December 31, 2006 and 2005
INDEX TO FINANCIAL STATEMENTS
Description | Reference |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Best Well Service, Inc.
Liberal, Kansas
We have audited the accompanying balance sheet of Best Well Service, Inc. (“Best Well”) as of December 31, 2006, and the related statements of operations, stockholder’s equity and cash flows for the years ended December 31, 2006 and 2005. These financial statements are the responsibility of Best Well 's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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 Best Well as of December 31, 2006, and the results of its operations and cash flows for the years ended December 31, 2006 and 2005, in conformity with accounting principles generally accepted in the United States of America.
/s/ Malone & Bailey
Malone & Bailey, PC
Malone & Bailey, PC
www.malone-bailey.com
Houston, Texas
January 4, 2008
F-1
Best Well Service, Inc.
Balance Sheet
December 31, 2006
ASSETS | ||
Current assets | ||
Cash | $ | 2,297,829 |
Trading securities, at market | 705,801 | |
Accounts receivable | 1,631,600 | |
Total current assets | 4,635,230 | |
Property and equipment, net | 4,335,287 | |
TOTAL ASSETS | $ | 8,970,517 |
LIABILITIES AND STOCKHOLDER’S EQUITY | ||
Current liabilities | ||
Accounts payable and accrued expenses | $ | 653,268 |
Income taxes payable | 816,285 | |
Current portion of notes payable | 230,431 | |
Total current liabilities | 1,699,984 | |
Long-term liabilities | ||
Notes payable | 211,466 | |
Deferred income taxes | 362,183 | |
TOTAL LIABILITIES | 2,273,633 | |
Stockholder’s equity | ||
Common stock, $100 par value per share;10,000 shares authorized; 300 shares issued and outstanding | 30,000 | |
Additional paid-in capital | 41,540 | |
Retained earnings | 6,625,344 | |
Total stockholder’s equity | 6,696,884 | |
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY | $ | 8,970,517 |
The Accompanying Notes are an Integral Part of the Financial Statements
F-2
Best Well Service, Inc.
Statements of Operations
For the Years Ended December 31, 2006 and 2005
2006 | 2005 | ||||
Revenues | $ | 17,182,055 | $ | 12,118,399 | |
Operating expenses | |||||
Salaries and wages | 6,860,915 | 5,010,888 | |||
Drilling service expenses | 3,712,918 | 2,892,502 | |||
General and administrative expense | 1,626,219 | 1,696,089 | |||
Depreciation | 811,131 | 654,673 | |||
Total operating expenses | 13,011,183 | 10,254,152 | |||
Income from operations | 4,170,872 | 1,864,247 | |||
Other income (expense) | |||||
Investment income | 133,759 | 65,474 | |||
Interest expense | (15,202) | (14,470) | |||
Income before provision for income taxes | 4,289,429 | 1,915,251 | |||
Income tax expense | 1,831,058 | 810,273 | |||
Net income | $ | 2,458,371 | $ | 1,104,978 | |
Per Share Data | |||||
Basic and diluted net income per share | $ | 8,194.57 | $ | 3,683.26 | |
Weighted average shares outstanding | 300 | 300 |
The Accompanying Notes are an Integral Part of the Financial Statements
F-3
Best Well Service, Inc.
Statements of Stockholder’s Equity
For the Years Ended December 31, 2006 and 2005
Common Stock | Additional Paid-in | Retained | ||||||||||||
Shares | Amount | Capital | Earnings | Total | ||||||||||
Balance, December 31, 2004 | 300 | $ | 30,000 | 41,540 | $ | 3,101,995 | $ | 3,173,535 | ||||||
Net income | - | - | - | 1,104,978 | 1,104,978 | |||||||||
Balance, December 31, 2005 | 300 | 30,000 | 41,540 | 4,206,973 | 4,278,513 | |||||||||
(40,000) | (40,000) | |||||||||||||
Net income | - | - | - | 2,458,371 | 2,458,371 | |||||||||
Dividends | - | - | - | (40,000) | (40,000) | |||||||||
Balance, December 31, 2006 | 300 | $ | 30,000 | $ | 41,540 | $ | 6,625,344 | $ | 6,696,884 |
The Accompanying Notes are an Integral Part of the Financial Statements
F-4
Best Well Service, Inc.
Statements of Cash Flows
For the Years Ended December 31, 2006 and 2005
2006 | 2005 | ||||
Cash flows from operating activities | |||||
Net income | $ | 2,458,371 | $ | 1,104,978 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities | |||||
Depreciation | 811,131 | 654,673 | |||
Deferred income tax expense (recovery) | 125,371 | (74,785) | |||
Noncash investment income (loss) | (117,995) | (39,023) | |||
Changes in assets and liabilities | |||||
Accounts receivable | (594,438) | (157,101) | |||
Prepaid expenses | 22,823 | (99,712) | |||
Accounts payable and accrued liabilities | 291,213 | 322,891 | |||
Income taxes payable | 330,552 | 494,769 | |||
Net cash provided by operating activities | 3,327,028 | 2,206,690 | |||
Cash flows from investing activities | |||||
Capital expenditures | (1,404,399) | (2,122,192) | |||
Cash flows from financing activities | |||||
Proceeds of long-term debt | 373,801 | 169,963 | |||
Payments on long-term debt | (293,143) | (279,608) | |||
Proceeds of (payments on) related party loans | (104,590) | 104,590 | |||
Payment of dividends | (40,000) | - | |||
Net cash provided by (used in) investing activities | (63,932) | (5,055) | |||
Increase in cash and equivalents | 1,858,697 | 79,443 | |||
Cash and equivalents, beginning of year | 439,132 | 359,689 | |||
Cash and equivalents, end of year | $ | 2,297,829 | $ | 439,132 | |
Supplemental disclosures | |||||
Cash paid for interest | $ | 15,202 | $ | 14,470 | |
Cash paid for taxes | $ | 2,043,827 | $ | 1,025,357 |
The Accompanying Notes are an Integral Part of the Financial Statements
F-5
Best Well Service, Inc.
Notes to Financial Statements
December 31, 2006 and 2005
Note 1: Organization and Nature of Operations
Best Well Service, Inc. a Kansas corporation, was formed in 1992. Best Well operates twenty three drilling and core rigs in Kansas, Oklahoma, Nevada, Arizona and Colorado and derives its income from mineral core sampling, deep water well drilling and oil and gas drilling.
Note 2: Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash Equivalents
Best Well considers all highly liquid investments with maturities from date of purchase of three months or less to be cash equivalents. Cash and equivalents consist of cash on deposit with domestic banks and, at times, may exceed federally insured limits.
Accounts Receivable
Best Well provides an allowance for doubtful accounts on trade receivables based on historical collection experience and a specific review of each customer's trade receivable balance. As of December 31, 2006, there was no allowance provided on accounts receivable due to management’s assessment of the collectability of these items. No accounts were written off during the years ended December 31, 2006 and 2005.
Credit Risk
Best Well is subject to credit risk relative to its trade receivables. However, credit risk with respect to trade receivables is minimized due to the nature of its customer base.
Best Well maintains cash balances at one bank and one financial institution. Accounts at the bank are insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. Best Well had uninsured cash balances of approximately $2,200,000 as of December 31, 2006.
Trading securities
Best Well classifies its investments as trading based upon the nature of the investment. Trading securities are primarily marketable equity securities which are reported at estimated fair value with realized and unrealized gains and losses included other income (loss). The estimated fair values of investments are based on quoted market prices or dealer quotes.
Property and Equipment
Property and equipment are carried at cost. Depreciation of property and equipment is provided using the straight-line method for financial reporting purposes at rates based on the following estimated useful lives:
F-6
Classification | Estimated Useful Life |
Drilling rigs & equipment | 10 Years |
Vehicles | 5 Years |
Buildings and improvements | 5 Years |
Office equipment | 3 Years |
The cost of asset additions and improvements that extend the useful lives of property and equipment are capitalized. Routine maintenance and repair items are charged to current operations. The original cost and accumulated depreciation of asset dispositions are removed from the accounts and any gain or loss is reflected in the statement of operations in the period of disposition.
Impairment of Long-Lived Assets
Long-lived assets, including property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If it is determined that an impairment loss has occurred, the loss is measured as the amount by which the carrying amount of the long-lived asset exceeds its fair value.
Revenue Recognition
Best Well recognizes service revenue based on rate agreements in effect with customers as the service is provided and realization is assured.
Income Taxes
Best Well has adopted the provisions of SFAS No. 109, “Accounting for Income Taxes" which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The differences are primarily differences in depreciation methods used for tax and reported for generally accepted accounting principles.
Net Income per Common Share
Basic net income (loss) per common share amounts are computed using the weighted average number of common shares outstanding during the year. Diluted per common share amounts are computed using the weighted average number of common shares outstanding during the year and dilutive potential common shares. Dilutive potential common shares consist of stock options, stock warrants and redeemable convertible preferred stock and are calculated using the treasury stock method. As of December 31, 2006, there were no dilutive potential common shares outstanding.
Recent Accounting Pronouncements
Best Well does not expect that adoption of recently issued accounting pronouncements will have a material impact on its financial position, results of operations or cash flows.
Note 3: Property and Equipment
Property and equipment consisted of the following as of December 31, 2006:
F-7
Description | 2006 | |
Drilling rigs and equipment | $ | 4,114,764 |
Vehicles | 3,324,241 | |
Buildings and improvements | 278,882 | |
Office equipment | 72,674 | |
Total | 7,790,561 | |
Less: Accumulated depreciation | 3,455,274 | |
Property and equipment, net | $ | 4,335,287 |
Depreciation expense was $811,131 and $654,673 for the years ended December 31, 2006 and 2005, respectively.
Note 4: Trading investments
The aggregate amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value, trading securities by major security type at December 31, 2006, is as follows: |
Description | Cost | Gross Unrealized | Estimated Fair | |||||
Trading | $ | 470,005 | $ | 235,796 | $ | 705,801 |
Note 5: Concentrations
As of December 31, 2006, two of Best Well 's customers accounted for 16% and 11%, of total accounts receivable, and as of December 31, 2005, two of Best Well’s customers accounted for 23% and 22%, respectively. For the years ended December 31, 2006 and 2005, Best Well 's two largest customers accounted for 21% and 15% and 19% and 17%, of total revenues, respectively.
Note 6: Income Taxes
Best Well files its income tax returns using the accrual method of accounting, having converted from the cash method in 2003. Cumulative timing differences resulting from the conversion to the accrual method of accounting for income tax purposes as well as differences in accounting methods for depreciation among others result in a net deferred tax liability and amounted to approximately $861,000 and $547,000 as of December 31, 2006 and 2005, respectively.
A reconciliation of the differences between the effective and statutory income tax rates are as follows for the years ended December 31, 2006 and 2005:
2006 | 2005 | ||||
Federal statutory rate – 34% | $ | 1,458,406 | $ | 651,185 | |
State tax rate – 6% | 343,154 | 153,220 | |||
Permanent differences | 29,498 | 5,868 | |||
Income tax provision | $ | 1,831,058 | $ | 810,273 |
Deferred income tax expense (recovery) amounted to approximately $125,000 and ($75,000) for the years ended December 31, 2006 and 2005, respectively.
F-8
Note 7: Fair Value of Financial Instruments
The estimated fair value of the Company's financial instruments is as follows as of December 31, 2006:
The carrying amounts of cash and equivalents, accounts receivable and accounts payable approximated fair value due to the short-term maturity of these instruments.
Marketable securities are presented at estimated market value of $705,801
Note 8 – Long-Term Debt
Long-term debt as of December 31, 2006 consists of the following:
Description | Amount | |
Notes payable to a financial institution secured by transportation and rig equipment, bearing interest at rates ranging from 0% to 9.1% per annum, due in monthly installments totaling $25,250 maturing at various dates through December 2008 | $ | 441,897 |
Less: current maturities | 230,431 | |
Long-term portion | $ | 211,466 |
The aggregate annual maturities under long-term debt as of December 31, 2003 are as follows:
Year Ending December 31, | Amount | ||
2007 | $ | 230,431 | |
2008 | 151,276 | ||
2009 | 60,190 | ||
Total | $ | 441,897 |
F-9
INDEX TO FINANCIAL STATEMENTS
Description | Reference |
Balance Sheets as of September 30, 2007 and December 31, 2006 (Unaudited) | F-1 |
Statements of Operations for the Nine Months Ended September 30, 2007 and 2006 (Unaudited) | F-2 |
Statements of Cash Flow for the Nine Months Ended September 30, 2007 and 2006 (Unaudited) | F-3 |
Notes to Financial Statements | F-4 |
Best Well Service, Inc.
Balance Sheets
(Unaudited)
ASSETS | September 30, 2007 | December 31, 2006 | |||
Current assets | |||||
Cash | $ | 2,004,562 | $ | 2,297,829 | |
Trading securities, at market | 789,710 | 705,801 | |||
Accounts receivable | 2,121,770 | 1,631,600 | |||
Total current assets | 4,916,042 | 4,635,230 | |||
Property and equipment, net | 5,585,405 | 4,335,287 | |||
TOTAL ASSETS | $ | 10,501,447 | $ | 8,970,517 | |
LIABILITIES AND STOCKHOLDER’S EQUITY | |||||
Current liabilities | |||||
Accounts payable and accrued expenses | $ | 71,918 | $ | 653,268 | |
Income taxes payable | 285,013 | 816,285 | |||
Current portion of notes payable | 295,374 | 235,285 | |||
Total current liabilities | 652,305 | 1,704,838 | |||
Long-term liabilities | |||||
Notes payable | 226,300 | 206,612 | |||
Deferred income taxes | 480,502 | 362,183 | |||
TOTAL LIABILITIES | 1,359,107 | 2,273,633 | |||
Stockholder’s equity | |||||
Common stock, $100 par value per share;10,000 shares authorized; 300 shares issued and outstanding | 30,000 | 30,000 | |||
Additional paid-in capital | 41,540 | 41,540 | |||
Retained earnings | 9,070,800 | 6,625,344 | |||
Total stockholder’s equity | 9,142,340 | 6,696,884 | |||
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY | $ | 10,501,447 | $ | 8,970,517 |
The Accompanying Notes are an Integral Part of the Financial Statements
F-1
Best Well Service, Inc.
Statements of Operations
For the Nine Months Ended September 30, 2007 and 2006
(Unaudited)
2007 | 2006 | ||||
Revenues | $ | 13,186,260 | $ | 12,805,471 | |
Operating expenses | |||||
Salaries and wages | 4,718,443 | 4,244,102 | |||
Drilling service expense | 1,843,083 | 1,358,677 | |||
General and administrative expense | 1,764,133 | 2,409,587 | |||
Depreciation | 799,453 | 596,810 | |||
Total operating expenses | 9,125,112 | 8,609,176 | |||
Income from operations | 4,061,148 | 4,196,295 | |||
Other income (expense): | |||||
Investment income | 168,699 | 49,794 | |||
Interest expense | (7,242 ) | (10,064) | |||
Income before provision for income taxes | 4,222,605 | 4,236,025 | |||
Income tax expense | 1,777,149 | 1,389,763 | |||
Net income | $ | 2,445,456 | $ | 2,846,262 | |
Per Share Data | |||||
Basic and diluted net income per share | $ | 8,151.52 | $ | 9,487.54 | |
Weighted average shares outstanding | 300 | 300 |
The Accompanying Notes are an Integral Part of the Financial Statements
F-2
Best Well Service, Inc.
Statements of Cash Flow
For the Nine Months Ended September 30, 2007 and 2006
(Unaudited)
2007 | 2006 | ||||
Cash flow from operating activities | |||||
Net income | $ | 2,445,456 | $ | 2,846,262 | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities | |||||
Depreciation | 799,454 | 596,810 | |||
Deferred income taxes | 118,319 | 82,898 | |||
Noncash investment loss | (83,909) | (107,966) | |||
Changes in assets and liabilities | |||||
Accounts receivable | (490,170) | (1,141,034) | |||
Other assets | - | 22,823 | |||
Accounts payable and accrued liabilities | (581,350) | (201,571) | |||
Income taxes payable | (531,272) | 147,050 | |||
Net cash provided by operating activities | 1,676,528 | 2,245,272 | |||
Cash flow from investing activities | |||||
Capital expenditures | (2,049,572) | (766,776) | |||
Cash flow from financing activities | |||||
Proceeds of long-term debt | 252,270 | 280,351 | |||
Payments on notes payable | (172,493) | (158,010) | |||
Payments on margin notes payable | - | (104,590) | |||
Net cash provided by (used in) financing activities | 79,777 | 17,751 | |||
Increase (decrease) in cash and equivalents | (293,267) | 1,496,247 | |||
Cash and equivalents, beginning of period | 2,297,829 | 439,132 | |||
Cash and equivalents, end of period | $ | 2,004,562 | $ | 1,935,379 | |
Supplemental disclosures | |||||
Cash paid for interest | $ | 7,242 | $ | 10,064 | |
Cash paid for taxes | $ | 2,043,827 | $ | 1,153,999 |
The Accompanying Notes are an Integral Part of the Financial Statements
F-3
Best Well Service, Inc.
Notes to Financial Statements
September 30, 2007 and 2006
(Unaudited)
Note 1: Description of Business
The accompanying unaudited interim financial statements of Best Well Service, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the rules and regulations of the Securities and Exchange Commission. They do not include all information and notes required by U.S. generally accepted accounting principles for complete financial statements. These interim financial statements should be read in conjunction with the audited financial statements and the accompanying notes located elsewhere in this private placement memorandum for the years ended December 31, 2006 and 2005.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented have been included. The results of operations for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the full year.
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Note 2: Property and Equipment
Property and equipment consisted of the following as of September 30, 2007 and December 31, 2006:
Description | September 30, 2007 | December 31, 2006 | |||
Drilling rigs and equipment | $ | 4,991,282 | $ | 4,114,764 | |
Vehicles | 4,495,460 | 3,324,241 | |||
Leasehold improvements | 278,882 | 278,882 | |||
Office equipment | 74,509 | 72,674 | |||
Total | 9,840,133 | 7,790,561 | |||
Less: Accumulated depreciation | 4,254,728 | 3,455,274 | |||
Property and equipment, net | $ | 5,585,405 | $ | 4,335,287 |
Note 3: Concentrations
Best Well maintains cash balances at one bank. Accounts at the institution are insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. Best Well had uninsured cash balances of approximately $1,900,000 and $2,200,000 as of September 30, 2007 and December 31, 2006, respectively.