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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
OR
( ) TRANSITION REPORT PURSUANT TO 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)
(432) 563-3974
(Issuer's Telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X 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 October 22, 2004
---------------------------- ----------------
Common Stock, $.01 par value 6,068,269
Transitional Small Business Disclosure Format (Check one): Yes No X
--- ---
NATURAL GAS SERVICES GROUP, INC.
Part I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
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
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Item 3. Control and Procedures..........................................Page 11
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Part II - OTHER INFORMATION
Item 1. Legal Proceedings...............................................Page 12
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Item 6. Exhibits........................................................Page 13
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Signatures...............................................................Page 16
Natural Gas Services Group, Inc.
Consolidated Balance Sheet
(unaudited)
September 30, 2004
ASSETS
Current Assets:
Cash and cash equivalents $ 4,408,170
Accounts receivable - trade 1,187,402
Inventory 3,179,066
Prepaid expenses 178,694
-----------
Total current assets 8,953,332
Lease equipment, net 25,818,667
Other property, plant and equipment, net 3,140,203
Goodwill, net 2,589,655
Patents, net 93,328
Other assets 95,501
-----------
Total assets $40,690,686
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long term debt and capital lease $ 3,145,056
Line of Credit 521,461
Accounts payable and accrued liabilities 1,647,514
Unearned Income 118,284
-----------
Total current liabilities 5,432,315
Long term debt and capital lease, less current portion 9,079,435
Subordinated notes, net 1,433,060
Deferred income tax payable 2,612,013
-----------
Total liabilities 18,556,823
SHAREHOLDERS' EQUITY
Common stock 60,683
Paid in capital 16,249,850
Retained earnings 5,823,331
-----------
Total shareholders' equity 22,133,864
-----------
Total liabilities and shareholders' equity $40,690,686
===========
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 September 30, Nine months ended September 30,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Revenue:
Sales $ 702,679 $ 1,372,248 $ 2,444,899 $ 2,877,358
Service and maintenance income 436,584 452,714 1,370,306 1,346,597
Leasing income 2,730,851 1,874,594 7,405,324 5,040,161
-------------- -------------- -------------- --------------
3,870,113 3,699,556 11,220,529 9,264,116
Cost of revenue:
Cost of sales 451,334 1,008,771 1,699,003 2,155,568
Cost of service and maintenance 338,312 290,008 1,030,167 961,237
Cost of leasing 843,725 545,309 2,174,185 1,313,093
-------------- -------------- -------------- --------------
1,633,371 1,844,088 4,903,355 4,429,898
-------------- -------------- -------------- --------------
Gross Margin 2,236,742 1,855,468 6,317,174 4,834,218
Operating Cost:
Selling expense 226,935 159,870 629,545 484,421
General and administrative expense 425,299 395,918 1,368,524 1,186,922
Depreciation and amortization 641,817 455,563 1,750,851 1,235,118
-------------- -------------- -------------- --------------
1,294,050 1,011,351 3,748,919 2,906,461
-------------- -------------- -------------- --------------
Operating income 942,692 844,117 2,568,255 1,927,757
Interest expense (205,532) (170,971) (580,083) (500,760)
Other income 2,306 1,253 1,496,329 2,040
-------------- -------------- -------------- --------------
Income before income taxes 739,466 674,399 3,484,501 1,429,037
Provision for income tax 288,391 289,992 773,932 611,595
-------------- -------------- -------------- --------------
Net income 451,074 384,407 2,710,568 817,442
Preferred dividends 0 30,530 53,277 92,550
-------------- -------------- -------------- --------------
Net income available to common shareholders $ 451,074 $ 353,877 $ 2,657,291 $ 724,892
============== ============== ============== ==============
Earnings per share:
Basic $0.08 $0.07 $0.49 $0.15
Diluted $0.07 $0.07 $0.43 $0.14
Weighted average Shares:
Basic 5,626,280 4,995,713 5,428,146 4,910,062
Diluted 6,492,354 5,389,673 6,216,995 5,208,096
The accompanying notes are an integral part of the consolidated income
statements.
2
Natural Gas Services Group, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Nine Months
Ended Ended
September 30, September 30,
2004 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,710,568 $ 817,442
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,750,851 1,235,120
Deferred taxes 769,507 602,202
Amortization of debt issuance costs 48,717 48,717
Gain on disposal of assets 6,911 10,547
Changes in operating assets and liabilities:
Trade and other receivables (370,807) (938,817)
Inventory (624,827) (1,000,735)
Prepaid expenses and other (71,663) 42,958
Accounts payable and accrued liabilities 575,362 708,971
Deferred income (88,932) 174,710
Other (16,745) (60,436)
------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 4,688,942 1,640,679
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (786,941) (713,245)
Purchase of rental equipment (8,150,073) (5,187,208)
Acquisition of remaining interest in joint venture, net of cash acquired -- 242,753
Proceeds from sale of property and equipment 50,123 112,500
Decrease in lease receivable -- 210,512
Distribution from equity method investment -- 49,090
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NET CASH USED IN INVESTING ACTIVITIES (8,886,891) (5,285,598)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from bank loans 5,031,435 2,649,811
Net proceeds from line of credit 521,461 --
Repayments of long term debt (1,821,111) (1,583,951)
Repayments of line of credit (300,000) --
Proceeds from sale of common stock, exercised warrants and stock options 5,051,409 216,247
Dividends paid on preferred stock (53,277) (92,550)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 8,429,917 1,189,557
------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 4,231,968 (2,455,362)
CASH AT BEGINNING OF PERIOD 176,202 2,713,638
------------- -------------
CASH AT END OF PERIOD $ 4,408,170 $ 258,276
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 580,083 $ 500,760
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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 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
September 30, 2004 and the results of our operations for the nine month period
ended September 30, 2004 and 2003 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 for the year ended December 31,
2003 on file with the SEC. 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 nine month period ended September 30,
2004 are not necessarily indicative of the results of operations to be expected
for the full fiscal year ending December 31, 2004.
(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 net income and earnings per share would have
been reduced to the pro forma amounts listed below:
Three Months Ended Nine Months Ended
September 30 September 30
2004 2003 2004 2003
----------- ----------- ------------- -----------
Pro forma impact of fair value method
Income applicable to common shares, as reported $ 451,074 $ 353,877 $ 2,657,291 724,892
Pro-forma stock-based compensation costs under
the fair value method, net of related tax (10,000) (7,683) (30,000) (23,048)
----------- ----------- ------------- -----------
Pro-forma income applicable to common shares
under the fair-value method $ 441,074 $ 346,194 $ 2,627,291 $ 701,844
Earnings per common share
Basic earnings per share reported $0.08 $0.07 $0.49 $0.15
Diluted earnings per share reported $0.07 $0.07 $0.43 $0.14
Pro-forma basic earnings per share under the fair
value method $0.08 $0.07 $0.48 $0.14
Pro-forma diluted earnings per share under the
fair value method $0.07 $0.06 $0.42 $0.13
4
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%
(3) Merger
On January 1, 2004, we merged our subsidiaries, Rotary Gas Systems Inc,
NGE Leasing Inc, and Great Lakes Compression Inc. with their parent Company,
Natural Gas Services Group Inc. This had no effect on our consolidated financial
position or results of operations, with the exception of a small impact on our
state tax expenses.
(4) Preferred Stock Conversion
In accordance with the provisions of the Convertible Series A Preferred
Stock of Natural Gas Services Group, Inc., on March 26, 2004 each share of
Preferred Stock automatically converted to one share of Common Stock. The
conversion occurred after the closing market price of the stock was equal to or
higher than $6.50 for 20 consecutive trading days. 315,154 Preferred shares were
converted at that time. Dividends payable at the conversion date were
approximately $25,355.
(5) Common Stock Private Placement
On July 20, 2004, Natural Gas Services Group, Inc. and CBarney
Investments, Ltd. entered into a Securities Purchase Agreement. Under this
agreement, Natural Gas Services Group issued and sold 649,574 shares of its
common stock to CBarney at $7.69736 per share. The per share price was
determined by multiplying (x) $8.747, the average closing market price of the
common stock on the American Stock Exchange for the twenty consecutive trading
days ended July 15, 2004, times (y) eighty-eight percent. Natural Gas Services
Group received aggregate gross proceeds of $5,000,000 and net proceeds of
$4,950,000. We plan to use $2,950,000 of the net proceeds we received from
CBarney to reduce our existing bank debt, and to use the remainder of such
proceeds to obtain one or more letters of credit in the aggregate face amount of
$2,000,000 that will secure the promissory notes to be issued by us in
correction with the Screw Compression Systems, Inc. transaction described in
note (8) below.
5
(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 Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Basic earnings per share Numerator:
Net income $ 451,074 $ 384,407 $ 2,710,568 817,442
Less: dividends on preferred shares -- (30,530) (53,277) (92,550)
Net income available to common shareholders $ 451,074 $ 353,877 $ 2,657,291 $ 724,892
Denominator -
Weighted average common shares outstanding 5,626,280 4,995,713 5,428,146 4,910,062
Basic earnings per share $ 0.08 $ 0.07 $ 0.49 $ 0.15
Diluted earnings per share Numerator:
Net income $ 451,074 $ 384,407 $ 2,710,568 $ 817,442
Less: dividends on preferred shares (1) -- (30,530) (53,277) (92,550)
Net income available to common shareholders $ 451,074 $ 353,877 $ 2,657,291 $ 724,892
Denominator :
Weighted average common shares outstanding 5,626,280 4,995,713 5,428,146 4,910,062
Dilutive effect of common stock options
and warrants 866,074 393,960 788,849 298,034
6,492,354 5,389,673 6,216,995 5,208,096
Diluted earnings per share $ 0.07 $ 0.07 $ 0.43 $ 0.14
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(1) Preferred shares were anti-dilutive for the three and nine months ended
September 30, 2004 and 2003
(7) Other Income
On March 15, 2004 the President and C.E.O. of our company, Mr. Wayne L.
Vinson, passed away after a battle with cancer. The Company held 2 life
insurance policies on him, 1 for $1,000,000 and 1 for $500,000, with the Company
as the beneficiary. The proceeds of $1,500,000 were recorded as other income.
(8) Agreement to Purchase SCS.
On October 18, 2004, Natural Gas Services Group, Inc. entered into a
Stock Purchase Agreement with Screw Compression Systems, Inc., or "SCS", and the
stockholders of SCS. Under this agreement, Natural Gas Services Group agreed to
purchase all of the outstanding shares of capital stock of SCS.
SCS is a privately owned manufacturer of natural gas compressors, with
its principal offices located in Tulsa, Oklahoma.
6
The stockholders of SCS will receive, in proportionate shares (based on
their stock ownership of SCS), a total of $15 million, consisting of:
o $8 million in cash;
o promissory notes issued by Natural Gas Services in the
aggregate principal amount of $3 million bearing interest at
the rate of four percent (4.00%) per annum, maturing three
years from the date of closing and secured by a letter of
credit in the face amount of $2 million; and
o 609,576 shares of Natural Gas Services common stock valued at
$4 million, based on the average of the daily closing prices
of the common stock for the ninety consecutive trading days
ended April 28, 2004. All of the shares, upon issuance, will
be "restricted" securities within the meaning of Rule 144
under the Securities Act of 1933, as amended, and will bear a
legend to that effect.
7
Item 2. Management's Discussion and Analysis, or Plan of Operation
Overview
Our company provides products and services to the oil and gas industry
and is 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.
Critical Accounting Policies and New Accounting Pronouncements
See our December 31, 2003 Form 10-KSB on file with the SEC for a
discussion of our critical accounting policies and new accounting
pronouncements. There have been no substantive changes since that time.
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 natural gas compressors.
At September 30, 2004, we had cash and cash equivalents of
approximately $4,408,000, working capital of $3,521,000 and non-subordinated
debt of $12,225,000 of which approximately $3,145,000 was classified as current.
We had positive net cash flow from operating activities of approximately
$4,689,000 during the first nine months of 2004. This was primarily from net
income of $2,711,000 plus depreciation and amortization of $1,751,000, an
increase in deferred taxes of $770,000, an increase in accounts payable and
accrued liabilities of $575,000, offset by an increase in accounts
receivable-trade of $371,000, a decrease in deferred income of $17,000, and an
increase in inventory of $625,000.
On November 24, 2003 we completed a new $10 million senior credit
facility with a $7 million initial borrowing base. The credit facility is a
Multiple Advance Term Promissory Note arranged by Western National Bank,
Midland, Texas. The interest rate is one percent over Wall Street prime rate.
Funds have been drawn under this line as of September 30, 2004 totaling
$5,715,000. Substantially all of our equipment, inventory and accounts
receivables have been pledged as collateral for our bank loans.
Our line of credit for $750,000 with interest at 1% over prime for one
year expired March 15, 2004 but was renewed on May 28, 2004. Funds have been
drawn under the line of credit as of September 30, 2004 totaling $521,461.
In accordance with the provisions of the Convertible Series A Preferred
Stock of Natural Gas Services Group, Inc., on March 26, 2004 each share of
Preferred Stock automatically converted to one share of Common Stock. The
conversion occurred after the closing market price of the stock was equal to or
higher than $6.50 for 20 consecutive trading days. 315,154 Preferred shares were
converted at that time. As a result the conversion we will have a reduction in
expected dividend payments of approximately $68,000 for the remainder of the
year 2004.
On July 20, 2004, Natural Gas Services Group, Inc. and CBarney
Investments, Ltd. entered into a Securities Purchase Agreement. Under this
agreement, Natural Gas Services Group agreed to issue and sell 649,574 shares of
its common stock to CBarney at $7.69736 per share. The per share price was
determined by multiplying (x) $8.747, the average closing market price of the
common stock on the American Stock Exchange for the twenty consecutive trading
days ended July 15, 2004, times (y) eighty-eight percent. Natural Gas Services
Group received net proceeds of $4,950,000. We plan to use $2,950,000 of the net
proceeds we received from CBarney to reduce our existing bank debt, and to use
the remainder of such proceeds to obtain one or more letters of credit in the
aggregate face amount of $2,000,000 that will service the promissory notes to be
issued by us in correction with the Screw Compression Systems, Inc. transaction
described in following paragraph.
8
On October 18, 2004, Natural Gas Services Group, Inc. entered into a
Stock Purchase Agreement with Screw Compression Systems, Inc., or "SCS", and the
stockholders of SCS. Under this agreement, Natural Gas Services Group agreed to
purchase all of the outstanding shares of capital stock of SCS.
SCS is a privately owned manufacturer of natural gas compressors, with
its principal offices located in Tulsa, Oklahoma.
The stockholders of SCS will receive, in proportionate shares (based on
their stock ownership of SCS), a total of $15 million, consisting of:
o $8 million in cash;
o promissory notes issued by Natural Gas Services in the
aggregate principal amount of $3 million, bearing interest at
the rate of four percent (4.00%) per annum, maturing three
years from the date of closing and secured by a letter of
credit in the face amount of $2 million; and
o 609,576 shares of Natural Gas Services common stock valued at
$4 million, based on the average of the daily closing prices
of the common stock for the ninety consecutive trading days
ended April 28, 2004. All of the shares, upon issuance, will
be "restricted" securities within the meaning of Rule 144
under the Securities Act of 1933, as amended, and will bear a
legend to that effect.
Results of Operations
Nine Months Ended September 30, 2004, Compared to the Nine Months Ended
September 30, 2003.
Total revenue increased from $9,264,000 to $11,221,000 or 21% for the
nine months ended September 30, 2004 compared to the same period ended September
30, 2003. This was mainly the result of increased leasing income.
Sales revenue from outside sources decreased from $2,877,000 to
$2,445,000, or 15% for the nine months ended September 30, 2004 compared to the
same period ended September 30, 2003. Sales from outside sources included: (1)
Compressor unit sales, (2) Flare sales, (3) Parts sales and (4) Compressor
rebuilds. This decrease was mainly the result of a reduction in the sale of
compressor units to outside third parties in the nine months ended September 30,
2004 compared to the same period in 2003. Because our products are custom-built,
fluctuations in revenue from outside sources is not unusual and our focus has
been more on building a rental base than on the sale of equipment.
Service and maintenance revenue increased from $1,347,000 to
$1,370,000, or 2% for the nine months ended September 30, 2004 compared to the
same period ended September 30, 2003.
Leasing revenue increased from $5,040,000 to $7,405,000, or 47% for the
nine months ended September 30, 2004 compared to the same period ended September
30, 2003. This increase was the result of additional units added to our rental
fleet and leased to third parties. The company ended the period with 533
compressor packages in its rental fleet, up from 399 units at December 31, 2003
and 354 units at September 30, 2003.
9
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Total Revenue Breakdown for Nine Months Ended September 30, 2004
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Sales Revenue 22%
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Service & Maintenance Revenue 12%
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Leasing Revenue 66%
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The gross margin percentage increased from 52% for the nine months
ended September 30, 2003, to 56% for the same period ended September 30, 2004.
This improvement resulted mainly from the relative increase in leasing revenue
as a percentage of the total revenue. Our rental fleet carries a gross margin
averaging 70%, and an increase in rentals improves our total gross margin.
Selling, general and administrative expense increased from $1,671,000
to $1,998,000 or 20% for the nine months ended September 30, 2004, as compared
to the same period ended September 30, 2003. This was mainly the result of the
increase in commissions from additional leasing contracts on gas compressors to
third parties, an increase in legal expenses related to an internal
investigation concerning an employee matter that was settled in April 2004.
Depreciation and amortization expense increased 42 % from $1,235,000 to
$1,751,000 for the nine months ended September 30, 2004, compared to the same
period ended September 30, 2003. This increase was the result of 179 new gas
compressor rental units being added to rental equipment from September 30, 2003
to September 30, 2004.
Other income and expense increased approximately $1,494,000 for the
nine months ended September 30, 2004, compared to the same period ended
September 30, 2003. This increase was due mainly from the receipt of $1,500,000
in life insurance payable in connection with the death of Mr. Wayne L. Vinson,
our former President and C.E.O. His death on March 15, 2004 left the company as
the beneficiary of two life insurance policies, one for $1,000,000, and one for
$500,000.
Interest expense increased 16% for the nine months ended September 30,
2004 compared to the same period ended September 30, 2003, mainly due to the
increased loan balances on vehicles and rental equipment.
Provision for income tax increased $162,000 or 26%, primarily due to
the increase in net taxable income. The income from the life insurance proceeds
described above is not subject to federal income tax.
Three Months Ended September 30, 2004, Compared to the Three Months Ended
September 30, 2003.
Total revenue increased from $3,700,000 to $3,870,000 or 5% for the
three months ended September 30, 2004 compared to the same period ended
September 30, 2003. This was mainly the result of increased leasing income and
offset by a decrease in outside sales as outlined below.
Sales revenue from outside sources decreased from $1,372,000 to
$703,000, or 49% for the three months ended September 30, 2004 compared to the
same period ended September 30, 2003. This decrease was mainly the result of a
reduction in the sales of compressor units and parts. Because our products are
custom-built, fluctuations in compressor unit revenue from outside sources is
not unusual. The reduction in parts sales is the result of a change in our
discount status with a major supplier in northern Michigan. We expect this to be
a temporary situation. Also our customer base has dictated the trend toward
leasing since most would rather rent than buy. Also our current plant capacity
is used to fill our existing customer needs for rental equipment.
10
Service and maintenance revenue decreased from $452,000 to $437,000, or
4% for the three months ended September 30, 2004 compared to the same period
ended September 30, 2003. This revenue source is subject to seasonal change
since over 90% of this activity is generated in northern Michigan and is subject
to swings in weather conditions.
Leasing revenue increased from $1,875,000 to $2,731,000, or 47% for the
three months ended September 30, 2004 compared to the same period ended
September 30, 2003. This increase was the result of additional units added to
our rental unit fleet and leased to third parties. The company added 45 gas
compressors to its rental fleet in the quarter ended September 30, 2004.
-----------------------------------------------------------------
Total Revenue Breakdown for Three Months Ended September 30, 2004
-----------------------------------------------------------------
-----------------------------------------------------------------
Sales Revenue 18%
-----------------------------------------------------------------
Service & Maintenance Revenue 11%
-----------------------------------------------------------------
Leasing Revenue 71%
-----------------------------------------------------------------
The gross margin percentage increased from 50% for the three months
ended September 30, 2003 to 58% for the same period ended September 30, 2004.
Although we expect our margins to increase as our rental revenue increases
because our rental fleet carries a gross margin averaging 70%, changes in the
product mix during the quarter help to average out the gross margin company
wide.
Selling, general and administrative expense increased from $556,000 to
$652,000 or 17% for the three months ended September 30, 2004, as compared to
the same period ended September 30, 2003. This was mainly the result of the
increase in commissions from additional leasing contracts on gas compressors to
third parties and an increase in sales and administration salary expense.
Depreciation and amortization expense increased 41% from $456,000 to
$642,000 for the three months ended September 30, 2004, compared to the same
period ended September 30, 2003. This increase was the result of 45 new gas
compressor rental units being added to rental equipment during the three months
ended September 30, 2004.
There was a 20% increase in interest expense for the three months ended
September 30, 2004 compared to the same period ended September 30, 2003, which
was mainly due to the increase in loan balances for rental equipment.
Provision for income tax decreased $2,000, or 1%, primarily due from a
change in our effective tax rate. The effective tax rate changed because of a
reduction in our state taxes as a result the merger of our subsidiaries
effective January 1, 2004.
Forward Looking Statements
Some statements contained in this Report, and the documents
incorporated by reference, are "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 (or Securities Act) and Section 21E
of the Exchange Act. These statements include, without limitation, statements
relating to oil and gas prices, demand for oil and gas, budgets, business
strategies and other plans, intentions and objectives of our management for
future operations and activities and other such matters. The words "believe",
"budget", "plan", "estimate", "expect", "intend", "strategy", "project", "will",
"could", "may",
11
"anticipate", "continue", and similar expressions identify forward-looking
statements. We believe the assumptions and expectations reflected in these
forward-looking statements are reasonable. However, we cannot give any assurance
that our expectations will prove to be correct or that we will be able to take
any actions that are presently planned. Actual results could differ materially
from those expressed in the forward-looking statements. Factors that could cause
such a difference include:
o fluctuations in prices of oil and gas;
o future capital requirements and availability of financing;
o competition;
o general economic conditions;
o governmental regulations;
o receipt of amounts owed to us by our customers;
o events similar to 9/11; and
o fluctuations in interest rates and availability of capital.
You are cautioned not to place undue reliance on any of our
forward-looking statements, which speak only as of the date of the document or
in the case of documents incorporated by reference, the date of those documents.
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-15(e) under the Securities Exchange Act of
1934) as of the end of the period covered by this report. Based upon that
evaluation, our chief executive officer and chief financial officer concluded
that, as of the end of the period covered by this report, our disclosure
controls and procedures are effective in timely alerting them to the material
information relating to us that are required to be included in our periodic
filings with the SEC.
(b) Changes in internal controls.
There were no changes made in our internal controls during the period
covered by this report that have materially affected or are reasonably likely to
materially affect our internal controls over financial reporting. In addition,
to our knowledge there were no changes, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
PART II - OTHER INFORMATION
NATURAL GAS SERVICES GROUP, INC.
Item 1. Legal Proceedings
From time to time, we are a party to ordinary routine litigation
incidental to our business. We are not currently a party to any pending
litigation, and we are not aware of any threatened litigation.
12
Item 6. Exhibits
The following exhibits are filed herewith or incorporated by reference,
as indicated:
Exhibit No. Description
----------- -----------
2.1 Purchase and Sale Agreement by and between Hy-Bon Engineering
Company, Inc. and NGE Leasing, Inc. (Incorporated by reference
to Exhibit 2.1 of the Registrant's Current Report on Form 8-K
dated February 28, 2003 and filed with the Securities and
Exchange Commission on March 6, 2003)
*3.1 Articles of Incorporation, as amended
3.2 Bylaws (Incorporated by reference to Exhibit 3.4 of the
Registrant's Registration Statement on Form SB-2, No.
333-88314)
4.1 Form of warrant certificate (Incorporated by reference to
Exhibit 4.1 of the Registrant's Registration Statement on Form
SB-2, No. 333-88314)
4.2 Form of warrant agent agreement (Incorporated by reference to
Exhibit 4.2 of the Registrant's Registration Statement on Form
SB-2, No. 333-88314)
4.3 Form of lock-up agreement (Incorporated by reference to
Exhibit 4.3 of the Registrant's Registration Statement on Form
SB-2, No. 333-88314)
4.4 Form of representative's option for the purchase of common
stock (Incorporated by reference to Exhibit 4.4 of the
Registrant's Registration Statement on Form SB-2, No.
333-88314)
4.5 Form of representative's option for the purchase of warrants
(Incorporated by reference to Exhibit 4.5 of the Registrant's
Registration Statement on Form SB-2, No. 333-88314)
10.1 1998 Stock Option Plan (Incorporated by reference to Exhibit
10.1 of the Registrant's Registration Statement on Form SB-2,
No. 333-88314)
10.2 Asset Purchase Agreement, dated January 1, 2001, between the
Registrant and Great Lakes Compression, Inc. (Incorporated by
reference to Exhibit 10.2 of the Registrant's Registration
Statement on Form SB-2, No. 333-88314)
13
Exhibit No. Description
----------- -----------
10.3 Exhibits 3(c)(1), 3(c)(2), 3(c)(3), 3(c)(4), 13(d)(1),
13(d)(2) and 13(d)(3) to Asset Purchase Agreement, dated
January 1, 2001, between the Registrant and Great Lakes
Compression, Inc. (Incorporated by reference to Exhibit 10.14
of the Registrant's Registration Statement on Form SB-2, No.
333-88314)
10.4 Amendment to Guaranty Agreement between Natural Gas Services
Group, Inc. and Dominion Michigan Production Services, Inc.
(Incorporated by reference to Exhibit 10.3 of the Registrant's
Registration Statement on Form SB-2, No. 333-88314)
10.5 Form of Series A 10% Subordinated Notes due December 31, 2006
(Incorporated by reference to Exhibit 10.8 of the Registrant's
Registration Statement on Form SB-2, No. 333-88314)
10.6 Form of Five-Year Warrants to Purchase Common Stock
(Incorporated by reference to Exhibit 10.9 of the Registrant's
Registration Statement on Form SB-2, No. 333-88314)
10.7 Warrants issued to Berry-Shino Securities, Inc. (Incorporated
by reference to Exhibit 10.10 of the Registrant's Registration
Statement on Form SB-2, No. 333-88314)
10.8 Warrants issued to Neidiger, Tucker, Bruner, Inc.
(Incorporated by reference to Exhibit 10.11 of the
Registrant's Registration Statement on Form SB-2, No.
333-88314)
10.9 Form of warrant issued in March 2001 for guaranteeing debt
(Incorporated by reference to Exhibit 10.12 of the
Registrant's Registration Statement on Form SB-2, No.
333-88314)
10.10 Form of warrant issued in April 2002 for guaranteeing debt
(Incorporated by reference to Exhibit 10.13 of the
Registrant's Registration Statement on Form SB-2, No.
333-88314)
10.11 Articles of Organization of Hy-Bon Rotary Compression, L.L.C.,
dated April 17, 2000 (Incorporated by reference to Exhibit
10.18 of the Registrant's Registration Statement on Form SB-2,
No. 333-88314)
14
Exhibit No. Description
----------- -----------
10.12 Regulations of Hy-Bon Rotary Compression, L.L.C. (Incorporated
by reference to Exhibit 10.19 of the Registrant's Registration
Statement on Form SB-2, No. 333-88314)
10.13 First Amended and Restated Loan Agreement between the
Registrant and Western National Bank (Incorporated by
reference to Exhibit 10.1 of the Registrant's Current Report
on Form 8-K, dated March 27, 2003 and filed with the
Securities and Exchange Commission on April 14, 2003)
10.14 Form of Termination of Employment Agreement Letter relating to
the Employment Agreement of Alan Kurus (Incorporated by
reference to Exhibit 10.25 of the Registrant's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 2002)
10.15 Form of Termination of Employment Agreement Letter relating to
the Employment Agreement of Wayne Vinson (Incorporated by
reference to Exhibit 10.26 of the Registrant's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 2002)
10.16 Form of Termination of Employment Agreement Letter relating to
the Employment Agreement of Earl Wait (Incorporated by
reference to Exhibit 10.27 of the Registrant's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 2002)
10.17 Triple Net Lease Agreement, dated June 1, 2003, between NGE
Leasing, Inc. and Steven J. & Katherina L. Winer (Incorporated
by reference to Exhibit 10.17 of the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended December 31,
2003)
10.18 Lease Agreement, dated June 19, 2003, between NGE Leasing,
Inc. and Wise Commercial Properties (Incorporated by reference
to Exhibit 10.18 of the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 2003)
10.19 Lease Agreement, dated March 1, 2004, between the Registrant
and the City of Midland, Texas (Incorporated by reference to
Exhibit 10.19 of the Registrant's Form 10-QSB for the fiscal
quarter ended June 30, 2004)
10.20 Second Amended and Restated Loan Agreement, dated November 3,
2003, between the Registrant and Western National Bank
(Incorporated by reference to Exhibit 10.20 of the
Registrant's Form 10-QSB for the fiscal quarter ended June 30,
2004)
10.21 Securities Purchase Agreement, dated July 20, 2004, between
the Registrant and CBarney Investments, Ltd. (Incorporated by
reference to Exhibit 4.1 of the Registrant's Current Report on
Form 8-K dated July 20, 2004 and filed with the Securities and
Exchange Commission on July 27, 2004)
15
Exhibit No. Description
----------- -----------
10.22 Stock Purchase Agreement, dated October 18, 2004, by and among
the Registrant, Screw Compression Systems, Inc., Paul D.
Hensley, Jim Hazlett and Tony Vohjesus (Incorporated by
reference to Exhibit 4.1 of the Registrant's Current Report on
Form 8-K dated October 18, 2004 and filed with the Securities
and Exchange Commission on October 21, 2004)
*31.1 Certification of Chief Executive Officer required by Section
302 of the Sarbanes-Oxley Act of 2002
*31.2 Certification of Chief Financial Officer required by Section
302 of the Sarbanes-Oxley Act of 2002
*32.1 Certification required by Section 906 of the Sarbanes-Oxley
Act of 2002
*32.2 Certification required by Section 906 of the Sarbanes-Oxley
Act of 2002
--------------------------
* Filed herewith.
16
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/ Wallace Sparkman
-----------------------------
Wallace Sparkman
President and Chief Executive
Officer
By: /s/ Earl R. Wait
-----------------------------
Earl R. Wait
Chief Financial Officer
And Treasurer
November 9, 2004
17
INDEX TO EXHIBITS:
Exhibit No. Description
----------- -----------
2.1 Purchase and Sale Agreement by and between Hy-Bon Engineering
Company, Inc. and NGE Leasing, Inc. (Incorporated by reference
to Exhibit 2.1 of the Registrant's Current Report on Form 8-K
dated February 28, 2003 and filed with the Securities and
Exchange Commission on March 6, 2003)
*3.1 Articles of Incorporation, as amended
3.2 Bylaws (Incorporated by reference to Exhibit 3.4 of the
Registrant's Registration Statement on Form SB-2, No.
333-88314)
4.1 Form of warrant certificate (Incorporated by reference to
Exhibit 4.1 of the Registrant's Registration Statement on Form
SB-2, No. 333-88314)
4.2 Form of warrant agent agreement (Incorporated by reference to
Exhibit 4.2 of the Registrant's Registration Statement on Form
SB-2, No. 333-88314)
4.3 Form of lock-up agreement (Incorporated by reference to
Exhibit 4.3 of the Registrant's Registration Statement on Form
SB-2, No. 333-88314)
4.4 Form of representative's option for the purchase of common
stock (Incorporated by reference to Exhibit 4.4 of the
Registrant's Registration Statement on Form SB-2, No.
333-88314)
4.5 Form of representative's option for the purchase of warrants
(Incorporated by reference to Exhibit 4.5 of the Registrant's
Registration Statement on Form SB-2, No. 333-88314)
10.1 1998 Stock Option Plan (Incorporated by reference to Exhibit
10.1 of the Registrant's Registration Statement on Form SB-2,
No. 333-88314)
10.2 Asset Purchase Agreement, dated January 1, 2001, between the
Registrant and Great Lakes Compression, Inc. (Incorporated by
reference to Exhibit 10.2 of the Registrant's Registration
Statement on Form SB-2, No. 333-88314)
10.3 Exhibits 3(c)(1), 3(c)(2), 3(c)(3), 3(c)(4), 13(d)(1),
13(d)(2) and 13(d)(3) to Asset Purchase Agreement, dated
January 1, 2001, between the Registrant and Great Lakes
Compression, Inc. (Incorporated by reference to Exhibit 10.14
of the Registrant's Registration Statement on Form SB-2, No.
333-88314)
18
Exhibit No. Description
----------- -----------
10.4 Amendment to Guaranty Agreement between Natural Gas Services
Group, Inc. and Dominion Michigan Production Services, Inc.
(Incorporated by reference to Exhibit 10.3 of the Registrant's
Registration Statement on Form SB-2, No. 333-88314)
10.5 Form of Series A 10% Subordinated Notes due December 31, 2006
(Incorporated by reference to Exhibit 10.8 of the Registrant's
Registration Statement on Form SB-2, No. 333-88314)
10.6 Form of Five-Year Warrants to Purchase Common Stock
(Incorporated by reference to Exhibit 10.9 of the Registrant's
Registration Statement on Form SB-2, No. 333-88314)
10.7 Warrants issued to Berry-Shino Securities, Inc. (Incorporated
by reference to Exhibit 10.10 of the Registrant's Registration
Statement on Form SB-2, No. 333-88314)
10.8 Warrants issued to Neidiger, Tucker, Bruner, Inc.
(Incorporated by reference to Exhibit 10.11 of the
Registrant's Registration Statement on Form SB-2, No.
333-88314)
10.9 Form of warrant issued in March 2001 for guaranteeing debt
(Incorporated by reference to Exhibit 10.12 of the
Registrant's Registration Statement on Form SB-2, No.
333-88314)
10.10 Form of warrant issued in April 2002 for guaranteeing debt
(Incorporated by reference to Exhibit 10.13 of the
Registrant's Registration Statement on Form SB-2, No.
333-88314)
10.11 Articles of Organization of Hy-Bon Rotary Compression, L.L.C.,
dated April 17, 2000 (Incorporated by reference to Exhibit
10.18 of the Registrant's Registration Statement on Form SB-2,
No. 333-88314)
10.12 Regulations of Hy-Bon Rotary Compression, L.L.C. (Incorporated
by reference to Exhibit 10.19 of the Registrant's Registration
Statement on Form SB-2, No. 333-88314)
10.13 First Amended and Restated Loan Agreement between the
Registrant and Western National Bank (Incorporated by
reference to Exhibit 10.1 of the Registrant's Current Report
on Form 8-K, dated March 27, 2003 and filed with the
Securities and Exchange Commission on April 14, 2003)
19
Exhibit No. Description
----------- -----------
10.14 Form of Termination of Employment Agreement Letter relating to
the Employment Agreement of Alan Kurus (Incorporated by
reference to Exhibit 10.25 of the Registrant's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 2002)
10.15 Form of Termination of Employment Agreement Letter relating to
the Employment Agreement of Wayne Vinson (Incorporated by
reference to Exhibit 10.26 of the Registrant's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 2002)
10.16 Form of Termination of Employment Agreement Letter relating to
the Employment Agreement of Earl Wait (Incorporated by
reference to Exhibit 10.27 of the Registrant's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 2002)
10.17 Triple Net Lease Agreement, dated June 1, 2003, between NGE
Leasing, Inc. and Steven J. & Katherina L. Winer (Incorporated
by reference to Exhibit 10.17 of the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended December 31,
2003)
10.18 Lease Agreement, dated June 19, 2003, between NGE Leasing,
Inc. and Wise Commercial Properties (Incorporated by reference
to Exhibit 10.18 of the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 2003)
10.19 Lease Agreement, dated March 1, 2004, between the Registrant
and the City of Midland, Texas (Incorporated by reference to
Exhibit 10.19 of the Registrant's Form 10-QSB for the fiscal
quarter ended June 30, 2004)
10.20 Second Amended and Restated Loan Agreement, dated November 3,
2003, between the Registrant and Western National Bank
(Incorporated by reference to Exhibit 10.20 of the
Registrant's Form 10-QSB for the fiscal quarter ended June 30,
2004)
10.21 Securities Purchase Agreement, dated July 20, 2004, between
the Registrant and CBarney Investments, Ltd. (Incorporated by
reference to Exhibit 4.1 of the Registrant's Current Report on
Form 8-K dated July 20, 2004 and filed with the Securities and
Exchange Commission on July 27, 2004)
20
Exhibit No. Description
----------- -----------
10.22 Stock Purchase Agreement, dated October 18, 2004, by and among
the Registrant, Screw Compression Systems, Inc., Paul D.
Hensley, Jim Hazlett and Tony Vohjesus (Incorporated by
reference to Exhibit 4.1 of the Registrant's Current Report on
Form 8-K dated October 18, 2004 and filed with the Securities
and Exchange Commission on October 21, 2004)
*31.1 Certification of Chief Executive Officer required by Section
302 of the Sarbanes-Oxley Act of 2002
*31.2 Certification of Chief Financial Officer required by Section
302 of the Sarbanes-Oxley Act of 2002
*32.1 Certification required by Section 906 of the Sarbanes-Oxley
Act of 2002
*32.2 Certification required by Section 906 of the Sarbanes-Oxley
Act of 2002
--------------------------
* Filed herewith.
21