e10qsb
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2005
OR
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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)
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Colorado
(State or other jurisdiction of
incorporation or organization)
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75-2811855
(I.R.S. Employer
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
(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 þ No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
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.
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Outstanding at |
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| Class |
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November 02, 2005 |
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Common Stock, $.01 par value |
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9,005,783 |
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Transitional Small Business Disclosure Format (Check one): Yes o No þ
NATURAL GAS SERVICES GROUP, INC.
\
Natural Gas Services Group, Inc.
Condensed Consolidated Balance Sheet
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| (in thousands of dollars) |
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September 30, 2005 |
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December 31, 2004 |
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(unaudited) |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
5,729 |
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|
$ |
685 |
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Accounts receivable — trade, net of allowance |
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6,894 |
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|
1,999 |
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Inventory |
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14,369 |
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|
4,470 |
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Prepaid expenses |
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|
238 |
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|
141 |
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|
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Total current assets |
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27,230 |
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7,295 |
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Lease equipment, net of accumulated depreciation |
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37,357 |
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27,734 |
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Other property, plant and equipment, net of depreciation |
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6,691 |
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3,134 |
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Goodwill, net of accumulated amortization |
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8,154 |
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2,590 |
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Intangibles, net of accumulated amortization |
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4,059 |
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|
86 |
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Restricted cash |
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2,000 |
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|
2,000 |
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Other assets |
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92 |
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416 |
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Total Assets |
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$ |
85,583 |
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$ |
43,255 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current Liabilities: |
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Current portion of long term debt |
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$ |
4,103 |
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3,728 |
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Bank line of credit |
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300 |
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550 |
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Accounts payable and accrued liabilities |
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8,780 |
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|
2,355 |
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Unearned Income |
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235 |
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22 |
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|
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Total current liabilities |
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13,418 |
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6,655 |
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Long term debt, less current portion |
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21,610 |
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9,290 |
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Subordinated notes, less current portion |
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2,000 |
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1,449 |
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Deferred income tax payable |
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4,658 |
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2,958 |
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Total liabilities |
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41,686 |
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20,352 |
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Common stock |
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90 |
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61 |
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Paid in capital |
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34,260 |
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16,355 |
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Retained earnings |
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9,547 |
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6,487 |
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Shareholders’ Equity |
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43,897 |
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22,903 |
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Total Liabilities and Shareholders’ Equity |
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$ |
85,583 |
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$ |
43,255 |
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See accompanying notes to these condensed consolidated financial statements.
1
Natural Gas Services Group, Inc.
Condensed Consolidated Income Statements
(unaudited)
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Three months ended |
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Nine months ended |
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| (in thousands of dollars, except earnings per share) |
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September 30, |
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September 30, |
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2005 |
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|
2004 |
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2005 |
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2004 |
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Revenue: |
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Sales |
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$ |
7,479 |
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$ |
703 |
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|
$ |
22,066 |
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$ |
2,445 |
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Service and maintenance income |
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|
610 |
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|
436 |
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1,770 |
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|
1,370 |
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Rental income |
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4,371 |
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2,731 |
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11,696 |
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7,405 |
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Total revenue |
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12,460 |
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3,870 |
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35,532 |
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11,220 |
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Operating costs and expenses: |
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Cost of sales |
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5,778 |
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|
451 |
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16,977 |
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|
1,699 |
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Cost of service and maintenance |
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341 |
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|
338 |
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1,145 |
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|
1,030 |
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Cost of rentals |
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1,782 |
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|
844 |
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|
|
4,539 |
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|
|
2,174 |
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Selling expense |
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|
269 |
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|
227 |
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|
750 |
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|
|
630 |
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General and administrative expense |
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|
1,007 |
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|
425 |
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|
|
2,850 |
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|
|
1,368 |
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Depreciation and amortization |
|
|
1,076 |
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|
|
642 |
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|
|
3,026 |
|
|
|
1,751 |
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|
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|
|
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Total operating costs and
expenses |
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10,253 |
|
|
|
2,927 |
|
|
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29,287 |
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|
|
8,652 |
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|
|
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|
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|
|
|
|
|
|
|
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|
|
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|
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|
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Operating Income |
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|
2,207 |
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|
|
943 |
|
|
|
6,245 |
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|
|
2,568 |
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|
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Other Income (Expense) |
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Interest expense |
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|
(508 |
) |
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(206 |
) |
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(1,439 |
) |
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(580 |
) |
Other |
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33 |
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2 |
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|
51 |
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1,496 |
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|
|
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|
|
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Total other income (expense) |
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(475 |
) |
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|
(204 |
) |
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(1,388 |
) |
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|
916 |
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|
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|
|
|
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|
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Income before income taxes |
|
|
1,732 |
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|
|
739 |
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|
|
4,857 |
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|
|
3,484 |
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Provision for income tax |
|
|
641 |
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|
|
288 |
|
|
|
1,797 |
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|
774 |
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|
|
|
|
|
|
|
|
|
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Net Income |
|
|
1,091 |
|
|
|
451 |
|
|
|
3,060 |
|
|
|
2,710 |
|
Preferred dividends |
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|
— |
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|
|
— |
|
|
|
— |
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|
|
53 |
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|
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Income available to common
shareholders |
|
$ |
1,091 |
|
|
$ |
451 |
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|
$ |
3,060 |
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|
$ |
2,657 |
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Earnings per share: |
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Basic |
|
$ |
0.14 |
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|
$ |
0.08 |
|
|
$ |
0.43 |
|
|
$ |
0.49 |
|
Diluted |
|
$ |
0.12 |
|
|
$ |
0.07 |
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|
$ |
0.37 |
|
|
$ |
0.43 |
|
Weighted average Shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
7,606 |
|
|
|
5,626 |
|
|
|
7,078 |
|
|
|
5,428 |
|
Diluted |
|
|
8,771 |
|
|
|
6,492 |
|
|
|
8,213 |
|
|
|
6,217 |
|
See accompanying notes to these condensed consolidated financial statements.
2
Natural Gas Services Group, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands of dollars)
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Nine Months |
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Nine Months |
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Ended |
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Ended |
|
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September 30, |
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September 30, |
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2005 |
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|
2004 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
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|
Net income |
|
$ |
3,060 |
|
|
$ |
2,710 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
3,026 |
|
|
|
1,751 |
|
Deferred taxes |
|
|
1,700 |
|
|
|
770 |
|
Amortization of debt issuance costs |
|
|
49 |
|
|
|
49 |
|
Gain on disposal of assets |
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|
(47 |
) |
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|
7 |
|
Changes in current assets and liabilities: |
|
|
|
|
|
|
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|
Trade and other receivables |
|
|
(2,057 |
) |
|
|
(371 |
) |
Inventory and work in progress |
|
|
(5,345 |
) |
|
|
(625 |
) |
Prepaid expenses and other |
|
|
(32 |
) |
|
|
(72 |
) |
Accounts payable and accrued liabilities |
|
|
4,180 |
|
|
|
575 |
|
Deferred income |
|
|
(723 |
) |
|
|
(89 |
) |
Other assets |
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|
323 |
|
|
|
(16 |
) |
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|
|
|
|
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NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
|
4,134 |
|
|
|
4,689 |
|
|
|
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|
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CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(13,107 |
) |
|
|
(8,937 |
) |
Assets acquired, net of cash |
|
|
(7,584 |
) |
|
|
— |
|
Proceeds from sale of property and equipment |
|
|
239 |
|
|
|
50 |
|
|
|
|
|
|
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NET CASH USED IN INVESTING ACTIVITIES |
|
|
(20,452 |
) |
|
|
(8,887 |
) |
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|
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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|
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|
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|
Net proceeds from bank loans |
|
|
20,517 |
|
|
|
5,031 |
|
Net proceeds from line of credit |
|
|
300 |
|
|
|
521 |
|
Repayments of long term debt |
|
|
(12,268 |
) |
|
|
(1,821 |
) |
Repayments of line of credit |
|
|
— |
|
|
|
(300 |
) |
Dividends paid on preferred stock |
|
|
— |
|
|
|
(53 |
) |
Proceeds from exercise of warrants and stock options |
|
|
12,813 |
|
|
|
5,052 |
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES |
|
|
21,362 |
|
|
|
8,430 |
|
|
|
|
|
|
|
|
NET INCREASE IN CASH |
|
|
5,044 |
|
|
|
4,232 |
|
CASH AT BEGINNING OF PERIOD |
|
|
685 |
|
|
|
176 |
|
|
|
|
|
|
|
|
CASH AT END OF PERIOD |
|
$ |
5,729 |
|
|
$ |
4,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
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|
Interest paid |
|
$ |
1,396 |
|
|
$ |
580 |
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Assets acquired for issuance of subordinated debt |
|
$ |
3,000 |
|
|
|
— |
|
Assets acquired for issuance of common stock |
|
$ |
5,120 |
|
|
|
— |
|
See accompanying notes to these condensed consolidated financial statements.
3
NATURAL GAS SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements present the
condensed 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, 2005 and September 30, 2004 and the
results of our operations for the three and nine month periods ended September 30, 2005 and
September 30, 2004 not misleading. As permitted by the rules and regulations of the Securities and
Exchange Commission (SEC) the accompanying condensed consolidated financial statements do not
include all disclosures normally required by accounting principles generally accepted in the United
States of America. These condensed consolidated 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, 2004 on file with the SEC. In our opinion, the condensed 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 three and nine month periods ended September 30, 2005 are
not necessarily indicative of the results of operations to be expected for the full fiscal year
ending December 31, 2005.
Unless otherwise noted, amounts reported in tables are in thousands, except earnings per share
data.
(2) Recently Issued Accounting Pronouncements
On December 16, 2004, the FASB published FASB Statement No. 123 (revised 2004),
Share-Based Payment. Statement 123(R) requiring that the compensation cost relating to share-based
payment transactions be recognized in financial statements. That cost will be measured based on the
fair value of the equity or liability instruments issued. We will be required to apply Statement
123(R) as of January 1, 2006. Statement 123(R) replaces FASB Statement No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. Statement 123, as originally issued in 1995, established as preferable a
fair-value-based method of accounting for share-based payment transactions with employees. However,
that Statement permitted entities the option of continuing to apply the guidance in Opinion 25, as
long as the footnotes to financial statements disclosed what net income would have been had the
preferable fair-value-based method been used. We are currently assessing the impact of Statement
123(R).
In November 2004, the FASB issued SFAS No 151, Inventory Costs — an Amendment of ARB
No. 43, Chapter 4 (“SFAS 151”). This standard provides clarification that abnormal amounts of idle
facility expense, freight, handling costs, and spoilage should be recognized as current-period
charges. Additionally, this standard requires that allocation of fixed production overhead to the
costs of conversion be based on the normal capacity of the production facilities. The provisions
of this standard are effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. We do not expect the adoption of the new standard to have a material effect on our
condensed consolidated results of operations, cash flows or financial position.
4
NATURAL GAS SERVICES GROUP, INC.
(3) 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. However 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:
| |
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|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Pro forma impact of fair value method |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income applicable to common shares, as reported |
|
$ |
1,091 |
|
|
$ |
451 |
|
|
$ |
3,060 |
|
|
$ |
2,657 |
|
Compensation expenses regained under Opinion 25 |
|
|
21 |
|
|
|
|
|
|
|
21 |
|
|
|
|
|
Pro-forma stock-based compensation costs under the
fair value method, net of related tax |
|
|
(47 |
) |
|
|
(10 |
) |
|
|
(106 |
) |
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro-forma income applicable to common shares under
the fair-value method |
|
$ |
1,065 |
|
|
$ |
441 |
|
|
$ |
2,975 |
|
|
$ |
2,637 |
|
Earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share reported |
|
$ |
0.14 |
|
|
$ |
0.08 |
|
|
$ |
0.43 |
|
|
$ |
0.49 |
|
Diluted earnings per share reported |
|
$ |
0.12 |
|
|
$ |
0.07 |
|
|
$ |
0.37 |
|
|
$ |
0.43 |
|
Pro-forma basic earnings per share under the fair
value method |
|
$ |
0.14 |
|
|
$ |
0.08 |
|
|
$ |
0.42 |
|
|
$ |
0.49 |
|
Pro-forma diluted earnings per share under the
fair value method |
|
$ |
0.12 |
|
|
$ |
0.07 |
|
|
$ |
0.36 |
|
|
$ |
0.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average Black-Scholes fair value
assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free rate |
|
|
6.75%-7.25 |
% |
|
|
4.0%-5.2 |
% |
|
|
6.75%-7.25 |
% |
|
|
4.0%-5.2 |
% |
Expected life |
|
5-10 yrs |
|
5-10 yrs |
|
5-10 yrs |
|
5-10 yrs |
Expected volatility |
|
|
39.0 |
% |
|
|
50.0 |
% |
|
|
39.0 |
% |
|
|
50.0 |
% |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
(4) Acquisition
On October 18, 2004, we entered into a Stock Purchase Agreement with Screw Compression
Systems, Inc., or “SCS”, and the stockholders of SCS. Under this agreement, we agreed to purchase
all of the outstanding shares of capital stock of SCS for the purpose of expanding our product
line, production capacity and customer base.
SCS is a manufacturer of natural gas compressors, with its principal offices located in Tulsa,
Oklahoma.
5
NATURAL GAS SERVICES GROUP, INC.
The stockholders of SCS received, in proportionate shares (based on their stock ownership of
SCS), a total of $16.1 million.
| |
• |
|
$8 million in cash; |
| |
| |
• |
|
promissory notes issued by Natural Gas Services Group, Inc. in the aggregate
principal amount of $3 million bearing interest at the rate of 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 |
| |
| |
• |
|
609,576 shares of Natural Gas Services Group, Inc. common stock valued at $5.1
million. All of the shares are “restricted” securities within the meaning of Rule 144
under the Securities Act of 1933, as amended, and bear a legend to that effect. |
This transaction was completed January 3, 2005 and we began reporting condensed consolidated
financial results for the first quarter 2005 included in this report. The total purchase price was
$16.1 million and we recorded goodwill of approximately $5 million and intangible assets of
approximately $4.2.
The following table represents the combined results of operations on a pro-forma basis with
Natural Gas Services Group, Inc. and Screw Compression Systems, Inc. as if the acquisition had
occurred on January 1, 2004.
(Unaudited)
Pro Forma Results
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2004 |
|
|
2004 |
|
| |
|
|
Revenue |
|
$ |
9,202 |
|
|
$ |
27,217 |
|
Net income available to common shareholders |
|
$ |
1,123 |
|
|
$ |
4,672 |
|
Net Income per share, basic |
|
$ |
0.18 |
|
|
$ |
0.77 |
|
Net Income per share, diluted |
|
$ |
0.16 |
|
|
$ |
0.68 |
|
(5) Long Term Debt
On January 3, 2005, we amended our existing loan agreement with Western National Bank to
provide additional borrowings for the cash portion of the SCS acquisition of $8 million for 84
months and interest of 1% over the prime rate. This funding was provided by entering into a Third
Amended and Restated Loan Agreement made and entered into by and among Natural Gas Services Group,
Inc., Screw Compression Systems, Inc., and Western National Bank.
On March 14, 2005, we amended our existing loan agreement with Western National Bank to
provide additional borrowings of $10 million for 60 months and interest of 1% over the prime rate.
This funding will be used to invest in the growth of our rental fleet for the current year. This
funding was provided by entering into a Fourth Amended and Restated Loan Agreement made and entered
into by and among Natural Gas Services Group, Inc., Screw Compression Systems, Inc., and Western
National Bank.
6
NATURAL GAS SERVICES GROUP, INC.
On May 1, 2005, we modified our existing loan agreement with Western National Bank to reduce
the current interest rate from 1% over prime to 1/2% over prime and change the current ratio
calculation from 1.5 to 1.4. This modification also allowed us to add the $2 million restricted
cash item on our balance sheet to our current assets for calculating the bank covenants.
On August 26, 2005, we prepaid all of the outstanding 10% subordinate notes that were due
December 31, 2006. The principal amount of the payoff was $1.5 million. Each of these
notes included a five-year warrant to purchase shares of the Company’s common stock at $3.25 per
share. During the three months ending September 30, 2005, we collected receipts for the exercise of
493,704 of the debt warrants for a total of $1.6 million. As of September 30, 2005, 80,000 of these
warrants are still outstanding.
Between September 20, 2005 and September 30, 2005, we prepaid $4.5 million of our notes with
Western National bank, GMAC and Ford Motor Credit with the proceeds from the exercise of our
publicly held common stock purchase warrants that we collected during the three month period ended
September 30, 2005.
On October 20, 2005, we modified our existing loan agreement with Western National Bank which
allowed us to free up the $2 million restricted cash item on the balance sheet, a portion of which
cash was used to retire debt on the SCS facility.
Our Revolving Line of Credit Facility matures on January 1, 2006; however, we are currently
negotiating to renew and extend this facility for an additional year and to increase the principal
amount of the facility from $2.0 million to $10.0 million.
Our obligations under the Loan Agreement continue to be secured by substantially all of our
assets, including our equipment, trade accounts receivable and other personal property, the stock
we own in SCS, and by the real estate and related plant facilities owned by SCS.
(6) Common Stock Purchase Warrants and Options
On July 28, 2005, Natural Gas Services Group, Inc. announced that it would redeem its
outstanding common stock purchase warrants that were issued in connection with its initial public
offering in October 2002 (the “IPO Warrants”). Holders of the IPO Warrants were required to
exercise the IPO Warrants by 5:00 p.m., Mountain Daylight Savings Time on Tuesday, September 6,
2005 (the “Redemption Date”). The IPO Warrants had an exercise price of $6.25 per share and were
subject to redemption at the redemption price of $0.25 per IPO Warrant. IPO Warrants not properly
exercised by the Redemption Date ceased to be exercisable and were redeemed for $0.25 per IPO
Warrant, without interest. A total of 1.5 million IPO Warrants were initially issued in
conjunction with our initial public offering. Before we announced the redemption of the IPO
Warrants on July 28, 2005, a total of 227,800 IPO Warrants had been exercised. Between July 28,
2005, the date we announced the redemption of the IPO Warrants, and the Redemption Date, a total of
1.3 million IPO Warrants were exercised and 1.3 million shares of common stock were issued upon
exercise of the IPO Warrants. We have received a total of $9.4 million in proceeds from all IPO
Warrant exercises, of which $8 million was received after announcing our intention to redeem the
remaining outstanding IPO Warrants. A total of 2,417 IPO Warrants were not exercised by the
Redemption Date and were redeemed for the aggregate redemption amount of $604.25.
7
NATURAL GAS SERVICES GROUP, INC.
In 2001, the Company completed an offering of units consisting of subordinated debt and
warrants. Each unit consisted of a $25,000 10% subordinated note due December 31, 2006 and a
five-year warrant to purchase 10,000 shares of the Company’s common stock at $3.25 per share. On
August 26, 2005, we prepaid all of the outstanding 10% subordinate notes that were due December 31,
2006. During the three months ending September 30, 2005 we collected receipts for the exercise of
493,704 of these warrants for a total of $1.6 million. As of September 30, 2005, 80,000 of these
warrants are still outstanding.
On August 26, 2005, we entered into a non-statutory Stock Option Agreement with Mr. Steve C.
Taylor, our CEO and President. The Stock Option Agreement grants to Mr. Taylor a ten-year option
to purchase 45,000 shares of our common stock at an exercise price equal to $9.22 (the fair market
value of our common stock on January 13, 2005, the date we initially hired Mr. Taylor), with
15,000 shares vesting on each of January 13, 2006, 2007, and 2008. The options expire ten years
from the date of grant. Compensation expense of $21,000 was recognized related to these options in
the three and nine month periods ended September 30, 2005.
(7) 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 |
|
| |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Basic earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,091 |
|
|
$ |
451 |
|
|
$ |
3,060 |
|
|
$ |
2,710 |
|
Less: dividends on preferred shares |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(53 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders |
|
$ |
1,091 |
|
|
$ |
451 |
|
|
$ |
3,060 |
|
|
$ |
2,657 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
7,606 |
|
|
|
5,626 |
|
|
|
7,077 |
|
|
|
5,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.14 |
|
|
$ |
0.08 |
|
|
$ |
0.43 |
|
|
$ |
0.49 |
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,091 |
|
|
$ |
451 |
|
|
$ |
3,060 |
|
|
$ |
2,710 |
|
Less: dividends on preferred shares (1) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(53 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders |
|
$ |
1,091 |
|
|
$ |
451 |
|
|
$ |
3,060 |
|
|
$ |
2,657 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
7,606 |
|
|
|
5,626 |
|
|
|
7,077 |
|
|
|
5,428 |
|
Dilutive effect of common stock options and warrants |
|
|
1,165 |
|
|
|
866 |
|
|
|
1,136 |
|
|
|
789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares |
|
|
8,771 |
|
|
|
6,492 |
|
|
|
8,213 |
|
|
|
6,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.12 |
|
|
$ |
0.07 |
|
|
$ |
0.37 |
|
|
$ |
0.43 |
|
|
|
|
| (1) |
|
Preferred shares were anti-dilutive for the three months ended September 30, 2004. |
8
NATURAL GAS SERVICES GROUP, INC.
(8) Segment Information
FAS No. 131, Disclosures About Segments of an Enterprise and Related Information,
establishes standards for public companies relating to the reporting of financial and descriptive
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.
The Company identifies its segments based upon major revenue sources as follows:
For the Three months ended September 30, 2005
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Service & |
|
|
|
|
|
|
| |
|
Sales |
|
Maintenance |
|
Rental |
|
Corporate |
|
Total |
| |
|
|
Revenue |
|
$ |
7,479 |
|
|
$ |
610 |
|
|
$ |
4,371 |
|
|
|
|
|
|
$ |
12,460 |
|
Operating costs
and expenses |
|
|
5,778 |
|
|
|
341 |
|
|
|
1,782 |
|
|
|
2,352 |
|
|
|
10,253 |
|
| |
|
|
Operating income |
|
$ |
1,701 |
|
|
$ |
269 |
|
|
$ |
2,589 |
|
|
$ |
(2,352 |
) |
|
$ |
2,207 |
|
| |
|
|
*Segment Assets |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
85,583 |
|
|
$ |
85,583 |
|
| |
|
|
For the Three months ended September 30, 2004
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Service & |
|
|
|
|
|
|
| |
|
Sales |
|
Maintenance |
|
Rental |
|
Corporate |
|
Total |
| |
|
|
Revenue |
|
$ |
703 |
|
|
$ |
436 |
|
|
$ |
2,731 |
|
|
|
|
|
|
$ |
3,870 |
|
Operating costs
and expenses |
|
|
451 |
|
|
|
338 |
|
|
|
844 |
|
|
|
1,294 |
|
|
|
2,927 |
|
| |
|
|
Operating income |
|
$ |
252 |
|
|
$ |
98 |
|
|
$ |
1,887 |
|
|
$ |
(1,294 |
) |
|
$ |
943 |
|
| |
|
|
*Segment Assets |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
40,691 |
|
|
$ |
40,691 |
|
| |
|
|
For the Nine months ended September 30, 2005
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Service & |
|
|
|
|
|
|
| |
|
Sales |
|
Maintenance |
|
Rental |
|
Corporate |
|
Total |
| |
|
|
Revenue |
|
$ |
22,066 |
|
|
$ |
1,770 |
|
|
$ |
11,696 |
|
|
|
|
|
|
$ |
35,532 |
|
Operating costs
and expenses |
|
|
16,977 |
|
|
|
1,145 |
|
|
|
4,539 |
|
|
|
6,626 |
|
|
|
29,287 |
|
| |
|
|
Operating income |
|
$ |
5,089 |
|
|
$ |
625 |
|
|
$ |
7,157 |
|
|
$ |
(6,626 |
) |
|
$ |
6,245 |
|
| |
|
|
*Segment Assets |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
85,583 |
|
|
$ |
85,583 |
|
| |
|
|
For the Nine months ended September 30, 2004
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Service & |
|
|
|
|
|
|
| |
|
Sales |
|
Maintenance |
|
Rental |
|
Corporate |
|
Total |
| |
|
|
Revenue |
|
$ |
2,445 |
|
|
$ |
1,370 |
|
|
$ |
7,405 |
|
|
|
|
|
|
$ |
11,220 |
|
Operating costs
and expenses |
|
|
1,699 |
|
|
|
1,030 |
|
|
|
2,174 |
|
|
|
3,749 |
|
|
|
8,652 |
|
| |
|
|
Operating income |
|
$ |
746 |
|
|
$ |
340 |
|
|
$ |
5,231 |
|
|
$ |
(3,749 |
) |
|
$ |
2,568 |
|
| |
|
|
*Segment Assets |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
40,691 |
|
|
$ |
40,691 |
|
| |
|
|
|
|
|
| * |
|
Management does not track assets by segment |
9
NATURAL GAS SERVICES GROUP, INC.
(9) Subsequent Event
Our five-year rental and maintenance agreement with Dominion Exploration & Production
(“Dominion Exploration”) expires on December 31, 2005. In August 2005, we were advised by Dominion
Exploration that it would seek competing proposals from us as well as other third parties to
continue the rental and maintenance services required for their Northern Michigan operations. We
submitted a bid to rent screw compressors to Dominion Exploration and to provide maintenance and
service on certain screw compressors owned by Dominion Exploration. We also submitted a proposal
to continue service and maintenance of reciprocating compressors owned by Dominion Exploration. In
October 2005, we were advised by Dominion Exploration that we will retain the screw compressor
rental, maintenance and service business, but that a third party was successful in bidding for the
maintenance and service of Dominion Exploration’s larger reciprocating compressors. We estimate
that the screw compressor rental, maintenance and service business we have retained from Dominion
Exploration represented approximately 78% and 86% of our revenues from Dominion Exploration in the
year ended December 31, 2004 and the nine months ended September 30, 2005, respectively.
(10) Legal Proceedings
We are currently a defendant in a lawsuit, Karifico v. Natural Gas Services Group, Inc.,
filed on September 21, 2005 in District Court, Jefferson County, Colorado, Case No. 05 CV 3161.
The lawsuit is in the nature of a complaint for breach of contract and for money for services
rendered. According to the complaint filed by Karifico, under terms of an agreement dated November
3, 2003 between Karifco and us, Karifico was retained by us to “find a company for sale that
Defendant could purchase if it fit into its financial and operational plans.” Karifico claims that
it is entitled to a fee in the amount of $300,000 as the result of our acquisition of Screw
Compression Systems, Inc. We have paid $150,000 to Karifico and Karifico seeks the additional sum
of $150,000, together with interest and costs, and for alleged further damages in an unspecified
amount. We believe that we have valid defenses to Karifico’s claims to our financial position,
results of operations or cash flows. Accordingly, we have not established a reserve for loss in
connection with this proceeding.
From time to time, we are a party to various other legal proceedings in the ordinary course of
our business. While management is unable to predict the ultimate outcome of these actions, it
believes that any ultimate liability arising from these actions will not have a material adverse
effect on our consolidated financial position, results of operations or cash flow. Except as
discussed herein, we are not currently a party to any other legal proceedings and we are not aware
of any other threatened litigation.
10
NATURAL GAS SERVICES GROUP, INC.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis of our financial condition and results of operations are
based on, and should be read in conjunction with, our consolidated financial statements and the
related notes included elsewhere in this report and in our December 31, 2004 form 10KSB on file
with the SEC.
Overview
We fabricate, manufacture, rent and sell natural gas compressors and related equipment. Our
primary focus is on the rental of natural gas compressors. Our rental contracts generally provide
for initial terms of six to 24 months. After the initial term of our rental contracts, most of our
customers have continued to rent our compressors on a month-to-month basis. Rental amounts are
paid monthly in advance and include maintenance of the rented compressors. As of September 30,
2005, we had 756 natural gas compressors totaling 83,702 horsepower rented to 76 third parties,
compared to 495 natural gas compressors totaling 55,120 horsepower rented to 47 third parties at
September 30, 2004. Of the 756 natural gas compressors rented as of September 30, 2005, 96 were
rented to Dominion Exploration and its affiliates.
We also fabricate natural gas compressors for sale to our customers, designing compressors to
meet unique specifications dictated by well pressures, production characteristics and particular
applications for which compression is sought. Fabrication of compressors involves the purchase by
us of engines, compressors, coolers and other components, and then assembling these components on
skids for delivery to customer locations. These major components of our compressors are acquired
through periodic purchase orders placed with third-party suppliers on an “as needed” basis, which
typically requires a three to four month lead time with delivery dates scheduled to coincide with
our estimated production schedules. Although we do not have formal continuing supply contracts
with any major supplier, we believe we have adequate alternative sources available. In the past,
we have not experienced any sudden and dramatic increases in the prices of the major components for
our compressors. However, the occurrence of such an event could have a material adverse effect on
the results of our operations and financial condition, particularly if we were unable to increase
our rental rates and sales prices proportionate to any such component price increases.
We also manufacture a proprietary line of compressor frames, cylinders and parts, known as our
CiP (Cylinder-in-Plane) product line. We use finished CiP component products in the fabrication of
compressor units for sale or rental by us or sell the finished component products to other
compressor fabricators. We also design, fabricate, sell, install and service flare stacks and
related ignition and control devices for onshore and offshore incineration of gas compounds such as
hydrogen sulfide, carbon dioxide, natural gas and liquefied petroleum gases. To provide customer
support for our compressor and flare sales businesses, we stock varying levels of replacement parts
at our Midland, Texas facility and at field service locations. We also provide an exchange and
rebuild program for screw compressors and maintain an inventory of new and used compressors to
facilitate this business.
We provide service and maintenance to our customers under written maintenance contracts or on
an ad hoc basis in the absence of a service contract. As of September 30, 2005, we had written
maintenance agreements with third parties relating to 51 compressors, the majority of which were
owned by Dominion Exploration. Maintenance agreements typically have terms of six months to one
year and require payment of a monthly fee.
11
NATURAL GAS SERVICES GROUP, INC.
The following table sets forth our revenues from each of our three business segments for the
periods presented:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Compressor sales |
|
$ |
7,479 |
|
|
$ |
703 |
|
|
$ |
22,066 |
|
|
$ |
2,445 |
|
Compressor service and maintenance |
|
|
610 |
|
|
|
436 |
|
|
|
1,770 |
|
|
|
1,370 |
|
Compressor rentals |
|
|
4,371 |
|
|
|
2,731 |
|
|
|
11,696 |
|
|
|
7,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
12,460 |
|
|
$ |
3,870 |
|
|
$ |
35,532 |
|
|
$ |
11,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 3, 2005, we completed the acquisition of Screw Compression Systems, Inc. (SCS)
for consideration consisting of $8.0 million in cash, subordinated promissory notes payable by us
to the former shareholders of SCS in the aggregate principal amount of $3.0 million, and 609,576
shares of our common stock. As a result of this acquisition, our results of operations for periods
before and after the completion of the acquisition may not be comparable.
Historically, the majority of our revenues and income from operations have come from our
compressor rental business. The acquisition of SCS, which is engaged primarily in the business of
custom fabrication of compressors for sale to third parties, significantly altered the mix of our
revenues, with compressor sales now contributing the largest percentage of our revenues. Margins
for our rental business historically have averaged approximately 65%, while margins for the
compressor sales business have typically averaged approximately 20%. As a result of the SCS
acquisition, therefore, our overall margins have declined significantly in the first nine months of
2005 compared to prior periods. Our strategy for growth is focused on our compressor rental
business, and we intend to use the additional fabrication capacity now available through SCS to
expand our rental fleet while continuing SCS’s core custom fabrication business. As our rental
business grows and contributes a larger percentage of our total revenues, we expect our overall
margins to improve from those experienced in the first nine months of 2005.
The oil and gas equipment rental and services industry is cyclical in nature. The most
critical factor in assessing the outlook for the industry is the worldwide supply and demand for
natural gas and the corresponding changes in commodity prices. As demand and prices increase, oil
and gas producers increase their capital expenditures for drilling, development and production
activities. Generally, the increased capital expenditures ultimately result in greater revenues and
profits for services and equipment companies.
In general, we expect our overall business activity and revenues to track the level of
activity in the oil and gas industry, with changes in domestic natural gas production and
consumption levels and prices more significantly affecting our business than changes in crude oil
and condensate production and consumption levels and prices. We also believe that demand for
compression services and products is driven by declining reservoir pressure in maturing natural gas
producing fields and, more recently, by increased focus by producers on non-conventional natural
gas production, such as coalbed methane, gas shales and tight gas, which typically requires more
compression than production from conventional natural gas reservoirs.
Demand for our products and services have been strong throughout 2004 and 2005. We believe
demand will remain strong throughout the remainder of 2005 and into 2006 due to high oil and gas
prices and increased demand for natural gas. Because of these market fundamentals for natural gas,
we believe the long-term trend of activity in our markets is favorable. However, these factors
could be more than offset by other developments affecting the worldwide supply and demand for
natural gas. Additionally, activity created by recent increases in the price of natural gas may
make it difficult to meet the demands of our markets.
12
NATURAL GAS SERVICES GROUP, INC.
Our five-year rental and maintenance agreement with Dominion Exploration expires on December
31, 2005. Dominion Exploration accounted for approximately 21% and 8% of our consolidated revenues
in the year ended December 31, 2004 and the nine months ended September 30, 2005, respectively. In
August 2005, we were advised by Dominion Exploration that it would seek competing proposals from us
as well as other third parties to continue the rental and maintenance services required for its
northern Michigan operations. We submitted a bid to rent screw compressors to Dominion Exploration
and to provide maintenance and service on certain screw compressors owned by Dominion Exploration.
We also submitted a proposal to continue service and maintenance of reciprocating compressors owned
by Dominion Exploration. In October 2005, we were advised by Dominion Exploration that we will
retain the screw compressor rental, maintenance and service business, but that a third party was
successful in bidding for the maintenance and service of Dominion Exploration reciprocating
compressors. We estimate that the screw compressor rental, maintenance and service business we
have retained from Dominion Exploration represented approximately 78% and 86% of our revenues from
Dominion Exploration in the year ended December 31, 2004 and the nine months ended September 30,
2005, respectively.
For fiscal year 2006, our forecasted capital expenditures will be approximately $20 to $25
million, primarily for additions to our compressor rental fleet. The funds available to us under
our bank credit facility and cash flows from operations will need to be supplemented with funds
from other sources in order to satisfy our capital and liquidity requirements through 2006. We may
further require additional capital to fund any unanticipated expenditures, including any
acquisitions of other businesses. There can be no assurance that additional capital will be
available to us when we need it or on acceptable terms.
Results of operations
Three months ended September 30, 2005, Compared to the Three months ended September 30, 2004.
The table below shows our revenues, percentage of total revenues, gross profit and
gross profit margin of each of our segments for the three months ended September 30, 2005 and
September 30, 2004. The gross profit margin is the ratio, expressed as a percentage, of gross
profit to total revenue.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Revenue |
|
|
Gross Profit |
|
| |
|
Three Months Ended September 30, |
|
Three Months Ended September 30, |
| |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Sales Revenue |
|
$ |
7,479 |
|
|
|
60 |
% |
|
$ |
703 |
|
|
|
18 |
% |
|
$ |
1,701 |
|
|
|
23 |
% |
|
$ |
252 |
|
|
|
36 |
% |
Services and
Maintenance Revenue |
|
|
610 |
|
|
|
5 |
% |
|
|
436 |
|
|
|
11 |
% |
|
|
269 |
|
|
|
44 |
% |
|
$ |
98 |
|
|
|
22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental Revenue |
|
$ |
4,371 |
|
|
|
35 |
% |
|
$ |
2,731 |
|
|
|
71 |
% |
|
$ |
2,589 |
|
|
|
59 |
% |
|
$ |
1,887 |
|
|
|
69 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,460 |
|
|
|
|
|
|
$ |
3,870 |
|
|
|
|
|
|
$ |
4,559 |
|
|
|
37 |
% |
|
$ |
2,237 |
|
|
|
58 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue increased from approximately $3.9 million to $12.5 million, or 222%, for
the three months ended September 30, 2005, compared to the same period ended September 30, 2004.
This was mainly the result of increased rental revenue and the addition of compressor sales from
the acquisition of SCS.
13
NATURAL GAS SERVICES GROUP, INC.
Rental revenue increased from $2.7 million to $4.4 million, or 60%, for the three months ended
September 30, 2005, compared to the same period ended September 30, 2004. This increase was the
result of additional units added to our rental fleet and rented to third parties. The company
ended the period with 805 compressor packages in its rental fleet, up from 586 units at December
31, 2004, and 533 units at September 30, 2004.
Sales revenue increased from approximately $703 thousand to $7.5 million, or 964%, for the
three months ended September 30, 2005, compared to the same period ended September 30, 2004. Sales
from outside sources included: (1) compressor unit sales, (2) flare sales, (3) parts sales and (4)
compressor rebuilds. This increase was mainly the result of the sale of compressor units to outside
third parties by SCS in the three months ended September 30, 2005, compared to the same period
ended September 30, 2004. The outside sales of SCS were $6.6 million for three months ended
September 30, 2005.
Service and maintenance revenue increased from $436 thousand to $610 thousand, or 40%, for the
three months ended September 30, 2005, compared to the same period ended September 30, 2004. This
increase was mainly the result of the additional third party service work in the San Juan Basin.
The gross margin percentage decreased to 37% for the three months ended September 30, 2005,
from 58% for the same period ended September 30, 2004. This decrease resulted mainly from the
relative increase in compressor sales revenue as a percentage of the total revenue. Our rental
fleet carried a gross margin averaging 59%, and compressor sales margins average 23% for the three
months ended September 30, 2005, therefore the total margins decrease as the lower margin product
sales increase.
Cost of revenue for the three months ended September 30, 2005 increased as a percentage of
sales approximately 20% over the comparable period in the prior year. Our principal components of
costs of revenue are materials, labor, and repair parts. The increase in cost of revenue was
primarily attributable to change in product mix. Although we could be adversely affected by a
sudden significant increase in the price of raw materials and labor, we believe that current
competitive conditions related to our available labor pool and raw materials will result in
continued price stability in the near future. We also believe that any gradual increases in the
price of raw materials and labor will be reflected in periodic increases in prices to our
customers.
Selling, general and administrative expense increased from $652 thousand, to $1.3 million or
96% for the three months ended September 30, 2005, as compared to the same period ended September
30, 2004. This was mainly the result of assuming the operations of SCS. SCS accounted for $456
thousand of the total selling, general and administrative expenses for the three months ended
September 30, 2005.
Depreciation and amortization expense increased 68% from $642 thousand, to $1.1 million for
the three months ended September 30, 2005, compared to the same period ended September 30, 2004.
This increase was the result of 257 new gas compressor rental units being added to rental equipment
from September 30, 2004 to September 30, 2005, thus increasing the depreciable base.
Other revenue net of other expense increased approximately $31 thousand for the three months
ended September 30, 2005, compared to the same period ended September 30, 2004. This increase is
mainly the result of interest revenue from our money market accounts.
Interest expense increased 147% for the three months ended September 30, 2005, compared to the
same period ended September 30, 2004, mainly due to increased loan balances financing rental
equipment and debt related to the acquisition of SCS.
14
NATURAL GAS SERVICES GROUP, INC.
Provision for income tax increased to $641 thousand, or 123%, because taxable income
increased.
Nine Months Ended September 30, 2005 Compared to the Nine Months Ended September 30, 2004.
The table below shows our revenues, percentage of total revenues, gross profit and gross
profit margin of each of our segments for the nine months ended September 30, 2005 and September
30, 2004. The gross profit margin is the ratio, expressed as a percentage, of gross profit to
total revenue.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Revenue |
|
Gross Profit |
| |
|
Nine Months Ended September 30, |
|
Nine Months Ended September 30, |
| |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Sales Revenue |
|
$ |
22,066 |
|
|
|
62 |
% |
|
$ |
2,445 |
|
|
|
22 |
% |
|
$ |
5,089 |
|
|
|
23 |
% |
|
$ |
746 |
|
|
|
31 |
% |
Services and
Maintenance Revenue |
|
|
1,770 |
|
|
|
5 |
% |
|
|
1,370 |
|
|
|
12 |
% |
|
|
625 |
|
|
|
35 |
% |
|
|
340 |
|
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental Revenue |
|
$ |
11,696 |
|
|
|
33 |
% |
|
$ |
7,405 |
|
|
|
66 |
% |
|
$ |
7,157 |
|
|
|
61 |
% |
|
$ |
5,231 |
|
|
|
71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
35,532 |
|
|
|
|
|
|
$ |
11,220 |
|
|
|
|
|
|
$ |
12,871 |
|
|
|
36 |
% |
|
$ |
6,317 |
|
|
|
56 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue increased from approximately $11.2 million to $35.5 million, or 217%, for
the nine months ended September 30, 2005, compared to the same period ended September 30, 2004.
This was mainly the result of increased rental revenue and the addition of revenue from the
acquisition of SCS.
Rental revenue increased from $7.4 million to $11.7 million, or 57%, for the nine months ended
September 30, 2005, compared to the same period ended September 30, 2004. This increase was the
result of additional units added to our rental fleet and rented to third parties. The company
ended the period with 805 compressor packages in its rental fleet, up from 586 units at December
31, 2004, and 533 units at September 30, 2004. The average monthly rental rate per unit at
September 30, 2005 was $2,015 as compared to $1,909 at September 30, 2004.
Sales revenue increased from $2.4 million to $22.1 million, or 803%, for the nine month ended
September 30, 2005, compared to the same period ended September 30, 2004. This increase was mainly
the result of the sale of compressor units to outside third parties by SCS.
Service and maintenance revenue increased from approximately $1.4 million to $1.8 million, or
29%, for the nine months ended September 30, 2005, compared to the same period ended September 30,
2004. This was mainly the result of additional third party labor sales in our New Mexico and
Michigan branches.
The overall gross margin percentage decreased to 36% for the nine months ended September 30,
2005, as compared to 56% the same period ended September 30, 2004. This decrease resulted mainly
from the relative increase in compressor sales revenue as a percentage of the total revenue. Our
rental fleet carried a gross margin of 61% for the first nine months of 2005, and compressor and
parts sales margins averaged 23%. The acquisition of SCS was the main reason for the increase in
unit sales since they historically sell compressor units rather than rent equipment.
Cost of revenue for the nine months ended September 30, 2005 increased as a percentage of
sales approximately 20% over the comparable period in the prior year. Our principal components of
costs of revenue are materials, labor, and repair parts. The increase in cost of revenue was
primarily attributable to the increase in compressor units built for sales to third parties, which
have a lower gross margin as compared to margins for our rental fleet activity.
15
NATURAL GAS SERVICES GROUP, INC.
Selling, general and administrative expense increased from approximately $2 million to $3.6
million, or 80%, for the nine months ended September 30, 2005, as compared to the same period ended
September 30, 2004. This was mainly the result of the increased expenses attributed to the
acquisition of SCS. SCS accounted for $1.4 million of the total selling, general and
administrative expenses for the nine months ended September 30, 2005
Depreciation and amortization expense increased 73% from $1.8 million to $3 million for the
nine months ended September 30, 2005, compared to the same period ended September 30, 2004. This
increase was the result of 257 new gas compressor rental units being added to rental equipment from
September 30, 2004 to September 30, 2005.
Other income decreased approximately $1.4 million for the nine months ended September 30,
2005, compared to the same period in 2004. This decrease was due mainly to the $1.5 million that
was received in the nine months ended September 30, 2004 as life insurance proceeds from the death
of our former CEO Wayne Vinson offset by additional interest income received from money market
accounts.
Interest expense increased to $1.4 million, or 148%, for the nine months ended September 30,
2005 compared to the same period ended September 30, 2004, mainly due to increased debt incurred to
finance rental equipment additions, debt related to the acquisition of SCS and increasing interest
rates.
Provision for income tax increased to $1.8 million, or 132%, because taxable income increased
after giving effect to the non-taxable life insurance proceeds received in 2004.
Critical Accounting Policies and Practices
A discussion of our critical accounting policies is included in the Company’s Form 10-KSB
for the year ended December 31, 2004. There have been no changes in our critical accounting
policies as of September 30, 2005.
Recently Issued Accounting Pronouncements
On December 16, 2004, the FASB published FASB Statement No. 123 (revised 2004),
Share-Based Payment. Statement 123(R) requiring that the compensation cost relating to share-based
payment transactions be recognized in financial statements. That cost will be measured based on the
fair value of the equity or liability instruments issued. We will be required to apply Statement
123(R) as of January 1, 2006. Statement 123(R) replaces FASB Statement No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. Statement 123, as originally issued in 1995, established as preferable a
fair-value-based method of accounting for share-based payment transactions with employees. However,
that Statement permitted entities the option of continuing to apply the guidance in Opinion 25, as
long as the footnotes to financial statements disclosed what net income would have been had the
preferable fair-value-based method been used.
In November 2004, the FASB issued SFAS No 151, Inventory Costs — an Amendment of ARB No. 43,
Chapter 4 (“SFAS 151”). This standard provides clarification that abnormal amounts of idle
facility expense, freight, handling costs, and spoilage should be recognized as current-period
charges. Additionally, this standard requires that allocation of fixed production overhead to the
costs of conversion be based on the normal capacity of the production facilities. The provisions
of this standard are effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. We do not expect the adoption of the new standard to have a material effect on our
condensed consolidated results of operations, cash flows or financial position.
16
NATURAL GAS SERVICES GROUP, INC.
Liquidity and Capital Resources
Historically, we have funded our operations through public and private offerings of our
equity securities, subordinated debt, bank borrowings and cash flow from operations. Proceeds of
financings 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, 2005, we had cash and cash equivalents of approximately $5.7 million, working
capital of $14 million and bank debt of $25 million of which approximately $4.1 million was
classified as current. We had positive net cash flow from operating activities of approximately
$4.1 million during the first nine months of 2005. This was primarily from net income of $3
million and the cash received from the exercise of common stock
warrants and options of $12.8 million during the nine months ended September 30, 2005.
For the nine months ended September 30, 2005, we invested approximately $13 million in
equipment for our rental fleet and in service vehicles. We financed this activity with bank debt
and cash flow from operations. We have borrowed approximately $20 million in the first nine months
of 2005 from our bank which includes $8 million to finance the acquisition of Screw Compression
Systems, Inc. In addition we have repaid $12.2 million of our existing debt.
The table below sets out components of our capital expenditures for the three years ended
December 31, 2004 and the nine months ended September 30, 2005, along with the total budgeted for
2006, excluding acquisitions:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
|
Budgeted 2006 |
|
| |
|
September 30, |
|
|
September 30, |
|
|
|
|
| Expenditure Category |
|
2004 |
|
|
2004 |
|
|
(excluding acquisitions) |
|
Rental Equipment,
Vehicles, and Shop
Equipment |
|
$ |
8,937 |
|
|
$ |
13,107 |
|
|
$20,100 to $25,000 |
The level of our expenditures will vary in future periods depending on energy market
conditions and other related economic factors. Based upon existing economic and market conditions,
we believe net operating cash flow, borrowings under our bank loan facilities and other financing
alternatives that we expect will be available to us in 2006 will be sufficient to fund our net
investing cash requirements for the year. We also believe we have significant flexibility with
respect to our financing alternatives and adjustment of our expenditure plans if circumstances
warrant. When considered in relation to our total financial capacity, we do not have any material
continuing commitments associated with expenditure plans related to our current operations.
17
NATURAL GAS SERVICES GROUP, INC.
Contractual Obligations and Commitments
We have contractual obligations and commitments that affect our consolidated results of
operations, financial condition and liquidity. The following table is a summary of our significant
cash contractual obligations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Obligation Due in Period |
|
| Cash contractual |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 |
|
|
|
|
| obligations |
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
years |
|
|
Total |
|
Credit facility
(secured) |
|
$ |
1,166 |
|
|
$ |
4,623 |
|
|
$ |
4,623 |
|
|
$ |
4,622 |
|
|
$ |
4,623 |
|
|
$ |
5,356 |
|
|
$ |
25,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt |
|
|
— |
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
— |
|
|
|
— |
|
|
|
3,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities and
office leases |
|
|
52 |
|
|
|
146 |
|
|
|
129 |
|
|
|
62 |
|
|
|
29 |
|
|
|
134 |
|
|
|
552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,218 |
|
|
$ |
5,769 |
|
|
$ |
5,752 |
|
|
$ |
5,684 |
|
|
$ |
4,652 |
|
|
$ |
5,490 |
|
|
$ |
28,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Bank Borrowings
On March 14, 2005, we entered into a Fourth Amended and Restated Loan Agreement with
Western National Bank, Midland, Texas, which was modified on May 1, 2005 by a First Modification to
Fourth Amended and Restated Loan Agreement. Our Loan Agreement provides for the following loan
facilities:
| |
• |
|
$8.0 Million Term Loan Facility; |
| |
| |
• |
|
$7,512,109 Term Loan Facility; |
| |
| |
• |
|
$1,415,836 Term Loan Facility; |
| |
| |
• |
|
$10.0 Million Multiple Advance Term Loan Facility; |
| |
| |
• |
|
$1.5 Million Multiple Advance Term Loan Facility; |
| |
| |
• |
|
Revolving Line of Credit Facility; and |
| |
| |
• |
|
Advancing Line of Credit Facility. |
On September 20, 2005, we prepaid in full the outstanding principal balance of our $1.5
Million Multiple Advance Term Loan Facility and our $7,512,109 Term Loan Facility, and on September
30, 2005 we prepaid in full the outstanding principal balance of our $1,415,836 Term Loan Facility.
All outstanding principal under our $10.0 Million Multiple Advance Term Loan Facility is due
and payable on April 1, 2011, and all outstanding principal under our $8.0 Million Term Loan
Facility is due and payable on January 1, 2012. The outstanding principal balance of our Advancing
Line of Credit Facility is due and payable on November 15, 2009.
Our Revolving Line of Credit Facility matures on January 1, 2006; however, we are currently
negotiating to renew and extend this facility for an additional year and to increase the principal
amount of the facility from $2.0 million to $10.0 million.
Our obligations under the Loan Agreement continue to be secured by substantially all of our
assets, including our equipment, trade accounts receivable and other personal property, the stock
we own in SCS, and by the real estate and related plant facilities owned by SCS.
18
NATURAL GAS SERVICES GROUP, INC.
Subordinated Debt and Related Letters of Credit
The promissory notes issued to the three stockholders of SCS as part of the consideration
for the acquisition of SCS are in the aggregate principal amounts of $2.1 million, $600,000 and
$300,000. The principal of each note is payable in three equal annual installments, commencing on
January 3, 2006. Accrued and unpaid interest on the unpaid principal balance of each note is
payable on the same dates as, and in addition to, the installments of principal. Under the terms of
our Loan Agreement with our bank lender, we are prohibited from making payments on these notes if
at the time of any such payment we are then in default under the Loan Agreement or if any such
payment would cause or result in a default under the Loan Agreement.
To secure payment of these notes, our bank lender issued for our account three separate
letters of credit for the benefit of the holder of each respective note. The $2.1 million
promissory note is secured by a letter of credit in the face amount of $1.4 million; the $600,000
promissory note is secured by a letter of credit in the face amount of $400,000; and the $300,000
promissory note is secured by a letter of credit in the face amount of $200,000.
The letters of credit expire February 3, 2008. Drafts for payment under each beneficiary’s
respective letter of credit may be made by the beneficiary only upon our default in payment of the
promissory note. If a draft for payment is not presented on or before February 3, 2007, the face
amount of the letter of credit will automatically be reduced by one-half.
Market Risk
We are exposed to market risk primarily from changes in interest rates.
We rely heavily upon debt financing provided by our bank lender. Most of these instruments
contain interest provisions that are at least a one-half percentage point above the published prime
rate. This creates a vulnerability to us relative to the movement of the prime rate. As the
prime rate increases, our cost of funds will increase and affect our ability to obtain additional
debt. We have not engaged in any hedging activities to offset these risks.
At September 30, 2005, we were exposed to interest rate fluctuations on approximately $2.4
million of bank borrowings carrying adjustable interest rates. A hypothetical one hundred basis
point increase in interest rates for these notes payable would increase our annual interest expense
by approximately $24 thousand. Due to the uncertainty of fluctuations in interest rates and the
specific actions that might be taken by us to mitigate the impact of such fluctuations and their
possible effects, the foregoing sensitivity analysis assumes no changes in our financial structure.
Off-Balance Sheet Arrangements
We do not participate in financial transactions that generate relationships with
unconsolidated entities or financial partnerships. Such entities, often referred to as variable
interest entities or special purpose entities, are generally established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We
were not involved in any unconsolidated financial transactions with variable interest or special
purpose entities during any of the reporting periods in this report and have no intention to
participate in such transactions in the foreseeable future.
19
NATURAL GAS SERVICES GROUP, INC.
Item 3. CONTROLS AND PROCEDURES
| |
(a) Evaluation of Disclosure Controls and Procedures. |
| |
Under the supervision and with the participation of certain members of Natural Gas
Services Group, Inc’s management, the chief executive officer and the chief
financial
officer evaluated the effectiveness of the design and operation of the disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”)) of Natural Gas Services Group,
Inc. as of the end of the period covered by this report. Based on this evaluation, the
chief executive officer and chief financial officer concluded that, as of the end of the
period covered by this report, Natural Gas Services Group, Inc’s disclosure controls and
procedures were effective to ensure that information required to be disclosed by Natural
Gas Services Group, Inc. in the reports that it files under the Exchange Act is
collected, processed and disclosed within the time periods specified in the Commission’s
rules and forms. |
| |
(b) Changes in Internal Controls. |
| |
There were no changes in Natural Gas Services Group, Inc’s internal controls during
the period covered by this report that have materially affected or are reasonably likely
to materially affect Natural Gas Services Group, Inc’s internal controls over financial
reporting. In addition, to the knowledge of the chief executive officer and chief
financial officer there were no changes in other factors that could significantly affect
these controls subsequent to the date of the most recent evaluation made by the chief
executive officer and the chief financial officer. |
20
NATURAL GAS SERVICES GROUP, INC.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
We are currently a defendant in a lawsuit, Karifico v. Natural Gas Services Group, Inc.,
filed on September 21, 2005 in District Court, Jefferson County, Colorado, Case No. 05 CV 3161.
The lawsuit is in the nature of a complaint for breach of contract and for money for services
rendered. According to the complaint filed by Karifico, under terms of an agreement dated November
3, 2003 between Karifco and us, Karifico was retained by us to “find a company for sale that
Defendant could purchase if it fit into its financial and operational plans.” Karifico claims that
it is entitled to a fee in the amount of $300,000 as the result of our acquisition of Screw
Compression Systems, Inc. We have paid $150,000 to Karifico and Karifico seeks the additional sum
of $150,000, together with interest and costs, and for alleged further damages in an unspecified
amount. We believe that we have valid defenses to Karifico’s claims and that our potential
liability, if any, with respect to this matter is not material in the aggregate to our financial
position, results of operations or cash flows. Accordingly, we have not established a reserve for
loss in connection with this proceeding.
From time to time, we are a party to various other legal proceedings in the ordinary course of
our business. While management is unable to predict the ultimate outcome of these actions, it
believes that any ultimate liability arising from these actions will not have a material adverse
effect on our consolidated financial position, results of operations or cash flow. Except as
discussed herein, we are not currently a party to any other legal proceedings and we are not aware
of any other threatened litigation.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
In January 2001, we privately placed 61.57 “units” consisting of (1) $1,539,261 aggregate
principal amount of subordinated notes maturing December 31, 2006 and bearing interest at the rate
of 10% per annum and (2) warrants to purchase a total of 615,704 shares of our common stock. Each
unit consisted of a 10% subordinated note in the principal amount of $25,000 and a warrant to
purchase 10,000 shares of our common stock. The warrants are exercisable at a price of $3.25 per
share and expire December 31, 2006.
The units were privately placed to 40 investors in reliance upon the exemption from
registration contained in Section 4(2) of the Securities Act of 1933, as amended. On August 26,
2005, we prepaid all of the outstanding 10% subordinated notes. During the three-month period
ended September 30, 2005, 493,704 shares of common stock were issued upon exercise of the warrants.
The common stock was issued in reliance upon the exemptions from registration contained in Section
3(a) (9) and Section 4(2) of the Securities Act. We received aggregate proceeds of $1,604,539 from
the exercise of the warrants. We have used these proceeds to reduce bank debt.
21
NATURAL GAS SERVICES GROUP, INC.
Item 6. Exhibits
The following exhibits are filed herewith or incorporated herein 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 (Incorporated by reference to Exhibit 3.1 of the
10QSB filed and dated November 10, 2004) |
|
|
|
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) |
|
|
|
4.6
|
|
Stockholders Agreement, dated January 3, 2005 among Paul D. Hensley, Tony Vohjesus, Jim
Hazlett and Natural Gas Services Group, Inc. (Incorporated by reference to Exhibit 4.3 of
the Registrant’s From 8-K Report, dated January 3, 2005, as filed with the Securities and
Exchange Commission on January 7, 2005) |
|
|
|
4.7
|
|
Executive Compensation Plans and Arrangements (Exhibits 10.1, 10.24, 10.25 and 10.26) |
|
|
|
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) |
22
NATURAL GAS SERVICES GROUP, INC.
| |
|
|
| 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) |
|
|
|
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) |
23
NATURAL GAS SERVICES GROUP, INC.
| |
|
|
| Exhibit No. |
|
Description |
10.17
|
|
Triple Net Lease Agreement, dated September 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 September 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 September 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 September 30, 2004) |
|
|
|
10.21
|
|
Securities Purchase Agreement, dated July 20, 2004, between the Registrant and C.
Barney 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) |
|
|
|
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) |
|
|
|
10.23
|
|
Fourth Amended and Restated Loan Agreement (Incorporated by reference to Exhibit 10.1
of the Registrant’s Current Report on Form 8-K, dated March 14, 2005 as filed with the
Securities and Exchange Commission on March 18, 2005) |
|
|
|
10.24
|
|
Employment Agreement between Paul D. Hensley and Natural Gas Services Group, Inc.
(Incorporated by reference to Exhibit 10.1 of the Registrants Form 8-K Report, dated
January 3, 2005, as filed with the Securities and Exchange Commission on January 7, 2005) |
|
|
|
10.25
|
|
Employment Agreement between William R. Larkin and Natural Gas Services Group, Inc.
(Incorporated by reference to Exhibit 10.25 of the Registrant’s Form 10-KSB for the fiscal
year ended December 31, 2004, and filed with the Securities and Exchange Commission on
March 30, 2005) |
|
|
|
10.26
|
|
Promissory Note, dated January 3, 2005, in the original principal amount of
$2,100,000.00 made by Natural Gas Services Group, Inc. payable to Paul D. Hensley
(Incorporated by reference to Exhibit 10.26 of the Registrant’s Form 10-KSB for the fiscal
year ended December 31, 2004, and filed with the Securities and Exchange Commission on
March 30, 2005) |
|
|
|
10.27
|
|
Third Amended and Restated Loan Agreement, dated as of January 3, 2005, among Natural
Gas Services Group, Inc., Screw Compression Systems, Inc. and Western National Bank
(Incorporated by reference to Exhibit 10.1 of the Registrant’s current Report on form 8-K,
dated January 3, 2005, and filed with the Securities and Exchange Commission on January 7,
2005) |
24
NATURAL GAS SERVICES GROUP, INC.
| |
|
|
| Exhibit No. |
|
Description |
10.28
|
|
Modification Agreement, dated as of January 3, 2005, by and between Natural Gas
Services Group, Inc. and Western National Bank (Incorporated by reference to Exhibit 10.2
of the Registrant’s Current Report on Form 8-K, dated January 3, 2005, and filed with the
Securities and Exchange Commission on January 7, 2005) |
|
|
|
10.29
|
|
Guaranty Agreement, dated as of January 3, 2005, made by Natural Gas Service Group,
Inc., for the benefit of Western National Bank (Incorporated by reference to Exhibit 10.3
of the Registrant’s Current Report on Form 8-K, dated January 3, 2005, and filed with the
Securities and Exchange Commission on January 7, 2005) |
|
|
|
10.30
|
|
Guaranty Agreement, dated as of January 3, 2005, made by Screw Compression Systems,
Inc., for the benefit of Western National Bank (Incorporated by reference to Exhibit 10.4
of the Registrant’s Current Report on Form 8-K, dated January 3, 2005, and filed with the
Securities and Exchange Commission on January 7, 2005) |
|
|
|
10.31
|
|
Third Amended and Restated Loan Agreement (Incorporated by reference to Exhibit 10.1
of the Registrant’s Form 8-K dated January 3, 2005 and filed with the Securities and
Exchange Commission January 3, 2005) |
|
|
|
10.32
|
|
First Modification to Fourth Amended and Restated Loan Agreement (Incorporated by
reference Exhibit 10.1 of the Registrant’s Form 8-K dated May 1, 2005 and filed with
Securities and Exchange Commission May 13, 2005) |
|
|
|
14.0
|
|
Code of Ethics (Incorporated by reference to Exhibit 14.0 of the Registrant’s Form
10-KSB for the fiscal year ended December 31, 2004, and filed with the Securities and
Exchange Commission on March 30, 2005) |
|
|
|
21.0
|
|
Subsidiaries (Incorporated by reference to Exhibit 21.0 of the Registrant’s Form 10-KSB
for the fiscal year ended December 31, 2004, and filed with the Securities and Exchange
Commission on March 30, 2005) |
|
|
|
*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 |
25
NATURAL GAS SERVICES GROUP, INC.
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/ Stephen C. Taylor |
|
|
|
|
|
Stephen C. Taylor |
|
|
President and Chief Executive Officer |
|
|
|
By:
|
|
/s/ Earl R. Wait |
|
|
|
|
|
Earl R. Wait |
|
|
Chief Financial Officer And Treasurer |
|
|
|
| November 14, 2005 |
26
NATURAL GAS SERVICES GROUP, INC.
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 (Incorporated by reference to Exhibit 3.1 of the
10QSB filed and dated November 10, 2004) |
|
|
|
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) |
|
|
|
4.6
|
|
Stockholders Agreement, dated January 3, 2005 among Paul D. Hensley, Tony Vohjesus, Jim
Hazlett and Natural Gas Services Group, Inc. (Incorporated by reference to Exhibit 4.3 of
the Registrant’s From 8-K Report, dated January 3, 2005, as filed with the Securities and
Exchange Commission on January 7, 2005) |
|
|
|
4.7
|
|
Executive Compensation Plans and Arrangements (Exhibits 10.1, 10.24, 10.25 and 10.26) |
|
|
|
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) |
27
NATURAL GAS SERVICES GROUP, INC.
| |
|
|
| 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) |
|
|
|
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) |
28
NATURAL GAS SERVICES GROUP, INC.
| |
|
|
| Exhibit No. |
|
Description |
10.17
|
|
Triple Net Lease Agreement, dated September 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 September 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 September 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 September 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) |
|
|
|
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) |
|
|
|
10.23
|
|
Fourth Amended and Restated Loan Agreement (Incorporated by reference to Exhibit 10.1
of the Registrant’s Current Report on Form 8-K, dated March 14, 2005 as filed with the
Securities and Exchange Commission on March 18, 2005) |
|
|
|
10.24
|
|
Employment Agreement between Paul D. Hensley and Natural Gas Services Group, Inc.
(Incorporated by reference to Exhibit 10.1 of the Registrants Form 8-K Report, dated
January 3, 2005, as filed with the Securities and Exchange Commission on January 7, 2005) |
|
|
|
10.25
|
|
Employment Agreement between William R. Larkin and Natural Gas Services Group, Inc.
(Incorporated by reference to Exhibit 10.25 of the Registrant’s Form 10-KSB for the fiscal
year ended December 31, 2004, and filed with the Securities and Exchange Commission on
March 30, 2005) |
|
|
|
10.26
|
|
Promissory Note, dated January 3, 2005, in the original principal amount of
$2,100,000.00 made by Natural Gas Services Group, Inc. payable to Paul D. Hensley
(Incorporated by reference to Exhibit 10.26 of the Registrant’s Form 10-KSB for the fiscal
year ended December 31, 2004, and filed with the Securities and Exchange Commission on
March 30, 2005) |
|
|
|
10.27
|
|
Third Amended and Restated Loan Agreement, dated as of January 3, 2005, among Natural
Gas Services Group, Inc., Screw Compression Systems, Inc. and Western National Bank
(Incorporated by reference to Exhibit 10.1 of the Registrant’s current Report on form 8-K,
dated January 3, 2005, and filed with the Securities and Exchange Commission on January 7,
2005) |
29
NATURAL GAS SERVICES GROUP, INC.
| |
|
|
| Exhibit No. |
|
Description |
10.28
|
|
Modification Agreement, dated as of January 3, 2005, by and between Natural Gas
Services Group, Inc. and Western National Bank (Incorporated by reference to Exhibit 10.2
of the Registrant’s Current Report on Form 8-K, dated January 3, 2005, and filed with the
Securities and Exchange Commission on January 7, 2005) |
|
|
|
10.29
|
|
Guaranty Agreement, dated as of January 3, 2005, mad by Natural Gas Service Group,
Inc., for the benefit of Western National Bank (Incorporated by reference to Exhibit 10.3
of the Registrant’s Current Report on Form 8-K, dated January 3, 2005, and filed with the
Securities and Exchange Commission on January 7, 2005) |
|
|
|
10.30
|
|
Guaranty Agreement, dated as of January 3, 2005, mad by Screw Compression Systems,
Inc., for the benefit of Western National Bank (Incorporated by reference to Exhibit 10.4
of the Registrant’s Current Report on Form 8-K, dated January 3, 2005, and filed with the
Securities and Exchange Commission on January 7, 2005) |
|
|
|
10.31
|
|
Third Amended and Restated Loan Agreement (Incorporated by reference to Exhibit 10.1
of the Registrant’s Form 8-K dated January 3, 2005 and filed with the Securities and
Exchange Commission January 3, 2005) |
|
|
|
10.32
|
|
First Modification to Fourth Amended and Restated Loan Agreement (Incorporated by
reference Exhibit 10.1 of the Registrant’s Form 8-K dated May 1, 2005 and filed with
Securities and Exchange Commission May 13, 2005) |
|
|
|
14.0
|
|
Code of Ethics (Incorporated by reference to Exhibit 14.0 of the Registrant’s Form
10-KSB for the fiscal year ended December 31, 2004, and filed with the Securities and
Exchange Commission on March 30, 2005) |
|
|
|
21.0
|
|
Subsidiaries (Incorporated by reference to Exhibit 21.0 of the Registrant’s Form 10-KSB
for the fiscal year ended December 31, 2004, and filed with the Securities and Exchange
Commission on March 30, 2005) |
|
|
|
*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 |
30