Exhbit 99.2
OAK HILLS DRILLING AND OPERATING
INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
with Report of Independent Registered Public Accounting Firm
1
OAK HILLS DRILLING AND OPERATING
INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
Table of Contents
Report of Independent Registered Public Accounting Firm.................. 3
Consolidated Financial Statements:
Consolidated Balance Sheets..................................... 4
Consolidated Statements of Operations........................... 5
Consolidated Statements of Stockholders' Deficit................ 6
Consolidated Statements of Cash Flows........................... 7
Notes to Consolidated Financial Statements...................... 8
2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Oak Hills Drilling and Operating International, Inc.
We have audited the accompanying consolidated balance sheets of Oak Hills
Drilling and Operating International, Inc. and subsidiary (the "Company") as of
December 31, 2005 and 2004, and the related consolidated statements of
operations, stockholders' deficit, and cash flows for the years then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing 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
consolidated financial statements are free of material misstatement. An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Oak
Hills Drilling and Operating International, Inc. and subsidiary as of December
31, 2005 and 2004, and the consolidated results of their operations and their
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ Whitley Penn LLP
- ----------------------
Dallas, Texas
March 10, 2006
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OAK HILLS DRILLING & OPERATING INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
2005 2004
----------- -----------
Assets
Current assets:
Cash and cash equivalents $ 85,035 $ 24,856
Accounts receivable:
Trade 736,747 --
Related parties 149,116 --
Other current assets 20,449 78,573
----------- -----------
Total current assets 991,347 103,429
Fixed assets, net 1,146,746 963,715
----------- -----------
Total assets $ 2,138,093 $ 1,067,144
=========== ===========
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable:
Trade $ 640,948 $ 151,197
Related parties 41,147 --
Accrued liabilities 189,965 173,438
Current portion of long-term debt 117,069 75,951
----------- -----------
Total current liabilities 989,129 400,586
Long-term debt, net of current portion 108,463 149,120
Long-term debt, related parties 1,295,961 767,203
Commitments and contingencies -- --
Stockholders' deficit:
Common stock, $0.001 par value, 100,000,000
shares authorized, 400 shares issued
and outstanding -- --
Additional paid-in capital 10,245 10,245
Accumulated deficit (265,705) (260,010)
----------- -----------
Total stockholders' deficit (255,460) (249,765)
----------- -----------
Total liabilities and stockholders' deficit $ 2,138,093 $ 1,067,144
=========== ===========
4
OAK HILLS DRILLING & OPERATING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
2005 2004
----------- -----------
Revenues $ 3,079,550 $ --
Operating expenses:
Rig, well, and pulling unit expense 1,049,823 52,146
Salaries, wages and related personnel costs 1,172,191 30,348
Depreciation and amortization 138,701 20,153
General and administrative 608,608 120,043
----------- -----------
Total operating expenses 2,969,323 222,690
----------- -----------
Income (loss) from operations 110,227 (222,690)
Interest expense (115,922) (11,409)
----------- -----------
Net loss $ (5,695) $ (234,099)
=========== ===========
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OAK HILLS DRILLING & OPERATING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 2005 AND 2004
Additional Total
Common Stock Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2003 -- $ -- $ 245 $ (25,911) $ (25,666)
Common stock issued for cash
and equipment 400 -- 10,000 -- 10,000
Net loss -- -- -- (234,099) (234,099)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2004 400 -- 10,245 (260,010) (249,765)
Net loss -- -- -- (5,695) (5,695)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2005 400 $ -- $ 10,245 $ (265,705) $ (255,460)
============= ============= ============= ============= =============
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OAK HILLS DRILLING & OPERATING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2005 2004
--------- ---------
Operating Activities
Net loss $ (5,695) $(234,099)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 138,701 20,153
Changes in operating assets and liabilities:
Accounts receivable, trade (736,747) --
Accounts receivable, related parties (149,116) --
Other current assets 58,124 (67,778)
Accounts payable, trade and accrued expenses 480,557 288,174
Accounts payable, related parties 41,147 --
--------- ---------
Net cash provided by (used in) operating activities (173,029) 6,450
Investing Activities
Purchases of fixed assets (216,050) (758,797)
Financing Activities
Proceeds from issuance of common stock -- 10,000
Payments on long-term debt (79,500) --
Proceeds from issuance of long-term debt, related parties 528,758 767,203
--------- ---------
Net cash provided by financing activities 449,258 777,203
Net increase in cash and cash equivalents 60,179 24,856
Cash and cash equivalents at beginning of year 24,856 --
--------- ---------
Cash and cash equivalents at end of year $ 85,035 $ 24,856
========= =========
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for interest $ 19,637 $ --
========= =========
Non-cash Transactions
Purchase of fixed assets through issuance of long-term debt $ 105,682 $ 225,072
========= =========
Settlement of long-term debt, related party, through
assumption of accounts payable $ 25,721 $ --
========= =========
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Oak Hills Drilling and Operating International, Inc.
Notes to CONSOLIDATED Financial Statements
December 31, 2005 and 2004
A. Nature of Business
Oak Hills Drilling and Operating International, Inc., a Nevada corporation, was
incorporated in 2004. The Company's wholly owned subsidiary, Oak Hills Drilling
and Operating, LLC, began operations in 2003. The Company provides contract
drilling services to companies exploring for crude oil and natural gas. The
Company's corporate office is located in Holdenville, Oklahoma.
B. Summary of Significant Accounting Policies
A summary of the Company's significant accounting policies consistently applied
in the preparation of the accompanying consolidated financial statements
follows:
Basis of Accounting
The accounts are maintained and the consolidated financial statements have been
prepared using the accrual basis of accounting in accordance with accounting
principles generally accepted in the United States of America.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary. Significant intercompany accounts and transactions
have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect certain
reported amounts in the consolidated financial statements and accompanying
notes. Actual results could differ from these estimates and assumptions.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. At December 31, 2005 and
2004, the Company had no such investments. The Company maintains deposits
primarily in one financial institution, which may at times exceed amounts
covered by insurance provided by the U.S. Federal Deposit Insurance Corporation.
At December 31, 2005 and 2004, there were no uninsured portion of deposits.
Accounts Receivable
The Company performs ongoing credit evaluations of its customers' financial
condition and extends credit to virtually all of its customers on an
uncollateralized basis. Credit losses to date have not been significant and have
been within management's expectations. Management has not established a bad debt
reserve due to no accounts being deemed uncollectible. In the event of complete
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B. Summary of Significant Accounting Policies - continued
non-performance by the Company's customers, the maximum exposure to the Company
is the outstanding accounts receivable balance at the date of non-performance.
Fixed Assets
Property and equipment are stated at cost. Depreciation is computed using
straight-line method over the estimated useful lives of the assets for financial
reporting purposes. Drilling rigs and related equipment have estimated useful
lives of ten years. Automobiles, trucks, other equipment, software, furniture,
fixtures and office equipment useful lives of five years. Expenditures for major
renewals and betterments that extend the useful lives are capitalized.
Expenditures for normal maintenance and repairs are expensed as incurred. The
cost of assets sold or abandoned and the related accumulated depreciation are
eliminated from the accounts and any gains or losses are charged or credited in
the accompanying consolidated statement of operations of the respective period.
Impairment of Long-Lived Assets
The Company reviews its long-term assets for impairment in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires that, when
events or circumstances indicate that the carrying amount of an asset may not be
recoverable, the Company should determine if impairment of value exists. If the
estimated undiscounted future net cash flows are less than the carrying amount
of the assets, an impairment exists and an impairment loss must be calculated
and recorded. If an impairment exists, the impairment loss is calculated based
on the excess of the carrying amount of the asset over the asset's fair value.
Any impairment loss is treated as a permanent reduction in the carrying value of
the assets. Through December 31, 2005, no events or circumstances have arisen
which would require the Company to record a provision for impairment on its
long-lived assets.
Revenue Recognition
The Company enters into contracts with customers, and revenues are earned and
recognized on a per-day basis as services are rendered when collectibility is
deemed probable.
Income Taxes
Deferred income taxes are determined using the liability method in accordance
with SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred income taxes are
measured using enacted tax rates expected to apply to taxable income in years in
which such temporary differences are expected to be recovered or settled. The
effect on deferred income taxes of a change in tax rates is recognized in the
statement of income of the period that includes the enactment date. In addition,
a valuation allowance is established to reduce any deferred tax asset for which
it is determined that it is more likely than not that some portion of the
deferred tax asset will not be realized.
Fair Value of Financial Instruments
In accordance with the reporting requirements of SFAS No. 107, Disclosures About
Fair Value of Financial Instruments, the Company calculates the fair value of
its assets and liabilities which qualify as financial instruments under this
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B. Summary of Significant Accounting Policies - continued
statement and includes this additional information in the notes to the
consolidated financial statements when the fair value is different than the
carrying value of those financial instruments. The estimated fair values of
accounts receivable, accounts payable, and accrued expenses approximate their
carrying amounts due to the relatively short maturity of these instruments. The
carrying value of short- and long-term debt also approximates fair value since
these instruments bear market rates of interest. None of the financial
instruments are held for trading purposes.
C. Fixed Assets
Fixed assets consist of the following:
December 31,
2005 2004
---------- ----------
Drilling rigs and related equipment $ 921,895 $ 752,557
Automobiles and trucks 121,882 --
Other equipment 227,969 227,325
Software 21,548 --
Furniture, fixtures and office equipment 12,306 3,986
---------- ----------
1,305,600 983,868
Less accumulated depreciation 158,854 20,153
---------- ----------
Fixed assets, net $1,146,746 $ 963,715
========== ==========
D. Long-Term Debt
The Company has entered into notes payable to financial institutions secured by
certain assets of the Company with interest rates ranging from 6.25% to 11.5%
and maturing January 2006 through October 2010.
Future maturities of long-term debt are as follows:
2006 $ 117,069
2007 46,116
2008 22,718
2009 22,420
2010 17,209
-----------------
Total future maturities of long-term debt $ 225,532
=================
E. Long-Term Debt - Related Parties
The Company has entered into notes payable to stockholders secured by the assets
of the Company bearing interest at a rate of 9% with total principal and
interest due on maturity in 2008.
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F. Income Taxes
Income tax expense for the years presented differs from the "expected" federal
income tax expense computed by applying the U.S. federal statutory rate of 34%
to earnings before income taxes for the years ended December 31, as a result of
the following
2005 2004
-------- --------
Computed expected tax benefit $ (1,936) $(79,594)
Other 11,654 --
Deferred tax asset valuation allowance
(9,718) 79,594
-------- --------
Total income before income taxes $ -- $ --
======== ========
The significant components of the Company's deferred tax assets and liabilities
at December 31, are as follows:
2005 2004
-------- --------
Fixed assets $(10,153) $ 7,457
Net operating losses 87,026 79,134
Valuation allowance (76,873) (86,591)
-------- --------
Total deferred income taxes $ -- $ --
======== ========
The Company has established a valuation allowance to fully reserve the deferred
tax assets at December 31, 2005 and 2004 due to the uncertainty of the timing
and amounts of future taxable income. At December 31, 2005, the Company had net
operating loss carryforwards of approximately $235,000 which expire in 2023
through 2025.
G. Concentrations
Revenue
For the year ended December 31, 2005, the Company had four customers that
accounted for 10%, 10%, 13%, and 68% of total revenue. For the year ended
December 31, 2004, the Company had no revenues, as they began drilling in 2005.
Accounts Receivable
As of December 31, 2005, the Company had two customers that accounted for 48%
and 15% of the total accounts receivable balance. As of December 31, 2004, the
Company had no accounts receivable.
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H. Related Party Transactions
In 2005, the Company paid approximately $17,500 in rent to a stockholder of the
Company for office space. In 2005 and 2004, the Company accrued approximately
$98,000 and $10,000, respectively, of interest expense for long-term debt due to
related parties, none of which has been paid and is included in accrued expenses
in the accompanying consolidated balance sheets.
I. Subsequent Event
Effective January 23, 2006, the Company was acquired by Lexington Resources,
Inc., which is a natural resource exploration and production company.
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