7030
Empire Central Drive
Houston,
Texas 77040
____________________
NOTICE
OF ANNUAL MEETING OF STOCKHOLDERS
____________________
May
24, 2005
To
the Stockholders of Flotek Industries, Inc.:
At the
direction of the Board of Directors of Flotek Industries, Inc. (the “Company”),
a Delaware corporation, NOTICE IS HEREBY GIVEN that the Annual Meeting of
Stockholders of the Company will be held at the Petroleum Club of Houston, 800
Bell Street, Suite 4300, Houston, Texas 77002, on May 24, 2005 at 2:00 p.m.
(local time), for the purpose of considering and voting upon the following
matters:
1. The
election of seven directors to serve until the next annual meeting of
stockholders of the Company or until their successors are duly elected and
qualified, or until their earlier resignation or removal.
2. Approval
of the 2005 Long-Term Incentive Plan.
3. Any other
business which may be properly brought before the meeting or any adjournment
thereof.
| |
By order of the Board of
Directors |
| |
|
| |
|
| |
Rosalie Melia
Secretary |
| |
|
| April 14, 2005 |
|
YOU
ARE REQUESTED TO MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS
POSSIBLE, WHETHER YOU PLAN TO ATTEND THE MEETING IN PERSON OR NOT. YOU MAY
REVOKE YOUR PROXY AT ANY TIME PRIOR TO THE MEETING, OR IF YOU ATTEND THE MEETING
YOU MAY REVOKE YOUR PROXY AT THAT TIME, IF YOU WISH.
FLOTEK
INDUSTRIES, INC.
7030
Empire Central Drive
Houston,
Texas 77040
____________________
PROXY
STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
May
24, 2005
This
Proxy Statement and the accompanying form of proxy are being sent to the
stockholders of Flotek Industries, Inc. (the “Company”), a Delaware corporation,
in connection with the solicitation by the Board of Directors of the Company
(the “Board”) of proxies to be voted at the Annual Meeting of Stockholders of
the Company (the “Meeting”) to be held at 2:00 p.m. (local time) on Tuesday, May
24, 2005, at the Petroleum Club of Houston, 800 Bell Street, Suite 4300,
Houston, Texas 77002, and at any adjournments thereof.
The
Notice of Meeting, this Proxy Statement and the accompanying form of proxy are
first being mailed to the stockholders on or about April 20, 2005. The Annual
Report of the Company for the year 2004 has been furnished to stockholders with
this Proxy Statement.
At the
Meeting, stockholders will be asked (i) to consider and vote upon the election
of seven nominees to serve on the Board of Directors of the Company; (ii) to
consider and vote upon the adoption of the 2005 Long-Term Incentive Plan of the
Company; and (iii) to consider and take action upon such other matters as may
properly come before the Meeting.
VOTING
RIGHTS AND PROXIES
The Board
of Directors has fixed the close of business on April 5, 2005, as the record
date for determination of stockholders entitled to notice of, and to vote at,
the Meeting. At the close of business on such date, there were outstanding and
entitled to vote 6,803,846 shares of
common stock, $0.0001 par value per share (“Common Stock”) of the Company, which
is the Company’s only authorized and outstanding class of stock entitled to vote
at the Meeting.
Holders
of at least one-third of the outstanding shares of Common Stock are required to
be represented at the Meeting, in person or by proxy, to constitute a quorum.
Each outstanding share of Common Stock as of the record date is entitled to one
vote. There will be no cumulative voting of shares for any matter voted upon at
the Meeting.
Directors
are elected by a plurality of the votes cast. Abstentions and broker non-votes
will be disregarded and have no effect on the outcome of the election of
directors.
The
affirmative vote of at least a majority of the shares represented at the Meeting
is required to approve the 2005 Long-Term Incentive Plan of the Company. In
determining whether this proposal has received the requisite number of
affirmative votes, abstentions and broker nonvotes will have the same effect as
votes against the proposal.
If the
enclosed form of proxy is properly executed and returned to the Company prior to
or at the Meeting and is not revoked prior to its exercise, all shares of Common
Stock represented thereby will be voted at the Meeting and, where instructions
have been given by a stockholder, will be voted in accordance with such
instructions.
Any
stockholder executing a proxy which is solicited hereby has the power to revoke
it prior to its exercise. Revocation may be made by attending the Meeting and
voting the shares of Common Stock in person or by delivering to the Secretary of
the Company at the principal executive offices of the Company located at 7030
Empire Central Drive, Houston, Texas 77040 prior to exercise of the Proxy a
written notice of revocation or a later-dated, properly executed
proxy.
The
solicitation of proxies will be by mail, but proxies also may be solicited by
telephone, telegram or in person by directors, officers and other employees of
the Company. The Company will bear all costs of soliciting proxies. Should the
Company, in order to solicit proxies, request the assistance of financial
institutions, brokerage houses or other custodians, nominees or fiduciaries, the
Company will reimburse such persons for their reasonable expenses in forwarding
proxy materials to stockholders and obtaining their proxies.
ITEM
1: ELECTION OF DIRECTORS
The
members of the Board of Directors serve one-year terms. Directors are elected by
a plurality of the votes cast. Abstentions and broker nonvotes will be
disregarded and have no effect on the outcome of the election of directors.
Seven
nominees, Jerry D. Dumas, Sr., Gary M. Pittman, Richard O. Wilson, Barry E.
Stewart, Dr. Glenn S. Penny, John W. Chisholm, and William R. Ziegler, are
proposed to be elected to serve as directors of the Company until the next
annual meeting of stockholders or until their successors are duly elected and
qualified, or until their earlier resignation or removal.
All
proxies which are timely received in proper form will be voted FOR the Board’s
nominees for director, unless contrary instructions are given. All nominees are
presently directors of the Company. If any nominee is unable to serve, the Board
of Directors may designate a substitute nominee, in which event the proxy votes
which would have been cast for the nominee not serving will be cast for the
substitute nominee.
THE
BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE “FOR” THE ELECTION OF
THE NOMINEES.
Nominees
and Executive Officers
The
following table provides certain information with respect to the Board nominees
and the executive officers of the Company.
|
Name |
|
Age |
|
Positions |
|
|
| |
|
|
|
|
|
|
|
Jerry
D. Dumas, Sr. |
|
69 |
|
Chief
Executive Officer,
|
|
1998 |
|
Glenn
S. Penny |
|
55 |
|
President,
Chief Technical
Officer
and Director |
|
2001 |
|
Lisa
Bromiley Meier |
|
32 |
|
Chief
Financial Officer
and
Vice President |
|
2004 |
|
Gary
M. Pittman |
|
41 |
|
Director |
|
1997 |
|
William
R. Ziegler |
|
63 |
|
Director |
|
1997 |
|
John
W. Chisholm |
|
50 |
|
Director |
|
1999 |
|
Barry
E. Stewart |
|
50 |
|
Director |
|
2001 |
|
Richard
O. Wilson |
|
75 |
|
Director |
|
2003 |
The
following is a brief description of the background and principal occupation of
each Nominee and executive officer:
Jerry
D. Dumas, Sr. - Mr.
Dumas became Chairman of the Board of Directors of the Company in 1998. He has
served as Chief Executive Officer of the Company since September 1998. Prior to
that he was Vice President of Corporate and Executive Services with Merrill
Lynch Private Client Group for ten years. Mr. Dumas served as Group Division
President with Hughes Tool Company, a predecessor to Baker Hughes, Inc., from
1980 to 1984. Mr. Dumas holds a BS degree from Louisiana State
University.
Glenn
S. Penny - Dr.
Penny became President, Chief Technical Officer and a Director of the Company
with the merger of Flotek Industries, Inc. and Chemical & Equipment
Specialties, Inc. (“CESI”) in 2001. Dr. Penny founded CESI in April 2000 and
served as its President and Chief Executive Officer. Prior to founding CESI, Dr.
Penny served as President of Stim-Lab, Inc., a company specializing in
independent testing of completion fluids and methods, from its founding in 1985
to April 2000. Stim-Lab, Inc. was acquired by Core Laboratories N.V., an
NYSE-listed oilfield service company, in 1997. Dr. Penny holds a BS degree in
Chemistry from Trinity University and a Ph.D. in Chemistry from the University
of Houston.
Lisa
Bromiley Meier - Mrs.
Meier was appointed Chief Financial Officer of the Company in April 2004 and
Vice President in January 2005. Prior to joining Flotek, Mrs. Meier worked in
the energy audit practice of PricewaterhouseCoopers, LLP and worked for three
Fortune 500 companies. Mrs. Meier served in various accounting, finance, SEC
reporting and risk management positions. Mrs. Meier is a CPA and a CFA
candidate. Mrs. Meier holds a BBA and Masters of Accountancy from the University
of Texas.
Gary
M. Pittman - Mr.
Pittman has served as a Director of the Company since 1997. He is President of
BioSafe Technologies, a consumer products company which supplies non-toxic
insecticides to the U.S., Europe and the Middle East. Mr. Pittman founded his
own company in 1995 to provide investment and merchant banking services to
private and public companies. From 1987 to 1995, Mr. Pittman was Vice President
of The Energy Recovery Fund, a $180 million private equity fund focused on the
energy industry. Mr. Pittman has served as Director and Audit Committee member
of Czar Resources, Ltd., a public Canadian E & P company; Triton Elics
International; Secretary, Vice President and Director of Sub Sea International,
Inc., an offshore robotics and diving company; and owned and operated an oil and
gas production and gas gathering company in Montana. Current directorships
include BioSafe Technologies, Inc. and Hemisphere Investments. Mr. Pittman holds
a BA degree in Economics/Business from Wheaton College and an MBA in Finance and
Marketing from Georgetown University. Mr. Pittman serves as Chairman of the
Company’s Compensation Committee.
William
R. Ziegler - Mr.
Ziegler has been a director of the Company since 1997. He has been of counsel to
the law firm of Satterlee Stephens Burke & Burke LLP since January 2001.
Prior to that time he was a partner in that law firm and predecessor firms for
over five years. Mr. Ziegler is a director and Vice Chairman of Grey Wolf, Inc.,
a provider of contract land drilling services to the oil and gas industry. He is
Chairman of the Board (non-executive) of Vesta Corp., Firebird Holdings Limited,
and Geokinetics, Inc. He serves as Vice Chairman of the Board (non-executive) of
Union Drilling, Inc. Mr. Ziegler is a graduate of Amherst College and received a
law degree from the University of Virginia and an M.B.A. from Columbia
University. He has practiced corporate, banking and securities law since 1968.
Mr. Zeigler is a member of the Compensation Committee.
John
W. Chisholm - Mr.
Chisholm has served as a Director of the Company since 1999. Mr. Chisholm is a
founder of Wellogix, Inc., which develops software for the oil and gas industry
to streamline workflow, improve collaboration, expedite the inter-company
exchange of enterprise data and communicate complex engineered services. Mr.
Chisholm co-founded ProTechnics Company and served as President of that company
from 1985 through 1998, which was acquired by Core Laboratories N.V. in 1996.
After leaving Core Laboratories in 1998 as Senior Vice President of Global Sales
and Marketing he started Chisholm Energy Partners, an investment fund
specializing in mid-size energy service companies. Mr. Chisholm holds a BA from
Ft. Lewis College. Mr. Chisholm is a member of the Audit Committee.
Barry
E. Stewart - Mr.
Stewart has been a director of the Company since 2001. Mr.
Stewart became Chief Financial Officer of Rotech Healthcare Inc. in July 2004.
Mr. Stewart served as Chief Financial Officer of Evolved Digital Systems, Inc.
from 2001 to 2004, and Vice President of Finance of Community Health Systems,
Inc. from 1996 to 2001. Prior to 1996, Mr. Stewart served in various
managing director positions with national commercial banks. He is a
Certified Public Accountant licensed in Texas and Tennessee and has a
Master of Business Administration Degree from the University of Houston. Mr.
Stewart serves as Chairman of the Audit Committee.
Richard
O. Wilson - Mr.
Wilson was elected a director of the Company in 2003. Mr. Wilson is an Offshore
Construction consultant with 48 years experience in the North Sea, Gulf of
Mexico, Gulf of Paria, Lake Maracaibo, South Atlantic Offshore Brazil and
Angola. Mr. Wilson is a Director of Callon Petroleum Inc. Mr. Wilson received a
BS in Civil Engineering from Rice University. Mr. Wilson serves on the Audit
Committee.
There are
no family relationships between any director or executive officer.
Board
Committees and Meetings
The Board
of Directors of the Company met four times during 2004. Each director attended
75% or more of the Board of Directors and committee meetings held during the
period he was a director or committee member.
The
standing committees of the Board include the Compensation Committee consisting
as of the date of this Proxy Statement of Gary Pittman, Robert Beall, and
William Ziegler, and the Audit Committee, comprised of Barry Stewart, John
Chisholm and Richard Wilson.
The
Compensation Committee sets compensation policy for the Executive Officers of
the Company, makes recommendations to the full Board of Directors regarding
executive compensation and employee stock option awards, and will administer the
2005 Long-Term Incentive Plan of the Company. The Compensation Committee met
three times during the last fiscal year.
The
primary function of the Audit Committee is to provide advice with respect to our
financial matters and to assist the Board of Directors in fulfilling its
oversight responsibilities regarding audit, finance, accounting, and tax
compliance. In particular, the Audit Committee is responsible for overseeing the
engagement, independence, and services of our independent auditors. The Audit
Committee also serves to: (i) act as an independent and objective party to
monitor the financial reporting process and internal control system of the
Company; (ii) review and appraise the audit efforts of the independent auditors;
(iii) evaluate the quarterly financial performance as well as the compliance
with laws and regulations of the Company; (iv) oversee management’s
establishment and enforcement of financial policies and business practices; and
(v) provide an open avenue of communication among the independent auditors,
financial and senior management, counsel, and the Board of Directors. The Audit
Committee met five times during the last fiscal year, which meetings were
separate and apart from meetings of the full Board. The Board has adopted a
written charter for the Audit Committee. The Board of Directors has determined
that Mr. Stewart qualifies as an “audit committee financial expert” as that term
is defined in Item 401(e) of Regulation S-B promulgated by the SEC based on his
education and experience which is described elsewhere in this Proxy
Statement.
The Board
of Directors of the Company does not have a standing executive or nominating
committee or committees performing similar functions.
The above
Committees meet as and when required, except for the Audit Committee which meets
at least four times each year. Certain matters that may come before a committee
may be reviewed or acted on by the Board as a whole.
Compliance
with Section 16(a) of the Securities Exchange Act
Pursuant
to Section 16(a) of the Securities Exchange Act of 1934 and the rules issued
thereunder, the Company’s directors and executive officers are required to file
with the Securities and Exchange Commission (“SEC”) reports of ownership and
changes in ownership of Common Stock. Copies of such forms are required to be
filed with the Company. Based solely on its review of copies of such reports
furnished to the Company, the Company believes that the directors and executive
officers were in compliance with the filing requirements of Section 16(a) during
the most recent fiscal year.
EXECUTIVE
COMPENSATION
The
following table sets forth cash and certain other compensation paid to or earned
by the Chief Executive Officer and other executive officers of the Company who
earned at least $100,000 in cash compensation for the years indicated (the
“Named Executive Officers”).
Summary
Compensation Table
| |
|
Annual
Compensation |
|
Long
Term
Compensation Awards |
|
|
Name
and Principal Position |
|
Year |
|
Salary |
|
Bonus |
|
Other
Annual Compensation |
|
Securities
Underlying Options |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Jerry
D. Dumas, Sr. |
|
|
2004 |
|
$ |
180,800 |
|
$ |
56,600 |
|
$ |
— |
|
|
187,500 |
|
|
Chairman
and Chief Executive Officer |
|
|
2003 |
|
$ |
162,700 |
|
$ |
— |
|
$ |
75,000 |
|
|
209,546 |
|
| |
|
|
2002 |
|
$ |
137,600 |
|
$ |
— |
|
$ |
|
|
|
84,557 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr.
Glen Penny |
|
|
2004 |
|
$ |
113,800 |
|
$ |
20,400 |
|
$ |
|
|
|
22,000 |
|
|
President
and Chief Technical Officer |
|
|
2003 |
|
$ |
89,400 |
|
$ |
|
|
$ |
|
|
|
|
|
| |
|
|
2002 |
|
$ |
93,700 |
|
$ |
|
|
$ |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No
bonuses were issued during 2003 and 2002. Amounts exclude certain personal
benefits, the aggregate value of which does not exceed 10% of the annual
compensation shown for each person.
On April
3, 2003, a stock grant of 125,000 shares was awarded to Jerry D. Dumas, Sr. The
fair market value of the stock on the date of grant was $0.60 per share
resulting in $75,000 of compensation expense.
Stock
Options Granted During 2004
|
Name
and Date of Option
Grant |
|
Options
Granted |
|
%
of Total
Options
Granted to Employees |
|
|
Exercise
Price |
|
Expiration
Date |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Jerry
D. Dumas, Sr. |
|
|
|
|
|
|
|
|
|
|
|
09/21/2004 |
|
|
125,000 |
|
|
36.7 |
% |
|
$ |
1.70 |
|
|
09/21/2014 |
|
|
12/10/2004 |
|
|
62,500 |
|
|
18.3 |
% |
|
$ |
4.25 |
|
|
12/10/2014 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Glenn
S. Penny |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/10/2004 |
|
|
22,000 |
|
|
6.5 |
% |
|
$ |
4.68 |
|
|
12/10/2009 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number
of Securities
Underlying Unexercised
Options
at Fiscal Year End |
|
Value
of Unexercised In-the-Money
Options at Fiscal Year
End* |
|
|
Name |
|
Exercisable |
|
Unexercisable |
|
Exercisable |
|
Unexercisable |
|
| |
|
|
|
|
|
|
|
|
|
|
Jerry
D. Dumas, Sr. |
|
|
157,525 |
|
|
221,250 |
|
$ |
360,661 |
|
$ |
453,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Glenn
S. Penny |
|
|
36,500 |
|
|
35,500 |
|
$ |
132,860 |
|
$ |
49,140 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) Based
on the difference between the exercise
price of the option and the closing price on December 31, 2004 which was $4.30
per share.
There
were no stock options exercised by the Named Executive Officers in 2004.
Compensation
of Directors
Directors
who are not our employees are paid $250 for each meeting attended. On December
23, 2004, each non-employee director was granted an option to purchase common
shares at an exercise price of $4.65 per share, the fair market value on the
date of grant. The number of options granted was based on years of service. The
options vested immediately.
Employment
Contracts
Dr. Penny
was covered by an employment contract which provided for minimum compensation of
$100,000 per year which expired pursuant to its terms on January 21, 2004. Dr.
Penny remains an employee of the Company.
SECURITY
OWNERSHIP OF CERTAIN
BENEFICIAL
OWNERS AND MANAGEMENT
The
following table sets forth information concerning the beneficial ownership of
common stock of (i) our directors, (ii) the Named Executive Officers
and (iii) all of our current directors and executive officers as a group as
of April 5, 2005. Except as otherwise noted, the beneficial owners listed have
sole voting and investment power with respect to shares beneficially owned. An
asterisk in the percent of class column indicates beneficial ownership of less
than 1%.
|
Name
of Beneficial Owner |
|
Shares
Owned
(a) |
|
Right
to
Acquire (b) |
|
Total
Shares |
|
Percent
of
Class |
|
| |
|
|
|
|
|
|
|
|
|
|
Glenn
S. Penny |
|
|
875,415 |
|
|
36,500 |
|
|
911,915 |
|
|
13.4 |
% |
|
Robert
S. Beall |
|
|
577,143 |
|
|
47,833 |
|
|
624,976 |
|
|
9.2 |
% |
|
Jerry
D. Dumas, Sr. (c) |
|
|
250,198 |
|
|
139,242 |
|
|
389,440 |
|
|
5.7 |
% |
|
William
R. Ziegler |
|
|
290,418 |
|
|
63,451 |
|
|
353,869 |
|
|
5.2 |
% |
|
John
W. Chisholm (d) |
|
|
200,113 |
|
|
92,991 |
|
|
293,104
|
|
|
4.3 |
% |
|
Gary
M. Pittman (e)(f) |
|
|
10,000 |
|
|
72,593 |
|
|
82,593 |
|
|
1.2 |
% |
|
Barry
E. Stewart |
|
|
9,999 |
|
|
47,833 |
|
|
57,832 |
|
|
* |
|
|
Richard
O. Wilson |
|
|
2,000 |
|
|
39,040 |
|
|
41,040 |
|
|
* |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
directors and officers as a group |
|
|
2,222,160 |
|
|
559,483 |
|
|
2,781,643 |
|
|
40.9 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Beneficial Owners: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOSI,
L.P. (e)(f) |
|
|
752,347 |
|
|
— |
|
|
752,347 |
|
|
11.1 |
% |
|
1601
Elm Street, Suite 3900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dallas,
Texas 75201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
Each
person has sole voting and investment power with respect to the common
shares listed, except as noted below. The address for each of the
Executive Officers and Directors is 7030 Empire Central Drive, Houston,
Texas 77040. |
| (b) |
Includes
common shares which may be acquired within 60 days of March 21, 2005
through the exercise of stock options or warrants to acquire common
shares. |
| (c) |
Includes
105,438 common shares owned by Saxton River Corporation and 19,760 common
shares owned by Hinckley Brook, Inc., both of which are controlled by Mr.
Dumas. |
| (d) |
Includes
162,185 common shares held by Chisholm Energy Partners LLC, of which Mr.
Chisholm is a manager and member and 29,540 warrants.
|
| (e) |
The
sole general partner of TOSI, L.P., Pitman Property Corp. and its
President and controlling person, J.W. Beavers, may also be deemed to be
the beneficial owners of those shares. Pitman Property Corp. has no
affiliation with Mr. Gary Pittman, a Director of
Flotek. |
| (f) |
Mr.
Pittman, through Pittman & Company, owns 10% of TOSI, LP. Pittman
& Company has no voting nor investment rights in TOSI. |
AUDIT
COMMITTEE REPORT
In
accordance with resolutions adopted by the Board of Directors, the Audit
Committee (the “Committee”), which consists entirely of directors who meet the
independence and experience requirements of Nasdaq Stock Market, Inc. currently
applicable to the Company, as determined by the Board of Directors, assists the
Board of Directors in fulfilling its responsibility for oversight of the quality
and integrity of the accounting, auditing and financial reporting practices of
the Company. The duties and responsibilities of the Audit Committee are set
forth in a written charter adopted by the Board of Directors. The Audit
Committee reviews and reassesses the charter annually and recommends any changes
to the Board of Directors for approval. The Audit Committee has reviewed the
relevant requirements of the Sarbanes-Oxley Act of 2002, the rules, proposed and
adopted, of the Securities and Exchange Commission and the proposed new listing
standards of the Nasdaq Small Cap Market regarding audit committee procedures
and responsibilities.
In
discharging its oversight responsibility as to the audit process, the Committee
obtained from the independent auditors a formal written statement describing all
relationships between the auditors and the Company that might bear on the
auditors’ independence as required by Independence Standards Board Standard No.
1, “Independence Discussions with Audit Committees.” The Committee discussed
with the auditors any relationships that may impact their objectivity and
independence, including fees for non-audit services, and satisfied itself as to
the auditors’ independence. The Committee also discussed with management, the
internal auditors and the independent auditors the quality and adequacy of the
Company’s internal controls. The Committee reviewed with the independent
auditors their management letter on internal controls.
The
Committee discussed and reviewed with the independent auditors all matters
required to be discussed by auditing standards generally accepted in the United
States of America, including those described in Statement on Auditing Standards
No. 61, as amended, “Communication with Audit Committees”.
The
Committee reviewed the audited consolidated financial statements of the Company
as of and for the year ended December 31, 2004, with management and the
independent auditors. Management has the responsibility for the preparation of
the Company’s financial statements and the independent auditors have the
responsibility for the examination of those statements.
Based on
the above-mentioned review and discussions with the independent auditors and
management, the Committee recommended to the Board of Directors that the
Company’s audited consolidated financial statements be included in its Annual
Report on Form 10-KSB for the year ended December 31, 2004, for filing with the
Securities and Exchange Commission.
AUDIT
COMMITTEE
Barry E.
Stewart, Chairman
John W.
Chisholm, Member
Richard
O. Wilson, Member
CERTAIN
RELATIONSHIPS AND TRANSACTIONS WITH MANAGEMENT
The
Company purchased from Phoenix E&P Technology, LLC, the manufacturing
assets, inventory and intellectual property rights to produce oilfield shale
shaker screens on January 28, 2005. The assets were purchased for $46,640 with a
three year royalty interest on all shale shaker screens produced. Phoenix is 75%
owned by Chisholm Energy Partners (“CEP”). Jerry D. Dumas, Sr., Chief Executive
Officer, director, and Chairman of the Company, and Dr. Glenn Penny, President
and director of the Company, each have a two and one-half percent indirect
ownership interest in CEP and John Chisholm, who is also a director, has a
thirty percent ownership interest in CEP.
On
January 30, 2003, a subsidiary of the Company entered into an agreement with
Stimulation Chemicals, LLC (“SCL”). SCL is owned jointly by Dr. Penny and Mr.
Robert Beall, whom are both directors as well as principal shareholders of
Flotek. Dr. Penny is also an employee of the Company. Under the agreement SCL
agreed to procure raw materials as ordered by CESI and grant the subsidiary of
the Company 120 day payment terms for a 15% percent markup on established
supplier prices up to a purchase value of $500,000. On August 27, 2003 a new
agreement was executed with SCL deferring $359,993 of purchases made by SCL on
the behalf of the Company subsidiary for 12 months, with principal and interest
payments beginning September 15, 2003 in the amount of $38,600 for principal
plus interest of 1% per month on the unpaid balance. As of December 31, 2004 the
outstanding balance owed to SCL was $347,333. On February 14, 2005 in connection
with the new senior credit facility of the Company, SCL was required to fully
subordinate its debt position to that of the senior lender and defer principal
payments for six months. To compensate for this subordination and deferment the
rate on the note to SCL was raised to 21%. On April 1, 2005 the Company retired
the debt position of SCL pursuant to the following terms: (i) a payment of
$225,511 was made to Mr. Beall, (ii) a payment of $4,063 was made to Dr. Penny,
(iii) Dr. Penny accepted a new promissory note from the Company $128,722, which
bears interest at 12.5% per annum and is payable over 36 months.
On
February 11, 2003, Mr. Jerry D. Dumas, Sr., Chairman and CEO of the Company,
made a short-term loan to the Company for $135,000 to cover operating cash flow
requirements. This note bore interest at 6% annually. This note was paid down to
$95,000 as of September 9, 2003, and refinanced as of that date with a $10,000
principal payment due October 31, 2003 and monthly payments of $5,000 due until
note is paid in full, bearing interest at 10% per annum. As of April 5, 2005,
this note was paid in full. Additional demand notes from Mr. Dumas total
$71,068, bearing interest at 10% per annum remain outstanding.
On July
25, 2002, the Company borrowed $500,000 under a promissory note from Oklahoma
Facilities LLC. Dr. Penny has a minority investment interest in and is an
officer of Oklahoma Facilities LLC. The majority of the note is secured by
specific Petrovalve inventory. The note was amended on October 1, 2004 bearing
interest at the prime rate plus 7.25%, payable in 36 monthly installments
beginning January 1, 2005.
Pursuant
to an arrangement which existed at the time of the merger of Chemical &
Equipment Specialties, Inc with the Company, Dr. Penny was a personal guarantor
on substantially all of the bank debt of the Company. Dr. Penny does not receive
any compensation for his guaranty of Company indebtedness. Dr. Penny was removed
as guarantor of the Company indebtedness pursuant to the closing of the Wells
Fargo credit facility obtained by the Company in 2005.
RELATIONSHIP
WITH INDEPENDENT AUDITORS
Our Audit
Committee of our Board of Directors dismissed Weinstein Spira & Company as
its independent and principal accountants effective February 23, 2005, and on
the same day engaged the firm of UHY Mann Frankfort Stein & Lipp CPAs as our
new independent principal auditors.
During
the two most recent fiscal years audited and the subsequent interim periods
preceding its determination to change independent principal accountants, there
were no disagreements with Weinstein Spira & Company on any matter of
accounting principles or practices, financial statement or disclosure or
auditing scope or procedure, which, if not resolved to the satisfaction of
Weinstein Spira & Company would have caused it to make reference to the
subject matter of the disagreement in connection with its reports on the
financial statements for such years. In addition, there were no disagreements
between ourselves and our successor auditors through the date of this report.
Representatives
of UHY Mann Frankfort Stein & Lipp CPAs, LLP are expected to be present at
the Meeting and will have the opportunity to make statements if they so desire
and will be available to respond to appropriate questions.
Audit
Fees. The
aggregate fees billed by UHY Mann Frankfort Stein & Lipp CPAs, LLP for
professional services rendered for the audit of the annual financial statements
of the Company for the most recent fiscal year and the review of the financial
statements of the Company included in the Form 10-KSB for that year was
$48,550.
All
Other Fees. There
were no fees billed for services rendered by UHY Mann Frankfort Stein & Lipp
CPAs, LLP, other than for audit services, for the most recent fiscal year of the
Company. The Audit Committee has considered whether the provision of such
non-audit services is compatible with UHY Mann Frankfort Stein & Lipp CPAs,
LLP maintaining its independence and determined that these services do not
compromise their independence.
ITEM
2: ADOPTION OF THE 2005 LONG-TERM INCENTIVE PLAN
Description
of the Plan
Effective
September 21, 2004, the Board of Directors of the Company adopted the Flotek
Industries, Inc. 2005 Long-Term Incentive Plan (the "2005 Plan"), subject to
approval by the Company's stockholders. The summary description that follows is
qualified by reference to the 2005 Plan. In the event that stockholder approval
is not received, the 2005 Plan will be terminated.
The
purpose of the 2005 Plan is to provide employees, directors, consultants and
other individuals rendering services to or on behalf of the Company and/or one
or more of its subsidiaries an opportunity to acquire an equity interest in the
Company. The Company intends to use the Plan to link the long-term interests of
stockholders of the Company and participants in the 2005 Plan, attract and
retain participants' services, motivate participants to increase the Company's
value and create flexibility in compensating participants.
The 2005
Plan is administered by a committee (the "Plan Committee") appointed by the
Board of Directors and is currently administered by the Compensation Committee
of the Board of Directors.
The 2005
Plan provides for the grant of incentive and nonqualified stock options, stock
appreciation rights, restricted stock, performance shares and performance units
(individually an "Award" or collectively, "Awards"). All employees, directors
and consultants of the Company or its subsidiaries will be eligible to receive
Awards under the 2005 Plan (currently approximately 130 individuals). The Plan
Committee has the discretion to select the individuals to whom the Awards will
be granted, to determine the type, size and terms and conditions applicable to
each Award and the authority to interpret, construe and implement the provisions
of the 2005 Plan. The Plan Committee's decisions will be binding.
The total
number of shares of Common Stock that may be subject to Awards under the 2005
Plan is 950,000 shares (subject to adjustment as provided in the 2005 Plan). No
more than 190,000 shares authorized under the 2005 Plan may be issued as
restricted stock. Any shares of Common Stock subject to an Award which expires,
is canceled, is forfeited or terminated for any reason other than being settled
in shares of Common Stock shall again be available for issuance under the Plan.
As of the
date of this Proxy Statement, the Compensation Committee has approved the grant
of 362,414 Options pursuant to the 2005 Plan. The Company intends to grant
Awards in the future to the Named Executive Officers and other selected
participants, but no determination is contemplated or has been made regarding
the number or terms of such Awards.
The
Compensation Committee intends to grant Awards under the 2005 Plan which will
strongly link the interests of stockholders and Award recipients. Accordingly,
the Compensation Committee intends to grant awards to eligible individuals who
have demonstrated successful performance in their respective positions with the
Company. Set forth below is a brief description of the types of Awards that may
be granted under the 2005 Plan.
Stock
Options. Options
(each an "Option") to purchase shares of Common Stock, which may be incentive or
nonqualified stock options, may be granted under the 2005 Plan at an exercise
price (the "Option Price") determined by the Plan Committee in its discretion,
provided that the Option Price may be no less than the trading price of the
Common Stock on the date of grant. Each Option represents the right to purchase
one share of Common Stock at the specified Option Price.
Options
will expire no later than 10 years after the date on which they are granted and
will become exercisable at such times and in such installments as determined by
the Plan Committee. Payment of the Option Price must be made in full at the time
of exercise in cash, certified or bank check, or by tendering to the Company
shares of Common Stock having a fair market value equal to the Option Price.
Options
may become vested and exercisable based upon satisfaction of criteria
established by the Plan Committee. Such criteria may be time-based vesting based
on continuous employment or rendering services to the Company over a specified
period of time from the date of grant.
Stock
Appreciation Rights. An
Award of a stock appreciation right ("SAR") may be granted under the 2005 Plan
with respect to shares of Common Stock. Generally, one SAR is granted with
respect to one share of Common Stock. The SAR entitles the participant, upon the
exercise of the SAR, to receive an amount equal to the appreciation in the
underlying share of Common Stock. The appreciation is equal to the difference
between (i) the "base value" of the SAR (which is the trading price of the
Common Stock on the date the SAR is granted), and (ii) the closing trading price
of the Common Stock on the date preceding the date the SAR is exercised. Upon
the exercise of a vested SAR, the exercising participant will be entitled to
receive the appreciation in the value of one share of Common Stock as so
determined, payable at the discretion of the Plan Committee in cash or in shares
of Common Stock.
SARs will
expire no later than 10 years after the date on which they are granted. SARs
become exercisable at such times and in such installments as determined by the
Plan Committee.
Tandem
Option/SARs. An
Option and an SAR may be granted "in tandem" with each other (a "Tandem
Option/SAR"). An Option and an SAR are considered to be in tandem with each
other because the exercise of the Option aspect of the tandem unit automatically
cancels the right to exercise the SAR aspect of the tandem unit, and vice versa.
The Option may be an incentive stock option or a nonqualified stock option, and
the Option may be coupled with one SAR, more than one SAR or a fractional SAR in
any proportionate relationship selected by the Plan Committee.
Restricted
Stock. An
Award of restricted stock ("Restricted Stock") is an Award of Common Stock that
is subject to such restrictions, if any, as the Plan Committee deems
appropriate, including forfeiture conditions and restrictions against transfer
for a period specified by the Plan Committee. Restricted Stock Awards may be
granted under the 2005 Plan as consideration for services and/or payments of
cash by the participant, as determined by the Compensation Committee.
Restrictions, if any, on Restricted Stock may lapse in installments based on
factors selected by the Plan Committee. Prior to the expiration of the
restricted period, except as provided by the Plan Committee, a grantee who has
received a Restricted Stock Award generally has the rights of a stockholder of
the Company, including the right to vote and to receive cash dividends on the
shares subject to the Award. Stock dividends issued with respect to a Restricted
Stock Award may be treated as additional shares under such Award and may be
subject to the same restrictions and other terms and conditions that apply to
the shares with respect to which such dividends are issued.
Performance
Shares and Performance Units. A
performance share Award (a "Performance Share") and/or a performance unit Award
(a "Performance Unit") may be granted under the 2005 Plan. Each Performance Unit
will have an initial value that is established by the Plan Committee at the time
of grant. Each Performance Share will have an initial value equal to the trading
price of one share of Common Stock on the date of grant. Such Awards may be
earned based upon satisfaction of certain specified performance criteria,
subject to such other terms and conditions as the Plan Committee deems
appropriate. Prior to the end of a performance period, the Plan Committee, in
its discretion, may adjust the performance objectives to reflect an event that
may materially affect the performance of the Company, including, but not limited
to, market conditions or a significant acquisition or disposition of the assets
or other property by the Company. The extent to which a grantee is entitled to
payment in settlement of such an Award at the end of the performance period will
be determined by the Plan Committee, in its sole discretion, based on whether
the performance criteria have been met and payment will be made in cash or in
shares of Common Stock in accordance with the terms of the applicable Award
Agreements.
Adjustments
Under the
2005 Plan, if there is any change in the capitalization of the Company, a
reorganization, or a similar transaction, such proportionate adjustments as may
be necessary (in the form determined by the Plan Committee) to reflect such
change will be made to prevent dilution or enlargement of the rights with
respect to the aggregate number of shares of Common Stock for which Awards in
respect thereof may be granted under the 2005 Plan, the number of shares of
Common Stock covered by each outstanding Award and the price per share in
respect thereof. Unless otherwise provided in an Award Agreement, an
individual's rights under the 2005 Plan may not be assigned or transferred
(except in the event of death).
The award
agreements will provide that in the event of a change-in-control of the Company,
each Award will expire as of the effective date of such transaction, provided
that to the extent possible the Company is to provide 30 days written notice of
such transaction to the participants so as to enable them to exercise their
vested awards prior to the change-in-control event.
Termination
The 2005
Plan will remain in effect until terminated by the Board of Directors and
thereafter until all Awards granted thereunder are satisfied by the issuance of
shares of Common Stock or the payment of cash or the 2005 Plan is otherwise
terminated pursuant to the terms of the 2005 Plan or under any Award Agreements.
Notwithstanding the foregoing, no Awards may be granted under the 2005 Plan
after the tenth anniversary of the effective date of the 2005 Plan. The Board of
Directors may at any time terminate, modify or amend the 2005 Plan, provided
however, that no such amendment, modification or termination may (i) materially
adversely affect an optionee's or grantee's rights under any Award previously
granted under the 2005 Plan, except with the consent of such optionee or
grantee, or (ii) increase the number of shares subject to the 2005 Plan, or
change the designation of the class of persons eligible to receive Awards,
unless approved by the stockholders of the Company.
Certain
Federal Income Tax Consequences of Awards
An
employee to whom an Option which is an incentive stock option ("ISO") that
qualifies under Section 422 of the Internal Revenue Code is granted will not
recognize income at the time of grant or exercise of such option. No federal
income tax deduction will be allowable to the Company upon the grant or exercise
of such ISO. However upon the exercise of an ISO, any excess in the fair market
price of the Common Stock over the Option Price constitutes an item of
adjustment that may have alternative minimum tax consequences for the employee.
When the employee sells such shares more than one year after the date of
transfer of such shares and more than two years after the date of grant of such
ISO (the "ISO Holding Period"), the employee will generally recognize either a
long-term or mid-term capital gain or loss equal to the difference, if any,
between the sale prices and the aggregate Option Price and the Company will not
be entitled to a federal income tax deduction with respect to the exercise of
the ISO or the sale of such shares. The shares must be held for more than 12
months to qualify for long-term capital gains. If the employee does not hold
such shares for the required ISO Holding Period, when the employee sells such
shares the employee will recognize ordinary compensation income and possibly
short-term capital gain or loss in such amounts as are prescribed by the
Internal Revenue Code and the regulations thereunder and the Company will
generally be entitled to a federal income tax deduction.
A
participant to whom a nonqualified stock option ("NSO") or SAR is granted will
not recognize income at the time of grant of such Option or SAR. When the
participant exercises such NSO or SAR, the participant will recognize ordinary
compensation income equal to the difference, if any, between the exercise price
paid and the fair market value, as of the date of exercise of such Option or
SAR, of the shares of Common Stock the participant receives. The tax basis of
such shares to such participant will be equal to the exercise price paid plus
the amount includible in the participant's gross income, and the participant's
holding period for such shares will commence on the date of exercise. Subject to
the applicable provisions of the Internal Revenue Code and regulation
thereunder, the Company will generally be entitled to a federal income tax
deduction in respect of an NSO or SAR in an amount equal to the ordinary
compensation income recognized by the employee upon the exercise of the NSO or
SAR.
No income
generally will be recognized upon the grant of performance shares or performance
units. Upon payment in respect of performance shares or earned performance
units, the recipient generally will be required to include as taxable ordinary
income in the year of receipt an amount equal to the amount of cash received and
the fair market value of any nonrestricted shares of Common Stock received less
any amount paid for such award at the time of payment or transfer pursuant to
the fulfillment of the specified conditions or the achievement of the
performance goals.
The
recipient of Restricted Stock generally will be subject to tax at ordinary
income rates on the fair market value of the shares of Common Stock on the first
date that such shares either are transferable by the recipient or cease to be
subject to forfeiture, and the capital gain or loss holding period for such
shares will also commence on that date.
Required
Affirmative Vote
The
affirmative vote of holders of a majority of the shares of Common Stock present
in person or by proxy at the 2005 Annual Meeting of Stockholders is required to
approve the Flotek Industries, Inc. 2005 Long-Term Incentive Plan. If not
approved, the 2005 Plan will not become effective.
THE BOARD
OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL OF THE COMPANY’S
2005 LONG-TERM INCENTIVE PLAN, AND PROXIES EXECUTED AND RETURNED WILL BE SO
VOTED UNLESS CONTRARY INSTRUCTIONS ARE INDICATED THEREON.
OTHER
MATTERS
The Board
of Directors of the Company is not aware of any other matters that may come
before the Meeting. However, the proxies may be voted with discretionary
authority with respect to any other matters that may properly come before the
Meeting.
ANNUAL
REPORT
A Summary
Annual Report to Stockholders and an Annual Report on Form 10-KSB covering the
fiscal year of the Company ended December 31, 2004 are enclosed herewith. These
reports do not form any part of the material for solicitation of
proxies.
STOCKHOLDER
PROPOSALS
Stockholder
proposals for inclusion in the proxy statement for the 2006 Annual Meeting of
Stockholders must be received by the Company at its principal executive offices
by February 15, 2006. Such stockholder proposals, together with any supporting
statements, should be directed to the Secretary of the Company.
| Date: April 14, 2005 |
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By order of the Board of
Directors |
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Rosalie Melia,
Secretary |