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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 1-31398
NATURAL GAS SERVICES GROUP, INC.
(Exact name of small business issuer as specified in its charter)
Colorado 75-2811855
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2911 SCR 1260
Midland, Texas 79706
(Address of principal executive offices)
(915) 563-3974
(Issuer's Telephone number)
N/A
----------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes No
--- ----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Outstanding at
Class June 30, 2003
-------------------------- --------------------------
Common Stock, $.001 par value 4,881,632
--------------------------
Transitional Small Business Disclosure Format (Check one): Yes No X
--- ---
NATURAL GAS SERVICES GROUP, INC.
Commission File Number: 1-31398
Quarter Ended June 30, 2003
FORM 10-QSB
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements............................................Page 1
Unaudited Consolidated Balance Sheet.....................................Page 1
Unaudited Consolidated Income Statements.................................Page 2
Unaudited Consolidated Statements of Cash Flows..........................Page 3
Notes to Unaudited Consolidated Financial Statements.....................Page 4
Item 2. Management's Discussion and Analysis or Plan of Operation.......Page 7
Item 3. Controls and Procedures.........................................Page 12
Part II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.......................Page 13
Item 4. Submission of Matters to a Vote of Security Holders.............Page 14
Item 6. Exhibits and Reports on Form 8-K................................Page 15
Signatures...............................................................Page 16
Natural Gas Services Group, Inc.
Consolidated Balance Sheet
(unaudited)
June 30, 2003
ASSETS
Current Assets:
Cash and cash equivalents $ 976,004
Accounts receivable - trade 1,482,762
Inventory 2,292,196
Prepaid expenses 81,156
-----------
Total current assets 4,832,118
Lease equipment, net 16,709,633
Other property, plant and equipment, net 2,616,661
Goodwill, net 2,589,655
Patents, net 127,684
Other assets 114,605
-----------
Total assets $26,990,356
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long term debt and capital lease $ 2,278,951
Accounts payable and accrued liabilities 973,025
Unearned Income 588,007
-----------
Total current liabilities 3,839,983
Long term debt and capital lease, less current portion 6,708,947
Subordinated notes, net 1,376,865
Deferred income tax payable 1,492,573
-----------
Total liabilities 13,418,368
SHAREHOLDERS' EQUITY
Preferred stock 3,577
Common stock 49,816
Paid in capital 11,167,733
Retained earnings 2,350,862
-----------
Total shareholders' equity 13,571,988
-----------
Total liabilities and shareholders' equity $26,990,356
===========
The accompanying notes are an integral part of the consolidated balance sheet.
1
Natural Gas Services Group, Inc.
Consolidated Income Statements
(unaudited)
Three months ended June 30 Six months ended June 30
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenue:
Sales $ 939,838 $ 962,252 $ 1,505,110 $ 2,311,269
Service and maintenance 516,573 410,158 893,883 752,020
Leasing income 1,764,404 1,056,750 3,165,567 2,056,267
----------- ----------- ----------- -----------
3,220,815 2,429,160 5,564,560 5,119,556
Cost of revenue:
Cost of sales 713,624 472,567 1,146,797 1,561,452
Cost of service and maintenance 335,928 348,634 671,229 658,049
Cost of leasing 406,867 303,764 767,784 586,299
----------- ----------- ----------- -----------
1,456,419 1,124,965 2,585,810 2,805,800
----------- ----------- ----------- -----------
Gross Margin 1,764,396 1,304,195 2,978,750 2,313,756
Operating Cost:
Selling expense 185,604 119,003 324,551 243,670
General and administrative expense 410,838 326,946 791,004 600,487
Amortization and depreciation 417,589 283,196 779,555 537,600
----------- ----------- ----------- -----------
1,014,031 729,145 1,895,110 1,381,757
----------- ----------- ----------- -----------
Operating income 750,365 575,050 1,083,640 931,999
Interest expense (175,706) (265,480) (329,789) (522,840)
Equity in earnings of joint venture -- 124,151 -- 207,603
Other income (21,760) 212 787 1,910
----------- ----------- ----------- -----------
Income before income taxes 552,899 433,933 754,638 618,672
Income tax expense 237,747 191,000 321,603 279,563
----------- ----------- ----------- -----------
Net income 315,152 242,933 433,035 339,109
Preferred dividends 31,010 31,430 62,020 75,614
----------- ----------- ----------- -----------
Net income available to common shareholders $ 284,142 $ 211,503 $ 371,015 $ 263,495
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.06 $ 0.06 $ 0.08 $ 0.08
Diluted $ 0.06 $ 0.05 $ 0.07 $ 0.06
Weighted average shares:
Basic 4,875,324 3,357,632 4,866,527 3,357,632
Diluted 5,024,774 4,193,490 5,116,332 4,163,710
The accompanying notes are an integral part of the consolidated income
statements.
2
Natural Gas Services Group, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Six Months Six Months
Ended Ended
June 30, 2003 June 30, 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 433,035 $ 339,109
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 779,555 537,600
Deferred taxes 321,573 279,563
Amortization of debt issuance costs 32,478 32,477
Warrants Issued for debt guarantee -- 42,025
Equity in earnings of joint venture -- (207,603)
Gain on disposal of assets 10,547 --
Changes in operating assets and liabilities:
Trade and other receivables (836,812) (174,984)
Inventory and work in progress (746,248) (247,991)
Prepaid expenses and other 92,146 (23,513)
Accounts payable and accrued liabilities 270,867 276,419
Unearned income 270,446 449,065
Other (91,341) (23,760)
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 536,246 1,278,407
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (4,465,223) (2,296,033)
Acquisition of remaining interest in joint venture, net of cash acquired 242,753 --
Proceeds from sale of property and equipment 112,500 --
Decrease in lease receivable 210,512 40,954
Distribution from equity method investee 49,090 123,353
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (3,850,368) (2,131,726)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from bank loans and line of credit 2,438,997 1,353,386
Repayments of long term debt (1,000,489) (449,123)
Deferred offering costs -- (152,326)
Proceeds from stock offering, net of offering cost -- 12,724
Dividends paid on preferred stock (62,020) (75,614)
Proceeds from exercise of warrants 200,000 --
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,576,488 689,047
------------- -------------
NET CHANGE IN CASH AND CASH EQUVALENTS (1,737,634) (164,272)
CASH AT BEGINNING OF PERIOD 2,713,638 506,669
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CASH AT END OF PERIOD $ 976,004 $ 342,397
============= =============
SUPPLEMENTAL DICLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 329,789 $ 470,697
Income taxes paid $ -- $ --
The accompanying notes are an integral part of the consolidated statements of
cash flows.
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying unaudited financial statements present the
consolidated results of our company and its wholly-owned subsidiaries taken from
our books and records. In our opinion, such information includes all
adjustments, consisting of only normal recurring adjustments, which are
necessary to make our financial position at June 30, 2003 and the results of our
operations for the six months periods ended June 30, 2003 and 2002 not
misleading. As permitted by the rules and regulations of the Securities and
Exchange Commission (SEC) the accompanying financial statements do not include
all disclosures normally required by accounting principles generally accepted in
the United States of America. These financial statements should be read in
conjunction with the financial statements included in our Annual Report on Form
10-KSB on file with the SEC. Investments in joint ventures in which our company
does not have majority voting control are accounted for by the equity method.
All intercompany balances and transactions have been eliminated in
consolidation. In our opinion , the consolidated financial statements are a fair
presentation of the financial position, results of operations and cash flows for
the periods presented.
The results of operations for the six months ended June 30, 2003 are
not necessarily indicative of the results of operations to be expected for the
full fiscal year ending December 31, 2003
(2) Stock-based Compensation
Statement of Financial Accounting Standards No. 123, ("SFAS 123")
"Accounting for Stock-Based Compensation," encourages, but does not require, the
adoption of a fair value-based method of accounting for employee stock-based
compensation transactions. We have elected to apply the provisions of Accounting
Principles Board Opinion No. 25 ("Opinion 25"), "Accounting for Stock Issued to
Employees," and related interpretations, in accounting for our employee
stock-based compensation plans. Under Opinion 25, compensation cost is measured
as the excess, if any, of the quoted market price of our stock at the date of
the grant above the amount an employee must pay to acquire the stock.
Had compensation costs for options granted to our employees been
determined based on the fair value at the grant dates consistent with the method
prescribed by SFAS No. 123, our pro forma net income and earnings per share
would have been reduced to the pro forma amounts listed below:
Three Months Ended Six Months Ended
June 30 June 30
2003 2002 2003 2002
----------- ----------- ----------- -----------
Pro forma impact of fair value method
Income applicable to common shares, as reported $ 284,142 $ 211,503 $ 371,015 $ 263,495
Pro-forma stock-based compensation costs under
the fair value method, net of related tax (7,683) (14,010) (15,365) (14,010)
----------- ----------- ----------- -----------
Pro-forma income applicable to common shares $ 276,459 $ 197,493 $ 355,650 $ 249,485
under the fair-value method
Earnings per common share
Basic earnings per share reported $ 0.06 $ 0.06 $ 0.08 $ 0.08
Diluted earnings per share reported $ 0.06 $ 0.05 $ 0.07 $ 0.06
Pro-forma basic earnings per share under the fair
value method $ 0.06 $ 0.06 $ 0.07 $ 0.07
Pro-forma diluted earnings per share under the
fair value method $ 0.05 $ 0.05 $ 0.07 $ 0.06
Weighted average Black-Scholes fair value
assumptions:
Risk free rate 4.0% - 5.2%
Expected life 5-10 yrs
Expected volatility 50.0%
Expected dividend yield 0.0%
4
(3) Acquisitions
On March 31, 2003 we acquired 28 gas compressor packages from Hy-Bon
Engineering Company, Inc. ("Hy-Bon"). The adjusted purchase price amounted to
approximately $2,140,000. As part of the purchase and sale agreement, Hy-Bon
withdrew as a member of Hy-Bon Rotary Compression, L.L.C. ("Joint Venture")
effective as of January 1, 2003. We, as the other member of Hy-Bon Rotary
Compression, L.L.C., retained all assets of Hy-Bon Rotary Compression, L.L.C.
that as of December 31, 2002 had an unaudited aggregate value of $346,511. We
plan to dissolve Hy-Bon Rotary Compression, L.L.C. and have agreed not to
operate under the name Hy-Bon. We have consolidated the operations of the Joint
Venture beginning January 1, 2003 and then began recording our share of the
profit of the acquired interest beginning April 1, 2003.
(4) Long Term Debt
We entered into a new loan agreement with our bank, as of March 26,
2003 that included new borrowing of $2,150,000 in the form of a term loan with
monthly principal payments of $35,833 with interest at 1% over prime but not
less than 5.25% for 60 months. The proceeds from this new borrowing were used to
purchase the 28 gas compressors from Hy-Bon Engineering Company, Inc. The new
loan agreement also included the renewal of our line of credit for $750,000 with
interest at 1% over prime but not less than 5.25% for one year.
(5) Segment Information
FAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for public companies relating to the
reporting of information about their operating segments in financial statements.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by chief
operating decision-makers in deciding how to allocate resources and in assessing
performance.
Our segment information is set forth in the following table:
Natural Gas
(in thousands) Rotary NGE Great Lakes Services
Gas Leasing Compression Group Total
Six Months Ended ----------- ----------- ----------- ----------- -----------
June 30, 2003
Revenue $ 1,200 $ 2,070 $ 2,295 $ -- $ 5,565
Inter-segment revenue 2,744 35 8 -- 2,787
Net Income (loss) (54) 874 394 (781) 433
Segment Assets 4,323 12,986 9,195 486 26,990
Natural Gas
(in thousands) Rotary NGE Great Lakes Services
Gas Leasing Compression Group Total
Six Months Ended ----------- ----------- ----------- ----------- -----------
June 30, 2002
Revenue $ 1,571 $ 1,059 $ 2,490 $ -- $ 5,120
Inter-segment revenue 3,046 -- -- -- 3,046
Net Income (loss) 196 515 188 (560) 339
Segment Assets 4,504 6,711 9,160 695 21,070
5
Natural Gas
(in thousands) Rotary NGE Great Lakes Services
Gas Leasing Compression Group Total
Three Months Ended ----------- ----------- ----------- ----------- -----------
June 30, 2003
Revenue $ 756 $ 1,211 $ 1,254 $ -- $ 3,221
Inter-segment revenue 1,337 18 3 -- 1,358
Net Income (loss) (11) 541 265 (480) 315
Natural Gas
(in thousands) Rotary NGE Great Lakes Services
Gas Leasing Compression Group Total
Three Months Ended ----------- ----------- ----------- ----------- -----------
June 30, 2002
Revenue $ 704 $ 560 $ 1,166 $ -- $ 2,430
Inter-segment revenue 1,629 -- -- -- 1,629
Net Income (loss) 179 282 134 (352) 243
(6) Earnings per common share
The following table reconciles the numerators and denominators of the basic and
diluted earnings per share computation.
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
-------------- ----------- --------------------------
Basic earnings per share Numerator:
Net income $ 315,152 $ 242,933 $ 433,035 $ 339,109
Less: dividends on preferred shares (31,010) (31,430) (62,020) (75,614)
----------- ----------- ----------- -----------
Net income available to common shareholders $ 284,142 $ 211,503 $ 371,015 $ 263,495
=========== =========== =========== ===========
Denominator -
Weighted average common shares outstanding 4,875,324 3,357,632 4,866,527 3,357,632
=========== =========== =========== ===========
Basic earnings per share $ 0.06 $ 0.06 $ 0.08 $ 0.08
=========== =========== =========== ===========
Diluted earnings per share Numerator:
Net income $ 315,152 $ 242,933 $ 433,035 $ 339,109
Less: dividends on preferred shares (1) (31,010) (31,430) (62,020) (75,614)
----------- ----------- ----------- -----------
Net income available to common shareholders $ 284,142 $ 211,503 $ 371,015 $ 263,495
=========== =========== =========== ===========
Denominator :
Weighted average common shares outstanding 4,875,324 3,357,632 4,866,527 3,357,632
Common stock options and warrants 149,450 835,858 249,805 806,078
Conversion of preferred shares (1) -- -- -- --
----------- ----------- ----------- -----------
5,024,774 4,193,490 5,116,332 4,163,710
=========== =========== =========== ===========
Diluted earnings per share $ 0.06 $ 0.05 $ 0.07 $ 0.06
=========== =========== =========== ===========
(1) Preferred shares were anti-dilutive for the six and three months ended June
30, 2003 and 2002.
6
Item 2. Management's Discussion and Analysis or Plan of Operation
Overview
We include the operations of Rotary Gas Systems, NGE Leasing and Great
Lakes Compression, which are wholly owned subsidiaries. These entities provide
products and services to the oil and gas industry and are engaged in (1) the
manufacture, service, sale, and rental of natural gas compressors to enhance the
productivity of oil and gas wells, and (2) the manufacture, sale and rental of
flares and flare ignition systems for plant and production facilities. We are
the parent company and provide administrative and management support and
therefore, have expenses associated with that activity.
Liquidity and Capital Resources
We have funded our operations through public and private offerings of
our common and preferred stock, subordinated debt and bank debt. Proceeds were
primarily used to pay debt and to fund the manufacture and fabrication of
additional units for our rental fleet of gas compressors.
At June 30, 2003, we had cash and cash equivalents of $976,004, working
capital of $992,135 and non-subordinated debt of $8,987,898, of which $2,278,951
was classified as current. We had net cash flow from operating activities of
$536,246 during the first six months of 2003. This was primarily from net income
of $433,035 plus depreciation and amortization of $779,555, an increase in
accounts payable and accrued liabilities of $270,867, an increase in deferred
taxes of $321,573 and an increase in deferred income of $270,446, offset by an
increase in inventory of $746,248 and accounts receivable of $836,812.
On October 24, 2002, we paid off the note of $6,952,464 payable to
Dominion Michigan, used for the acquisition of the compression related assets of
Great Lakes Compression. $3,452,464 of the funds to pay the note came from the
proceeds of our initial public offering, and $3,500,000 came from additional
bank financing to be amortized over 60 months at prime plus 1%.
We entered into a new loan agreement with our bank, dated as of March
26, 2003. This included new borrowing of $2,150,000 in the form of a term loan
with monthly principal payments of $35,833 with interest at 1% over prime but
not less than 5.25% for 60 months. The proceeds from this new borrowing were
used to purchase the 28 gas compressors from Hy-Bon. The new loan agreement also
included the renewal of our line of credit for $750,000 with interest at 1% over
prime for one year. We have not drawn from the line of credit as of June 30,
2003.
Funds from the initial public offering, which closed on October 24,
2002, will permit us to actively pursue adding gas compressors to our rental
fleet. We expect to fund additional rental units through the use of the offering
proceeds, additional bank debt and cash flow from operations.
A summary of the use of proceeds from our initial public offering as of
June 30, 2003 is as follows:
o $3,458,464 to reduce indebtedness;
o $2,577,870 for the manufacture of gas compressors placed in
our rental fleet and
o $492,836 in temporary investments - Bank Money Market Account.
7
Results of Operations
Six Months Ended June 30, 2003. Compared to the Six Months Ended June 30, 2002.
Natural Gas
(in thousands) Rotary NGE Great Lakes Services
Gas Leasing Compression Group Total
----------- ----------- ----------- ----------- -----------
Six Months Ended
June 30, 2003
Revenue $ 1,200 $ 2,070 $ 2,295 $ -- $ 5,565
Inter-segment revenue
2,744 35 8 -- 2,787
Gross margin 479 1,554 946 -- 2,979
Selling, general and
administrative
expense 460 86 135 434 1,115
Depreciation and amortization
expense 70 379 319 12 780
Operating income (loss) (51) 1,089 492 (446) 1,084
Interest expense 3 224 89 13 329
Other income or (expense) -- 9 (9) -- --
Provision for income tax -- -- -- 322 322
----------- ----------- ----------- ----------- -----------
Net Income (loss) $ (54) $ 874 $ 394 $ (781) $ 433
=========== =========== =========== =========== ===========
Six Months Ended
June 30, 2002
Revenue $ 1,571 $ 1,059 $ 2,490 $ -- $ 5,120
Inter-segment revenue 3,046 -- -- -- 3,046
Gross margin 656 761 897 -- 2,314
Selling, general and
administrative
expense 398 80 126 240 844
Depreciation and amortization
expense 59 189 270 20 538
Operating income (loss) 199 492 501 (260) 932
Interest expense 4 186 313 20 523
Equity in earnings from joint
venture -- 208 -- -- 208
Other income or (expense) 1 1 -- -- 2
Provision for income tax -- -- -- 280 280
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 196 $ 515 $ 188 $ (560) $ 339
=========== =========== =========== =========== ===========
--------------------------------------------------------------------------------
Rotary Gas Systems Operations
Revenue from outside sources decreased 24% or $371,000 for the six
months ended June 30, 2003, as compared to the same period ended June 30, 2002.
Because our products are custom-built, fluctuations in revenue from outside
sources are expected. This decrease was mainly the result of a reduction in the
sale of flare units to third parties.
The gross margin percentage decreased from 42% for the six months ended
June 30, 2002, to 40% for the same period ended June 30, 2003. The cost of
revenue is comprised of expenses associated with service, parts and
manufacturing expenses. This decrease resulted mainly from a change in the
product mix.
Selling, general and administrative expense increased $62,000 or 16%
for the six months ended June 30, 2003, as compared to the same period ended
June 30, 2002. This was mainly the result of the addition of new salesmen in the
Farmington, New Mexico and West Texas areas.
Depreciation expense increased 19% or $11,000 for the six months ended
June 30, 2003, as compared to the same period ended June 30, 2002. This increase
was mainly due to the purchase of additional sales vehicles, shop and office
equipment.
8
There was a decrease of $1,000 in interest expense for the six months
ended June 30, 2003, as compared to the same period ended June 30, 2002, mainly
due to the reduction in loan balances on vehicles.
NGE Leasing Operations
Revenue from our rental of natural gas compressors increased 95% for
the six months ended June 30, 2003, as compared to the same period in 2002. This
increase is the result of units added to our rental fleet. From June 30, 2002,
to June 30, 2003, we added 137 gas compressor units to our rental fleet, which
included the 28 units we purchased from Hy-Bon Engineering Company, Inc. on
March 31, 2003. The revenue from the Joint Venture, which was previously using
the equity method, has been consolidated beginning January 1, 2003. The revenue
from the units purchased from Hy-Bon Engineering Company, Inc. is included in
our consolidated revenue beginning April 1, 2003.
The gross margin percentage increased from 72% for the six months ended
June 30, 2002 to 75% for the same period ending 2003. This increase mainly
resulted from a slight reduction in the maintenance expenses associated with the
compressor units and also additional revenue recognized from the sale of our
irrigation pump engines.
Selling, general and administrative expense increased $6,000 or 8% for
the six months ended June 30, 2003, as compared to the same period in 2002. This
was mainly the result of an increase in sales commissions from increased rental
revenue.
Depreciation expense increased 101% or $190,000 for the six months
ended June 30, 2003, as compared to the same period ended June 30, 2002. This
increase was the result of new gas compressor rental units being added to the
rental fleet during the period.
There was an increase in interest expense of 20% from $186,000 for the
six months ended June 30, 2002, to $224,000 for the same period ended June 30,
2003. This is mainly as a result of an increase in bank debt used to purchase
equipment for the rental fleet.
Great Lakes Compression
Revenue decreased 8% for the six months ended June 30, 2003, compared
to the same period in 2002. This decrease resulted from a decrease in the sales
of compressor units to third parties. In the period ended June 30, 2002 we had
unit sales of approximately $501,000 to third parties while in the same period
2003 we had no unit sales to third parties. At the same time our rental revenue
increased 5% and our parts sales increased 2%. Because our compressor units are
custom-built, fluctuations in revenue from outside sources are expected.
The gross margin percentage increased from 36% for the six months ended
June 30, 2002 to 41% for the same period in 2003. The cost of revenue is
comprised of expenses associated with the maintenance of the gas compressor
rental activity, service, parts and manufacturing expenses. This increase
resulted mainly from a change in the sales product mix.
Selling, general and administrative expense increased by 7% or $9,000
for the six months ended June 30, 2003, as compared to the same period in 2002.
This is mainly the result of an increase in selling expense.
Depreciation expense increased from $270,000 for the six months ended
June 30, 2002, to $319,000 for the same period ended June 30, 2003. The increase
is the result of equipment that was added to the rental fleet and the
replacement of several service vehicles.
9
There was a decrease in interest expense of 72% from $313,000 for the
six months ended June 30, 2002 to $89,000 for the six months ended June 30,
2003. This decrease resulted from a reduction of the debt owed to Dominion
Michigan. Part of the proceeds from our initial public offering was used to
reduce debt in the amount of $3,452,464 and our bank financed the remaining
balance of $3,500,000 at a more favorable interest rate.
Natural Gas Services Group
Selling, general and administrative expense increased 81% from $240,000
for the six months ended June 30, 2002, as compared to $434,000 for the same
period ended June 30, 2003. This was mainly the result of the added expense for
being a publicly held company such as legal fees, auditor fees, underwriters and
public relations fees.
Amortization and depreciation expense decreased 40% from $20,000 for
the six months ended June 30, 2002, to $12,000 for the same period ended June
30, 2003. This mainly resulted from vehicles that were moved to our subsidiary,
Great Lakes Compression.
Interest expense decreased 35% from $20,000 for the six months ended
June 30, 2002, to $13,000 for the same period ended June 30, 2003. This decrease
resulted from a reduction in the interest rate and from bank notes for vehicles
moved to our subsidiary.
Provision for income tax is accounted for on a consolidated basis.
Therefore, the tax for all companies is included in the provision for income tax
for Natural Gas Services Group Inc. Income tax expense increased $42,000 or 15%,
which is consistent with and pursuant to changes in state and federal tax
statutes and the increase in net taxable income.
Three Months Ended June 30, 2003. Compared to the Three Months Ended June 30,
2003.
(in thousands) Natural Gas
Rotary NGE Great Lakes Services
Gas Leasing Compression Group Total
----------- ----------- ----------- ----------- -----------
Three Months Ended
June 30, 2003
Revenue $ 756 $ 1,211 $ 1,254 $ -- $ 3,221
Inter-segment revenue 1,337 18 3 -- 1,358
Gross margin 276 923 566 -- 1,765
Selling, general and
administrative
expense 250 45 70 230 595
Depreciation and amortization
Expense 36 215 161 7 419
Operating income (loss) (10) 663 335 (237) 751
Interest expense 2 124 44 5 175
Other income or (expense) 1 2 (26) -- (23)
Provision for income tax -- -- -- (238) 238
=========== =========== =========== =========== ===========
Net Income (loss) $ (11) $ 541 $ 265 $ (480) $ 315
=========== =========== =========== =========== ===========
Three Months Ended
June 30, 2002
Revenue
$ 704 $ 560 $ 1,166 $ -- $ 2,430
Inter-segment revenue
1,629 -- -- -- 1,629
Gross margin 410 399 495 -- 1,304
Selling, general and
administrative
expense 199 42 65 139 445
Depreciation and amortization
Expense 30 103 140 11 284
Operating income (loss) 181 254 290 (150) 575
Interest expense 2 96 156 11 265
Equity in earnings from joint
venture -- 124 -- -- 124
Provision for income tax -- -- -- 191 191
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 179 $ 282 $ 134 $ (352) $ 243
=========== =========== =========== =========== ===========
10
Rotary Gas Systems Operations
Revenue from outside sources decreased $52,000 or 7% for the three
months ended June 30, 2003, as compared to the same period ended June 30, 2002.
Because our products are custom-built, fluctuations in revenue from outside
sources are expected. This decrease was mainly the result of a reduction in the
sale of flare units to third parties.
The gross margin percentage decreased to 37% for the three months ended
June 30, 2003, as compared to 58% for the same period ended June 30, 2002. The
cost of revenue is comprised of expenses associated with service, parts and
manufacturing expenses. This decrease resulted mainly from a change in the
product-mix.
Selling, general and administrative expense increased 26% or $51,000
for the three months ended June 30, 2003, as compared to the same period ended
June 30, 2002. This was mainly the result of the addition of new salesmen in the
Farmington, New Mexico and West Texas areas. Depreciation expense increased 20%
from $30,000 for the three months ended June 30, 2002, to $36,000 for the same
period ended June 30, 2003. This increase was mainly due to the purchase of
additional service vehicles, shop and office equipment.
There was a slight decrease in interest expense for the three months
ended June 30, 2003, as compared to the same period ended June 30, 2002, mainly
due to the reduction in loan balances on vehicles.
NGE Leasing Operations
Revenue from our rental of natural gas compressors increased 116% for
the three months ended June 30, 2003, as compared to the same period in 2002.
This increase is the result of the revenue from units added to our rental fleet
and also additional revenue recognized from the sale of our irrigation pump
engines.
The gross margin percentage increased from 71% for the three months
ended June 30, 2002, to 76% the same period in 2003. This increase mainly
resulted from the sale of the irrigation pump engines mentioned above and slight
reduction in the maintenance expenses associated with the compressor units.
Selling, general and administrative expense increased from $42,000 for
the three months ended June 30, 2002, to $45,000 for the same period in 2003.
This was mainly the result of an increase in sales commissions due to increased
rental revenue.
Depreciation expense increased 109% from $103,000, for the three months
ended June 30, 2002 to $215,000 for the three months ended June 30, 2003. This
increase was the result of new gas compressor rental units being added to the
rental fleet during the period.
There was an increase in interest expense from $96,000 for the three
months ended June 30, 2002, to $124,000 for the same period ended June 30, 2003.
This is mainly a result of an increase in bank debt used to purchase equipment
for the rental fleet.
Great Lakes Compression
Revenue increased 8% for the three months ended June 30, 2003, as
compared to the same period in 2002. This increase was the result of an increase
in maintenance, labor and parts sales to third parties.
11
The gross margin percentage increased from 42% for the three months
ended June 30, 2002, to 45% for the same period in 2003. The cost of revenue is
comprised of expenses associated with the maintenance of the gas compressor
rental activity, service, parts and manufacturing expenses. This increase
resulted mainly from a change in the sales product mix.
Selling, general and administrative expense increased from $65,000 for
the three months ended June 30, 2002, to $70,000 for the same period in 2003.
This is mainly the result of an increase in selling expense.
Depreciation expense increased from $140,000 for the three months ended
June 30, 2002, to $161,000 for the same period ended June 30, 2003. The increase
is the result of equipment that was added to the rental fleet.
There was a decrease in interest expense from $156,000 for the three
months ended June 30, 2002, to $44,000 for the same period ended June 30, 2003.
This decrease resulted from a reduction of the debt owed to Dominion Michigan.
Part of the proceeds from our initial public offering was used to reduce debt in
the amount of $3,452,464 and our bank financed the remaining balance of
$3,500,000 at a more favorable interest rate.
Natural Gas Services Group
Selling, general and administrative expense increased 65% from $139,000
for the three months ended June 30, 2002, to $230,000 for the same period ended
June 30, 2003. This was mainly the result of an added expense for being a
publicly held company such as legal fees, auditor fees, underwriters and public
relations fees.
Amortization and depreciation expense decreased 36% from $11,000 for
the three months ended June 30, 2002, to $7,000 for the same period ended June
30, 2003. This mainly resulted from vehicles that were moved to our subsidiary,
Great Lakes Compression.
Interest expense decreased 55% from $11,000 for the three months ended
June 30, 2002, to $5,000 for the same period ended June 30, 2003. This decrease
resulted from a reduction in the interest rate and for bank notes for vehicles
moved to our subsidiary.
Provision for income tax is accounted for on a consolidated basis.
Therefore, the tax for all companies is included in the provision for income tax
for Natural Gas Services Group, Inc. Income tax expense increased $47,000 or
25%, which is consistent with and pursuant to changes in state and federal tax
statutes. This increase is mainly due to an increase in income before taxes.
Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934) as of a date (the "Evaluation Date") within 90 days prior to the filing
date of this report. Based upon that evaluation, our chief executive officer and
chief financial officer concluded that, as of the Evaluation Date, our
disclosure controls and procedures are effective in timely alerting them to the
material information relating to us and our consolidated subsidiaries required
to be included in our periodic filings with the SEC.
12
(b) Changes in internal controls.
There were no significant changes made in our internal controls during
the period covered by this report or, to our knowledge, in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) During the three months ended June 30, 2003, holders of 24,000
shares of our outstanding 10% Convertible Series A Preferred Stock converted the
shares into 24,000 shares of our common stock. There was no underwriter involved
in the transactions. The shares of our common stock were all issued in reliance
upon the exemption contained in Section 4(2) of the Securities Act of 1933, as
amended, because all of the persons were accredited investors and appropriate
restrictive legends were placed on the certificates unless the shares were sold
pursuant to the provisions of Rule 144.
(d) On October 21, 2002, our Registration Statement (File No.
333-88314) was declared effective.
Since October 21, 2002, we have incurred an aggregate of approximately
$1,345,830 of expenses in connection with the offering, including underwriting
discounts ($708,750), expenses paid to or for the underwriter ($157,500), and
other expenses of the offering ($479,680). Such amounts were not paid directly
or indirectly to the directors, the officers or to persons owning 10% or more of
any class of our equity securities or to our affiliates. Rather, such payments
were to others. After deducting the total expenses, we received net offering
proceeds of approximately $6,529,170. Through June 30, 2003, the net offering
proceeds have been used for:
o $3,458,464 to reduce indebtedness;
o $2,577,870 for the manufacture of gas compressors placed in
our rental fleet and
o $492,836 in temporary investments - Bank Money Market Account.
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Item 4. Submission of Matters to a Vote of Security Holders
On June 18, 2003, we held our Annual Meeting of Shareholders. At the
Annual Meeting of Shareholders, Richard L. Yadon was elected for a term expiring
at the Annual Meeting of Shareholders to be held in 2004, Gene A. Strasheim was
elected for a term expiring at the Annual Meeting of Shareholders to be held in
2005, and James T. Grigsby and Scott W. Sparkman were elected for terms expiring
at the Annual Meeting of Shareholders to be held in 2006. The terms of Charles
G. Curtis, Wallace O. Sellers and Wayne L. Vinson as directors continued after
the Annual Meeting of Shareholders until the Annual Meetings of Shareholders
held in 2005, 2005 and 2004, respectively.
Voting for Richard L. Yadon
For: 4,680,928 Withheld: 25 Abstentions: -0-
---- --------- -------------
Voting for Gene A. Strasheim
For: 4,680,928 Withheld: 25 Abstentions: -0-
---- --------- ------------
Voting for James T. Grisgby
For: 4,680,928 Withheld: 25 Abstentions: -0-
---- --------- ------------
Voting for Scott W. Sparkman
For: 4,680,928 Withheld: 25 Abstentions: -0-
---- --------- ------------
Also, at the Annual Meeting of Shareholders held on June 18, 2003, the
shareholders adopted an amendment to the Articles of Incorporation to reduce the
number of designated shares of 10% Convertible Series A Preferred Stock. The
votes were as follows:
For: 3,431,554 Against: 25 Abstentions: 71,150 Broker Non-Votes: -0-
---- -------- ------------ -----------------
14
NATURAL GAS SERVICES GROUP, INC.
Commission File Number: 1-31398
Quarter Ended June 30, 2003
Form 10-QSB
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Purchase and Sale Agreement by and between Hy-Bon Engineering
Company, Inc. and NGE Leasing, Inc. (previously filed as
Exhibit 2.1 to Natural Gas Services Group, Inc. Current Report
on Form 8-K filed on March 6, 2003, File No. 1-31398, and
incorporated herein by reference)
3.1 Articles of Amendment to the Articles of Incorporation filed
on June 19, 2003
10.1 First Amended and Restated Loan Agreement between Natural Gas
Services Group, Inc. and Western National Bank (previously
filed as Exhibit 10.1 to Natural Gas Services Group, Inc.
Current Report on Form 8-K filed on April 14, 2003, File No.
1-31398, and incorporated herein by reference)
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350
(b) Reports on Form 8-K
On April 14, 2003, we filed a Current Report on Form 8-K dated
March 27, 2003, reporting under Item 5 the closing of the
agreement to acquire certain compressor packages from Hy-Bon
Engineering Company, Inc., and filing the Purchase and Sale
Agreement and the First Amended and Restated Loan Agreement as
an Exhibits under Item 7.
On May 8, 2003, we filed a Current Report on Form 8-K dated
May 9, 2003, filing a news release as an Exhibit under Item 7.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NATURAL GAS SERVICES GROUP, INC.
By: /s/ Wayne L. Vinson
-----------------------------
Wayne L. Vinson
President and Chief Executive
Officer
By: /s/ Earl R. Wait
-----------------------------
Earl R. Wait
Chief Financial Officer
And Treasurer
August 7, 2003
EXHIBIT INDEX
2.1 Purchase and Sale Agreement by and between Hy-Bon Engineering Company,
Inc. and NGE Leasing, Inc. (previously filed as Exhibit 2.1 to Natural
Gas Services Group, Inc. Current Report on Form 8-K filed on March 6,
2003, File No. 1-31398, and incorporated herein by reference)
3.1 Articles of Amendment to the Articles of Incorporation filed on June
19, 2003
10.1 First Amended and Restated Loan Agreement between Natural Gas Services
Group, Inc. and Western National Bank (previously filed as Exhibit 10.1
to Natural Gas Services Group, Inc. Current Report on Form 8-K filed on
April 14, 2003, File No. 1-31398, and incorporated herein by reference)
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350
16