Exhibit 99.1
Teledrift, Inc.
Audited Financial Statements
As of and for the Nine Months Ended
September 30, 2007 and each of the
Years in the Two-Year Period Ended December 31, 2006
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Teledrift, Inc.
We have audited the accompanying balance sheets of Teledrift, Inc. (the “Company”) as of September 30, 2007 and December 31, 2006, and the related statements of income, changes in stockholders’ equity, and cash flows for the nine months ended September 30, 2007 and each of the years in the two-year period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2007 and December 31, 2006, and the results of its operations and its cash flows for the nine months ended September 30, 2007 and each of the years in the two-year period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.
UHY LLP
Houston, Texas
February 1, 2008
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BALANCE SHEETS
September 30, 2007 | December 31, 2006 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,896,811 | $ | 1,753,417 | ||||
Accounts receivable, net of allowance for doubtful accounts of $20,000 and $0 at September 30, 2007 and December 31, 2006, respectively | 4,276,192 | 3,713,527 | ||||||
Inventories, net | 2,055,158 | 1,707,722 | ||||||
Other current assets | 33,242 | 189,392 | ||||||
Total current assets | 8,261,403 | 7,364,058 | ||||||
Property, plant and equipment, net | 9,055,352 | 7,063,828 | ||||||
Total Assets | $ | 17,316,755 | $ | 14,427,886 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,048,249 | $ | 1,551,281 | ||||
Accrued liabilities | 200,829 | 79,237 | ||||||
Total current liabilities | 1,249,078 | 1,630,518 | ||||||
Total liabilities | 1,249,078 | 1,630,518 | ||||||
Stockholders’ equity: | ||||||||
Common Stock, $1 par value; 50,000 shares authorized, 520 shares issued and 495 shares outstanding | 520 | 520 | ||||||
Additional paid-in capital | 466,667 | 266,667 | ||||||
Treasury stock | (1,000,000 | ) | (1,000,000 | ) | ||||
Retained earnings | 16,600,490 | 13,530,181 | ||||||
Total stockholders’ equity | 16,067,677 | 12,797,368 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 17,316,755 | $ | 14,427,886 | ||||
See notes to the financial statements.
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TELEDRIFT, INC.
For the Nine Months Ended September 30, 2007 | For the Year Ended December 31, 2006 | For the Year Ended December 31, 2005 | ||||||||||
Revenues | $ | 12,815,519 | $ | 13,996,456 | $ | 7,799,665 | ||||||
Expenses: | ||||||||||||
Selling, general and administrative | 4,565,657 | 4,772,909 | 3,232,623 | |||||||||
Depreciation and amortization | 1,241,630 | 1,236,748 | 740,683 | |||||||||
Research and development | 339,339 | 108,000 | 110,151 | |||||||||
Stock compensation expense | 200,000 | 266,667 | — | |||||||||
Freight charges | 229,620 | 250,672 | 211,680 | |||||||||
Total expenses | 6,576,246 | 6,634,996 | 4,295,137 | |||||||||
Gain on equipment lost in hole | 1,971,448 | 1,673,246 | 1,567,993 | |||||||||
Income from operations | 8,210,721 | 9,034,706 | 5,072,521 | |||||||||
Other income (expense): | ||||||||||||
Interest expense | — | (50,604 | ) | (25,828 | ) | |||||||
Other, net | 112,391 | 213,677 | 76,178 | |||||||||
Total other income (expense) | 112,391 | 163,073 | 50,350 | |||||||||
Income before income taxes | 8,323,112 | 9,197,779 | 5,122,871 | |||||||||
Provision for income taxes | (452,803 | ) | (373,651 | ) | (62,801 | ) | ||||||
Net income | $ | 7,870,309 | $ | 8,824,128 | $ | 5,060,070 | ||||||
See notes to the financial statements.
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TELEDRIFT, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Total | |||||||||||||||||||
Shares | Par Value | Shares | Par Value | ||||||||||||||||||||
Balance January 1, 2005 | 500 | $ | 500 | — | $ | — | $ | — | $ | 5,645,983 | $ | 5,646,483 | |||||||||||
Common stock issued (repurchased) | (25 | ) | (1,000,000 | ) | — | — | (1,000,000 | ) | |||||||||||||||
Distributions to stockholders | — | — | — | — | — | (2,400,000 | ) | (2,400,000 | ) | ||||||||||||||
Net income | — | — | — | — | — | 5,060,070 | 5,060,070 | ||||||||||||||||
Balance December 31, 2005 | 500 | 500 | (25 | ) | (1,000,000 | ) | — | 8,306,053 | 7,306,553 | ||||||||||||||
Distributions to stockholders | — | — | — | — | (3,600,000 | ) | (3,600,000 | ) | |||||||||||||||
Stock compensation expense | 20 | 20 | — | — | 266,667 | — | 266,687 | ||||||||||||||||
Net income | — | — | — | — | — | 8,824,128 | 8,824,128 | ||||||||||||||||
Balance December 31, 2006 | 520 | 520 | (25 | ) | (1,000,000 | ) | 266,667 | 13,530,181 | 12,797,368 | ||||||||||||||
Distributions to stockholders | — | — | — | — | — | (4,800,000 | ) | (4,800,000 | ) | ||||||||||||||
Stock compensation expense | — | — | — | — | 200,000 | — | 200,000 | ||||||||||||||||
Net income | — | — | — | — | — | 7,870,309 | 7,870,309 | ||||||||||||||||
Balance September 30, 2007 | 520 | $ | 520 | (25 | ) | $ | (1,000,000 | ) | $ | 466,667 | $ | 16,600,490 | $ | 16,067,677 | |||||||||
See notes to the financial statements.
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TELEDRIFT, INC.
For the Nine Months Ended September 30, 2007 | For the Year Ended December 31, 2006 | For the Year Ended December 31, 2005 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 7,870,309 | $ | 8,824,128 | $ | 5,060,070 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 1,241,630 | 1,236,748 | 740,683 | |||||||||
(Gain) loss on sale of assets | (1,971,448 | ) | (1,673,246 | ) | (1,567,993 | ) | ||||||
Stock compensation expense | 200,000 | 266,667 | — | |||||||||
Change in assets and liabilities: | ||||||||||||
Accounts receivable | (562,665 | ) | (1,235,294 | ) | (645,188 | ) | ||||||
Inventories | (347,436 | ) | (661,956 | ) | (484,879 | ) | ||||||
Deposits and other | 156,150 | (104,157 | ) | 188,068 | ||||||||
Accounts payable | (503,032 | ) | 305,692 | 766,441 | ||||||||
Accrued liabilities and other | 121,592 | (15,007 | ) | 58,326 | ||||||||
Net cash provided by operating activities | 6,205,100 | 6,943,575 | 4,115,528 | |||||||||
Cash flows from investing activities: | ||||||||||||
Proceeds from sale of equipment | 2,346,693 | 1,871,328 | 1,786,895 | |||||||||
Other assets | — | — | 134,854 | |||||||||
Capital expenditures | (3,608,399 | ) | (3,179,798 | ) | (3,391,344 | ) | ||||||
Net cash used in investing activities | (1,261,706 | ) | (1,308,470 | ) | (1,469,595 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from issuance of restricted stock | — | 20 | — | |||||||||
Repurchase of stock | — | — | (1,000,000 | ) | ||||||||
Proceeds from borrowings | — | — | 1,000,000 | |||||||||
Repayments of indebtedness | — | (1,000,000 | ) | — | ||||||||
Distributions to shareholders | (4,800,000 | ) | (3,600,000 | ) | (2,400,000 | ) | ||||||
Net cash used in financing activities | (4,800,000 | ) | (4,599,980 | ) | (2,400,000 | ) | ||||||
Net increase in cash and cash equivalents | 143,394 | 1,035,125 | 245,933 | |||||||||
Cash and cash equivalents at beginning of period | 1,753,417 | 718,292 | 472,359 | |||||||||
Cash and cash equivalents at end of period | $ | 1,896,811 | $ | 1,753,417 | $ | 718,292 | ||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Interest paid | $ | — | $ | 50,604 | $ | 25,828 | ||||||
Income taxes paid | $ | 464,873 | $ | 359,116 | $ | 57,443 |
See notes to the financial statements.
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TELEDRIFT, INC.
Note 1—Business and Basis of Presentation
Teledrift, Inc. (“Teledrift” or the “Company”) has provided survey instruments to oil and gas operators and drilling contractors since 1986. The Company, which was originally formed from the assets of the Teledrift division of Hughes Tool Company, is headquartered in Oklahoma City, Oklahoma. Teledrift tools have been utilized in the industry for over 30 years. Its business model incorporates agents supplying unmanned, rig-operated tools to end customer in both domestic and international locales.
Note 2—Summary of Significant Accounting Policies
Basis of Presentation: The financial statements of the Company have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.
Cash and Cash Equivalent: Cash equivalents consist of highly liquid investments with an original maturity of three months or less. The Company had cash deposits in financial institutions in excess of the federally insured limit of $100,000 at September 30, 2007 and December 31, 2006. The Company regularly monitors the financial condition of these institutions in which it has depository accounts and believes the risk of loss is minimal.
Revenue Recognition: Revenue for domestic and most international product rentals is recognized when all of the following criteria have been met: (i) evidence of an agreement exists, (ii) products are shipped or services rendered to the customer, (iii) the price to the customer is fixed and determinable and (iv) collectability is reasonably assured. Accounts receivable are recorded at that time, net of any discounts. The Company operates through agents in both domestic and international markets and recognizes net revenues received from the agents. Earnings are charged with a provision for doubtful accounts based on a current review of collectability of the accounts receivable. Accounts receivable deemed ultimately uncollectible are applied against the allowance for doubtful accounts. Revenue from international activities accounted for 35%, 36% and 46% of total revenue for the nine months ended September 30, 2007 and years ended December 31, 2006 and 2005, respectively.
Lost In-Hole: During the course of normal drilling activity, motors and other oilfield equipment are lost in-hole by customers and agents. The Company bills the customers and agents for the lost equipment and recognizes the gain or loss on the sale of the equipment. For the nine months ended September 30, 2007 and the years ended December 31, 2006 and 2005, the Company billed their customers and agents $2,346,693, $1,871,328 and $1,786,895 for equipment lost in hole, respectively.
Inventories: Inventories consist of work-in-process, spare parts and finished goods. Inventories are carried at the lower of cost or market using the weighted average cost method.
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TELEDRIFT, INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
Property, Plant and Equipment: Property, plant and equipment are stated at cost. The Company determines value of acquired property, plant and equipment on the lower of (a) replacement cost or (b) appraised value. The cost of ordinary maintenance and repairs is charged to operations, while replacements and major improvements are capitalized. Depreciation is provided at rates considered sufficient to depreciate the cost of the assets using the straight-line method over the following estimated useful lives:
Buildings and leasehold improvements | 3-24 years | |
Machinery and equipment | 3-7 years | |
Rental tools | 3-7 years | |
Furniture and fixtures | 3-7 years | |
Transportation equipment | 3-5 years | |
Computer equipment | 3-5 years |
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds either the fair value or the estimated discounted cash flows of the assets, whichever is more readily measurable. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Financial Instruments: The Company considers the fair value of all financial instruments (primarily accounts receivable and notes payable) not to be materially different from their carrying values at the end of each fiscal year based on management’s estimate of the collectability of net accounts receivable and due to its ability to borrow funds under favorable terms and conditions.
The Company has no off-balance sheet debt or other off-balance sheet financing arrangements. The Company has not entered into derivatives or other financial instruments.
Research and Development Costs: Expenditures for research activities relating to product development and improvement are charged to expense as incurred.
Income Taxes: The Company, with the consent of its stockholders, has elected under the Internal Revenue Code to be taxed as an S Corporation. The stockholders of an S Corporation are taxed on their proportionate share of the Company’s taxable income. Therefore, no provision or liability for federal income taxes has been included in the Company’s financial statements. Certain specific deductions and credits flow through the Company to its stockholders. The provision for income taxes includes taxes withheld on payments received from agents in various countries where the Company transacts business.
Stock-Based Compensation: The Company recognizes compensation expense associated with stock-based awards under the recognition and measurement principles of SFAS No. 123R, “Accounting for Stock-Based Compensation”.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and certain assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the
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TELEDRIFT, INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes current estimates are reasonable and appropriate, actual results could differ from these estimates.
Note 3—Inventories
The components of inventories as of September 30, 2007 and December 31, 2006 were as follows:
September 30, 2007 | December 31, 2006 | |||||
Work-in-process | $ | 209,301 | $ | 148,993 | ||
Spare parts and finished goods | 1,845,857 | 1,558,729 | ||||
$ | 2,055,158 | $ | 1,707,722 | |||
Note 4—Property, Plant and Equipment
As of September 30, 2007 and December 31, 2006, property, plant and equipment were comprised of the following:
September 30, 2007 | December 31, 2006 | |||||||
Land | $ | 437,409 | $ | 50,590 | ||||
Buildings and leasehold improvements | 336,773 | 336,773 | ||||||
Machinery and equipment | 88,696 | 88,696 | ||||||
Rental tools | 13,327,264 | 10,803,352 | ||||||
Furniture and fixtures | 264,292 | 262,934 | ||||||
Transportation equipment | 465,167 | 401,819 | ||||||
Gross property, plant and equipment | 14,919,601 | 11,944,164 | ||||||
Less: Accumulated depreciation | (5,864,249 | ) | (4,880,336 | ) | ||||
Net property, plant and equipment | $ | 9,055,352 | $ | 7,063,828 | ||||
Depreciation expense for the nine month period ended September 30, 2007 and the years ended December 31, 2006 and 2005 was $1,241,630, $1,236,748 and $740,683, respectively.
Note 5—Related Party Transactions
The Company periodically contracts with a stockholder of the Company for usage of his private airplane for the purpose of site visits to domestic agent locations. The Company is responsible for purchasing fuel and hiring pilots. These costs are expensed as incurred. During the nine months ended September 30, 2007 and the year ended December 31, 2006, the Company incurred expenses of $1,997 and $6,693 related to this service, respectively.
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TELEDRIFT, INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
Note 6—Commitments and Contingencies
The Company is involved, on occasion, in routine litigation incidental to its business.
The Company has entered into operating leases for engineering/research and development facilities and field operation facilities. Future minimum lease payments under these leases as of September 30, 2007 are as follows:
2007 | $ | 10,106 | |
2008 | $ | 41,425 | |
2009 | $ | 17,581 | |
2010 | — |
Total rent expense under these operating leases totaled $54,467, $65,987 and $26,656 during the nine months ended September 30, 2007 and the years ended December 31, 2006 and 2005, respectively.
401(k) Retirement Plan
The Company maintains a Simple IRA retirement plan for the benefit of eligible employees in the United States. All employees are eligible to elect to participate in the plan during April and October election periods, regardless of date of employment. As of September 30, 2007 and December 31, 2006, the Company matches up to 3% of employee contributions. All matching contributions vest immediately. Company matching contributions to the Plan totaled $13,528 for the nine months ended September 30, 2007 and $23,321 and $13,568 for the years ended December 31, 2006 and 2005, respectively.
Stock-Based Compensation
The Company recognizes stock-based payments to employees based on their grant-date fair values. In January 2006, the Company granted 20 shares of common stock as a restricted stock award to an employee which vests over a period of three years from the date of grant. The fair value of the stock granted was approximately $800,000. The Company has recognized stock compensation expense of $200,000 and $266,667 for the nine months ended September 30, 2007 and the year ended December 31, 2006, respectively.
Note 7—Significant Concentrations
Customer concentrations: During the nine months ended September 30, 2007, one customer accounted for approximately 15% of revenue. Accounts receivable of approximately $656,000 was due from this customer as of September 30, 2007. During the year ended December 31, 2006, two customers accounted for approximately 22% of revenue. Accounts receivable of approximately $822,000 was due from these customers as of December 31, 2006.
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