>
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Years ended February 28,
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Sales $ 1,793,709 $ 3,181,668
Costs and expenses:
Cost of goods sold 1,149,343 2,438,720
Selling 1,015,172 1,530,574
General and administrative 735,065 1,393,903
Depreciation and amortization 62,246 93,103
Research and development - 4,158
----------- -----------
2,961,826 5,460,458
----------- -----------
Loss from operations 1,168,117 2,278,790
Other expense (income), net
Interest 134,819 123,562
Other (89,528) 30,452
----------- -----------
45,291 154,014
----------- -----------
Net loss 1,213,408 2,432,804
Other comprehensive income, net of tax
Foreign currency translation 1,550 (8,661)
----------- -----------
Comprehensive loss $ 1,211,858 $ 2,441,465
=========== ===========
Basic and diluted net loss per share $ .03 $ .08
=========== ===========
Weighted average number of shares outstanding 44,420,521 31,150,755
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE>
Flotek Industries Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY
Years ended February 28,
<TABLE>
<CAPTION>
Accumulated Total
Common stock Additional other stockholders'
-------------------------- paid-in Accumulated comprehensive (deficit)
Shares Amount capital deficit income equity
---------- ----------- ----------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 1, 1997 25,744,797 $16,171,467 $ - $(14,561,619) $(276,975) $ 1,332,873
Issuance of common stock on private placement 12,708,333 1,182,608 - - - 1,182,608
Settlement of liabilities through issuance of
common stock 4,727,665 516,135 - - - 516,135
Issuance of stock options to non-employees - - 60,592 - - 60,592
Issuance of detachable stock warrants - - 88,521 - - 88,521
Equity adjustment from foreign currency
translation - - - - (8,661) (8,661)
Net loss - - - (2,432,804) - (2,432,804)
---------- ----------- ----------- ----------- --------- -----------
Balance at February 28, 1998 43,180,795 17,870,210 149,113 (16,994,423) (285,636) 739,264
Issuance of common stock for Turbeco, Inc.
repurchase option 2,500,000 264,085 - - - 264,085
Issuance of stock options to non-employees - - 1,200 - - 1,200
Issuance of detachable stock warrants - - 13,500 - - 13,500
Equity adjustment from foreign currency
translation - - - - 1,550 1,550
Net loss - - - (1,213,408) - (1,213,408)
---------- ----------- ----------- ------------ --------- -----------
Balance at February 28, 1999 45,680,795 $18,134,295 $ 163,813 $(18,207,831) $(284,086) $ (193,809)
========== =========== =========== ============ ========= ===========
</TABLE>
The accompanying notes are an integral part of this statement.
21
<PAGE>
Flotek Industries Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended February 28,
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net loss for the year $(1,213,408) $(2,432,804)
Adjustments to reconcile net losses to net cash
used in operating activities
Depreciation and amortization 62,246 93,103
Bad debt expense 31,292 102,683
Accretion of discount 55,326 17,034
Accrued repurchase option - 264,085
Compensatory stock options 1,200 60,592
Write-off and reserve of inventory and other 50,000 604,765
Loss on disposal of furniture and equipment 26,641 50,604
Change in assets and liabilities
Decrease in accounts receivable 257,817 277,785
Decrease (increase) in inventory 345,465 (461,569)
(Decrease) increase in accounts payable and
accrued liabilities (307,383) 325,010
----------- -----------
Net cash used in operating activities (690,804) (1,098,712)
Cash flows from investing activities
Purchase of furniture and equipment (24,955) (18,960)
Purchase of other assets - (2,001)
Proceeds from sale of furniture and equipment 12,000 -
----------- -----------
Net cash used by investing activities (12,955) (20,961)
Cash flows from financing activities
Issuance of common stock, net of costs - 1,182,608
Proceeds from long-term debt, notes payable and due to related parties 205,901 1,144,473
Repayment of long-term debt, notes payable and due to related parties (87,711) (655,877)
----------- -----------
Net cash provided by financing activities 118,190 1,671,204
Effect of exchange rates on cash 1,550 (8,661)
----------- -----------
Net (decrease) increase in cash (584,019) 542,870
Cash at beginning of year 634,511 91,641
----------- -----------
Cash at end of year $ 50,492 $ 634,511
=========== ===========
Supplementary information
Interest paid $ 94,304 $ 91,265
Income taxes paid - -
Non cash activities
Issuance of detachable stock warrants 13,500 88,521
Issuance of stock for Turbeco, Inc. repurchase option 264,085 -
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE>
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 1999 and 1998
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Flotek Industries, Inc. was originally incorporated under the laws of the
Province of British Columbia on May 17, 1985. Effective September 7, 1995, the
Company transferred its corporate status under the law of continuance to the
laws of the Province of Alberta. Flotek Industries, Inc. and its subsidiaries,
collectively referred to as the Company, consist of two divisions which provide
proprietary and patented products and services used in the drilling and
production of oil and gas wells. One of the Company's divisions carries on the
business of developing, manufacturing and marketing the Petrovalve + Plus(R)
Pump Valve and the Petrovalve Gas Breaker Valve, which are valves for downhole
sucker-rod pumps used in oil wells. The other division manufacturers and
distributes centralizers, which are a spiraled vane cementing sleeve and stand
off tool that improves mud and cementation displacement in drilled oil wells.
The Company sells its products primarily to companies in the oil and gas
industry in North America.
1. PRINCIPLES OF CONSOLIDATION
---------------------------
These consolidated financial statements include the accounts of Flotek
Industries, Inc. and, its direct and indirect wholly-owned subsidiaries
Petrovalve International Inc. ("Petrovalve"), USA Petrovalve, Inc., Turbeco,
Inc., Petrovalve International (Barbados) Inc. and Petrovalve Canada Limited.
All material intercompany transactions have been eliminated.
2. CASH EQUIVALENTS
----------------
The Company considers all highly liquid debt instruments with a maturity at the
date of purchase of three months or less to be cash equivalents.
3. REVENUE RECOGNITION
-------------------
The Company recognizes revenue when products have been delivered and all
significant risks and rewards of ownership have passed to customers. Funds
received on deposit in advance of delivery are deferred until the ultimate
transfer of ownership.
4. INVENTORY
---------
Inventory, which primarily comprises finished goods, is stated at the lower of
cost, determined on a first-in, first-out basis, or net realizable value.
Included in cost of goods sold for the year ended February 28, 1999, is a
$50,000 reserve for slow-moving inventory. Included in cost of goods sold for
the year ended February 28, 1998, is a $604,765 write-down of petrovalve
components to its net realizable value.
23
<PAGE>
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1999 and 1998
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
5. FURNITURE AND EQUIPMENT
-----------------------
Furniture and equipment is recorded at cost and depreciated using the following
annual rates:
Automotive equipment 30% declining balance
Computer equipment 30% declining balance
Furniture and equipment 20% declining balance
Moulds straight-line over seven years
6. INCOME TAXES
------------
The Company's policy is to include in income tax expense all United States,
foreign and state income taxes, including federal income taxes that would
become due if all undistributed earnings of foreign subsidiaries were
repatriated. Deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates which will be in effect when
these differences reverse. Deferred tax expense (benefit) is the result of
changes in deferred tax assets and liabilities. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
7. FOREIGN CURRENCY TRANSLATION
----------------------------
The assets and liabilities denominated in foreign currency are translated
into U.S. dollars at the current rate of exchange existing at period end and
revenues and expenses are translated at average monthly exchange rates.
Related translation adjustments are reported as a separate component of
stockholders' equity, whereas, gains or losses resulting from foreign currency
transactions are included in results of operations.
8. LOSS PER SHARE
--------------
Basic loss per share is calculated by dividing net loss by the weighted
average number of common shares outstanding. Dilutive loss per share is
calculated by dividing net loss by the weighted average number of common shares
and dilutive potential common shares outstanding. Diluted loss per share has
not been presented as the effect of the outstanding share purchase warrants,
options and convertible debt is anti-dilutive.
24
<PAGE>
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
February 28, 1999 and 1998
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
9. STOCK-BASED COMPENSATION
------------------------
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic method, as prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the fair market value of the Company's stock at the date of the grant
over the amount the employee must pay to acquire the stock, and is recognized
over the related vesting period. The Company provides supplemental disclosure
of the effect on net income and earnings per share as if the provisions of SFAS
No. 123, Accounting for Stock-Based Compensation had been applied in measuring
compensation expense.
10. LONG-LIVED ASSETS
-----------------
The Company reviews the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment
loss would be recognized when estimated future cash flows expected to result
from the use of the asset and its eventual disposition is less than its
carrying value amount. The Company has not identified any such impairment
losses.
11. SEGMENT INFORMATION
-------------------
The FASB issued Statement of Financial Accounting Standards No. 131, Disclosure
about Segments of an Enterprise and Related Information (SFAS 131). SFAS 131
establishes standards for the way public enterprises are to report information
about operating segments in annual financial statements and requires the
reporting of selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic area, and major customers.
12. COMPREHENSIVE INCOME
--------------------
Effective March 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income, which requires an entity to
report and display comprehensive income and its components. Comprehensive
income includes net earnings plus other comprehensive income. The Company's
other comprehensive income consists of foreign currency translation
adjustments.
25
<PAGE>
Flotek Industries Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
February 28, 1999 and 1998
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
13. USE OF ESTIMATES IN FINANCIAL STATEMENTS
----------------------------------------
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and revenues and expenses during the reporting period. Actual results could
differ from those estimates.
14. RECLASSIFICATIONS
-----------------
Certain of the 1998 amounts have been reclassified to conform to the 1999
presentation.
NOTE B - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of
the Company as a going concern. However, the Company has sustained substantial
operating losses in recent years resulting in a stockholders' deficit at
February 28, 1999. In addition, the Company has used substantial amounts of
working capital in its operations. Further, the Company has current maturities
of debt totaling $930,012.
In view of these matters, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financing requirements, and the success of its future operations. Management
believes that actions presently being taken to revise the Company's operating
and financial requirements provide the opportunity for the Company to continue
as a going concern. Management has taken the following steps to revise its
operating and financial requirements which it believes are sufficient to
provide the Company with adequate working capital:
. Management continues to reduce selling, general and administrative expenses
to acceptable levels.
. Management is adding complementary product lines to help diversify the
Company's product mix, without increasing supporting expenditures.
. Management intends on securing new long-term equity financing for working
capital purposes.
. Management intends to convert the existing $900,000 in debt obligations to
equity.
. Management plans to seek potential acquisition candidates that will be
accretive to earnings and diversify the Company's market.
26
<PAGE>
Flotek Industries Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1999 and 1998
NOTE C - FURNITURE AND EQUIPMENT
As at February 28, furniture and equipment comprised the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Automotive equipment $111,229 $224,115
Computer equipment 66,104 73,244
Furniture and equipment 106,723 112,517
Moulds 64,329 64,329
-------- --------
348,385 474,205
Accumulated depreciation and amortization 230,522 287,594
-------- --------
$117,863 $186,611
======== ========
</TABLE>
NOTE D - OTHER ASSETS
Included in other assets are patents which are amortized over the life of the
patent. Petrovalve received a United States patent on the design of its
Petrovalve Plus valve on June 2, 1992 and on the Petrovalve Gas Breaker valve
on October 5, 1993. In addition, filings were made in the United States to
protect improvements to the core technology. Original filings were also made
in Canada, Venezuela and Mexico.
Also included in other assets is goodwill of $82,181 and $84,535 net of
accumulated amortization of $11,985 and $9,631 in 1999 and 1998. Goodwill,
which represents the excess of the cost of the purchased company over the fair
value on the company's net assets at the date of acquisition, is being
amortized on the straight-line method over 40 years.
NOTE E - NOTES PAYABLE
During the year ended February 28, 1998, the Company entered into and paid in
full two notes payable totaling $308,000.
At February 28, 1998, the note payable in the original amount of $50,000 is
due to an individual with interest at 10%, due in 5 monthly installments of
$10,000 and accrued interest due as the sixth monthly installment. The
individual also received 10,000 shares of stock and 10,000 warrants at $0.60
(Canadian), which expire in March 1999. The Company believes it has reached a
verbal renegotiation of the terms of the note to address the outstanding
principal balance due of $30,000.
27
<PAGE>
Flotek Industries Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1999 and 1998
NOTE F - LONG-TERM DEBT
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Convertible debt with interest at 10%, principal
and interest due in August 1999, net of unamortized
discount of $13,500 attributable to 2,500,000 detachable
stock warrants at $.06 expiring August 1999; secured by
an equal senior exclusive lien on all of the assets of
the Company with the holder of the $750,000 convertible
debt; the debt is convertible at the discretion of the
lender until maturity into 2,500,000 shares of common
stock. Additionally, the holder has a right to purchase
$350,000 of common stock at $.06 per share. If such
right is exercised, 5,833,333 additional warrants will be
issued at $.06 per share. $ 136,500 $ -
Convertible debt with interest at 10%, payable
quarterly with the balance due in July 1999,
net of unamortized discount of $55,326 in 1998
attributable to 7,000,000 detachable stock warrants at
$.15 (Canadian) expiring July 1999, secured by an equal
senior exclusive lien on all of the assets of the Company
with the holder of the $150,000 convertible debt; the
debt is convertible at the discretion of the lender until
maturity into 7,000,000 shares of common stock; the
agreement prohibits the Company from declaring or paying
any dividends. 750,000 694,674
Government of Canada, Department of Western
Economic Diversification; interest at 6.5% payable in
monthly installments of $2,535; balance due on November 15,
1998. The Company restructured the payment terms during
the year ended February 28, 1999 and retired the note
subsequent to year end. 12,683 27,890
Other notes payable collateralized by automobiles
payable in aggregate monthly installments of
approximately $1,100, including interest ranging
from 4.9% to 10.5%, maturing at various dates through
May 2002. 28,975 27,598
Obligations under capital leases 11,915 40,895
-------- --------
940,073 791,057
Less current portion 930,012 771,719
-------- --------
$ 10,061 $ 19,338
======== ========
</TABLE>
28
<PAGE>
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1999 and 1998
NOTE F - LONG-TERM DEBT - CONTINUED
Long-term debt is due as follows:
2000 $930,012
2001 8,901
2002 1,160
NOTE G - DUE TO RELATED PARTY
Due to related party at February 28, 1999 represents two notes payable due to
a company controlled by a director of the Company. The notes bear interest at
9% and are due upon demand.
NOTE H - WARRANTS
At February 28, 1999, the following share purchase warrants were outstanding:
<TABLE>
<CAPTION>
Conversion prices
Number per share Expiration dates
------ ------------------- --------------------
<S> <C> <C>
12,500 C $0.60 March 18, 1999
11,666,667 C $0.15/$0.17 September 14, 1999
7,000,000 C $0.15 February 1, 2004
2,500,000 US $0.06 February 1, 2004
----------
21,179,167
==========
</TABLE>
C$ = Canadian dollars
US$ = United States dollars
In February 1999, the Company issued in connection with the $150,000
convertible debt 2,500,000 warrants at $0.06 that expire in February 2004.
29
<PAGE>
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1999 and 1998
NOTE H - WARRANTS - CONTINUED
At February 28, 1998, the following share purchase warrants, issued
in connection with private placements, were outstanding:
<TABLE>
<CAPTION>
Conversion prices
per share (in
Number Canadian dollars) Expiration dates
- ---------- ---------------------- ------------------------
<S> <C> <C>
12,500 $ 0.60 March 18, 1999
11,666,667 $0.15/$0.17 September 14, 1999
1,199,000 $ 0.83 April 18, 1998
2,062,500 $ 0.60 October 16, 1998
7,000,000 $ 0.15 October 16, 1998
- -----------
21,940,667
===========
</TABLE>
In March 1997, the Company issued 12,500 warrants in connection with two notes
payable at $0.60 (Canadian) that expire March 1999. In September 1997, the
Company issued 11,666,667 warrants in connection with private placements at
$0.15 (Canadian) for the first year and $0.17 (Canadian) thereafter expiring
September 1999. In October 1997, the Company issued in connection with the
$750,000 convertible debt 7,000,000 warrants at $0.15 (Canadian) that
originally expired in October 1998 but was extended to February 2004 by the
Company.
Warrants are issued at prices based on the market value of the shares at the
date of issuance of the warrants.
NOTE I - STOCK OPTIONS
During the year ended February 28, 1998, all outstanding options were cancelled
and replaced by an incentive stock option plan. Under the plan, the Company may
grant options for up to 3,945,000 shares of common stock. The exercise price of
each option is equal to the market price of the Company's stock on the date of
grant. The term of the options is five years, and they are 100% vested on the
grant date. The shares are restricted, as they have not been registered with
the United States Securities and Exchange Commission.
30
<PAGE>
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1999 and 1998
NOTE I - STOCK OPTIONS - CONTINUED
Compensation cost charged to operations for options granted to non-employees
was $1,200 and $60,592 for the years ended February 28, 1999 and 1998.
Had compensation cost been determined on the basis of fair value pursuant to
FASB Statement No. 123, stock-based compensation costs for options granted to
employees would have increased loss for the year by approximately $15,000 and
$93,000 in 1999 and 1998. Basic and diluted loss per share would have been $.03
and $.08 per share in 1999 and 1998. The pro forma disclosures only include the
effects of options granted since March 1, 1995.
Director and employee share purchase options are granted at prices based upon
Board approval, but not less than the market value of the share at the date of
grant. During the year ended February 28, 1997, all outstanding options were
repriced to $0.50 (Canadian) per share and the expiration dates were extended
to January 7, 2002. At February 28, 1998, 3,945,000 director and employee share
purchase options were outstanding. In August 1998, 700,000 options were granted
to a director. The options expire in August 2003 and vest over 3 years.
In February 1999, the Company issued in connection with the $150,000
convertible debt 350,000 options at $0.06 that expire February 2004.
The fair value of options at the date of grant was estimated using the Black-
Scholes option pricing model with the following weighted-average assumptions:
1999 1998
-------- ----------
Expected life 2 years 1.6 years
Interest rate 5.1% 5.8%
Volatility 130% 80%
Dividend yield 0% 0%
31
<PAGE>
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1999 and 1998
NOTE I - STOCK OPTIONS - CONTINUED
A summary of the status of the stock option plan follows:
<TABLE>
<CAPTION>
1999
----
Exercise Price Range Weighted Average
Options Per Share Exercise Price
------------------- ------------------------------ --------------------------
<S> <C> <C> <C>
Outstanding at beginning of year 3,945,000 C $0.17 C $0.17
Granted (in Canadian dollars) 800,000 C $0.15 C $0.15
Granted (in U.S. dollars) 350,000 US $0.06 US $0.06
Exercised - - -
Expired 1,710,000 C $0.17 C $0.17
---------
Outstanding at end of year (in
Canadian dollars) 3,035,000 C $0.15 - C $0.17 C $0.16
=========
Outstanding at end of year (in
U.S. dollars) 350,000 US $0.06 US $0.06
=========
Exercisable (in Canadian dollars) 2,451,667 C $0.15 - C $0.17 C $0.17
Exercisable (in U.S. dollars) 350,000 US $0.06 US $0.06
---------
3,801,667
=========
C$ = Canadian dollars
US$ = United States dollars
1998
----
Exercise Price Range Per Weighted Average
Share Exercise Price
Options (in Canadian dollars) (in Canadian dollars)
-------------------- --------------------------- --------------------------
<S> <C> <C> <C>
Outstanding at beginning of year 2,480,000 $0.50 $0.50
Cancelled (2,480,000) $0.50 $0.50
Granted 3,945,000 $0.17 $0.17
Exercised - - -
Expired - - -
----------
Outstanding at end of year 3,945,000 $0.17 $0.17
==========
Exercisable 3,945,000 $0.17 $0.17
</TABLE>
32
<PAGE>
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1999 and 1998
NOTE I - STOCK OPTIONS - CONTINUED
Following is a summary of the options outstanding at February 28, 1999:
<TABLE>
<CAPTION>
Outstanding
------------------------------------------------------------------------------
Weighted Average Exercisable
Exercise Price Number Remaining Contractual Life Number
- ------------------------- ------------------ --------------------------------- ---------------------
<S> <C> <C> <C>
US $0.06 350,000 0.5 years 350,000
C $0.15 800,000 4.5 years 216,667
C $0.17 2,235,000 2.8 years 2,235,000
--------- ---------
3,385,000 3,801,667
========= =========
</TABLE>
NOTE J - RELATED PARTY TRANSACTIONS
In November 1997, $257,768 due to a company controlled by a director of the
Company including accrued interest of $15,356 and $20,000 of costs paid on
behalf of the Company by a director were converted into 2,405,832 shares of
common stock.
The Company had an agreement with a corporation whose president is a
director of the Company. The agreement calls for the promotion of Turbeco
sales in exchange for $12,500 a month through December 1998. During the year
ended February 28, 1999 the agreement was amended to a commission of 25% of all
sales made by the corporation. The Company incurred charges of $81,247 during
the year ended February 28, 1999. The Company incurred charges of $196,472 of
which $101,500 was settled in exchange for 1,531,419 shares of common stock
during the year ended February 28, 1998.
In September 1997, the Company entered into a three year employment agreement
with the president of the Company. The agreement called for a base salary of
$150,000 per year and bonuses up to $150,000 based upon the net income of the
Company. The agreement also provided for the issuance of up to 600,000 options
based upon the net income of the Company or at the compensation committee's
discretion. The options, if granted, vested at a rate of 4.17% per month and
had a maximum term of the earlier of five years or his last day of employment.
During the year ended February 1999, the president left the Company and no
options were granted under the agreement. The Company has accrued its estimate
of potential liability and are in negotiations to terminate the agreement
through arbitration.
33
<PAGE>
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1999 and 1998
NOTE K - INCOME TAXES
The temporary differences giving rise to the deferred tax asset consist
primarily of depreciation differences and the tax operating loss carryforwards.
Valuation allowances are required to reduce deferred tax assets when
realization is not more likely than not. As a result of the Company's previous
operating losses, a valuation allowance of $1,863,000 and $1,467,000 as of
February 28, 1999 and 1998 was recorded for deferred tax assets that were not
offset by scheduled future reversals of deferred tax liabilities. For U.S.
Federal tax purposes, the Company has net operating loss carryforwards of
approximately $4,818,000 and $3,822,000 as of February 28, 1999 and 1998 that
expire between the years 2009 and 2019. The Company's effective income tax
rate differed from the Federal statutory rate primarily due to meals and
entertainment, foreign and state income taxes and the valuation allowance
against deferred tax assets.
NOTE L - COMMITMENTS
Effective March 8, 1994, Petrovalve acquired 100% of the outstanding common
shares of Turbeco. The purchase agreement contains a repurchase option which
could be triggered upon the occurrence of certain events. Management reached
an agreement to purchase the aforementioned repurchase option for 2,500,000
shares of common stock at $0.15 (Canadian), and accrued $264,085 at February
28, 1998, which was included in general and administrative expense in the
accompanying consolidated statements of operations. In September 1998, the
2,500,000 shares of common stock were issued.
Petrovalve was engaged in ongoing research in conjunction with the Alberta
Research Council ("ARC"). On April 1, 1991, Petrovalve, entered into a two
year joint venture agreement with the ARC which provided for a total budget of
$847,000 (Canadian) for research and development of the Petrovalve Plus. The
joint venture agreement was extended until December 31, 1994, with an
additional budget of $400,000 (Canadian), to be jointly provided as per the
terms of the original agreement. The extension was subject to a payback
clause, whereby if Petrovalve moved its sales and distribution offices outside
Alberta or if Petrovalve is sold, two times the total investment of the ARC in
the project, equal to $1,247,000 (Canadian), must be paid back to the ARC, by
way of monthly payments equal to 2% of all proceeds received by Petrovalve in
the immediately proceeding month on sales of the Petrovalve Plus until the
amount is fully paid. No amount has been accrued in the accompanying
consolidated financial statements as the Company believes no liability
triggering event has occurred since inception of this research agreement.
34
<PAGE>
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
February 28, 1999 and 1998
NOTE L - COMMITMENT - CONTINUED
The Company has entered into operating lease arrangements that expire at
various dates through 2002. Rent expense for the years ended February 28, 1999
and 1998 was $96,049 and $116,200. Minimum lease payments for the next five
years are approximately as follows:
<TABLE>
<S> <C>
2000 $103,000
2001 28,000
2002 7,000
</TABLE>
NOTE M - SEGMENT INFORMATION
The Company has two reportable segments: drilling products and production
equipment. The drilling products segment manufactures and distributes
centralizers, which are a spiraled vane cementing sleeve and stand off tool
that improves mud and cementation displacement in drilled oil wells. The
production equipment segment carries on the business of developing,
manufacturing and marketing valves for downhole sucker-rod pumps used in oil
wells.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on profit or loss from operations not including nonrecurring gains and
losses and foreign exchange gains and losses.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies.
The Company operates primarily in the United States and Canada. As of
February 28, 1999 and 1998, and for each of the years then ended, the Company
has operated in two industry segments, drilling products and production
equipment, for which revenues, depreciation expense, operating loss, interest
expense, net loss, and total assets are as follows:
For fiscal year ended February 28, 1999:
<TABLE>
<CAPTION>
Drilling Production
Products Equipment Other Total
----------------- ------------------ ----------------- ----------------
<S> <C> <C> <C> <C>
Revenues $1,451,519 $342,190 $ - $1,793,709
Depreciation and amortiza-
tion expense 15,640 33,733 12,873 62,246
Operating loss 331,123 298,007 538,987 1,168,117
Interest expense 2,453 4,207 128,159 134,819
Assets 705,912 432,229 91,396 1,229,537
</TABLE>
35
<PAGE>
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1999 and 1998
NOTE M - SEGMENT INFORMATION - CONTINUED
For fiscal year ended February 28, 1998:
<TABLE>
<CAPTION>
Drilling Production
Products Equipment Other Total
----------------- ------------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Revenues $2,700,245 $ 481,423 $ - $3,181,668
Depreciation and amortiza-
tion expense 22,043 58,366 12,694 93,103
Operating loss 92,614 1,145,100 1,041,076 2,278,790
Interest expense 7,171 9,309 107,082 123,562
Assets 1,357,076 528,680 688,306 2,574,062
</TABLE>
Information on the Company's geographic segments, based on the locations of the
Company's operations, are as follows:
For fiscal year ended February 28, 1999:
<TABLE>
<CAPTION>
Canada U.S. Total
------------------ ------------------ ----------------
<S> <C> <C> <C>
Revenues $ 77,756 $1,715,953 $1,793,709
Operating (income) loss (27,339) 1,195,456 1,168,117
Assets 119,574 1,109,963 1,229,537
</TABLE>
For fiscal year ended February 28, 1998:
<TABLE>
<CAPTION>
Canada U.S. Other Total
----------------- ------------------ ----------------- ----------------
<S> <C> <C> <C> <C>
Revenues $139,610 $3,042,058 $ - $3,181,668
Operating loss 328,468 1,929,037 21,285 2,278,790
Assets 127,343 2,446,719 - 2,574,062
</TABLE>
36
<PAGE>
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
February 28, 1999 and 1998
NOTE N - SIGNIFICANT CUSTOMER AND MAJOR SUPPLIERS
Sales to a significant customer in the drilling products segment represented
13% and 23% of total sales for the years ended February 28, 1999 and 1998. At
February 28, 1998, amounts due from that customer included in receivables were
$57,436.
Purchases from a principal supplier, which were in excess of 10% of total
direct costs for materials during the years ended February 28, 1999 and 1998,
were 76% and 35% of total purchases.
Purchases from another principal supplier, which were in excess of 10% of
total direct costs for materials during the year ended February 28, 1998, were
28% of total purchases.
37
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The report of Grant Thornton LLP dated April 30, 1999 did not contain an
adverse opinion or disclaimer of opinion, nor was it qualified or modified as to
audit scope or accounting principles; however, the report included an emphasis
of a matter paragraph due to uncertainties resulting from going concern issues.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The Proxy Statement issued in connection with the Annual Meeting of
Stockholders to be held on August 5, 1999, to be filed with the Securities and
Exchange Commission pursuant to Rule 14a-6(c), contains under the caption,
"Directors and Executive Officers of the Registrant" information required by
Item 9 of Form 10-KSB as to directors and certain executive officers of the
Company and is incorporated herein by reference.
The Proxy Statement issued in connection with the Annual Meeting of
Stockholders to be held on August 5, 1999, to be filed with the Securities and
Exchange Commission pursuant to Rule 14a-6(c), contains under the caption
"Beneficial Ownership Reporting Compliance" information required by Item 9 of
Form 10-KSB as compliance with Section 16(a) of the Exchange Act and is
incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION.
The Proxy Statement issued in connection with the Annual Meeting of
Stockholders to be held on August 5, 1999, to be filed with the Securities and
Exchange Commission pursuant to Rule 14a-6(c), contains under the caption,
"Executive Compensation" information required by Item 10 of Form 10-KSB as to
directors and certain executive officers of the Company and is incorporated
herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Proxy Statement issued in connection with the Annual Meeting of
Stockholders to be held on August 5, 1999, to be filed with the Securities and
Exchange Commission pursuant to Rule 14a-6(c), contains under the caption,
"Security Ownership of Certain Beneficial Owners, Directors, and Management"
information required by Item 11 of Form 10-KSB as to directors and certain
executive officers of the Company and is incorporated herein by reference.
38
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Proxy Statement issued in connection with the Annual Meeting of
Stockholders to be held on August 5, 1999, to be filed with the Securities and
Exchange Commission pursuant to Rule 14a-6(c), contains under the caption,
"Certain Relationships and Related Transactions" information required by Item 12
of Form 10-KSB as to directors and certain executive officers of the Company and
is incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1 Articles of Incorporation (incorporated by reference to the Company's
Form 10-Q for the quarter ended November 30, 1997)
3.2 By-laws (incorporated by reference to the Company's Form 10-Q for the
quarter ended November 30, 1997)
3.3 Amendment to Registrant's Bylaws (incorporated by reference to the
Company's Form 10-KSB for the year ended February 28, 1998)
4.1 Shareholders Protection Rights Plan (incorporated by reference to the
Company's Form 10-Q for the quarter ended November 30, 1997)
10.1 Distribution Agreement - Downhole Products (UK), LTD (incorporated by
reference to the Company's Form 10-Q for the quarter ended November
30, 1997)
10.2 Wallace Robertson Inc. Consulting Agreement (incorporated by reference
to the Company's Form 10-Q for the quarter ended November 30, 1997)
10.3 Bill Jayroe Employment Agreement (incorporated by reference to the
Company's Form 10-Q for the quarter ended November 30, 1997)
10.4 Convertible Loan Agreement between the Company and TOSI, L.P. dated
October 16,1997 (incorporated by reference to the Company's Form 10-Q
for the quarter ended November 30, 1997)
10.5 Form of Warrant Agreement dated October 16, 1997 - Marlin Investors,
L.L.C. (incorporated by reference to the Company's Form 10-Q for the
quarter ended November 30, 1997)
10.6 Form of Warrant Agreement dated October 16, 1997 - Charles A.
Dickinson (incorporated by reference to the Company's Form 10-Q for
the quarter ended November 30, 1997)
10.7 License Agreement - Harlan King (incorporated by reference to the
Company's Form 10-Q for the quarter ended November 30, 1997)
10.8 Form of Subscription Agreement by and between the Company and certain
shareholders, dated September 16, 1997 - Marlin Investors, L.L.C.
(incorporated by reference to the Company's Form 10-Q for the quarter
ended November 30, 1997)
10.9 Form of Subscription Agreement by and between the Company and certain
shareholders, dated September 16, 1997 - Charles A. Dickinson
(incorporated by reference to the Company's Form 10-Q for the quarter
ended November 30, 1997)
39
<PAGE>
*10.10 Promissory Note between Chisholm Energy Partners, LLC and the
Company dated February 24, 1999.
21.1 List of Operating Subsidiaries (incorporated by reference to the
Company's Form 10-Q for the quarter ended November 30, 1997)
*27.1 Financial Data Schedule
* Filed herewith
(b) Reports on Form 8-K
During the fiscal quarter ended February 28, 1999, the Registrant
filed no reports on Form 8-K.
40
<PAGE>
Exhibit Index
3.1 Articles of Incorporation (incorporated by reference to the Company's
Form 10-Q for the quarter ended November 30, 1997)
3.2 By-laws (incorporated by reference to the Company's Form 10-Q for the
quarter ended November 30, 1997)
3.3 Amendment to Registrant's Bylaws (incorporated by reference to the
Company's Form 10-KSB for the year ended February 28, 1998)
4.1 Shareholders Protection Rights Plan (incorporated by reference to the
Company's Form 10-Q for the quarter ended November 30, 1997)
10.1 Distribution Agreement - Downhole Products (UK), LTD (incorporated by
reference to the Company's Form 10-Q for the quarter ended November
30, 1997)
10.2 Wallace Robertson Inc. Consulting Agreement (incorporated by reference
to the Company's Form 10-Q for the quarter ended November 30, 1997)
10.3 Bill Jayroe Employment Agreement (incorporated by reference to the
Company's Form 10-Q for the quarter ended November 30, 1997)
10.4 Convertible Loan Agreement between the Company and TOSI, L.P. dated
October 16, 1997 (incorporated by reference to the Company's Form 10-Q
for the quarter ended November 30, 1997)
10.5 Form of Warrant Agreement dated October 16, 1997 - Marlin Investors,
L.L.C. (incorporated by reference to the Company's Form 10-Q for the
quarter ended November 30, 1997)
10.6 Form of Warrant Agreement dated October 16, 1997 - Charles A.
Dickinson (incorporated by reference to the Company's Form 10-Q for
the quarter ended November 30, 1997)
10.7 License Agreement - Harlan King (incorporated by reference to the
Company's Form 10-Q for the quarter ended November 30, 1997)
10.8 Form of Subscription Agreement by and between the Company and certain
shareholders, dated September 16, 1997 - Marlin Investors, L.L.C.
(incorporated by reference to the Company's Form 10-Q for the quarter
ended November 30, 1997)
10.9 Form of Subscription Agreement by and between the Company and certain
shareholders, dated September 16, 1997 - Charles A. Dickinson
(incorporated by reference to the Company's Form 10-Q for the quarter
ended November 30, 1997)
*10.10 Promissory Note between Chisholm Energy Partners, LLC and the Company
dated February 24, 1999.
21.1 List of Operating Subsidiaries (incorporated by reference to the
Company's Form 10-Q for the quarter ended November 30, 1997)
*27.1 Financial Data Schedule
* Filed herewith
41
<PAGE>
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
June 11, 1999 FLOTEK INDUSTRIES INC.
(Registrant)
By: /s/ Jerry D. Dumas, Sr.
-----------------------------------
President and Chief Executive Officer
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.
Signature Title Date
- --------- ----- ----
/s/ JERRY D. DUMAS, SR. President, Chief Executive June 11, 1999
- ----------------------- Officer, Director
Jerry D. Dumas, Sr. (Principal Executive Officer, Principal
Accounting Officer)
/s/ GARY M. PITTMAN Director June 11, 1999
- -----------------------
Gary M. Pittman
/s/ WILLIAM ZIEGLER Director June 11, 1999
- -----------------------
William Ziegler
/s/ JASON EVANS Director June 11, 1999
- -----------------------
Jason Evans
/s/ LARRY R. SHABEN Director June 11, 1999
- -----------------------
Larry R. Shaben
42
<PAGE>
EXHIBIT 10.10
PROMISSORY NOTE
$150,000.00 Houston, Texas February 24, 1999
FOR VALUE RECEIVED, ON OR BEFORE ONE HUNDRED EIGHTY (180) DAYS FROM THE
DATE HEREOF, the undersigned, FLOTEK INDUSTRIES INC., and Alberta corporation
(herein called the "Maker"), promises to pay to the order of CHISHOLM ENERGY
PARTNERS, L.L.C., a Texas limited liability company (hereinafter called the
"Payee"), at 1160 Dairy Ashford, Suite 125, Houston, Texas 77079, or at such
other place as the Payee may designate in writing to the Maker, in lawful money
of the United States of America, the principal sum of ONE HUNDRED FIFTY THOUSAND
AND NO/100 DOLLARS ($150,000.00), together with interest thereon from the date
hereof until maturity at the rate of ten percent (10%) per annum.
The Maker covenants to apply the total amount advanced by the Payee
hereunder only in the manner set forth in the Loan Agreement of even date
herewith between the Maker and the Payee (the "Loan Agreement"). The Maker
understands and acknowledges that the Payee would not be willing to make the
loan evidenced hereby but for the Maker's covenant set forth in the immediately-
preceding sentence.
The outstanding principal amount of this Note shall be convertible into
common shares of the Maker in the manner and to the extent set forth in the Loan
Agreement.
All payments hereunder, whether designated as payments of principal or
interest, shall be applied: first to unpaid and accrued interest; then to the
discharge of any expenses or damages for which the Payee may be entitled to
receive reimbursement under the terms of this Note or under the terms of any
document executed in connection herewith; and, lastly, to unpaid principal in
the inverse order of maturity. All past due principal and interest on this
Note, whether due as the result of acceleration of maturity or otherwise, shall
bear interest from the date of the payment thereof shall have become due until
the same shall have been fully discharged by payment at the maximum nonusurious
rate of interest or, if applicable law does not provide for a maximum
nonusurious rate of interest, at a rate per annum equal to eighteen percent
(18%).
If the Maker shall file a voluntary petition in bankruptcy, or shall be
held insolvent, or shall file any petition or answer seeking for itself any
arrangement, composition, readjustment, or similar relief under any present of
future statute, law or regulation, or shall file any answer admitting the
material allegations of a petition filed against the Maker in any such
proceeding, or shall seek or consent to or acquiesce in the appointment of any
trustee or receiver, on all or any part of the properties of the Maker, or if a
decree or order by a court having jurisdiction in the premises shall have been
entered adjudging the Maker to be bankrupt or insolvent under the federal
bankruptcy laws or any applicable law of the United States of America or any
state law, or appointing a receiver or trustee or assignee in bankruptcy or
insolvency of the Maker or its properties, and such decree or order shall have
continued undischarged or unstayed for a period of sixty (60) days, or if the
Maker shall make an assignment for the benefit of creditors, or if the Maker
shall fail to pay this Note or any installment when due, or if a default shall
occur in the performance of any of the covenants or agreements contained herein
or any related documents or security instruments, then in any such event
---------
Initial
Page 1 of a 3 Page $150,000.00 Note
<PAGE>
the holder of this Note shall have the option to declare this Note due and
payable, whereupon the entire unpaid principal balance of this Note and all
interest accrued thereon shall thereupon at once mature and become due and
payable and shall bear interest from the date of such default or event
(whichever occurs first) until paid at the rate for default provided above,
without presentment, demand, protest or notice of any kind, all of which are
hereby expressly waived by the Maker. The time of payment of this Note is also
subject to acceleration in the event the Maker defaults or otherwise fails to
discharge its obligations under any of the instruments securing payment hereof.
All co-signers and endorsers of this Note are to be regarded as
principals as to their respective joint and several liability to any legal
holder hereof and the Maker, and each of the guarantors, sureties and
endorsers, hereby expressly and severally waive grace, and all notices, demands,
presentments for payment, notice of nonpayment, protest and notice of protest,
notice of intent to accelerate, notice of acceleration of the indebtedness due
hereunder, and diligence in collecting this Note or enforcing any security
rights of the Payee under any document securing this Note, and agree (i) that
the Payee or other legal holder of this Note may, at any time, and from time to
time, on request of or by agreement with the Maker, extend the date of maturity
of all or any part hereof, without notifying or consulting with any Maker or
principal hereof, who shall remain fully obligated for the payment hereof; (ii)
that it will not be necessary for the Payee or any holder hereof, in order to
enforce payment of this Note, to first institute or exhaust its remedies against
the Maker or other party liable therefor or to enforce its rights against any
security for this Note; and (iii) to any substitution, exchange or release of
any security now or hereafter given for this Note or the release of any party
primarily or secondarily liable hereon.
In the event of default hereunder or under any of the instruments
securing hereof and the placing of this Note in the hands of an attorney for
collection (whether or not suit is filed), or if this Note is collected by suit
or legal proceedings or through the probate court or bankruptcy proceedings,
the Maker agrees to pay the holder hereof the costs and reasonable attorney's
fees incurred in the collection hereof.
It is the intention of the parties hereto to comply with applicable
usury laws (now or hereafter enacted); accordingly, notwithstanding any
provision to the contrary in this Note, or in any of the documents securing
payment hereof or otherwise relating hereto, in no event shall this Note or such
documents require the payment or permit the collection of interest in excess of
the maximum amount permitted by such laws. If any such excess of interest is
contracted for, charged, taken, reserved or received under this Note or under
the terms of any of the documents securing payment hereof or otherwise relating
hereto, or in the event the maturity of the indebtedness evidenced by this Note
is accelerated in whole or in part, or in the event that all or part of the
principal or interest of this Note shall be prepaid, so that under any of such
circumstances the amount of interest contracted for, charged, taken, reserved or
received under this Note or under any of the instruments securing payment hereof
or otherwise relating hereto, on the amount of principal actually outstanding
from time to time under this Note shall exceed the maximum amount of interest
permitted by applicable usury laws, now or hereafter enacted, then in any such
event (i) the provisions of this paragraph shall govern and control, (ii) any
such excess which may have been collected at final maturity of said indebtedness
either shall be applied as a credit against the then unpaid principal amount
hereof or refunded to the Maker at the Payee's option, and (iii) upon such final
maturity, the effective rate of
----------
Initial
Page 2 of a 3 Page $150,000.00 Note
<PAGE>
interest shall be automatically reduced to the maximum lawful rate allowed under
applicable usury laws as now or hereafter construed by the courts having
jurisdiction thereof. Without limiting the foregoing, all calculations of the
rate of interest contracted for, charged, taken, reserved or received under this
Note or under such other documents which are made for the purpose of determining
whether such rate exceeds the maximum lawful rate, shall be made, to the extent
permitted by law, by amortizing, prorating, allocating and spreading in equal
parts during the period of the full stated term of the loan evidenced hereby,
all interest at any time contracted for, charged, taken, reserved or received
from the Maker or otherwise by the Payee in connection with such indebtedness.
Any check, draft, money order or other instrument given in payment of
all or any portion hereof may be accepted by the holder hereof and handled in
collection in the customary manner, but the same shall not constitute payment
hereunder or diminish any rights of the holder hereof except to the extent that
actual cash proceeds of such instrument are unconditionally received by the
holder and applied to this indebtedness in the manner elsewhere herein,
provided.
If is further agreed that the Payee shall have a first lien on all
deposits and other sums at any time credited by or due from the Payee to
any maker, endorser, surety or guarantor hereof as collateral security for the
payment of this Note, and the Payee, at its option, may at any time, without
notice and without any liability, hold all or any part of any such deposits or
other sums until all sums owing on this Note have been paid in full and/or apply
or set off all or any part of any such deposits or other sums credited by or due
from the Payee to or against any sums due on this Note in any manner and in any
order of preference with the Payee, in its sole discretion, chooses.
This Note is secured by a security interest granted in a Security
Agreement of even date herewith from the Maker to the Payee.
THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
FLOTEK INDUSTRIES INC.
By /s/ Jerry D. Dumas
-----------------------------------
Name Jerry D. Dumas
---------------------------------
Title President
--------------------------------
Page 3 of a 3 Page $150,000.00 Note
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> FEB-28-1999
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0
0
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<EPS-BASIC> (.03)
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</TABLE>
