UNITED STATES
SECURITIES EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 22, 2006
PROCESS TECHNOLOGY SYSTEMS, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
Nevada 000-29603 91-2070995
(State of organization) (Commission File Number) (IRS Employer
Identification No.)
6371 Richmond, #200
Houston, Texas 77057
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (713) 266-8005
Former name or former address, if changed since last report: Not Applicable
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of
the following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a- 12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Forward Looking Statements
This Form 8-K contains forward-looking statements. These statements
relate to future events or future financial performance and involve known and
unknown risks, uncertainties and other factors that may cause Process
Technology Systems, Inc. or its industry's actual results, levels of activity,
performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied
by the forward-looking statements.
In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," or the
negative of these terms or other comparable terminology. These statements
are only predictions. Actual events or results may differ materially.
Although we believe that the expectations reflected in the forward-
looking statements are reasonable, we cannot guarantee future results, levels
of activity, performance or achievements. Moreover, neither us nor any other
person assumes responsibility for the accuracy and completeness of these
forward-looking statements. We are under no duty to update any of the
forward-looking statements after the date of this report to conform its prior
statements to actual results.
Further, this report contains forward looking statements within the
meaning of Section 27A of the Securities Act of 1933 ("Securities Act") and
Section 21E of the Securities Exchange Act of 1934 ("Exchange Act") that
involve substantial risks and uncertainties. Such statements include, without
limitation, all statements as to expectation or belief and statements as to
our future results of operations, the progress of the re-manufacturing of oil
rigs and rig parts, the need for, and timing of, additional capital and
capital expenditures, partnering prospects, the protection of and the need for
additional intellectual property rights, effects of regulations, the need for
additional facilities and potential market opportunities. Our actual results
may vary materially from those contained in such forward-looking statements
because of risks to which we are subject, such as volatility in the demand for
oil and natural gas products, failure to obtain adequate financing, failure to
successfully re-furbish any drilling rig, failure to enter into one or more
drilling contracts, failure of our drilling crew to operate any drilling rig
that we may successfully re-manufacture, foreclosure on some of our drilling
rig parts due to our inability to service an outstanding loan, competition
from third parties, failure to adhere to environmental and other regulations,
litigation and other risks to which we are subject.
ITEM 1.01 ENTRY INTO MATERIAL DEFINITIVE AGREEMENT.
On June 16, 2006, the Registrant, Process Technology Systems, Inc., a
Nevada corporation ("Process," the "Company," "we," "our," "us" and words of
similar import), closed (the "Closing") on an Agreement and Plan of
Reorganization (the "Reorganization Agreement") by and among us, W. Scott
Thompson, William A. Silvey, Jr., Forster Drilling Corporation, a Nevada
corporation, and the shareholders of Forster (the "Reorganization").
At the Closing, the Forster shareholders assigned, transferred and
conveyed their respective shares of Forster common stock to us in exchange for
shares of our "restricted" common stock, as defined in Rule 144 of the
Securities Act, at the exchange rate of one share of our common stock for one
share of Forster common stock. As a result, we issued an aggregate of
40,055,463 of our shares of common stock to the former shareholders of Forster
resulting in all of the former shareholders of Forster owning approximately
95.2% of our issued and outstanding common stock. Prior to the Closing, our
shareholders owned approximately 2,000,000 shares of common stock.
Accordingly, there will be up to 42,055,463 shares of our issued and
outstanding on Closing.
Pursuant to the Reorganization, Messrs. Thompson and Silvey have agreed
to indemnify Forster and us (Messrs. Thompson and Silvey were shareholders of
both Process and Forster prior to the Reorganization) for any claim resulting
from any misstatement, omission, or any breach of any representation, warranty
or covenant by us or certain of our shareholders in the Reorganization
Agreement. We incurred an obligation to pay Messrs. Thompson and Silvey an
aggregate of $500,000 at the Closing for such indemnification. The source of
the indemnification payment came from debt and equity financing raised by
Forster. See "Section 5.01 Management" for additional information regarding
certain transactions of our executive officers and directors. Additionally,
certain of Forster and our shareholders entered into lock-up/leak-out
agreements to restrict the sale of our common stock received under the
Reorganization Agreement.
In connection with the Reorganization and resulting change in control,
Mr. Silvey resigned as chief executive officer and Mr. Forster was appointed
as chief executive officer and president. Further, Mr. Forster, Jr. and Mr.
Forster III were appointed to the board of directors. Bud Najvar was
appointed chief financial officer along with his existing duty as director.
See "Section 5.01 Management" for additional information regarding our
executive officers and directors.
A copy of the Reorganization Agreement, including all material exhibits
and related instruments, was attached as an exhibit to the Current Report on
Form 8-K which was filed on June 6, 2006. The Reorganization Agreement and
the Form 8-K are incorporated herein.
ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS.
Items 1.01, 5.01 and 9.01 are incorporated herein by reference.
ITEM 3.02 UNREGISTERED SALES OF EQUITY SECURITIES.
On June 16, 2006, we issued 40,055,463 shares of our common stock to
approximately 275 accredited investors in exchange for their common stock of
Forster pursuant to a Reorganization Agreement. As a result of the
Reorganization, Forster became a wholly-owned subsidiary of us.
The Reorganization was consummated pursuant to Section 4(2) of the
Securities Act and the rules and regulations promulgated thereunder on the
basis that such transaction did not involve a public offering and the offerees
were sophisticated, accredited investors with access to the kind of
information that registration would provide. No sales commissions were paid.
ITEM 5.01 CHANGES IN CONTROL OF REGISTRANT.
OUR BUSINESS
Overview
We have recently entered the oil and gas industry through our
Reorganization with Forster. Our business strategy is to refurbish oil rigs
and to deploy them for use by oil and natural gas producers in Texas. We
intend to provide contract land drilling services to the oil and gas companies
in the Barnet Shale, Permian Basin and Travis Peak geographic areas. In
addition to providing drilling services, we intend to provide the crews and
equipment used in the operation of these rigs. We believe that there is a
scarcity of land drilling rigs currently available for use, and that our
ability to refurbish drilling rigs will allow us to meet market demand before
new oil rigs are built and enter the market. Management is currently seeking
to enter into drilling contracts with oil and gas companies, but none have
been executed as of the date of this Current Report. We believe that our
management team has the experience to refurbish drilling rigs, seek and
negotiate oil and natural gas drilling contracts, and successfully operate the
rigs. We later intend on exploring for development, production and the sale
of oil and natural gas.
We were organized under the laws of the State of Nevada in May 1987,
under the name "Process Technology, Inc." In November 1998, we changed our
name to "Process Technology Systems, Inc.". Since November 1998, we have not
engaged in any substantive business activity, and we have sought to enter into
a business by acquiring, reorganizing, or merging with an operating company.
Forster was incorporated under the laws of the State of Nevada in March 2005
and has since incorporation been operating in the oil and gas industry,
primarily the remanufacturing and refurbishing of drilling rigs and drilling
rig parts.
Our initial business strategy will be focused on the re-manufacturing of
our first "field ready" rig and the re-manufacturing of up to six additional
rigs in inventory. Re-manufacturing includes the refurbishment and renovating
of used drilling parts and the assembling of the parts to complete a drilling
rig. Money raised from Forster's previous equity and debt financing has been
used to commence the re-manufacturing of three oil rigs and to provide for
working capital. We estimate that we will need a minimum of $900,000 to re-
manufacture our first drilling rig (Rig No. 15), a minimum of $4,500,000 for
the second drilling rig (Rig No. 12), and a minimum of $2,200,000 (Rig No. 21)
for our third rig, which estimates includes labor, rig parts and drill pipes.
Additionally, we require approximately $1.41 million to purchase equipment to
facilitate transportation and for ongoing maintenance of oil rigs. We
currently have four additional "draw works" in inventory, the main component
of an oil rig. These draw works have had no refurbishing work completed to
date. Thus, with additional external sources of financing, we could
potentially re-manufacture a total of seven drilling rigs. We will continue
to re-manufacture oil rigs at our leased manufacturing facility located in
Odessa, Texas. As of the date of this Current Report, we have insufficient
capital to complete the re-manufacture of our rigs or for operating expenses,
nor do we have any firm commitments for any debt or equity financings.
We are currently marketing our drilling services to oil and natural gas
exploration and production companies operating in the State of Texas, but we
have not yet entered into a drilling contract. We believe that there exists a
current demand for land drilling rigs in Texas, and our goal is to enter into
a drilling contract shortly after Rig No. 15 is complete, but we provide no
assurances that Rig No. 15 will be completed or that we will be able to enter
into a drilling contract. We believe that with adequate financing we can
successfully refurbish our seven drilling rigs and bring them to the oil and
gas drilling market in a timely fashion. Our goal is to provide our
refurbished drilling rigs to the market before newly manufactured rigs reach
the market. We believe that manufacturing capacity for drilling rigs is
currently low which has led to a current backlog of newly manufactured rigs.
We also believe the high demand for and the low supply of drilling rigs
presents a business opportunity for those companies who can move drilling rigs
quickly into the market.
When our first drilling rig is completed, we hope to deploy it to a site
in the Permian Basin. We intend to engage in a short-term drilling contract
of 90-180 days near our manufacturing facility in order to train our crews and
ascertain that the drilling rig is operational. We believe we may be paid up-
front during our trial run, which will cover crew labor expenses. We plan on
using the net proceeds obtained from our first drilling contract along with
funds obtained through a future debt or equity financing, if any, to re-
manufacture the rest of our drilling rigs. Revenue from any additional rigs
we re-manufacture, if any, will likely be used to purchase additional rig
parts until all seven drilling rigs are refurbished. We intend to initially
operate a land drilling rig fleet consisting of seven oil rigs with drilling
depths between 8,000 feet to 20,000 feet. At these depths, our rigs will be
able to reach both oil and natural gas deposits.
If we are successful in re-manufacturing our seven drilling rigs, our
long-term business strategy is to engage in oil and natural gas exploration.
As of the date of this Current Report, we do not have any oil or natural gas
interests, leases, or contracts, nor do we provide any assurance that we will
be able to acquire such assets.
We believe our management team possesses oil and gas drilling experience
to execute our business plan. Our management has experience with land-based
drilling operations. We believe we have experience and expertise in the
deployment and management of rig fleets, management and selection of rig crew
personnel, and negotiating contracts with oil and natural gas production
companies. We also believe we have the personnel who can successfully
refurbish rig parts at our manufacturing facility.
Our Strategy
We believe that drilling rig manufacturers are currently experiencing
backlogs for newly ordered land drilling rigs. We believe that the current
depletion of available draw works and mothballed parts creates a market
opportunity to land drilling companies who can successfully fabricate and
refurbish their own drilling rig components. We will rely on the experience
of management and personnel to execute our business plan by refurbishing our
own rigs and supplying these rigs to oil and gas exploration companies before
manufacturers can manufacture new oil rigs and bring them to market. The
Company believes it has the necessary personnel in place, including manpower
and supervision to provide service to oil and gas companies.
Our strategy is to raise money through an equity or debt raise to
complete the refurbishment of Rig No. 15. We then plan on entering into a
short-term drilling contract in the Permian Basin to train our drilling crew
and ensure that the rig is operational. If our trial run is successful, we
will seek to enter into a long-term drilling contract. We hope to use the
proceeds from this contract, along with money raised from another debt or
equity raise, to complete the re-manufacturing of Rig Nos. 12 and 21 to pay
for operating expenses. If we are successful in re-manufacturing our second
and third drilling rigs, we will seek to enter into long-term drilling
contracts for these rigs in the Permian Basin of West Texas, Barnett Shale
Trend of North Texas or the Cotton Valley/Travis Peak Trend of East Texas.
Any proceeds from these two contracts will be used to re-manufacture the rest
of our drilling rigs in inventory and to pay for operating expenses. We
provide no assurance that we will be able to raise money, successfully re-
manufacture any drilling rig, or enter into any drilling contract.
The Land Drilling Industry Overview
We believe the current land drilling industry is experiencing new growth
after several years of decline. Land drilling companies are putting land
drilling rigs into active drilling service to meet the demands of oil and
natural gas prospects. As well, natural gas production and exploration
companies are in need of contract drilling services to exploit higher current
natural gas prices. Natural gas prices have been on the rise due to (i)
diminishing returns from current natural gas fields and (ii) increasing demand
to generate electricity in the United States. A steady increase in natural
gas prices in turn increases the amount of drilling activity conducted by
natural gas exploration and production companies. This demand is met onshore
by land drilling rig companies who provide the equipment and crews to drill
the wells for the exploration and production industry.
In the early 1970's, drilling rig manufacturers began producing rigs and
equipment for a burgeoning industry. From 1973 to 1980, the rig fleet grew by
approximately 11% per year. If the years 1981 and 1982 are included, the
growth rate of the rig fleet in the last five years of the cycle was 18%. At
the peak of drilling activity in the 1980's there were over 5,500 land
drilling rigs in the U.S. fleet. However, downturn of oil and natural gas
prices during the mid-1980's through the 1990's resulted in widespread
underinvestment of drilling rigs and capital improvement to the drilling rig
fleet. The large fleet that existed in the 1970's has substantially become
cannibalized and obsolete. Additionally, the fact that many drilling rig
manufacturers ceased operations in the downturn has contributed to the
existing rig shortage.
Market Conditions In Our Industry
The U.S. contract land drilling industry is cyclical. Volatility in oil
and natural gas prices can produce significant changes in the overall level of
drilling activity in the markets we hope to serve, affecting the demand for
our future drilling services and the dayrates we hope to charge. The
availability of financing, prevailing oil and natural gas prices, and the
outlook for future oil and natural gas prices strongly influence the drilling
capital expenditures of oil and natural gas producers.
We believe the outlook for oil and natural gas prices and the needed
land drilling contractors remains positive for the remainder of 2006. The land
rig count has reached a point that we believe provides dayrates (the daily
rate paid to a drilling contractor for the use of its crew and drilling rig)
for our rigs potentially are over $20,000 per drilling day.
On June 5, 2006, the spot price for West Texas Intermediate crude oil was
$72.60 and the spot price for Henry Hub natural gas was $6.39. The Baker
Hughes land rig count on June 2, 2006 was 1,530, a 24% increase from 1,231 on
June 2, 2005.
The average weekly spot prices of West Texas Intermediate crude oil and
Henry Hub natural gas and the average weekly domestic land rig count, per the
Baker Hughes land rig count, for each of the previous six years ended
March 31, 2006 were:
Years Ended March 31
6/2/2006 2006 2005 2004 2003 2002 2001
Oil (West Texas Intermdiate) $72.60 $59.94 $45.04 $31.47 $29.27 $24.31 $30.40
Natural Gas (Henry Hub) $ 6.39 $ 9.10 $ 5.99 $ 5.27 $ 4.24 $ 2.96 $ 5.27
U. S. Land Rig Count 1,530 1,329 1,100 964 723 912 841
Industry Trends
We believe that the following trends in our industry can benefit our
future operations:
Increased decline rates in natural gas basins in the U.S. According to
the federal Energy Information Administration ("EIA"), even though the number
of U.S. natural gas wells drilled has increased significantly, a corresponding
increase in production has not been realized. We believe that a significant
reason for the limited supply response, even as drilling activities have
increased, is the accelerating decline rates of production from new natural
gas wells drilled. A study published by the National Petroleum Council in
September 2003 concluded, from analysis of production data over the preceding
ten years, that as a result of domestic natural gas decline rates of 25% to
30% per year, 80% of natural gas production in ten years will be from wells
that have not yet been drilled. We believe that this tends to support a
sustained higher natural gas price environment, which should create incentives
for oil and natural gas exploration and production companies to increase
drilling activities in the U.S.
The drilling industry is rebounding from a twenty-year downturn.
According to a Raymond James research report in July 2005 entitled, "How Big
Will the Drilling Fleet be by 2010?", in the early 1970's manufacturers began
producing rigs and capital equipment in order to facilitate a burgeoning
industry. However, when oil & gas prices collapsed in the early 1980's, oil
companies withdrew their demand for rigs, and the industry was left with an
excess rig supply. Over the past twenty years, instead of building new
equipment and new rigs, operators and drillers alike have consumed that excess
supply built in the 1970's. The industry is currently at a point where that
excess supply has been cannibalized, and the existing rig fleet averages 25
years in age. Therefore, we believe that companies with the experience and
facilities to refurbish, manufacture and place land drilling rigs in the field
will hold a strategic advantage over those companies waiting for new rigs to
come off the assembly line.
High natural gas prices. 2005 marked the third year of consecutive
increase in the yearly average NYMEX near month natural gas contract prices.
While natural gas prices are volatile, we believe that if the current prices
are sustained, the industry will see an increase in exploration and drilling.
This may translate into increased demand for contract drilling and increased
dayrates due to increased demand.
Inability to rapidly expand natural gas imports. According to the
EIA, in 2003, 15% of U.S. natural gas demand was satisfied by net imports. Of
these net imports, 86% were via pipeline, primarily from Canada. The balance
was imported liquefied natural gas. The EIA projects that Canadian imports of
natural gas will decrease and liquefied natural gas imports will continue to
increase to meet growing natural gas demand in the U.S. While major
investments are being made to increase liquefied natural gas import capacity,
the EIA estimates that liquefied natural gas imports will still satisfy less
than 10% of total U.S. natural gas demand by 2010.
Increases in dayrates and operating margins for land drilling. The
increase in the price of natural gas, coupled with accelerating decline rates
and an increase in the number of natural gas wells being drilled, have
resulted in increases in rig utilization, and consequently improved dayrates
and cash margins over the past two years. Additionally, we believe oil and
gas producers are willing to enter into longer term contracts to ensure the
availability of an oil rig on their properties.
Land Drilling Contracts
As a potential provider of contract land drilling services, our future
business will depend on the level of drilling activity by oil and gas
exploration and production companies operating in the three geographic markets
where we intend to operate. The oil and gas exploration and production
industry is a historically cyclical industry characterized by significant
changes in the levels of exploration and development activities. During
periods of higher levels of drilling activity, price competition tends to
decrease and results in increases in the profitability of daywork contracts.
Contracts for drilling oil and natural gas wells are obtained either
through competitive bidding or as a result of negotiations with oil and gas
exploration and production customers. Contract terms offered by customers will
be dependent on the complexity and risk of operations, on-site drilling
conditions, type of equipment used and the anticipated duration of the work to
be performed. Drilling contracts can be for a single well or multiple wells.
The majority of drilling contracts are typically subject to termination by the
customer on short notice with little or no penalty. In the current
environment, many oil and gas producers have offered one to three year term
contracts at higher dayrates in order to ensure rig availability in what is
expected to become a multi-year drilling cycle.
We intend to enter into a land drilling contract at the conclusion of the
trial run of 90-180 days for Rig No. 15. If we are successful in entering
into a contract, we will begin generating revenue which we will use, along
with any future financing, to purchase rig parts for the refurbishment of Rig
Nos. 12 and 21, and the remainder of our drilling rigs.
Daywork Contracts
Under daywork drilling contracts, we plan to provide a drilling rig with
required personnel to our customer who supervises the drilling of the well.
We expect to be paid based on a negotiated fixed rate per day while the rig is
used (referred to as the dayrate). Daywork drilling contracts specify the
equipment to be used, the size of the hole and the depth of the well. Under a
daywork drilling contract, the customer bears a large portion of the
out-of-pocket drilling costs and we generally bear no part of the usual risks
associated with drilling, such as time delays and unanticipated costs. We
expect to generally receive a lower rate when the drilling rig is moving, or
when drilling operations are interrupted or restricted by conditions beyond
our control. Daywork contracts will be the initial contracts we will
negotiate to commence business because of lower risk than other contracts.
Footage Contracts
Under footage contracts, we will contract to drill a well to a certain
depth under specified conditions for a fixed price per foot. The customer
provides drilling fluids, casing, cementing and well design expertise. These
contracts would require us to bear the cost of services and supplies that we
provide until the well has been drilled to the agreed depth. If we drill the
well in less time than estimated, we would have the opportunity to improve our
profits over those that would be attainable under a daywork contract. Future
revenues will be reduced and losses may be incurred if the well requires more
days to drill to the contracted depth than estimated. Footage contracts
generally contain greater risks for a drilling contractor than daywork
contracts. Under footage contracts, the drilling contractor assumes certain
risks associated with loss of the well from fire, blowouts and other risks.
Currently, we do not plan to seek footage contracts in the near term.
Turnkey Contracts
Under a turnkey contract, we will agree to drill a well for our customer
to a specified depth and under specified conditions for a fixed price,
regardless of the time required or the problems encountered in drilling the
well. We will provide technical expertise and engineering services, as well
as most of the equipment and drilling supplies required to drill the well. We
will subcontract for related services, such as the provision of casing crews,
cementing and well logging. Under typical turnkey drilling arrangements, we
will not receive progress payments and would be paid by our customer only
after we have performed the terms of the drilling contract in full.
The risks to us under a turnkey contract are substantially greater than
on a well drilled on a daywork basis. This is primarily because under a
turnkey contract we would assume most of the risks associated with drilling
operations generally assumed by the operator in a daywork contract, including
the risk of blowout, loss of hole, stuck drill pipe, machinery breakdowns,
abnormal drilling conditions and risks associated with subcontractors'
services, supplies, cost escalations and personnel. If we decide to enter
into this kind of contract, we will employ or contract for engineering
expertise to analyze seismic, geologic and drilling data to identify and
reduce some of the drilling risks we would assume. We will use the results of
this analysis to evaluate the risks of a proposed contract and seek to account
for such risks in our bid preparation. Currently, we do not plan to seek
turnkey contracts.
Drilling Equipment
A land drilling rig consists of engines, a hoisting system, a rotating
system, pumps and related equipment to circulate drilling fluid, blowout
preventers and related equipment. Diesel or gas engines are typically the
main power sources for a drilling rig. Power requirements for drilling jobs
may vary considerably, but most land drilling rigs employ two or more engines
to generate between 500 and 2,000 horsepower, depending on well depth and rig
design. There are numerous factors that differentiate land drilling rigs,
including their power generation systems and their drilling depth
capabilities. The actual drilling depth capability of a rig may be less than
or more than its rated depth capability due to numerous factors, including the
size, weight and amount of the drill pipe on the rig. The intended well depth
and the drill site conditions determine the amount of drill pipe and other
equipment needed to drill a well. Generally, land rigs operate with crews of
five to six persons. We intend to refurbish rigs that drill at depths below
8,000 feet which will allow our drills to reach both oil and natural gas
deposits. We expect that this may give us a competitive advantage over other
drillers whose rigs are capable of only reaching shallower oil deposits.
Company Draw works
Below are the seven draw works we currently have in inventory and the
anticipated depths at which they will operate. We are in the process of
standardizing our rig fleet including components such as draw works, masts,
subs, floor motors and generator packages. The benefits of standardization
are lower repair costs for the drilling rigs. We may trade our Continental
Emsco A-550 Draw works for a National 55 Draw works. Additionally, we may
trade our Mid-Continent U-15 Draw works for a National 75 Draw works.
Current Rig Inventory:
Count Description Depth Capacity
1 #15 National 50 CA 11,000'
2 #12 National 55 13,000'
3 #21 Continental Emsco GB 350 8,000'
4 #10 National 50A 11,000'
5 #17 National 50A 11,000'
6 #11 Continental Emsco A550 11,000'
7 #16 Mid Continent U-15 10,000'
Competition
We will compete with both regional and national land drilling companies
in our target geographical markets of the Barnett Shale Trend, the Permian
Basin and the Cotton Valley/Travis Peak Trend. Within our geographical
markets our primary competitors are companies such as Patterson-UTI, Grey
Wolf, Pioneer Drilling, and Unit Corporation. These companies have
significant capital and managerial resources and are generally well-received
in the marketplace. They are firmly entrenched in our target markets and have
been operating for several years. Additionally, our competitors have large,
established oil rig fleets. Patterson-UTI alone has over 400 hundred land
drilling rigs in inventory.
Our Strengths
Despite the advantages of our competitors, we believe we have several key
strengths which will allow us to compete.
* Refurbished Rig Fleet - Our strategy is to refurbish our rigs. Our
expectation is that these newly refurbished rigs will incur
decreased maintenance costs when compared to older non-refurbished
drilling rigs.
* Drilling Depth - We believe that the rigs we are refurbishing will
be able to reach the drilling depth where oil lies as well as where
natural gas lies (typically below 8,000 feet).
* Current Demand for Land Drilling Rigs - We believe the current high
demand for land drilling rigs driven by high natural gas prices and
relatively low supply of drilling rigs present opportunities for
entering into drilling contracts.
* Industry Experience - The current management and certain members of
the board of directors have experience and contacts throughout the
industry.
* Capable Manufacturing Facility - We lease a rig manufacturing
facility located in Odessa, Texas. The Odessa manufacturing facility
is capable of rebuilding used drilling rigs and manufacturing
individual rig components. The facility consists of five fenced
acres, two 30,000 square foot. "rig hangers", each with twin
overhead electric cranes for heavy equipment mobilization and
assembly, a stand alone welding shop with sand floor, machine shop,
sandblasting and painting booth, and offices. Our manufacturing
crews possess the experience to refurbish oil rigs.
* Location - Our Permian Basin manufacturing facility and offices
located in Odessa & Midland place our company in one of the largest
petroleum producing regions of the United States. We will be able
to respond to market conditions quickly in the Permian Basin because
of the location of our manufacturing facility.
Target Drilling Markets
Barnett Shale Trend
The Mississippian-age Barnett Shale of the Fort Worth Basin, North Texas
produces in approximately 10 counties with the major thrust of activity being
centered in the Newark East Field in Wise, Denton, and Tarrant Counties. The
Barnett Shale is a continuous (unconventional) gas accumulation in effect a
single, very large gas field underlying hundreds, and perhaps thousands, of
square miles. Initially, in the early 1980's, the first forty tests of the
Barnett Shale, all deepening of shallower wells, were concluded to be
uneconomic. From these tests, it was recognized that for drilling to be
profitable, it had to be based on efficient and cost effective drilling and
completion techniques. In 1989, the area was not included in the Atlas of
Major Texas Gas Reservoirs. By 1995, the USGS listed it as an unconventional
gas play and, in March 2004, it estimated total undiscovered gas resources for
the Barnett Shale of 26.7 trillion cubic feet of gas.
Currently, there is an acceleration of interest in drilling activity by
oil and gas companies in this market. There are approximately 70 different
operators and 70 rigs per day operating in the Barnett Shale. As a result of
the increased activity, greater technological innovation and efficiencies have
allowed the expansion of drilling activity out of the core area, moving to the
south and west. The Barnett Shale continues to attract a high degree of
interest from operators and drilling companies because of a continual increase
in estimated reserve potential and dramatically improved well economics.
Additionally, the Barnett Shale is a blanket formation which assures that most
every well drilled is a commercial producer.
We believe the current high demand of oil rigs plus the low supply of
rigs in this region presents an opportunity for us.
Permian Basin
The Permian Basin is located in West Texas and the adjoining area of
southeastern New Mexico. It underlies an area approximately 250 miles wide and
300 miles long and includes the Texas counties of Andrews, Borden, Crane,
Dawson, Ector, Gaines, Glasscock, Howard, Loving, Martin, Midland, Pecos,
Reeves, Terrell, Upton, Ward, and Winkler. The name derives from the fact that
the area subsided before being covered by the Permian sea and the subsidence
continued through much of the Permian period. Consequently, it contains one
of the thickest deposits of Permian rocks found anywhere. Researchers at the
Bureau of Economic Geology and the New Mexico Bureau of Geology and Mineral
Resources completed a Department of Energy research initiative which states
that the Permian Basin of West Texas and Southeast New Mexico contains 29% of
estimated future oil reserve growth and has the biggest potential for
additional oil production in the country.
We believe the current high demand of oil rigs plus the low supply of
rigs in this region presents an opportunity for us. Additionally, because our
manufacturing facility is located in this area, we will be able to respond
quicker to the specific oil rig specifications required by our future
customers.
Cotton Valley / Travis Peak
The Travis Peak Formation (and correlative Hosston Formation) is a
basinward-thickening wedge of terrigenous clastic sedimentary rocks that
underlies the northern Gulf Coast Basin from eastern Texas across northern
Louisiana to southern Mississippi. Across the main hydrocarbon-productive
trend in eastern Texas and northern Louisiana, the Travis Peak Formation is
about 2,000 ft thick. Most Travis Peak hydrocarbon production in eastern
Texas comes from drilling depths between 6,000 and 10,000 ft.
Our Market Strategy
Our target market is the southwestern United States including the Permian
Basin, Barnett Shale, and Cotton Valley/Travis Peak Trend. We believe
management's experience in drilling wells in these locations and its contacts
with industry parties in these geographical locations will allow us to market
our services effectively. Our management will rely on personal contact and
past relationships with oil and gas operators in these regions to solicit our
services in the hope of entering a drilling contract.
We intend on providing drilling services in our three target markets for
the following reasons:
Permian Basin
* Our manufacturing facilities are located within the Permian Basin.
This should create a quicker turnaround time for repairs and service
on future rigs operating in this area.
* The Permian Basin is one of the largest land drilling markets in the
United States and demand for rigs is high.
* Our management team has experience conducting drilling operations in
the region which should allow us to operate its future rigs
efficiently and effectively.
* Through management's past experience conducting drilling operations
in the region it has established a rapport with potential oil
drilling crew members.
Barnett Shale
* Vertical wells drilled in the Barnett Shale are typically 9,000 feet
in depth. The rigs we intend to refurbish, with the exception of
one, are all capable of drilling at least 10,000 feet.
* The region is currently experiencing a surge in demand, and we
believe some dayrates are over $20,000 for the type of rigs we
employ.
* The subsurface terrain in this location is believed to be.
Cotton Valley / Travis Peak
* The demand for oil rigs in this area is high and the availability of
rigs in this area is low.
* The Cotton Valley/Travis Peak area sits within the Ark/La/Tex
region. Utilization rates in this region have increased in recent
years.
No winterization is needed for our rigs in these three geographical locations
which will decrease the cost of refurbishing our rigs.
Employees, Consultants and Contractors
As of the date of this Current Report, we have five employees, 33
contractors, and three consultants. None of our employees are represented by
a labor union. We believe that our employee relations are good.
Environmental Regulations
Our operations will be subject to stringent federal, state and local laws
and regulations governing protection of the environment. These laws and
regulations may require acquisition of permits before drilling commences and
may restrict the types, quantities and concentrations of various substances
that can be released into the environment. Planning and implementation of
protective measures are required to prevent accidental discharges. Spills of
oil, natural gas liquids, drilling fluids, and other substances may subject us
to penalties and cleanup requirements. Handling, storage and disposal of both
hazardous and non-hazardous wastes are subject to regulatory requirements.
The federal Clean Water Act, as amended by the Oil Pollution Act, the
federal Clean Air Act, the federal Resource Conservation and Recovery Act, and
their state counterparts, are the primary vehicles for imposition of such
requirements and for civil, criminal and administrative penalties and other
sanctions for violation of their requirements. In addition, the federal
Comprehensive Environmental Response Compensation and Liability Act and
similar state statutes impose strict liability, without regard to fault or the
legality of the original conduct, on certain classes of persons who are
considered responsible for the release of hazardous substances into the
environment. Such liability, which may be imposed for the conduct of others
and for conditions others have caused, includes the cost of remedial action as
well as damages to natural resources.
Environmental laws and regulations are complex and subject to frequent
change that may result in more stringent and costly requirements. Compliance
with applicable requirements may have a material affect on the cost of our
future operations, earnings or competitive position. However, compliance with
amended, new or more stringent requirements, stricter interpretations of
existing requirements, or the discovery of contamination may cause us to incur
additional future costs or subject us to future liabilities that may have a
material adverse effect on our future results of operations and financial
condition.
Our operations will depend on the demand for services from the oil and
natural gas exploration and development industry, and therefore our future
operations can be affected by political developments and changes in laws and
regulations that control or curtail drilling for oil and natural gas for
economic, environmental or other policy reasons.
Insurance
Our future operations will be subject to the many hazards inherent in the
drilling business, including, for example, blowouts, cratering, fires,
explosions and adverse weather. These hazards could cause personal injury,
death, suspend drilling operations or seriously damage or destroy the
equipment involved and could cause substantial damage to producing formations
and surrounding areas. Damage to the environment could also result from our
future operations, particularly through oil spillage and extensive,
uncontrolled fires. As a protection against operating hazards, we may seek
insurance coverage, including comprehensive general liability, workers'
compensation insurance, property casualty insurance on our rigs and drilling
equipment, and "control of well" insurance. In addition, we may seek
commercial excess liability insurance, to cover general liability, auto
liability and workers' compensation claims which are higher than the maximum
coverage provided under those policies. As of the date of this Current
Report, we do not have any insurance coverage.
Our Facilities
Our principle executive offices are located at 6371 Richmond Avenue,
Suite 275 Houston, Texas 77057, and our telephone number is (713) 266-8125.
Our manufacturing operations are based in a leased 13,000 square foot
manufacturing facility located in Odessa, Texas. This facility is currently
operational, providing the physical requirements to refurbish the drilling
equipment, including overhauling and refurbishing draw works, pumps, and other
components, and sandblasting and painting of the various rig components. We
also lease an administrative office in Midland, Texas. We believe our
facilities are sufficient to meet current needs.
RISK FACTORS
Risks Relating to Our Business
We are a development stage company and have a history of operating losses
since inception and may experience further losses in the future.
We have had no operations until our Reorganization with Forster, which
was incorporated in March 2005. We are currently in a development stage and
have not re-manufactured any drilling rigs nor have we entered into any
drilling contracts. Although management has drilling experience in the oil
and gas industry, our operating strategy is untried. Accordingly, we are
subject to all of the risks inherent in the initial expenses, challenges,
complications and delays frequently encountered in connection with the
formation of any new business, as well as those risks that are specific to the
oil and gas industry in general. Despite our best efforts, we may never
overcome these obstacles to financial success. Investors should evaluate us
in light of the problems and uncertainties frequently encountered by new
companies. We have incurred $2,179,337 in net losses since inception through
February 28, 2005, and we expect to incur additional net losses for the
foreseeable future. We will be dependent on external sources of financing for
the foreseeable future.
We are a start-up business and, with all new business operations, there is a
risk of failure.
Any investment in us should be considered a high-risk investment because
investors will be placing funds at risk in a start-up business with unforeseen
costs, expenses, competition, and other problems to which start-up ventures
are often subject. Investors should not invest in us unless they can afford
to lose their entire investment. As we are a development stage company, our
prospects must be considered in light of the risks, expenses, and difficulties
encountered in establishing a new business in a highly competitive and mature
industry. Our limited business history will make it difficult for you to
analyze or to aid you in making an informed judgment concerning the merits of
an investment in us.
We will be required to raise additional capital through equity or debt
financing to execute our business plan.
To execute our business strategy, we will require more capital than we
currently have or have commitments to receive. As of February 28, 2006, we
had no cash on hand and, for the fiscal year end November 30, 2005, incurred
net loss of $1,953,528. As of the date of this Current Report, we have
nominal cash on hand. We have generated only nominal revenues since inception
and expect to incur losses for the next 12 months. We continue to operate on
a negative cash flow basis and expect this trend to continue for the next 12
months. Historically we have financed our operations through the sale of our
common stock and certain borrowings, and we expect to continue to depend on
outside debt and equity financing to sustain our operations for the next 12
months.
We require immediate financing. We believe that we will need to raise a
minimum of $4.1 million to meet our general and administrative needs for the
next twelve months. Additionally, we require a minimum of $7.6 million to re-
manufacture Rig. Nos. 15, 21 and 12, and approximately $1.41 million to
purchase equipment to facilitate transportation and ongoing maintenance of
deployed drilling rigs. Further, we may require additional money to commence
oil and natural gas exploration, to comply with licensing, registration and
other operating requirements, and to maintain compliance with the applicable
laws. Our inability to obtain immediate financing from third parties would
negatively impact our ability to fund our operations and execute our business
plan. If we are unable to raise sufficient capital from external sources to
fund our operations immediately, we may need to sell our assets, such as rig
parts, to meet working capital needs or curtail operations. Without our
operating assets, it would be impossible to generate revenue.
We have no committed sources of additional capital.
For the next 12 months, we intend to fund our operations and execute our
business strategy through best-efforts debt or equity financing. We cannot
assure you that any financing arrangements will be available in amounts or on
terms acceptable to us, if at all. As of the date of this Current Report, we
have borrowed approximately $800,000 from a bank for the purchase of Rig No.
21, which note is secured by Rig No. 21, and approximately $100,000 in 10%
demand and term notes due to related parties with the last note maturing in
July 2006. Additionally, we may attempt to borrow additional funds secured by
our other drilling rigs from the same bank or another bank, but we currently
do not have credit facilities available with other financial institutions or
other third parties. If we cannot obtain debt financing, we may attempt to
raise money through best-efforts equity financings, but we currently do not
have commitments for the purchase of our equity securities. If we choose to
raise money through the issuance of equity securities, this may cause
significant dilution of our common stock. Even if we are successful in
raising money through external sources, there is no assurance that this
capital will be sufficient to fund operations going forward without obtaining
additional capital financing. If we do not raise money immediately to satisfy
our capital needs we may be required to cease operations or sell our assets,
including rig parts which are integral to the execution of our business
strategy.
We have not completed the re-manufacturing of our first drilling rig, and we
are not certain that it will be fully functional when completed.
As of the date of this Current Report, we have not successfully re-
manufactured a drilling rig. We expect that Rig No. 15 will be our first rig.
Rig No. 15 will need a minimum of $900,000 to re-manufacture, including labor,
various rig parts and a drilling pipe to render it operational. Our next goal
is to re-manufacture Rig Nos. 12 and 21, and we estimate we will need a
minimum of $6,700,000 to re-manufacture them, including labor, various rig
parts and drilling pipes. Assuming we are successful in raising money for Rig
No. 15, it will take a minimum of a month to re-manufacture this drilling rig
at our manufacturing facility. Additionally, we must wait until we have
entered into a short-term drilling contract to train our crews and ascertain
that the drilling rig is operational. Thus, even if we raise money to
re-furbish Rig No. 15, we will not know if our refurbishment of the rig is
successful until we engage in a drilling contract to test its capability. If
Rig No. 15 is not operable at a drilling site, we will have to return the
drilling rig to our manufacturing facility for testing and improvement. We
offer no assurance that we will be able to cure the defect or that we will
ever successfully re-manufacture a drilling rig. Further, we will be
dependant on external sources of financing to provide working capital until
one or more of our drilling rigs are operating under drilling contracts.
We have no drilling contracts.
Our success will depend on our ability to enter into a drilling contract
to deploy our first completed oil rig for use by an oil and gas exploration
and production company. We are currently seeking to enter into a drilling
contract and, although we are in preliminary negotiations with multiple oil
and gas producers, we have not executed a drilling contract as of this date.
There is no assurance that we will be able to enter into any drilling
contracts, and until we do so, we have no ability to generate revenue. As
well, even if we have an oil rig and enter into a drilling contract, there is
no assurance that the oil and gas company will not terminate the contract
prematurely with little or no notice. We will not be able to generate cash
flow from operations until we enter into an oil drilling contract.
We do not have cash flow from operations to service our debt.
At February 28, 2006, we had approximately $1.2 million of debt, of which
approximately $800,000 is from a financial institution, which loan we have
used for the purchase of the Rig No. 21 draw work. This variable interest
loan (up to 18%) is secured by Rig No. 21, and if we default on the loan the
bank has a right to foreclose on Rig. No 21, including all improvements we
have made to the rig. The loan requires us to make monthly payments of
approximately $22,225 at an initial 9.5% interest, which we are current as of
the date of this Current Report; however, our monthly payment can increase if
the prime rate increases during the term of the loan. Because we are not
generating cash flows from operations, our ability to make payments on the
loan is contingent on our ability to obtain immediate financing of which we
currently have no firm commitments. Additionally, we may not be able to cover
debt service on our other notes. We are relying on external sources of
financing to pay off these debts. However, we may not be able to raise
sufficient funds from third parties in order to pay off these debts and carry
out our business plan.
There is a short supply of oil rig parts, and rig part prices are increasing.
The high demand of oil rigs has resulted in a high demand for oil rig
parts. Many oil rig parts that we require for the refurbishment of our first
oil rig are on back order. Because a few of these oil rig parts cannot be
manufactured in house, they are subject to limited availability. Thus, we may
still experience delays in refurbishing our drilling rigs because we cannot
acquire the oil rig parts. A delay in getting oil rigs to market will
postpone the execution of our business strategy which will negatively impact
our financial condition. Because of the limited supply of rig parts and high
demand, rig part prices are increasing. Increasing rig part prices will
increase our estimated completion costs for our drilling rigs and our cash
requirements for operations.
Increases in the supply of rigs could decrease dayrates and utilization rates.
Any increase in the supply of land rigs in our target markets, whether
through new construction or refurbishment, could decrease dayrates and
utilization rates, which would adversely affect any future revenues. In
addition, such increases could adversely affect any future revenue through
increased competition and lower dayrates. Utilization rates could be further
decreased by any downturn in oil and natural gas prices.
A material reduction in the levels of exploration and development activities
in Texas or an increase in the number of rigs mobilized to Texas could
negatively impact our dayrates and utilization rates.
We plan to conduct our operations in Texas. A material reduction in the
levels of exploration and development activities in Texas due to a variety of
oil and natural gas industry risks or an increase in the number of rigs
mobilized into Texas could negatively impact our future dayrates and
utilization rates, which, in turn, could adversely affect our future revenues.
Force Majeure events may lead to delays in obtaining operating materials and
the inability of us to operate our future rigs in an efficient manner.
All of our contemplated contracts will provide that our customers bear
all fuel expenses. However, prolonged shortages in the availability of fuel to
run our drilling rigs resulting from action of the elements, warlike actions
or other "Force Majeure" events could result in the suspension of our future
contracts and have a material adverse effect on our future financial condition
and results of operations.
We will operate in a highly competitive, fragmented industry in which price
competition is intense.
We will encounter substantial competition from other drilling
contractors, the majority of which are larger and better financed. Our
primary market areas are highly fragmented and competitive. The fact that
drilling rigs are mobile and can be moved from one market to another in
response to market conditions heightens the competition in the industry.
Drilling contracts are usually awarded on the basis of competitive bids. We
believe pricing and rig availability are the primary factors our potential
customers consider in determining which drilling contractor to select. In
addition, we believe the following factors are also important:
* the type and condition of each of the competing drilling rigs;
* the mobility and efficiency of the rigs;
* the quality of service and experience of the rig crews;
* the safety records of the rigs;
* the offering of ancillary services; and
* the ability to provide drilling equipment adaptable to, and
personnel familiar with, new technologies and drilling techniques.
Contract drilling companies compete primarily on a regional basis, and
the intensity of competition may vary significantly from region to region at
any particular time. If demand for drilling services improves in a region
where we operate, our competitors might respond by moving in suitable rigs
from other regions. An influx of rigs from other regions could rapidly
intensify competition, reduce future profitability and cause demand for
drilling rigs to become short-lived. We make no assurance that we will be
able to compete effectively with other drilling companies in our same market.
We may be unable to attract and retain qualified, skilled employees necessary
to operate our business.
Our future success depends in large part on our ability to attract and
retain skilled and qualified personnel to operate our manufacturing facility
and future rigs. Our inability to hire, train and retain a sufficient number
of qualified employees could impair our ability to manage and maintain our
business. We require skilled employees to re-manufacture and operate our
drillings rigs. Shortages of qualified personnel are occurring in our
industry. As a result of the volatility of the oil and natural gas industry
and the demanding nature of the work, potential employees may choose to pursue
employment in fields that offer a more desirable work environment at wage
rates that are higher than ours. If we should be unable to recruit and employ
workers with the requisite level of training and experience to adequately
operate our equipment, our operations could be materially and adversely
affected. With a reduced pool of workers, it is possible that we will have to
raise wage rates to attract workers from other fields and to retain our
current employees. If we are not able to increase our future service rates to
our customers to compensate for wage-rate increases, our future profitability
and other results of future operations may be adversely affected.
Our management team has a limited history of working together.
We have a limited history of operations under our current officers and
directors. Although experienced, our officers have not worked together for an
extensive length of time. If for any reason our officers cannot work
efficiently as a team, our business will be adversely affected.
Key management may leave us.
Our business strategy is dependent upon the skills and knowledge of
management. These individuals will be responsible for the day to day
operations of our business. We believe that the special knowledge of these
individuals gives us a competitive advantage. If one or more of these
critical employees leave us, we may be unable to hire suitable replacements to
operate our business. Although management has entered into employment
agreements, there is no assurance that these individuals will remain with us.
We will face competition from our competitors with greater resources which may
make it more difficult for us to compete which can reduce our dayrates and
utilization rates.
It should be assumed that all of our competitors have greater financial,
technical and other resources than we do which may make it more difficult for
us to compete which can reduce our dayrates and utilization rates. Their
greater capabilities in these areas may enable them to:
* better withstand industry downturns;
* compete more effectively on the basis of price and technology;
* retain skilled rig personnel; and
* build new rigs or acquire and refurbish existing rigs so as to be
able to place rigs into service more
* quickly than us in periods of high drilling demand.
Our future operations involve operating hazards, which if not insured or
indemnified against, could adversely affect our future results of operations
and financial condition.
Our future operations are subject to the many hazards inherent in the
contract land drilling business, including the risks of:
* blowouts;
* fires and explosions;
* loss of well control;
* collapse of the borehole;
* lost or stuck drill strings; and
* damage or loss from natural disasters.
Any of these hazards can result in substantial future liabilities or
losses to us from, among other things:
* suspension of drilling operations;
* damage to, or destruction of, our property and equipment and that of
others;
* personal injury and loss of life;
* damage to producing or potentially productive oil and gas formations
through which we drill; and
* environmental damage.
We will seek to protect ourselves from some but not all operating hazards
through insurance coverage, in instances where such insurance coverage is
affordable. However, some risks are either not insurable or insurance is
available only at rates that we consider uneconomical. Those risks include
pollution liability in excess of relatively low limits. Depending on
competitive conditions and other factors, we will attempt to obtain
contractual protection against uninsured operating risks from our customers.
However, customers who provide contractual indemnification protection may not
in all cases maintain adequate insurance to support their indemnification
obligations. Our future insurance or indemnification arrangements may not
adequately protect us against liability or loss from all the hazards of our
operations. The occurrence of a significant event that we have not fully
insured or indemnified against or the failure of a customer to meet its
indemnification obligations to us could materially and adversely affect our
future results of operations and financial condition. Furthermore, we may be
unable to maintain adequate insurance in the future at rates we consider
reasonable.
Our operations will be subject to various laws and governmental regulations
that could restrict our future operations and increase our operating costs.
The U.S. oil and natural gas industry is affected from time to time in
varying degrees by political developments and federal, state and local
environmental, health and safety laws and regulations applicable to our
business. Our operations are vulnerable to certain risks arising from the
numerous environmental health and safety laws and regulations. These laws and
regulations may restrict the types, quantities and concentration of various
substances that can be released into the environment in connection with
drilling activities, require reporting of the storage, use or release of
certain chemicals and hazardous substances, require removal or cleanup of
contamination under certain circumstances, and impose substantial civil
liabilities or criminal penalties for violations. Environmental laws and
regulations may impose strict liability, rendering a company liable for
environmental damage without regard to negligence or fault, and could expose
us to liability for the conduct of, or conditions caused by, others, or for
our acts that were in compliance with all applicable laws at the time such
acts were performed. Moreover, there has been a trend in recent years toward
stricter standards in environmental, health and safety legislation and
regulation, which may continue.
We may incur material liability related to our operations under
governmental regulations, including environmental, health and safety
requirements. We cannot predict how existing laws and regulations may be
interpreted by enforcement agencies or court rulings, whether additional laws
and regulations will be adopted, or the effect such changes may have on our
business, financial condition or results of operations. Because the
requirements imposed by such laws and regulations are subject to change, we
are unable to forecast the ultimate cost of compliance with such requirements.
The modification of existing laws and regulations or the adoption of new laws
or regulations curtailing exploratory or development drilling for oil and
natural gas for economic, political, environmental or other reasons could have
a material adverse effect on us by limiting drilling opportunities.
Risks Relating to the Oil and Natural Gas Industry
Our future revenue, if any, will be derived from companies in the oil and
natural gas exploration and production industry, a historically cyclical
industry with levels of activity that are significantly affected by the levels
and volatility of oil and natural gas prices. Any prolonged reduction in the
overall level of exploration and development activities, whether resulting
from changes in oil and natural gas prices or otherwise, can adversely impact
us in many ways by negatively affecting:
* any future revenues, cash flows and profitability;
* our ability to obtain, maintain or increase our borrowing capacity;
* our ability to obtain additional capital to finance our business,
and the cost of that capital; and
* our ability to hire and retain skilled rig personnel whom we would
need in the event of an upturn in the demand for our services.
Depending on the market prices of oil and gas, oil and gas exploration and
production companies may cancel or curtail their drilling programs, thereby
reducing demand for our services. Oil and gas prices have been volatile
historically and, we believe, will continue to be so in the future. Many
factors beyond our control affect oil and gas prices, including:
* weather conditions in the United States and elsewhere;
* economic conditions in the United States and elsewhere;
* actions by OPEC, the Organization of Petroleum Exporting Countries;
* political instability in the Middle East and other major oil and gas
producing regions;
* governmental regulations, both domestic and foreign;
* the pace adopted by foreign governments for the exploration,
development and production of their national reserves;
* the price of foreign imports of oil and gas;
* the cost of exploring for, producing and delivering oil and gas;
* the discovery rate of new oil and gas reserves;
* the rate of decline of existing and new oil and gas reserves;
* available pipeline and other oil and gas transportation capacity;
* the ability of oil and gas companies to raise capital;
* the overall supply and demand for oil and gas;
* the development of alternate energy sources and the long-term
effects of worldwide energy conservation measures; and
* the capacity of the natural gas pipeline network.
Risks Relating to Our Stock
Our "blank check" preferred stock could be issued to prevent a business
combination not desired by management or our current majority shareholders.
Our articles of incorporation authorize the issuance of "blank check"
preferred stock with such designations, rights and preferences as may be
determined by our board of directors without shareholder approval. Our
preferred stock could be utilized as a method of discouraging, delaying, or
preventing a change in our control and as a method of preventing shareholders
from receiving a premium for their shares in connection with a change of
control.
Future sales of our common stock in the public market could lower our stock
price.
We may sell additional shares of common stock in subsequent public or
private offerings. We may also issue additional shares of common stock to
finance future acquisitions or equity raises. We cannot predict the size of
future issuances of our common stock or the effect, if any, that future
issuances and sales of shares of our common stock will have on the market
price of our common stock. Sales of substantial amounts of our common stock,
or the perception that such sales could occur, may adversely affect prevailing
market prices for our common stock.
We presently do not intend to pay cash dividends on our common stock.
We currently anticipate that no cash dividends will be paid on the common
stock in the foreseeable future. While our dividend policy will be based on
the operating results and capital needs of the business, it is anticipated
that all earnings, if any, will be retained to finance the future expansion of
the our business. Therefore, prospective investors who anticipate the need for
immediate income by way of cash dividends from their investment should not
purchase the shares offered in this offering.
There is currently a limited market for our common stock, and any trading
market that develops in the common stock may be highly illiquid and may not
reflect the underlying value of our net assets or business prospects.
Although our common stock is currently traded on the OTC Bulletin Board,
there is currently a limited market for our common stock and there can be no
assurance that an improved market will ever develop. Historically, trading
volume has been limited, sporadic and volatile. Accordingly, common stock
holders will be required to bear the economic consequences of holding such
securities for an indefinite period of time until trading volume develops in
the common stock, if at all. As such, an active trading market for our common
stock may not ever develop. Any trading market that does develop may be
volatile, and significant competition to sell our common stock in any such
trading market may exist, which could negatively affect the price of our
common stock. As a result, the value of our common stock may decrease.
Additionally, if a trading market does develop, such market may be highly
illiquid, and our common stock may trade at a price that does not accurately
reflect the underlying value of our net assets or business prospects.
Investors are cautioned not to rely on the possibility that an active trading
market may develop or on the prices at which our stock may trade in any market
that does develop in making an investment decision. If our share price is
volatile, we may be the target of securities litigation, which is costly and
time-consuming to defend.
Penny stock rules could make it hard to resell shares of our common stock and
impose significant restrictions on broker-dealers.
The "penny stock" rules limit trading of securities not traded on
Nasdaq or a recognized stock exchange, or securities which do not trade at a
price of $5.00 or higher, in that brokers making trades in those securities
must make a special suitability determination for purchasers of the security,
and obtain the purchaser's consent prior to sale. The application of these
rules may make it difficult for shareholders to resell their shares.
MARKET PRICE INFORMATION AND DIVIDEND POLICY
Shares of our common stock are traded on the National Association of
Securities Dealers Inc. Over the Counter Bulletin Board under the symbol
"PTCY.OB". Our Common Stock trades on a limited, sporadic and volatile basis.
On May 30, 2006, the sales price of our common stock on the OTC Bulletin
Board was $5.00. As of the date of this Current Report, there were 42,055,463
shares outstanding held by approximately 400 holders of record.
The following table sets forth the approximate high and low bid
information for our common stock for the last two fiscal years and for the
quarter ended February 28, 2006. The quotations reflect inter-dealer prices,
without retail markups, markdowns, or commissions and may not represent actual
transactions.
Quarter ended: High Low
- ------------------ ------ ------
May 28, 2004 $0.10 $0.07
August 31, 2004 $0.10 $0.10
November 30, 2004 $0.10 $0.10
February 28, 2005 $0.15 $0.10
May 31, 2005 $0.15 $0.15
August 31, 2005 $0.15 $0.15
November 30, 2005 $0.50 $0.15
February 28, 2006 $0.50 $0.15
We have not paid dividends since inception nor do we anticipate that any
cash dividends will be paid in the foreseeable future.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
In June 2006, Process acquired Forster which is a wholly-owned subsidiary
of the Company, through which operations will be conducted. From an
accounting standpoint, Forster is deemed the acquirer in a reverse merger and
deemed the survivor of the merger. The combined company will pursue Forster's
business model and strategy by competing in the land drilling rig contracting
industry. Forster has not generated any profits since its inception in March
of 2005, has no current source of revenues, and has incurred significant
operating losses. As of February 28, 2006, it generated $2.2 million in net
losses.
Our strategy is to raise money through an equity or debt raise to
complete the refurbishment of Rig No. 15. We then plan on entering into a
short-term drilling contract in the Permian Basin to train our drilling crew
and ensure that the rig is operational. If our initial short-term drilling
operation is successful, we will seek to enter into a long-term drilling
contract. We hope to use the proceeds from this contract, along with money
raised from another debt or equity raise, to complete the re-manufacturing of
Rig Nos. 12 and 21 to pay for operating expenses. If we are successful in
re-manufacturing our second and third drilling rigs, we will seek to enter
into long-term drilling contracts for these rigs in the Permian Basin of West
Texas, Barnett Shale Trend of North Texas or the Cotton Valley/Travis Peak
Trend of East Texas. Any proceeds from these two contracts will be used to
re-manufacture the rest of our drilling rigs in inventory and to pay for
operating expenses. We provide no assurance that we will be able to raise
money, successfully re-manufacture any drilling rig, or enter into any
drilling contract.
Results of Operations
Process Technology:
Fiscal year ended November 30, 2005 compared with fiscal year ended November
30, 2004:
Process did not have any revenues during either of these fiscal years, and had
general and administrative expenses of $38,730 and $10,806 in fiscal 2005 and
fiscal 2004, respectively. In fiscal 2005, Process had a net loss of $38,720
and in fiscal 2004 Process had a net loss of $10,806. The expenses and losses
related primarily to legal and accounting expenses.
Three months ended February 28, 2006 compared to three months ended February
28, 2005:
Process did not have any revenues during either of these quarters, and had
general and administrative expenses of $13,493 and $18,429 for the quarter
ended February 28th 2006 and 2005, respectively. Process had a net loss of
$13,493 in the quarter ended February 28th, 2006 and $18,429 in the quarter
ended February 28th, 2005.
Forster Drilling
Inception to November, 30 2005:
Forster recorded $13,411 in revenue from the sale of rig parts from inception
to November 30, 2005. Our operating expenses were $1,942,301 from inception
until November 30, 2005. Forster incurred a net loss from inception through
November 30, 2005 of $1,953,528.
Three months ended February 28, 2006:
Forster recorded $266,000 in revenue from the sale of drilling rig parts for
the three months ended February 28, 2006. We plan to deploy our first rig in
mid-July, although such deployment is subject to additional financing being
obtained as well as the satisfaction of other conditions outside of our
control. We can make no assurances that the completed rig will be deployed by
such date. Our operating expenses were $359,252 for the three months ended
February 28, 2006. We anticipate our general and administrative expenses to
increase in the future. Forster had a net loss for the three months ending
February 28, 2006 of $225,809.
Liquidity
On a pro-forma basis at February 28, 2006, we had total assets of
$2,668,380, total liabilities of $1,322,176, and a working capital deficit of
$724,638. In February 2006, we borrowed $800,000 from a financial
institution. The $800,000 note bears a variable annual rate of prime plus 2%
and matures on February 23, 2009. The loan is to be repaid in 35 monthly
payments of approximately $22,225 and is secured by one of our drilling rigs.
Since February 28, 2006 through May 31, 2006, we have raised additional
funding of $1,839,200 through best efforts sales of common stock at weighted
average prices of $0.75. We believe that we will need to raise a minimum of
$4.1 million to meet our general and administrative needs for the next twelve
months. We anticipate we will need an additional $7.6 million in order to
complete the refurbishment of Rig Nos. 15, 21, and 12, and an additional $1.41
million to purchase equipment to facilitate transportation and ongoing
maintenance of deployed drilling rigs. These numbers could increase if we
accelerate the refurbishment of these rigs or subsequent rigs. Although we
anticipate that once the first rig is placed in operations that we will
receive revenue from operations, we will have to finance further expansion and
continuing operations. We will use our best efforts to obtain equity or debt
financing to fund operations. The company has no firm commitments or
arrangements for external financing to fund operations. We provide no
assurance that we will be successful in any future financing effort to obtain
the necessary working capital to support our operations. Our viability is
contingent upon our ability to receive external financing. Failure to obtain
sufficient working capital may result in management resorting to the sale of
assets or otherwise curtailing operations.
Critical Accounting Policies
Inventories.
Inventories include materials as well as labor costs directly associated
with the manufacturing of drilling rigs. Inventories are stated at the lower
of cost or market with cost being determined on a first-in, first-out basis.
Property and Equipment.
Property and equipment, including renewals and betterments, are
capitalized and stated at cost, while maintenance and repairs are expensed
currently. Assets are depreciated on a straight-line basis. The depreciable
lives of drilling rigs and related equipment are three to fifteen years. The
depreciable life of other equipment is three years. Depreciation is not
commenced until acquired rigs are placed in service. Once placed in service,
depreciation continues when rigs are being repaired, refurbished or between
periods of deployment. As of November 30, 2005, Forster had not recognized
any depreciation expense associate with drilling rigs, as no rigs had been
placed in service. Forster reviews long-lived assets to be held and used for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. If the sum of the
undiscounted expected future cash flows is less than the carrying amount of
the assets, Forester recognizes an impairment loss based upon fair value of
the assets.
Stock Options.
Forster adopted SFAS No 123R for the transactions in which an entity
exchanges its equity instruments for goods or services. SFAS No 123R focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. SFAS No.123R requires that the
fair value of such equity instruments be recognized as expense in the
historical financial statements as services are performed. As of November 30,
2005, no stock options or warrants had been granted.
MANAGEMENT
Executive Officers and Directors
Our executive officers and directors are:
Name Age Position
F. E. Forster, III 55 Chairman, Chief Executive Officer and President
W. Scott Thompson 56 Director, Secretary and Treasurer
Bud Najvar 49 Director and Chief Financial Officer
Fred Forster, Jr. 83 Director
William A. Silvey, Jr. 71 Director
F. E. Forster III has served as the chief executive officer and chairman
of the board of directors since the closing of the Reorganization. Mr.
Forster III has served as the chief executive officer and chairman of the
board of directors of Forster since its inception in March 2005. From 1998 to
2004, Mr. Forster engaged in several ventures related to land development,
residential construction, self-storage facilities, retailing and gaming. Mr.
Forster holds a BBA and an MBA from The University of Texas at Austin, and has
taught accounting at The University of Texas Permian Basin. Mr. Forster III
is the son of Fred Forster Jr.
Scott Thompson has served as secretary, treasurer and as a director since
October 1998. Mr. Thompson has served as the secretary, treasurer and as a
member of the board of directors of Forster since March 2005. From April 1993
to present, Mr. Thompson has served as president of Eurotrade Financial, Inc.
From May 2005 to present, Mr. Thompson has served as a member of the board of
directors of Oilsands Quest Inc. Mr. Thompson holds a BBA from The University
of Texas at Austin and completed work at the Graduate School of Business at
University of Texas at Austin.
Bud Najvar has served as chief financial officer since June 2006 and as a
director since January 2005. From May 2002 to present, Mr. Najvar has served
as a partner of Najvar & Najvar, CPA accounting firm. From May 2000 to May
2002, Mr. Najvar served as a senior tax manager at Margolis, Phipps & Wright,
P.C.
Fred Forster Jr. has served as a director since the closing of the
Reorganization. Mr. Forster has been in the oil and gas business since 1988.
Mr. Forster received a BS in Chemical Engineering from The University of Texas
at Austin in 1948. Mr. Forster Jr. is the father of Fred Forster III.
William A. Silvey has served as president and as a director since October
1998. From April 1993 to present, Mr. Silvey has served as an officer of
Eurotrade Financial, Inc. Mr. Silvey holds a BME from the California
Institute of Technology and an MBA from Stanford University.
Board Composition
Our board of directors currently consists of five members. Each of our
directors is elected annually at our annual meeting. There are no family
relationships between any of our officers and directors other than a father
and son relationship between Messrs. Fred Jr. and Fred III. The board of
directors has not established any committees but plans to establish an audit
committee, compensation committee, and nominating and governance committee in
the near future. We do not have an audit committee financial expert serving
on our board of directors. We have been unable to attract an audit committee
financial expert to serve on our board of directors as a result of our limited
operations and financial resources.
Director Compensation
We reimburse our directors for all reasonable ordinary and necessary
business related expenses, but we did not pay director's fees or other cash
compensation for services rendered as a director in the year ended November
30, 2005. We have no standard arrangement pursuant to which our directors are
compensated for their services in their capacity as directors. We expect to
pay fees for services rendered as a director when additional directors are
appointed to the board of directors.
Executive Compensation
The following table contains compensation data for Messrs. Silvey and
Forster. Mr. Silvey served as our chief executive officer until the closing
of the Reorganization in June 2006. Mr. Forster has served as our chief
executive officer since the closing of the Reorganization. Mr. Forster served
as chief executive officer of Forster since March 2005.
Summary Compensation Table
Annual Long Term
Compensation Compensation Awards
------------- ---------------------
Name and Salary Bonus Securities Underlying All Other
Principal Positions Year ($) ($) Options (#) Compensation($)
- ------------------- ---- ------------- --------------------- ---------------
William A. Silvey, Jr.2005 -- -- -- --
2004 -- -- -- --
2003 -- -- -- --
F. E. Forster III 2005 32,000 -- -- --
2004 -- -- -- --
2003 -- -- -- --
The following table sets forth information concerning individual grants
of stock options made during the last fiscal year to Messrs. Silvey & Forster.
Option Grants in Last Fiscal Year
(Individual Grants)
Number of Percent of Total
Securities Options Granted to Exercise or Expiration
Underlying Employees in Base Price Date
Options Fiscal Year ($/sh)
Name Granted (#)
William A. Silvey, Jr. -- -- -- --
F. E. Forster III -- -- -- --
The following table sets forth information concerning option exercises
made during the last fiscal year by Messrs. Silvey and Forster.
Aggregated Option Exercises In Last Fiscal Year
And FY-End Option Values
Shares Value of Unexercised
Acquired Value Number of Unexercised In-the-Money
on Realized Securities Underlying Options at FY-End
Name Exercise ($) Options at FY-End (#) ($) (1)
- -----------------------------------------------------------------------------
Exercisable Unexercis- Exercisable Unexercis
able able
----------- --------- ----------- -------
William A.
Silvey, Jr. -- -- -- -- -- --
F. E. Forster III -- -- -- -- -- --
Stock Option Plans and Other Benefits
No deferred compensation or long-term incentive plan awards were issued
or granted to our management during the last three fiscal years. We do not
have a stock option plan, but we intend on adopting one in the near future.
Employment Agreements
In June 2006, we entered into a three-year employment agreement with Mr.
Forster, pursuant to which he will receive an annual salary of $60,000.
However, Mr. Forster's salary is subject to adjustment as follows: his annual
salary will be reduced to $25,000 when the first drilling rig is placed into
operations, but will be increased by $25,000 for each additional rig placed
into operations, up to a maximum salary of $200,000. If we terminate Mr.
Forster's employment "without cause", we will pay him his unpaid salary earned
through the termination date and two months salary. Mr. Forster also entered
into a confidentiality, non-compete and non-solicit agreement with us
prohibiting him from: (i) disclosing confidential information for a period of
one year from the receipt of the last confidential information; (ii) competing
in a related business for a period of one year after the term of his
agreement; and (iii) soliciting or hiring any of our employees for a period of
one year after the term of his agreement.
In June 2006, we entered into a three-year employment agreement with Mr.
Thompson, pursuant to which he will receive monthly compensation of $8,000
from June 2006 through July 2006, $10,000 from August 2006 through November
2006, and $12,000 for the remainder of the term. Additionally, Mr. Thompson
will receive a monthly car allowance of $1,200 through the term of the
agreement. If we terminate his employment "without cause", we will pay him
his unpaid salary earned through the termination date and two months salary.
Mr. Thomspon also entered into a confidentiality, non-compete and non-solicit
agreement with us prohibiting him from: (i) disclosing confidential
information for a period of one year from the receipt of the last confidential
information; (ii) competing in a related business for a period of one year
after the term of his agreement; and (iii) soliciting or hiring any of our
employees for a period of one year after the term of his agreement.
In June 2006, we entered into a one-year employment agreement with Mr.
Najvar, pursuant to which he will receive an annual salary of $30,000 and up
to 90,000 shares of common stock. If we terminate his employment "without
cause", we will pay him his unpaid salary earned through the termination date
and two months salary. Mr. Najvar also entered into a confidentiality,
non-compete and non-solicit agreement with us prohibiting him from: (i)
disclosing confidential information for a period of one year from the receipt
of the last confidential information; (ii) competing in a related business for
a period of one year after the term of his agreement; and (iii) soliciting or
hiring any of our employees for a period of one year after the term of his
agreement.
Related Party Transactions
Pre-Reorganization
In April 2005, we issued 320,000 shares of common stock to Mr. Thompson
and his nominees, 360,000 shares of common stock to Mr. Silvey and his
nominees, and 70,000 shares of common stock to the spouse of Mr. Najvar; each
issued for nominal consideration.
In March 2000, we issued 192,858 shares of common stock to Leonard W.
Burningham for legal services rendered to us.
Reorganization-related
Pursuant to the Reorganization, Messrs. Thompson and Silvey have agreed
to indemnify us for any claim resulting from any misstatement, omission, or
any breach of any representation, warranty or covenant by Process or certain
Process shareholders in the Reorganization Agreement. We incurred an
obligation to pay Messrs. Thompson and Silvey an aggregate of $500,000 at the
Closing of the Reorganization for such indemnification.
In connection with the Reorganization, (i) Mr. Forster, Jr., Mr. Forster,
III and the Forster Family Trust exchanged an aggregate of 19,377,062 shares
of Forster common stock acquired for nominal consideration for 19,377,062
shares of our common stock, (ii) Mr. Thompson and the WLT Reification Trust
exchanged an aggregate of 6,051,208 shares of Forster common stock acquired
for nominal consideration for 6,051,208 shares of our common stock, (iii) the
spouse of Mr. Najvar exchanged 50,000 shares of Forster common stock acquired
for nominal consideration for 50,000 shares of our common stock, (iv) Sand
Hills Partners, LLC exchanged 2,000,000 of Forster common stock acquired for
nominal consideration for 2,000,000 shares of our common stock, and (v) Brewer
& Pritchard, P.C. exchanged 250,000 shares of Forster common stock acquired
for nominal consideration for 250,000 shares of our common stock.
Forster Transactions
From inception to the date of the Reorganization, Forster paid (i) Mr.
Forster $60,000 for services rendered, (ii) Mr. Thompson $71,000 for services
rendered, and (iii) Mr. Najvar $5,600 for services rendered.
In October 2005, Forster entered into a financial advisory agreement with
Sand Hills Partners, LLC whereby Forster is obligated to pay $16,000 for
services rendered after February 28, 2006. Since April 2006, Forster has
engaged SH Celera Management Service, LLC, an affiliate of Sand Hills
Partners, LLC to perform internal accounting services to us for $10,000 a
month.
In July 2005, Forster entered into a five year lease with CL Land and
Cattle Trust with a monthly base rent of $3,500. The lease premises is
located in Odessa, Texas and houses Forster's manufacturing facility. CL Land
and Cattle Trust granted to Forster a right of first refusal to purchase the
leased premises for $400,000, payable $240,000 in cash and $160,000 in common
stock valued at $0.50 per share. Mr. Hudnall, an affiliate of Forster,
conveyed the lease premises to CL Land and Cattle Trust, of which Mr.
Hudnall's son, Wesley Hudnall, is the beneficiary of this irrevocable trust.
Wesley Hudnall is an employed welder on a contract basis with Forster earning
approximately $8,000 a month.
In June 2005, Forster purchased rig parts from C&D Equipment, of which
Cullen Hudnall is an affiliate, for $161,250. C&D Equipment acquired the rig
parts for approximately $150,000.
PRINCIPAL STOCKHOLDERS
The following table sets forth the number and percentage of outstanding
shares of Company common stock owned by: (a) each person who is known by us to
be the beneficial owner of more than 5% of our outstanding shares of common
stock; (b) each of our directors; (c) the named executive officers as defined
in Item 402 of Regulation S-B; and (d) all current directors and executive
officers, as a group. As of June 16, 2006, there were 42,055,463 shares of
Company common stock issued and outstanding.
Beneficial ownership has been determined in accordance with Rule
13d-3 under the Exchange Act. Under this rule, certain shares may be
deemed to be beneficially owned by more than one person (if, for example,
persons share the power to vote or the power to dispose of the shares).
In addition, shares are deemed to be beneficially owned by a person if the
person has the right to acquire shares (for example, upon exercise of an
option or warrant) within sixty days of the date as of which the
information is provided. In computing the percentage ownership of any
person, the amount of shares is deemed to include the amount of shares
beneficially owned by such person by reason of such acquisition rights.
As a result, the percentage of outstanding shares of any person as shown
in the following table does not necessarily reflect the person's actual
voting power at any particular date.
To our knowledge, except as indicated in the footnotes to this table
and pursuant to applicable community property laws, the persons named in
the table have sole voting and investment power with respect to all shares
of common stock shown as beneficially owned by them. Unless otherwise
indicated, the business address of the individuals listed is 6371 Richmond
Ave., Suite 200, Houston, Texas 77057.
Number of Shares
Name and Address of Beneficial of Common Stock Percentage
Owner Beneficially Owned Of Class
Beneficial Owners of more than 5%:
Forster Family Trust 19,177,000 (1) 45.6%
WLT Reification Trust 4,922,000 (2) 11.7%
Officers and Directors:
F. E. Forster, III 19,277,062 (3) 45.8%
Fred Forster, Jr. 100,000 *
William A. Silvey, Jr. 2,429,269 (4) 5.8%
W. Scott Thompson 6,051,208 (5) 14.4%
Bud Najvar 120,000 (6) *
All directors & executive officers
as a group (5 persons) 27,977,539 (7) 66.5%
___________________
* Less than 1%
(1) Robin French exercises voting and dispositive power over all shares
beneficially owned by the Forster Family Trust.
(2) Ron Wilson exercises voting and dispositive power over all shares
beneficially owned by the WLT Reification Trust.
(3) Includes (i) 19,177,000 shares of Company common stock held by the
Forster Family Trust, of which Mr. Forster, III is the beneficiary and
(ii) 100,000 shares of Company common stock owned by Mr. Forster, III's
family members.
(4) Includes (i) 535,000 shares of Company common stock owned by Mr.
Silvey's wife and (ii) 285,703 shares held by entities over which Mr.
Silvey has either voting power, investment power, or beneficial ownership.
(5) Includes (i) 963,650 shares of Company common stock which are owned
either directly or indirectly by Mr. Thompson's wife, (ii) 4,922,000
shares of Company common stock held by the WLT Reification Trust, of which
Mr. Thompson is the beneficiary, and (iii) 21,426 shares of Company common
stock held by an entity over which Mr. Thompson has shared voting and
investment power.
(6) Represents shares owned by Bud Najvar's wife.
(7) Consisting of (i) 19,277,062 shares of Company common stock
beneficially owned by Mr. Forster, III, (ii) 100,000 shares of Company
common stock beneficially owned by Fred Forster, Jr., (iii) 2,429,269
shares of Company common stock beneficially owned by Mr. Silvey, Jr., (iv)
6,051,208 shares of Company common stock beneficially owned by Mr.
Thompson, and (v) 120,000 shares of Company common stock beneficially
owned by Mr. Navjar.
DESCRIPTION OF COMMON SECURITIES
Common Stock
There are 200,000,000 shares of common stock authorized, of
which 42,055,463 shares are presently issued and outstanding. The holders
of our common stock are entitled to one vote per share on each matter
submitted to a vote at a meeting of stockholders. The shares of common
stock do not carry cumulative voting rights in the election of directors.
Stockholders have no pre-emptive rights to acquire additional shares of
common stock or other securities. The common stock is not subject to
redemption rights and carries no subscription or conversion rights. In
the event of liquidation, the shares of common stock are entitled to share
equally in corporate assets after satisfaction of all liabilities. All
shares of the common stock issued and outstanding are fully paid and non-
assessable.
Preferred Stock
There are 12,500,000 shares preferred stock authorized, of which
5,835 shares designated as Series A Non-Voting Preferred Stock are issued
and outstanding. The rights, privileges and preferences of the Series A
Non-Voting Preferred Stock are as follows: (i) non-voting; (ii) non-
convertible; (iii) preference to dividends if any are declared; (iv) any
dividends shall be non-cumulative; and (v) the preferred stock shall be
entitled to an annual dividend of $0.10 per share, payable quarterly,
commencing on or before 24 months from the date of issuance of
certificates therefore, in the sole discretion of the board of directors.
No dividends have been declared to date.
Our Articles of Incorporation authorize the Board of Directors,
without stockholder approval, to designate and issue additional series,
classes, rights, privileges, and preferences of the preferred stock or any
class or series thereof.
Options and Warrants
As of the date hereof, there are no existing outstanding options or
warrants.
Indemnification
The General Corporation Law of the State of Nevada authorizes
corporations to limit or eliminate the personal liability of
directors to corporations and their stockholders for monetary damages
for breach of directors' fiduciary duty of care. Our articles of
incorporation include an indemnification provision which limits the
liability of directors to the Company or its stockholders to the fullest
extent permitted by Nevada law.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons as provided in the foregoing provisions, or otherwise, we have
been advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Act and is unenforceable.
In the event that a claim for indemnification against such
liabilities, other than the payment by us of expenses incurred or paid by
a director, officer or controlling person in the successful defense
of any action, suit or proceeding, is asserted by a director,
officer or controlling person in connection with the securities being
registered, we will, unless in the opinion of our counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
Shares Eligible for Future Sale
Of the 42,055,463 shares of common stock issued and outstanding,
40,055,463 shares were issued in the Reorganization and are therefore
restricted securities and the balance of 2,000,000 shares were issued
prior to the Reorganization and are either free trading securities or
restricted securities currently eligible to be traded on the open market
subject to volume and manner of sale limitations of Rule 144. In
general, restricted securities may be sold pursuant to Rule 144 after
they have been fully paid for and beneficially owned for one year and the
shares are sold in brokers' transactions or to market makers in an
amount per quarter not to exceed the greater of 1% of the number of
shares of common stock then outstanding or the average weekly trading
volume for a four-week prior to such sale.
Of the 40,055,463 shares issued in the Reorganization, a total of
26,844,500 shares are subject to a contractual lock-up agreement that
precludes any sales prior to June 16, 2007 and, thereafter, limits sales
up to an amount equal to one twelfth of the shares owned by such holders
per 30 day period. This lock-up will terminate if the last sales price of
Common Stock is at or above $10.00 per share for 10 out of 20 consecutive
days, or upon a "change of control" transaction. Of the 2,000,000 shares
issued prior to the Reorganization, a total of 1,664,601 shares are
subject to a separate contractual lock-up agreement that limits sales up
to an amount equal to one twelfth of the shares owned by such holders per
30 day period, provided that such sales are effected in accordance with
Rule 144(f) and (g). This lock-up will terminate if the last sales price
of Common Stock is at or above $10.00 per share for 10 out of 20
consecutive days, or upon a change of control transaction.
We are unable to estimate the number of shares to be sold in the
future by its stockholders, since this will depend upon the market price
for the common stock, the personal circumstance of the sellers and other
factors. Previously, there has been a limited market for the common stock
and the sale of a substantial number of shares on the market may
significantly reduce the market price.
Transfer Agent
Our transfer agent is Computershare Limited, located at 350 Indiana,
Suite 800, Golden, Colorado 80401.
ITEM 5.02 DEPARTURE OF DIRECTORS OR PRINCIPAL OFFICERS; ELECTION OF
DIRECTORS; APPOINTMENT OF PRINCIPAL OFFICERS.
In connection with the Reorganization and resulting change in
control, Mr. Silvey resigned as chief executive officer and Mr. Forster
was appointed as chief executive officer and president. Further, Mr.
Forster, Jr. and Mr. Forster III were appointed to the board of directors.
Bud Najvar was appointed chief financial officer along with his existing
duty as director. See "Section 5.01 - Management" for additional
information regarding our executive officers and directors.
ITEM 5.06 CHANGE IN SHELL COMPANY STATUS.
Item 1.01 and Item 5.01 is incorporated herein by reference.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBIT.
Our financial statements are stated in United States dollars (US$) and are
prepared in accordance with United States Generally Accepted Accounting
Principles.
(a) Financial Statements of businesses acquired.
Audited Financial Statements of Forster Drilling Corporation for the
period from March 22, 2005 (inception) to November 30, 2005
Balance Sheet at November 30, 2005
Statement of Operations for the period from March 22, 2005 (inception) to
November 30, 2005
Statement of Changes in Stockholder's Equity for the period from
March 22, 2005 (inception) to November 30, 2005
Statement of Cash Flows for the period from March 22, 2005 (inception)
to November 30, 2005
Notes to the Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Forster Drilling Corporation
(a development stage company)
Houston, Texas
We have audited the accompanying balance sheet of Forster Drilling Corporation
as of November 30, 2005 and the related statements of expenses, changes in
stockholders' equity and cash flows for the period from inception (March 22,
2005) through November 30, 2005. These financial statements are the
responsibility of the Forster's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Forster as of November
30, 2005 and the results of its operations and cash flows for the period from
inception through November 30, 2005 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that Forster
will continue as a going concern. As discussed in Note 2 to the financial
statements, Forster suffered a net loss from operations and has a working
capital deficiency, which raises substantial doubt about its ability to
continue as a going concern. Management's plans regarding those matters also
are described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/Malone & Bailey,
MALONE & BAILEY, PC
www.malone-bailey.com
Houston, Texas
February 28, 2006
Forster Drilling Corporation
(a development stage company)
Balance Sheet
November 30, 2005
ASSETS
Current assets:
Cash $ -
Accounts receivable 13,411
Inventory 164,925
------------
Total current assets 178,336
Property & Equipment - at cost
Construction in progress: drilling
rigs and related equipment 839,586
Transportation, office, & other equipment
(net of accumulated depreciation of $5,469) 26,204
------------
TOTAL ASSETS $ 1,044,126
============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities:
Accounts payable $ 197,122
Accrued liabilities 23,487
Notes payable related party 5,000
------------
Total current liabilities 225,609
------------
STOCKHOLDERS' EQUITY
Common stock, $.001 par value, 100,000,000 shares
authorized; 36,529,929 shares issued and outstanding 36,530
Additional paid-in capital 2,735,515
Deficit accumulated during the development stage (1,953,528)
------------
Total stockholders' equity 818,517
------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 1,044,126
============
See accompanying summary of accounting polices and notes to financial
statements.
Forster Drilling Corporation
(a development stage company)
Statement of Operations
For the Period from Inception (March 22, 2005) through November 30, 2005
REVENUES $ 13,411
COST OF GOODS SOLD (24,638)
----------
GROSS LOSS (11,227)
----------
OPERATING EXPENSES:
Rig refurbishment & related expenses 431,752
Depreciation 5,469
General and administrative 1,505,080
----------
TOTAL OPERATING EXPENSES 1,942,301
----------
NET LOSS $(1,953,528)
==========
See accompanying summary of accounting policies and notes to financial
statements.
Forster Drilling Corporation
(a development stage company)
Statement of Changes in Stockholders' Equity
For the Period from Inception (March 22, 2005) through November 30, 2005
Additional
Common Stock Paid-in Accumulated
Shares Par Capital Deficit Total
---------- ------- ---------- ---------- ------------
Shares issued for
services 23,830,000 $23,830 $1,122,750 $ - $ 1,146,580
Shares issued for
drilling rig parts
contributed by a
founder at founders
basis 10,000,000 10,000 231,000 - 241,000
Shares issued for cash 2,667,999 2,668 1,365,832 - 1,368,500
Shares issued for debt 31,930 32 15,933 - 15,965
Net loss - - - (1,953,528) (1,953,528)
---------- ------- ---------- ----------- -----------
Balances, November 30,
2005 36,529,929 $36,530 $2,735,515 $(1,953,528)$ 818,517
========== ======= ========== =========== ===========
See accompanying summary of accounting policies and notes to financial
statements.
Forster Drilling Corporation
(a development stage company)
Statement of Cash Flows
For the Period from Inception (March 22, 2005) through November 30, 2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,953,528)
Adjustments to reconcile net loss
to net cash used in operating activities:
Stock-based compensation expense 1,146,580
Expenses paid by shareholders 15,965
Depreciation 5,469
Change in:
Receivables (13,411)
Accounts payable 197,122
Inventory (18,175)
Accrued expenses 23,487
-----------------
Net cash used in operating activities (596,491)
-----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (689,009)
-----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 1,368,500
Proceeds from related party borrowings 10,821
Proceeds from third party borrowings 30,000
Payments on related party borrowings (5,821)
Payments on third party borrowings (118,000)
-----------------
Net cash provided by financing activities 1,285,500
-----------------
NET CHANGES IN CASH -
CASH AND CASH EQUIVALENTS, beginning of period -
-----------------
CASH AND CASH EQUIVALENTS, end of period $ -
=================
Supplemental Information:
Interest paid $ -
Income taxes paid -
Non-cash investing and financing activities:
Paid debt with common stock 15,965
Purchased drilling rig parts with common stock 241,000
Purchased drilling equipment with a note payable to the
seller 88,000
See accompanying summary of accounting policies and notes to financial
statements.
FORSTER DRILLING CORPORATION
(a development stage company)
Notes to the Financial Statements
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Forster Drilling Corporation ("Forster") was established on March 22, 2005 to
manufacture and refurbish oil and natural gas drilling rigs for Forster's use
as well as to sell to third parties and provide contract land drilling
services to oil and natural gas production companies. Forster is
headquartered in Houston, Texas. Forster's manufacturing operations are based
in its 13,000 square foot leased manufacturing facility in Odessa, Texas.
This facility is currently operational, providing the physical requirements to
refurbish and rig up drilling equipment, including overhauling and
refurbishing draw works, pumps, and other components, and sandblasting and
painting of various rig components. Forster also has administrative offices
in Midland, Texas. Forster's year end is November 30.
Use of Estimates in Financial Statement Preparation. The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States of America 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
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents. For purposes of the statement of cash flows, cash
equivalents include all highly liquid investments with original maturities of
three months or less.
Inventories. Inventories include materials as well as labor costs directly
associated with the manufacturing of drilling rigs for sale to third parties.
Inventories are stated at the lower of cost or market with cost being
determined on a first-in, first-out basis.
Property and Equipment. Property and equipment, including renewals and
betterments, are capitalized and stated at cost, while maintenance and repairs
are expensed currently. Assets are depreciated on a straight-line basis. The
depreciable lives of drilling rigs and related equipment are 3 to 15 years.
The depreciable life of other equipment is 3 years. Depreciation is not
commenced until acquired rigs are placed in service. Once placed in service,
depreciation continues when rigs are being repaired, refurbished or between
periods of deployment. As of November 30, 2005, Forster had not recognized any
depreciation expense associate with drilling rigs, as no rigs had been placed
in service. Forster reviews long-lived assets to be held and used for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. If the sum of the
undiscounted expected future cash flows is less than the carrying amount of
the assets, Forster recognizes an impairment loss based upon fair value of the
asset.
Income Taxes. Income tax expense is based on reported earnings before income
taxes. Deferred income taxes reflect the impact of temporary differences
between assets and liabilities recognized for consolidated financial reporting
purposes and such amounts recognized for tax purposes, and are measured by
applying enacted tax rates in effect in years in which the differences are
expected to reverse.
Basic and Diluted Net Loss Per Common Share. The basic net loss per common
share is computed by dividing the net loss by the weighted average number of
common shares outstanding. Diluted net loss per common share is computed by
dividing the net income adjusted on an "as if converted" basis, by the
weighted average number of common shares outstanding plus potential dilutive
securities. Basic and diluted loss per share is the same due to potential
dilutive securities had an anti-dilutive effect and were not included in the
calculation of diluted net income per common share.
Stock Options. Forster adopted SFAS No 123R for the transactions in which an
entity exchanges its equity instruments for goods or services. SFAS No 123R
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. SFAS No.123R requires
that the fair value of such equity instruments be recognized as expense in the
historical financial statements as services are performed. As of November 30,
2005, no stock options or warrants had been granted.
Newly Issued Accounting Pronouncements. In February of 2006, the FASB issued
SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments", which is
intended to simplify the accounting and improve the financial reporting of
certain hybrid financial instruments (i.e., derivatives embedded in other
financial instruments). The statement amends SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", and SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities a replacement of FASB Statement No. 125." SFAS No. 155 is
effective for all financial instruments issued or acquired after the beginning
of an entity's first fiscal year that begins after September 15, 2006. Forster
is currently evaluating the impact SFAS No. 155 will have on its financial
statements, if any.
Forster does not expect the adoption of any other recently issued accounting
pronouncements to have a significant impact on its financial position, results
of operations or cash flow.
NOTE 2 GOING CONCERN
As shown in the accompanying financial statements, Forster incurred a net loss
of $1,938,528 in fiscal 2005 and a working capital deficit of $47,273 as of
November 30, 2005. These conditions raise substantial doubt as to Forster's
ability to continue as a going concern. Management is trying to raise
additional capital through sales of common stock. The financial statements do
not include any adjustments that might be necessary if Forster is unable to
continue as a going concern.
NOTE 3 ACCOUNTS RECEIVABLE
Accounts receivable consists of $13,411 due to Forster from the sale of
drilling rig parts inventory.
NOTE 4 INVENTORIES
As of November 30, 2005, inventories consisted of drilling rigs under
construction totaling $164,925.
NOTE 5 NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES
From inception through November 30, 2005, Forster:
* borrowed and repaid $30,000 under short term notes with no balance
remaining as of November 30, 2005
* purchased $88,000 of production materials with a note payable from
the seller of the materials and repaid the $88,000 leaving no
balance as of November 30, 2005
* borrowed $10,821 from a related party and repaid the related party
$5,821 leaving a balance of $5,000 as of November 30, 2005. The
note bears 10% interest, is payable on demand and is unsecured.
NOTE 6 COMMITMENTS AND CONTINGENCIES
Forster leases a manufacturing facility in Odessa, Texas, under a
noncancelable operating lease. The lease will expire on May 30, 2010. The
lease includes an option for Forster to purchase the manufacturing facility at
will any time during the lease term. Monthly rent is $3,500 per month and
related rent expense was $24,500 during the period from Forster's inception
through November 30, 2005.
Forster leases office space in Houston, Texas, under a month-to-month
operating lease. The lease may be cancelled at any time with 30 days written
notice and carries a payment of $2,750 per month. Related rent expense was
$8,250 during the period from Forster's inception through November 30, 2005.
Forster leases a building in Midland, Texas, under a noncancelable operating
lease. The lease will expire on September 30, 2010. The lease payments are
$1,682 per month. Related rent expense was $3,364 during the period from
Forster's inception through November 30, 2005.
Forster leases office equipment under a noncancelable operating lease. The
lease will expire in July 2009. The lease payments are $1,378 per month.
Related rent expense was $5,510 during the period from Forster's inception
through November 30, 2005.
Future minimum lease payments at November 30, 2005 under leases with non-
cancelable terms are as follows:
2006 $ 111,720
2007 111,720
2008 111,720
2009 111,720
2010 75,284
On April 1, 2005, Forster hired a board member for consulting. The agreement
provides for $57,600 in cash compensation over 12 months. The agreement was
extended on March 15, 2006, providing for $556,800 in cash compensation for
the time period from April 1, 2006 through May 1, 2009.
On September 5, 2005, Forster hired its Chief Executive Officer. The
agreement provides for an annual salary of up to $200,000 annually, commencing
and based upon the successful deployment of drilling rigs. The agreement term
is 3 years from the commencement of drilling operations.
On June 20, 2005, Forster hired its Chief Financial Officer. The agreement
provides for an annual salary of up to $30,000 plus 90,000 shares of Forster
common stock annually, commencing on June 20, 2005. The agreement term is 1
year from the effective date.
NOTE 7 STOCKHOLDERS' EQUITY
On March 25, 2005, Forster issued 21,580,000 shares of common stock valued at
$21,580 as founder's shares.
In October 2005, Forster issued 2,250,000 shares of common stock valued at
$1,125,000 or $.50 per share to service providers.
On March 25, 2005, Forster issued 10,000,000 shares of common stock to a
founder for drilling rig parts contributed at the founder's adjusted basis of
$241,000.
From March 25, 2005 through October 2005, Forster sold 2,530,000 shares of
common stock to investors at $.50 per share for proceeds of $1,265,000.
During November 2005, Forster sold 137,999 shares of common stock to investors
at $.75 per share for proceeds of $103,500.
From inception through November 30, 2005, a shareholder paid rent and
utilities for the corporation totaling $15,965. In September 2005, Forster
issued 31,930 shares of its common stock at $.50 per share to repay the
shareholder.
NOTE 8 INCOME TAXES
Forster uses the liability method, where deferred tax assets and liabilities
are determined based on the expected future tax consequences of temporary
differences between the carrying amounts of assets and liabilities for
financial and income tax reporting purposes. During the period from inception
through November 30, 2005, Forster incurred net losses and, therefore, has no
tax liability. The net deferred tax asset generated by the loss carry-forward
has been fully reserved. The cumulative net operating loss carry-forward is
approximately $792,000 at November 30, 2005, and will expire in 2025.
At November 30, 2005, deferred tax assets consisted of the following:
Deferred tax assets
Deferred tax asset $ (269,340)
Less: valuation allowance 269,340
---------------
Net deferred tax assets $ -
===============
NOTE 9 SUBSEQUENT EVENTS
During the three months ended, February 28, 2006, Forster borrowed $146,000
from several entities. $46,000 of the $146,000 was from related parties. The
notes bear interest of 10% and were scheduled to mature on before April 30,
2006. Per the loan agreements, Forster exercised an option to extend the
notes through July 30, 2006 which will require Forster to issue 14,600 shares
of common stock as consideration for extensions. In connection with these
notes, Forster also issued a total of 14,600 shares of its common stock to the
note holders. The total proceeds were allocated between the notes payable and
the common stock resulting in $10,218 allocated to the common stock and
$135,782 allocated to the notes payable resulting in a $10,218 discount to the
notes payable to be amortized over the term of the notes as additional
interest expense. These notes were also convertible into Forster's common
stock at $.75 per share at the holder's option. After allocation of the
proceeds between the notes payable and the common stock, the conversion option
had a beneficial conversion feature of $10,218. This resulted in an
additional discount to the notes payable to be amortized over the term of the
notes as additional interest expense. Forster repaid $15,000 of these notes
prior to February 28, 2006.
During December 2005, Forster borrowed $10,000 from a related party. The loan
is due on March 15, 2006, bears interest of 10% and is unsecured. Forster
repaid $7,500 on this note prior to February 28, 2006 leaving a balance of
$2,500 as of February 28, 2006.
During December 2005, Forster borrowed $15,000 from a third party. The loan
is due on April 30, 2006, bears interest of 10% and is unsecured.
Forster borrowed $800,000 from Sterling bank on February 21, 2006. The note
bears interest at an annual rate of prime plus 2% and matures on February 23,
2009. The loan is to be repaid in 35 monthly payments of approximately
$22,225 and is secured by one of Forster's drilling rigs. $266,703 is to be
repaid by February 28, 2007 and the remaining balance of $533,297 is presented
as long term as of February 28, 2006.
In February 2006, Forster purchased a drilling rig for $1.2 million. The
$800,000 loan from Sterling Bank was used to purchase the rig as well as a
seller financed loan of $400,000. In February 2006, Forster issued 533,334
shares of common stock at $.75 per share to repay the $400,000 financed
through the seller.
From December 2005 through February 2006, Forster sold 535,333 shares of
common stock for $.75 per share for proceeds of $401,500.
In connection with issuing notes payable, Forster also issued 14,600 shares of
common stock. The proceeds were allocated between the notes payable and
common stock on a relative fair value basis resulting in an allocation of
$10,218 to the shares of common stock.
In February 2006 one of the Forster founders transferred 48,000 of their
shares of common stock to five individuals for services performed for Forster.
The shares will be recorded at their fair value of $.75 per share, or $36,000.
Unaudited Financial Statements of Forster Drilling Corporation for the
three months ended February 28, 2006
Balance Sheet at February 28, 2006 and November 30, 2005
Statement of Operations for the three months ended February 28,
2006 and the period from March 22, 2005 (inception) to February 28, 2006
Statement of Changes in Stockholder's Equity for the period from
March 22, 2005 (inception) to February 28, 2006
Statement of Cash Flows for the three months ended February 28, 2006 and
the period from March 22, 2005 (inception) to February 28, 2006
Notes to the Financial Statements
Forster Drilling Corporation
(a development stage company)
Balance Sheets
(unaudited)
February 28, 2006 November 30, 2005
ASSETS
Current assets:
Cash $ - $ -
Receivables - 13,411
Inventories 52,155 164,925
Other current assets 3,371 -
----------------- -----------------
Total current assets 55,526 178,336
Property & Equipment at cost
Construction in progress:
drilling rigs and related
equipment 2,588,071 839,586
Transportation, office, &
other equipment (net of
accumulated depreciation of
$8,259 and $5,469) 24,783 26,204
----------------- -----------------
TOTAL ASSETS $ 2,668,380 $ 1,044,126
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities:
Accounts payable $ 193,914 $ 197,122
Accrued Liabilities 74,666 23,487
Notes payable 369,166 -
Notes payable related party 46,693 5,000
----------------- -----------------
Total current liabilities 684,439 225,609
Notes payable long-term 533,297 -
----------------- -----------------
TOTAL LIABILITIES 1,217,736 225,609
----------------- -----------------
STOCKHOLDERS' EQUITY
Common stock, $.001 par value,
100,000,000 shares authorized;
37,613,196 shares issued and
outstanding 37,613 36,530
Additional paid-in capital 3,592,368 2,735,515
Deficit accumulated during the
development stage (2,179,337) (1,953,528)
----------------- -----------------
Total stockholders' equity 1,450,644 818,517
----------------- -----------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $ 2,668,380 $ 1,044,126
================= =================
Forster Drilling Corporation
(a development stage company)
Statements of Operations
(unaudited)
Period
from inception
(March 22, 2005)
Three months ended through
February 28, 2006 February 28, 2006
REVENUES $ 266,000 $ 279,411
COST OF GOODS SOLD 112,000 136,638
-------------- ------------
GROSS PROFIT 154,000 142,773
-------------- ------------
OPERATING EXPENSES:
Rig refurbishment & related expenses 129,685 561,437
Depreciation 2,790 8,259
General and administrative 226,777 1,731,857
-------------- ------------
Total operating expenses 359,252 2,301,553
-------------- ------------
OPERATING LOSS (205,252) (2,158,780)
Interest Expense 20,557 20,557
-------------- ------------
NET LOSS $ (225,809) $ (2,179,337)
============== ============
Basic and diluted net loss per
share $ (0.01) n/a
Weighted average common shares
outstanding 36,762,905 n/a
Forster Drilling Corporation
(a development stage company)
Statement of Changes in Stockholders' Equity
For the Period from Inception (March 22, 2005) through February 28, 2006
(unaudited)
Additional
Common Stock Paid-in Accumulated
Shares Par Capital Deficit Total
---------- ------- ---------- ---------- ------------
Shares issued for
services 23,830,000 $23,830 $1,122,750 $ - $ 1,146,580
Shares issued for
drilling rig parts
contributed by a
founder at founders
basis 10,000,000 10,000 231,000 - 241,000
Shares issued for cash 2,667,999 2,668 1,365,832 - 1,368,500
Shares issued for debt 31,930 32 15,933 - 15,965
Net loss - - - (1,953,528) (1,953,528)
---------- ------- ---------- ----------- -----------
Balances, November 30,
2005 36,529,929 36,530 2,735,515 (1,953,528) 818,517
Shares issued for cash 549,933 550 411,168 - 411,718
Shares issued for
payment of note payable 533,334 533 399,467 - 400,000
Shares issued for
services - - 36,000 36,000
Discount related to
beneficial conversion
feature on convertible
notes payable - - 10,218 - 10,218
Net loss - - - (225,809) (225,809)
---------- ------- ---------- ----------- -----------
Balances,
February 28, 2006 37,613,196 $37,613 $3,592,368 $(2,179,337)$ 1,450,644
========== ======= ========== =========== ===========
Forster Drilling Corporation
(a development stage company)
Statements of Cash Flows
Period
from inception
(March 22, 2005)
Three months ended through
February 28, 2006 February 28, 2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (225,809) $ (2,179,337)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Stock-based compensation expense 36,000 1,182,580
Amortization of Discount 16,092 16,092
Expenses paid by shareholders - 15,965
Depreciation 2,790 8,259
Change in:
Receivables 13,411 -
Other current assets (3,371) (3,371)
Inventories 112,770 94,595
Accounts payable (3,208) 193,914
Accrued expenses 51,179 74,666
-------------- ------------
Net cash used in operating
activities (146) (596,637)
-------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (1,349,854) (2,038,863)
-------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 411,718 1,780,218
Proceeds from related party borrowings 52,782 63,603
Proceeds from third party borrowings 908,000 938,000
Payments on related party borrowings (12,500) (18,321)
Payments on third party borrowings (10,000) (128,000)
-------------- ------------
Net cash provided by financing
activities 1,350,000 2,635,500
-------------- ------------
NET CHANGES IN CASH - -
CASH AND CASH EQUIVALENTS,
beginning of period - -
-------------- ------------
CASH AND CASH EQUIVALENTS,
end of period $ - $ -
============== ============
Cash paid for:
Interest $ - $ -
Non-cash investing and financing
activities
Paid debt with common stock 400,000 415,965
Purchased drilling rig parts
with common stock - 241,000
Purchased drilling rig parts
with note payable to the seller 400,000 488,000
Discount of notes payable for
beneficial conversion feature 10,218 10,218
FORSTER DRILLING CORPORATION
(a development stage company)
Notes to the Financial Statements
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Forster Drilling
Corporation ("Forster") have been prepared in accordance with accounting
principles generally accepted in the United States of America and the rules
of the Securities and Exchange Commission, and should be read in conjunction
with the audited financial statements and notes thereto contained in this
Form 8-K. In the opinion of management, all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of financial
position and the results of operations for the interim periods presented have
been reflected herein. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year.
Notes to the financial statements which would substantially duplicate the
disclosure contained in the audited financial statements for fiscal 2005 as
reported in this form 8-K have been omitted.
NOTE 2 NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES
During the three months ended February 28, 2006, Forster borrowed $100,000
from third parties and $46,000 from related parties. The notes bear interest
of 10% plus 14,600 shares of common stock and will mature July 30, 2006. In
connection with these notes, Forster also issued a total of 14,600 shares of
its common stock to the note holders as consideration to extend the due date
from the original due date of April 30, 2006. The total proceeds were
allocated between the notes payable and the common stock resulting in $10,218
allocated to the common stock and $135,782 allocated to the notes payable
resulting in a $10,218 discount to the notes payable to be amortized over the
term of the notes as additional interest expense. These notes were also
convertible into Forster's common stock at $.75 per share at the holder's
option. After allocation of the proceeds between the notes payable and the
common stock, the conversion option had a beneficial conversion feature of
$10,218. This resulted in an additional discount to the notes payable to be
amortized over the term of the notes as additional interest expense. Forster
repaid $15,000 of these notes prior to February 28, 2006.
Proceeds $146,000
Less: discount for common stock (10,218)
discount for beneficial conversion feature (10,218)
repayment of principal (15,000)
Add: amortization of discount 16,092
-----------
Balance at February 28, 2006 126,656
Less: related party portion (39,193)
-----------
Third party portion $ 87,463
===========
During December 2005, Forster borrowed $10,000 from a related party. The
loan is due on March 15, 2006, bears interest of 10% and is unsecured.
Forster repaid $7,500 on this note prior to February 28, 2006 leaving a
balance of $2,500 as of February 28, 2006.
Forster continued to owe a related party $5,000 as of February 28, 2006 from
a loan prior to December 1, 2005.
During December 2005, Forster borrowed $15,000 from a third party. The loan
is due on April 30, 2006, bears interest of 10% and is unsecured.
Forster borrowed $800,000 from Sterling bank on February 21, 2006. The note
bears interest at an annual rate of prime plus 2% and matures on February 23,
2009. The loan is to be repaid in 35 monthly payments of approximately
$22,225 and is secured by one of Forster's drilling rig. $266,703 is to be
repaid by February 28, 2007 and the remaining balance of $533,297 is
presented as long term as of February 28, 2006.
In February 2006, Forster purchased a drilling rig for $1.2 million. The
$800,000 loan from Sterling Bank was used to purchase the rig as well as a
seller financed loan of $400,000. In February 2006, Forster issued 533,334
shares of common stock at $.75 per share to repay the $400,000 financed
through the seller.
NOTE 3 STOCKHOLDERS' EQUITY
From December 2005 through February 2006, Forster sold 535,333 shares of
common stock for $.75 per share for proceeds of $401,500.
In connection with issuing notes payable, Forster also issued 14,600 shares
of common stock. The proceeds were allocated between the notes payable an
common stock on a relative fair value basis resulting in an allocation of
$10,218 to the shares of common stock.
In February 2006, Forster issued 533,334 shares of common stock at $.75 per
share as a $400,000 partial payment of a note payable.
In February 2006 one of the Forster founders transferred 48,000 of their
shares of common stock to five individuals for services performed for
Forster. The shares were recorded at their fair value of $.75 or $36,000.
NOTE 4 SUBSEQUENT EVENTS
On May 30, 2006, Forster was acquired by Process Technology Systems, Inc., a
publicly held Nevada corporation. Process Technology had 2,000,000 shares
previously outstanding, and issued another 40,055,463 shares for all the
currently issued and outstanding shares of the Forster. An additional
3,000,000 common stock shares will be issued to Forster pursuant to the
Forster's planned reorganization financing, prior to the closing of the
reorganization. Process Technology shall change its name to Forster Drilling
Corporation and current Forster became a wholly-owned subsidiary of Process
Technology.
Subsequent to February 28, 2006, Forster sold 2,452,266 of common stock for
cash of $1,839,200.
During the period from March 1, 2006 through May 21, 2006, Forster borrowed
$81,500 from various parties.
(b) Pro Forma Financial Statements
Pro Forma Unaudited Combined Balance Sheet at November 30, 2005
On June 16, 2006, we acquired Forster Drilling Corporation by issuing
40,055,463 common shares to the former shareholders of Forster. Prior to
closing, our shareholders owned 2,000,000 shares, so this is a change of
control and this business combination will be accounted for as a
recapitalization of Forster.
The following unaudited pro forma financial statements have been derived from
the financial statements of Forster at November 30, 2005 and adjusts such
information to give effect to its reverse acquisition by Process Technology
Systems, Inc., as if the acquisition had occurred at November 30, 2005. The
pro forma financial statements are presented for informational purposes only
and do not purport to be indicative of the financial condition that would have
resulted if the acquisition had been consummated at November 30, 2005. The
pro forma financial statements should be read in conjunction with each
company's consolidated financial statements and related notes thereto
contained herein and in Process's latest annual and quarterly reports filed
with the SEC.
11/30/05 11/30/05
Forster Process Adjustments Pro Forma
Assets
Cash $ - $ - $ -
Accounts receivable 13,411 13,411
Inventory 164,925 164,925
Property, plant &
equipment (net) 865,790 865,790
---------- --------- ---------
Total Assets $1,044,126 $ - $1,044,126
========== ========= =========
Liabilities
Accounts payable $ 197,122 $ 79,307 $ 276,429
Accrued expenses 23,487 23,487
Due to stockholder 2,925 2,925
Note payable related
party (short-term) 5,000 5,000
---------- --------- ---------
Total Liabilities 225,609 82,232 307,841
---------- --------- ---------
Preferred stock, $0.25 par
value, 12,500,000 shares
authorized; 5,835 shares
issued and outstanding 1,459 1,459
Common stock, $.002 par value,
200,000,000 shares authorized;
2,000,000 shares issued and
outstanding 4,000 80,111 84,111
Common stock, $.001 par value,
100,000,000 shares
authorized; 36,529,929 shares
issued and outstanding 36,530 (36,530) -
Paid in capital 2,735,515 327,260 (376,300) 2,686,475
Accumulated Deficit (1,953,528) (414,951) 332,719 (2,035,760)
---------- --------- ---------
Total stockholders' deficit 818,517 (82,232) 736,285
---------- --------- ---------
Total liabilities &
stockholders' deficit $1,044,126 $ - $1,044,126
========== ========= =========
Pro Forma Unaudited Combined Balance Sheet at February 28, 2006
The following pro forma financial statements has been derived from the
financial statements of Forster at February 28, 2006 and adjusts such
information to give effect to its reverse acquisition by Process Technology
Systems, Inc., as if the acquisition had occurred at February 28, 2006. The
pro forma financial statements are presented for informational purposes only
and do not purport to be indicative of the financial condition that would have
resulted if the acquisition had been consummated at February 28, 2006. The
pro forma financial statements should be read in conjunction with each
company's consolidated financial statements and related notes thereto
contained herein and in Process's latest annual and quarterly reports filed
with the SEC.
2/28/06 2/28/06
Forster Process Adjustments Pro Forma
Assets
Cash $ - $ - $ -
Other current assets 3,371 3,371
Inventories 52,155 52,155
Property, plant &
equipment (net) 2,612,854 2,612,854
---------- --------- ---------
Total Assets $2,668,380 $ - $2,668,380
========== ========= =========
Liabilities
Accounts payable $ 193,914 $ 85,115 $ 279,029
Accrued expenses 74,666 74,666
Due to stockholder 10,610 10,610
Note payable short-term 369,166 369,166
Note payable related
party (short-term) 46,693 46,693
Note payable long-term 533,297 533,297
---------- --------- ---------
Total Liabilities 1,217,736 95,725 1,313,461
---------- --------- ---------
Preferred stock, $0.25 par
value, 12,500,000 shares
authorized; 5,835 shares
issued and outstanding 1,459 1,459
Common stock, $.002 par
value, 200,000,000 shares
authorized; 2,000,000
shares issued and outstanding 4,000 80,111 84,111
Common stock, $.001 par value,
100,000,000 shares
authorized; 37,613,196 shares
issued and outstanding 37,613 (37,613) -
Paid in capital 3,592,368 327,260 (375,217) 3,544,411
Accumulated Deficit (2,179,337) (428,444) 332,719 (2,275,062)
---------- --------- ---------
Total stockholders' deficit 1,450,644 (95,725) 1,354,919
---------- --------- ---------
Total liabilities &
stockholders' deficit $2,668,380 $ - $2,668,380
========== ========= =========
(c) Exhibits
The following exhibits are to be filed as part of this 8-K:
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
2.1 Agreement and Plan of Reorganization (1)
3.1 Articles of Incorporation (2)
3.2 By-laws (2)
10.1 Employment Agreement with F. E. Forster III (3)
10.2 Employment Agreement with W. Scott Thompson (3)
10.3 Employment Agreement with Bud Najvar (3)
- ------------------------
(1) Filed previously on Current Report on Form 8-K filed on June 6,
2006.
(2) Incorporated by reference to the Company's Registration Statement on
Form 10-SB (File No. 000-29603)
(3) Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
PROCESS TECHNOLOGY SYSTEMS, INC.
By: /s/ F. E. Forster III
F. E. Forster III, Chief Executive
Officer
DATE: June 22, 2006
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
2.1 Agreement and Plan of Reorganization (1)
3.1 Articles of Incorporation (2)
3.2 By-laws (2)
10.1 Employment Agreement with F. E. Forster III (3)
10.2 Employment Agreement with W. Scott Thompson (3)
10.3 Employment Agreement with Bud Najvar (3)
- ------------------------
(1) Filed previously on Current Report on Form 8-K filed on June 6,
2006.
(2) Incorporated by reference to the Company's Registration Statement on
Form 10-SB (File No. 000-29603)
(3) Filed herewith.