U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 1-31398
NATURAL GAS SERVICES GROUP, INC.
(Name of small business issuer in its charter)
COLORADO 75-2811855
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2911 South County Road 1260
Midland, Texas 79706
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (915) 563-3974
.........
Securities registered under Section 12(b) of the Exchange Act:
Common Stock
(Title of Class)
Warrants to Purchase Common Stock
(Title of Class)
Securities registered under Section 12(g) of the Exchange Act:
None
----------------------------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No | |
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. _____
State issuer's revenue for its most recent fiscal year: $10,296,541
The aggregate market value of the voting and non-voting common equity
held by non-affiliates at February 28, 2003, computed by reference to the
closing price or $4.19 per share on the American Stock Exchange, was
$14,952,521.
The number of shares outstanding of each of the issuer's classes of
common equity on February 28, 2003, was 4,857,632.
Documents Incorporated by Reference None
Transitional Small Business Disclosure Format Yes | | No |X|
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PART 1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-KSB (this "Report" or this "Form 10-KSB)
contains certain forward-looking statements and information pertaining to us and
our subsidiaries, our industries and the oil and gas industry that is based on
the beliefs of our management, as well as assumptions made by and information
currently available to our management. All statements, other than statements of
historical facts contained in this Report, including statements regarding our
future financial position, growth strategy, budgets, projected costs, plans and
objectives of management for future operation, are forward-looking statements.
Although we believe our expectations reflected in these forward-looking
statements are based on reasonable assumptions, no assurance can be given that
these expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from the expectations reflected in the
forward-looking statements include, among other things:
o conditions in the gas and oil industry, including the demand
for natural gas and the price of oil and natural gas,
o competition among the various providers of compression
services and products,
o changes in safety, health and environmental regulations
pertaining to the production and transportation of natural
gas,
o changes in economic or political conditions in the markets in
which we operate, and
o introduction of competing technologies by other companies.
In addition, the factors described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Risk Factors" could
cause our actual results to differ materially from the expectations reflected in
the forward-looking statements contained herein. These statements relate to
"Description of Business," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and other sections of the Report. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," " expect," "plan," "intend," and "anticipate." The
forward-looking statements in this Report are based largely on our expectations
and are subject to a number of risks and uncertainties, which may be beyond our
control. Actual results may differ materially from the anticipated or implied
results in the forward-looking statements. We do not intend to publicly update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. In light of these risks and
uncertainties, we can give no assurances that the forward-looking events and
circumstances included in this Report will occur.
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ITEM 1. DESCRIPTION OF BUSINESS
History and Organization
We were incorporated on December 17, 1998 and initially operated as a
holding company of Flare King, Inc., Hi-Tech Compressor Company, L.C., NGE
Leasing, Inc. and CNG Engines Company. In July 2000, Flare King and Hi-Tech
merged and now operate as Rotary Gas Systems, Inc. Effective March 31, 2000, we
sold CNG.
On March 29, 2001, we acquired, through our subsidiary, Great Lakes
Compression, Inc., all of the compression related assets of Dominion Michigan
Petroleum Services, Inc., an unaffiliated company that is a subsidiary of
Dominion Resources, Inc. and that was in the business of manufacturing,
fabricating, selling, leasing and maintaining natural gas compressors. As a part
of the transaction an affiliate of Dominion Michigan committed to purchase or to
enter into five year leases for compressors totaling five thousand horsepower.
The purchases or leases are to be made by December 31, 2005.
On October 24, 2002, we closed our initial public offering pursuant to
a registration statement that was declared effective on October 21, 2002. In the
offering, we sold a total of 1,500,000 shares of our common stock and warrants
to purchase 1,500,000 shares of our common stock at a total of $5.25 per share
and warrant for an aggregate amount $7,875,000. After deducting the total
expenses of the offering, we received net offering proceeds of approximately
$6,529,170.
On March 27, 2003, we acquired 28 compressor packages from Hy-Bon
Engineering Company, Inc. for $2,150,000.
Company Business
Overview
We provide equipment and services to the natural gas and oil industry.
We manufacture, fabricate, sell and lease natural gas compressors that enhance
the production of oil and gas wells and we provide maintenance services for
those compressors. We define a natural gas compressor as a mechanical device
with one basic goal - to deliver gas at a pressure higher than that originally
existing. It may be powered by a natural gas burning engine or an electric motor
to accommodate different applications. Gas compression is undertaken to
transport and distribute natural gas to pipelines. Pipeline pressures vary and
with the addition of new wells to the pipeline, the need for compression
increases. We also manufacture and sell flare tips and ignition systems for oil
and gas plant and production facilities. We define a flare tip as a burner on
the upper end of a flare stack that is designed to combust waste gases to assure
a clean environment. An ignition system is a pilot light or a spark generator
that assures continuous ignition of the waste gases going through the burner in
the flare tip.
We primarily lease natural gas compressors. As of December 31, 2002, we
had 258 natural gas compressors under lease to third parties.
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We also fabricate natural gas compressors for our customers, designing
compressors to meet unique specifications dictated by well pressures, production
characteristics and particular applications for which compression is sought.
We have established an exchange and rebuild program to attempt to help
minimize costs and maximize revenue for our customers. Under the program, we
work with maintenance and operating personnel of a customer to identify
equipment for exchange. When we receive a compressor for exchange because of a
maintenance problem, we deliver to our customer a replacement compressor at full
price. We then rebuild the exchange compressor and credit our customer an amount
based on the value of the rebuilt compressor. We also offer a retrofitting
service by repackaging a customer's compressor with a compressor that meets our
customer's changed conditions.
We design, manufacture, install and service flare stacks and related
ignition and control devices for onshore and offshore burning of gas compounds
such as hydrogen sulfide, carbon dioxide, natural gas and liquefied petroleum
gases.
We have manufacturing and fabrication facilities located in Lewiston,
Michigan, and Midland, Texas, where we manufacture and fabricate natural gas
compressors. We design and manufacture natural gas flare systems, components and
ignition systems in our facility in Midland, Texas, for use in oilfield,
refinery and petrochemical plant applications.
We currently provide our products and services to a customer base of
oil and gas exploration and production companies operating primarily in
Colorado, Kansas, Louisiana, Michigan, New Mexico, Oklahoma, Texas and Wyoming.
We maintain our principal office at 2911 South County Road 1260,
Midland, Texas 79706 and our telephone number is (915) 563-3974.
Industry Background
Our products and services are related to the oil and natural gas
industries. The oil and natural gas industry is comprised of several large,
well-capitalized companies accounting for the majority of the market. There also
exist a large number of small privately held companies making up the remainder
of the market. According to information from the Energy Information
Administration there is a growing demand for natural gas in this country.
We believe that there will continue to be a growing demand for natural
gas. Because of this, demand for our products and services is expected to
continue to rise as a result of:
o the increasing demand for energy, both domestically and
abroad;
o environmental considerations which provide strong incentives
to use natural gas in place of other carbon fuels;
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o the cost savings of using natural gas rather than electricity
for heat generation;
o implementation of international environmental and conservation
laws;
o the aging of producing natural gas reserves worldwide; and
o the extensive supply of undeveloped natural gas reserves.
By using a compressor, the operator of a natural gas well is able to
increase the pressure of natural gas from a well to make it economically viable
by enabling gas to continue to flow in the pipeline to its destination. We feel
that we are well positioned through our gas compression and flare system
activities to take advantage of the aging of reserves and the development of new
reserves.
The Compression Business
Natural gas compressors are used in a number of applications intended
to enhance the productivity of oil and gas wells, gas transportation lines and
processing plants. Compression equipment is often required to boost a well's
production to economically viable levels and enable gas to continue to flow in
the pipeline to its destination. We believe that most producing gas wells in
North America, at some point, will utilize compression. As of December 31, 2001,
the Energy Information Administration reported that there were approximately
367,000 producing gas and gas condensate wells in the United States. The states
where we currently operate, account for approximately 194,000 of these wells.
The Leasing Business
We primarily lease natural gas compressors. As of February 28, 2003, we
had 313 natural gas compressors totaling approximately 33,240 horsepower leased
to 29 third parties, compared to 230 natural gas compressors totaling
approximately 18,293 horsepower leased to nine third parties at February 28,
2002. Of the 313 natural gas compressors, 46 were leased to Dominion Michigan
and its affiliates.
As a part of our leasing business, in 2000 we formed a limited
liability company, Hy-Bon Rotary Compression LLC, ("HBRC") with Hy-Bon
Engineering Company, Inc., a non-affiliated company, to lease natural gas
compressors. We formed HBRC to lease compressors to a customer with which the
non-affiliated company had a relationship. The non-affiliated company owns 50%
and we own 50% of HBRC. The non-affiliated company has appointed a majority of
the persons who serve as managers of HBRC. As of February 28, 2003, we had
contributed 40 compressors totaling approximately 2,870 horsepower to HBRC and
the non-affiliated company had contributed 28 compressors totaling approximately
2,520 horsepower to HBRC. We split the expenses of HBRC with the other company.
After the payment of expenses, we receive whatever profit is realized by HBRC in
proportion to the amount received by HBRC from the lease of natural gas
compressors that are contributed by us and by the non-affiliated company to
HBRC.
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On March 27, 2003, to be effective January 1, 2003, we purchased and
Hy-Bon sold to us 28 of Hy-Bon's compressor packages. In consideration
therefore, we paid Hy-Bon $2,150,000.00. The $2,150,000.00 was borrowed by us
from our current lender.
By the end of May 2003, Hy-Bon will withdraw as a member of HBRC
effective as of January 1, 2003. In connection with its withdrawal, Hy-Bon will
receive $67,144.11 from HBRC. We, as the other member of HBRC, will retain all
assets of HBRC which as of December 31, 2002, had an unaudited aggregate value
of $346,511.04. We plan to dissolve HBRC and we have agreed to not operate using
the name Hy-Bon.
In addition to 79 separate written maintenance agreements covering
non-owned compressor units that we had entered into at February 28, 2003, we
provide maintenance as a part of our compressor leases. Many companies and
individuals are turning to leasing of equipment instead of purchasing. Leasing
does not require the purchaser to make large capital expenditures for new
equipment or to obtain financing through a lending institution. This frees the
customer's assets for developing the customer's business. Our leases generally
have initial terms of from six to 24 months and then continue on a
month-to-month basis. The leases with Dominion Exploration have an initial five
year term. Lease rentals are paid monthly. At the end of a lease term, the
customer may continue to pay monthly rentals on the equipment, or we may require
them to return it to us.
Changing well and pipeline pressures and conditions over the life of a
well often require producers to reconfigure their compressor units to optimize
the well production or pipeline efficiency. Because the equipment is highly
technical, a trained staff of field service personnel, a substantial parts
inventory and a diversified fleet of natural gas compressors are often necessary
to perform reconfiguration functions in an economic manner. It is not efficient
or, in many cases, economically possible for independent natural gas producers
to maintain reconfiguration capabilities individually. Also, our management
believes that, in order to streamline their operations and reduce their capital
expenditures and other costs, a number of major oil and gas companies have sold
portions of their domestic energy reserves to independent energy producers and
have outsourced many facets of their operations. We believe that these
initiatives are likely to contribute to increased rental of compressor
equipment. For that reason, we have created our own compressor-rental fleet to
take advantage of the rental market, and intend to expand our fleet by spending
approximately $5,700,000 on natural gas compressors over the next 12 months.
The size, type and geographic diversity of our rental fleet enables us
to provide our customers with a range of compression units that can serve a wide
variety of applications, and to select the correct equipment for the job, rather
than the customer trying to fit the job to its own equipment. We base our gas
compressor rental rates on several factors, including the cost and size of the
equipment, the type and complexity of service desired by the customer, the
length of contract, and the inclusion of any other services desired, such as
leasing, installation, transportation and daily operation.
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Custom Fabrication
We also engineer and fabricate natural gas compressors for our
customers to meet their unique specifications based on well pressure, production
characteristics and the particular applications for which compression is sought.
In order to meet the ongoing needs of our customers for whom we custom
fabricate, we offer a variety of services, including: (i) engineering,
manufacturing and fabrication of the compressors; (ii) installation and testing
of compressors; (iii) ongoing performance review to assess the need for a change
in compression: and (iv) periodic maintenance and parts replacement. We receive
revenue for each service.
Maintenance
Although natural gas compressors generally do not suffer significant
technological obsolescence, they do require routine maintenance and periodic
refurbishing to prolong their useful life. Routine maintenance includes
alignment and compression checks and other parametric checks indicate a change
in the condition of the compressors. In addition, oil and wear-particle analysis
is performed on all compressors. Overhauls are done on a condition-based
interval or a time-based schedule. Based on our past experience, these
maintenance procedures maximize component life and unit availability and
minimize downtime.
As of February 28, 2003, we had written maintenance agreements with
third parties relating to 79 compressors. Each written maintenance agreement has
three years left on its term and expires on December 31, 2005. During our years
ended December 31, 2002 and 2001, we received revenue of approximately
$1,058,000 and $704,000 (approximately 10% and 8% of our total consolidated
revenue), respectively, from maintenance agreements.
Exchange and Rebuild Program
We have established an exchange and rebuild program to attempt to help
minimize costs and maximize our customers' revenue. This program is designed for
operations with rotary screw compressors where downtime and lost revenue are
critical.
Under the program, we work with our customer's maintenance and
operating personnel to identify and quantify equipment for exchange. When we
receive a compressor for exchange due to a problem with the compressor, we
deliver to our customer a replacement compressor at full price. We then rebuild
the exchange compressor and credit our customer with an amount based on the
value of the compressor we rebuild.
This program enables our customers to obtain replacement compressors
and shorten the time that the customer is unable to realize gas production from
one or more wells because of the lack of a compressor.
During the years ended December 31, 2002 and 2001, we received revenue
of approximately $630,000 and $402,000 (approximately 6% and 5% of our total
consolidated revenue) respectively, from exchanging and rebuilding rotary screw
compressors for third parties.
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Retrofitting Service
We recognize the capital invested by our customers in compressors. We
also recognize that producing wells and gas gathering systems change
significantly during their operating life. To meet these changing conditions and
help our customers maximize their operating income, we offer a retrofitting
service by repackaging a customer's compressor with a compressor that meets our
customer's changed conditions.
The Flare Business
The drilling for and production of oil and gas results in certain
gaseous hydrocarbon byproducts that generally must be burned off at the source.
Although flares and flare systems have been part of the oilfield and
petrochemical environment for many years, increasing regulation of emissions has
resulted in a significant increase in demand for flare systems of increasingly
complex design meeting new environmental regulations. Growth is primarily
related, as is the case for most industries connected with oil and gas, to the
price of oil and gas and new environmental regulations.
We design, manufacture, install and service flare stacks and related
ignition and control devices for the onshore and offshore burning of gas
compounds such as hydrogen sulfide, carbon dioxide, natural gas and liquefied
petroleum gases. We produce two ignition systems for varied applications: (a) a
standing jet-like pipe for minimal fuel consumption, with a patented electronic
igniter; and (b) an electronic sparked ignition system. Flare tips are available
in carbon steel as well as many grades of stainless steel alloys. The stacks can
be free standing, guyed, or trailer mounted. The flare stack and ignition
systems use a smokeless design for reduced emissions to meet or exceed
government regulated clean air standards. Our product line includes
solar-powered flare ignition systems and thermocouple control systems designed
to detect the loss of combustion in the product stream and reignite the product
stream. These products contain specially-designed combustion tips and utilize
pilot flow Venturi tubes to maximize the efficient burning of waste gas with a
minimal use of pilot or assist gas, thereby minimizing the impact on the
environment of the residual output. Increased emphasis on "clean air" and
industry emissions has had a positive effect on the flare industry. Our broad
energy industry experience has allowed us to work closely with our customers to
seek cost-effective solutions to their flare requirements.
During the years ended December 31, 2002 and 2001, we sold 39 and 54
flare systems, respectively, to our customers generating approximately $759,000
and $703,000 (approximately 7 % and 8% of our total consolidated revenue) in
revenue, respectively.
Major Customers
During our year ended December 31, 2002, sales to one customer,
Dominion Michigan, amounted to approximately 30% and during our year ended
December 31, 2001, sales to one customer, Dominion Michigan, amounted to
approximately 26% of our consolidated revenue. No other single customer
accounted for more than 10% of our revenue in either of those two years.
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Backlog
We had a backlog of approximately $81,335 as of February 28, 2003, as
compared to approximately $471,075 as of the same date in 2002. The reduced
backlog at February 28, 2003, results from us having more compressors being
built for leasing rather than for sale. Backlog consists of firm customer orders
for which a purchase order has been received, satisfactory credit or a financing
arrangement exists, and delivery is scheduled. Our backlog at February 28, 2003,
includes only sales to outside third parties and does not include the backlog
that we may receive from the lease or sale of compressors over the next three
years to Dominion Exploration.
Continuing Product Development
We engage in a continuing effort to improve our compressor and flare
operations. Continuing development activities in this regard include new and
existing product development testing and analysis, process and equipment
development and testing, and product performance improvement. We also focus our
activities on reducing overall costs to the customer, which include the initial
capital cost for equipment, the monthly leasing cost if applicable, and the
operating costs associated with such equipment, including energy consumption,
maintenance costs and environmental emissions.
During our years ended December 31, 2002, and December 31, 2001, we did
not spend any material amounts on research and development activities. Rather,
product improvements were made as a part of our normal operating activities.
Sales and Marketing
General. We conduct our operations from three locations. These
locations, with exception of our executive offices, maintain an inventory for
local customer requirements, trained service technicians, and manufacturing
capabilities to provide quick delivery and service for our customers. Our sales
force also operates out of these locations and focuses on communication with our
customers and potential customers through frequent direct contact, technical
assistance, print literature, direct mail and referrals. Our sales and marketing
is performed by seven employees.
Additionally, our personnel coordinate with each other to develop
relationships with customers who operate in multiple regions. Our sales
personnel maintain intensive contact with our operations personnel in order to
promptly respond to and address customer needs. Our overall sales efforts
concentrate on demonstrating our commitment to enhancing the customer's cash
flow through enhanced product design, fabrication, manufacturing, installation,
customer service and support.
During the years ended December 31, 2002 and 2001, we spent
approximately $49,000 and approximately $56,000, respectively, on advertising.
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Compression Activity. The compression marketing program emphasizes our
ability to design and fabricate natural gas compressors in accordance with the
customer's unique specifications and to provide all necessary service for such
compressors.
Flare Systems Activity. The flare systems marketing program emphasizes
our ability to design, manufacture, install and service flares with the updated
technology.
Competition
Compression Activity. The natural gas compression business is
competitive. We experience competition from companies with greater financial
resources. On a regional basis, we experience competition from several smaller
companies that compete directly with us. We have a number of competitors in the
natural gas compression segment, but we do not have sufficient information to
determine our competitive position within that group. We believe that we compete
effectively on the basis of price, customer service, including the ability to
place personnel in remote locations, flexibility in meeting customer needs and
quality and reliability of our compressors and related services.
Compressor industry participants can achieve significant advantages
through increased size and geographic breadth. As the number of rental
compressors in our rental fleet increases, the number of sales, support, and
maintenance personnel required and the minimum level of inventory does not
increase commensurately. As a result of economies of scale, we believe that we,
with a growing rental fleet, have relatively lower operating costs and higher
margins than smaller companies.
Flare Systems Activity. The flare business is highly competitive. We
have a number of competitors in the flare systems segment, but we do not have
sufficient information to determine our competitive position within that group.
We believe that we are able to compete by our offering products specifically
engineered for the customer's needs.
Employees
As of December 31, 2002, we had 69 employees. No employees are
represented by labor unions and we believe that our relations with our employees
are satisfactory.
Liability and Other Insurance Coverage
Our equipment and services are provided to customers who are subject to
hazards inherent in the oil and gas industry, such as blowouts, explosions,
craterings, fires, and oil spills. We maintain liability insurance that we
believe is customary in the industry. We also maintain insurance with respect to
our facilities. Based on our historical experience, we believe that our
insurance coverage is adequate.
Government Regulation
We are subject to numerous federal, state and local laws and
regulations relating to the storage, handling, emission and discharge of
materials to the environment, including the Comprehensive Environmental
Response, Compensation and Liability Act, the Clean Water Act, the Clean Air Act
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and the Resource Conservation and Recovery Act. As a result of our operations,
we generate or manage hazardous wastes, such as solvents, thinner, waste paint,
waste oil, washdown wastes and sandblast material. We currently spend a
negligible amount each year to dispose of the wastes. Although we attempt to
identify and address contamination before acquiring properties, and although we
attempt to utilize generally accepted operating and disposal practices,
hydrocarbons or other wastes may have been disposed of or released on or under
properties owned, leased, or operated by us or on or under locations where such
wastes have been taken for disposal. These properties and the wastes or remedial
sites where they have been released might have to be remediated at our expense.
We believe that our existing environmental control procedures are
adequate and we have no current plans for substantial operating or capital
expenditures relating to environmental control requirements. We believe that we
are in substantial compliance with environmental laws and regulations and that
the phasing in of emission controls and other known regulatory requirements at
the rate currently contemplated by such laws and regulations will not have a
material adverse affect on our financial condition or operational results. Some
risk of environmental liability and other costs are inherent in the nature of
our business, however, and there can be no assurance that environmental costs
will not rise. Moreover, it is possible that future developments, such as
increasingly strict requirements and environmental laws and enforcement policies
thereunder, could lead to material costs of environmental compliance by us.
While we may be able to pass on the additional cost of complying with such laws
to our customers, there can be no assurance that attempts to do so will be
successful.
Patents, Trademarks and Other Intellectual Property
We believe that the success of our business depends more on the
technical competence, creativity and marketing abilities of our employees than
on any individual patent, trademark, or copyright. Nevertheless, as part of our
ongoing research, development and manufacturing activities, we have a policy of
seeking patents when appropriate on inventions concerning new products and
product improvements. We currently own two United States patents covering
certain flare system technologies, which expire in May 2006 and in January 2010,
respectively. We do not own any foreign patents. Although we continue to use the
patented technology and consider it useful in certain applications, we do not
consider these patents to be material to our business as a whole.
Suppliers and Raw Materials
With respect to our flare system and compressor operations, our raw
materials used consist of cast and forged iron and steel. Such materials are
generally available from a number of suppliers, and accordingly, we are not
dependent on any particular supplier for these new materials. We currently do
not have long term contracts with our suppliers of raw materials, but believe
our sources of raw materials are reliable and adequate for our needs. We have
not experienced any significant supply problems in the past.
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Certain of our components of our compressors are obtained primarily
from four suppliers. If either one of our current major suppliers should curtail
its operations or be unable to meet our needs, we would encounter delays in
supplying our customers with compressors until an alternative supplier could be
found. We may not be able to find acceptable alternative suppliers.
ITEM 2. DESCRIPTION OF PROPERTY
We maintain our executive offices in Midland, Texas. This facility is
owned by us and is used for manufacturing, fabrication, remanufacturing,
operations, testing, warehousing and storage, general and administrative
functions and training.
The facility in Midland is an approximately 24,600 square foot building
that provides us with sufficient space to manufacture, fabricate and test our
equipment on site and has land available to expand the building when needed. Our
current facilities in Midland are anticipated to provide us with sufficient
space and capacity for at least the next year and thus there are no current
plans to open new locations, unless they are acquired as a result of any future
acquisitions.
The facilities in Lewiston, Michigan consist of a total of
approximately 15,360 square feet. Approximately 9,360 square feet are used as
offices and a repair shop and approximately 6,000 square feet are used for
manufacturing and fabrication of compressors and storage.
We also own an approximate 4,100 square foot building in Midland that
is leased at a current rate of $1,050 per month to an unaffiliated party
pursuant to a lease that terminates in May 2005. This facility previously
contained our executive offices and manufacturing and fabrication operations.
We believe that our properties are generally well maintained and in
good condition.
ITEM 3. LEGAL PROCEEDINGS
There are no pending or, to our knowledge, threatened claims against
us. However, from time to time, we expect to be subject to various legal
proceedings, all of which are of an ordinary or routine nature and incidental to
our operations. Such proceedings have not in the past, and we do not expect they
will in the future have, a material impact on our results of operations or
financial condition
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit anything to a vote of our security holders during the
fourth quarter of our fiscal year ended December 31, 2002.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock and warrants are quoted on the American Stock Exchange
under the symbols NGS and NGS.WS, respectively. The following table sets forth
from October 21, 2002, (the first day of trading) through December 31, 2002, the
high and low sales prices for our common stock and warrants as reported by the
American Stock Exchange.
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October 21, 2002 through December 31, 2002 High Sales Price Low Sales Price
- ------------------------------------------- ------------------ -----------------
Common Stock $4.25 $3.35
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Warrant $0.90 $0.25
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As of December 31, 2002, there were approximately 32 holders of record
of our common stock and 2 holders of record of our warrants. The number of
holders of record does not include holders whose securities are held in street
name.
We have never declared or paid any dividends on our common stock. We
anticipate that, for the foreseeable future, all earnings will be retained for
use in our business and no cash dividends will be paid to holders of our common
stock. If we were to pay cash dividends in the future on the common stock, it
would be dependent upon our:
o financial condition,
o results of operations,
o current and anticipated cash requirements,
o plans for expansion,
o restrictions, if any, under debt obligations,
as well as other factors that our board of directors deemed relevant.
Our agreement with our bank contains provisions that restrict us from paying
dividends on our common stock.
We have 381,654 shares of our 10% Convertible Series A Preferred Stock
outstanding. Holders of that stock are entitled to cash dividends paid quarterly
at a rate equal to 10% per annum or $0.325 per share annually. The 10%
Convertible Series A Preferred Stock will automatically convert into our common
stock at any time after April 24, 2003, if our common stock trades for 20
consecutive trading days after the six-month period at a price of $6.50 or more
per share.
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The following is a table with information regarding our equity
compensation plans as of February 28, 2003:
- ---------------------- ---------------------- ---------------------- -------------------------
Plan category Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding options, future issuance under
outstanding options, warrants and rights equity compensation
warrants and rights plans (excluding
securities reflected in
column (a))
(a) (b) (c)
- ---------------------- ---------------------- ---------------------- -------------------------
Equity compensation
plans approved by
security holders 61,500 $3.00 88,500
- ---------------------- ---------------------- ---------------------- -------------------------
Equity compensation
plans not approved by
security holders - - -
- ---------------------- ---------------------- ---------------------- -------------------------
Total 61,500 $3.00 88,500
- ---------------------- ---------------------- ---------------------- -------------------------
Beginning in March 1999, we issued 1,000,000 shares of our common stock
to 25 investors. The shares were issued in transactions not involving a public
offering and were issued in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933. The persons to whom the
shares were issued had access to full information concerning us and represented
that they acquired the shares for their own account and not for the purpose of
distribution. The certificates for the shares contain a restrictive legend
advising that the shares may not be offered for sale, sold or otherwise
transferred without having first been registered under the 1933 Act or pursuant
to an exemption from registration under the 1933 Act. The underwriter of this
offering was Berry-Shino Securities, Inc. which received a commission of
$126,000 and a nonaccountable expense allowance of $15,000.
Beginning in October 2000, we issued 62 units comprised of Series A 10%
Subordinated Notes and Five Year Warrants to Purchase Common Stock to 34
investors. The units were issued in transactions not involving a public offering
and were issued in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933. A Form D relating to the offering
was filed with the Securities and Exchange Commission. The persons to whom the
units were issued had access to full information concerning us and represented
that they acquire the shares for their own account and not for the purpose of
distribution. The certificates for the securities contain a restrictive legend
advising that the shares may not be offered for sale, sold or otherwise
transferred without having first been registered under the 1933 Act or pursuant
to an exemption from registration under the 1933 Act. The underwriter of this
offering was Berry-Shino Securities, Inc. which received a commission of
$153,926, a nonaccountable expense allowance of $46,178 and warrants to purchase
61,570 shares of our common stock at $3.25 per share.
14
In March 2001, we issued five year warrants to purchase 68,524 shares
of our common stock at $2.50 per share in exchange for persons guaranteeing
approximately $1,749,000 of our debt. The warrants were issued in a transaction
not involving a public offering and were issued in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act of 1933. The
persons to whom the warrants were issued had access to full information
concerning us. The certificates for the warrants contain a restrictive legend
advising that the warrants and underlying shares may not be offered for sale,
sold or otherwise transferred without having first been registered under the
1933 Act or pursuant to an exemption from registration under the 1933 Act. There
was no underwriter involved in the exchange of the warrants for the guaranteeing
of the debt.
Beginning in July 2001, we issued 381,654 shares of our 10% Convertible
Series A Preferred Stock to 35 investors. The shares were issued in transactions
not involving a public offering and were issued in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act of 1933. A Form
D relating to the offering was filed with the Securities and Exchange
Commission. The persons to whom the shares were issued had access to full
information concerning us and represented that they acquired the shares for
their own account and not for the purpose of distribution. The certificates for
the shares contain a restrictive legend advising that the shares may not be
offered for sale, sold or otherwise transferred without having first been
registered under the 1933 Act or pursuant to an exemption from registration
under the 1933 Act. The underwriter of this offering was Neidiger, Tucker,
Bruner, Inc. which received a commission of $124,037 a nonaccountable expense
allowance of $37,211 and warrants to purchase 38,165 shares of our 10%
Convertible Series A Preferred Stock.
In April 2002, we issued five year warrants to purchase 16,472 shares
of our common stock at $3.25 per share in exchange for three persons
guaranteeing approximately $824,000 of our debt. The warrants were issued in a
transaction not involving a public offering and were issued in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933. The persons to whom the warrants were issued had access to full
information concerning us. The certificates for the warrants contain a
restrictive legend advising that the warrants and underlying shares may not be
offered for sale, sold or otherwise transferred without having first been
registered under the 1933 Act or pursuant to an exemption from registration
under the 1933 Act. There was no underwriter involved in the exchange of the
warrants for the guaranteeing of the debt.
Effective December 31, 2002, we issued options to purchase 2,500 shares
of our common stock to each of our three independent directors. We do not
consider grants of these options to constitute sales.
15
On October 21, 2002, our Registration Statement (File No. 333-88314)
was declared effective. The offering closed on October 24, 2002, after the sale
of 1,500,000 shares of our common stock and warrants to purchase 1,500,000
shares of our common stock. The representative of the underwriters for our
offering was Neidiger,Tucker,Bruner, Inc.
Not including shares of common stock and warrants underlying the
underwriters' over-allotment option and shares of common stock and warrants
underlying options that were to be issued to the representative of the
underwriters, we registered 1,650,000 shares of our common stock for sale at a
maximum offering price of $5.75 per share for an aggregate amount of $9,487,500
and warrants to purchase 1,650,000 shares of our common stock for sale at a
maximum offering price of $0.25 per warrant for an aggregate amount of $412,500.
We also registered 1,650,000 shares of our common stock for sale upon exercise
of the warrants at a maximum offering price of $7.1875 per share for an
aggregate of $11,859,375.
We also registered 247,500 shares of our common stock for sale at a
maximum offering price of $5.75 per share for an aggregate amount of $1,423,125
and warrants to purchase 247,500 shares of our common stock for sale at a
maximum offering price of $0.25 per warrant for an aggregate amount of $61,875
that were issuable upon exercise of the underwriter's over-allotment option. We
also registered 247,500 shares of our common stock for sale upon exercise of the
warrants included in the underwriter's over-allotment option for sale at a
maximum offering price of $7.1875 per share for an aggregate of $1,778,906.
In addition, as part of the offering, we also registered 165,000 shares
of our common stock, warrants to purchase 165,000 shares of our common stock and
165,000 shares of our common stock underlying the options to be issued to the
representative of the underwriters.
Subsequent to the effective time of the Registration Statement, we and
Neidiger, Tucker, Bruner, Inc. agreed to reduce the primary offering to
1,500,000 shares of common stock which were sold at $5.00 per share for an
aggregate amount of $7,500,000 and warrants to purchase 1,500,000 shares of our
common stock which warrants were sold for $0.25 per warrant for an aggregate
amount of $375,000.
When we and Neidiger, Tucker, Bruner, Inc. agreed to reduce the primary
offering, the number of shares of our common stock and the number of warrants
(including the underlying shares of common stock) underlying the underwriter's
over-allotment option was reduced to 225,000 and the prices of each were reduced
to the prices set forth above. To date, the underwriters have not exercised
their over-allotment option.
As a result of the reduction in the primary offering, the
representative of the underwriters received options to purchase 150,000 shares
of our common stock and warrants to purchase 150,000 shares of our common stock
at prices of $6.25 and $0.3125, respectively. The representative's warrants
included in the representative's options are exercisable at $7.8125 per share.
16
Since October 21, 2002, we have incurred an aggregate of approximately
$1,345,830 of expenses in connection with the offering, including underwriting
discounts ($708,750), expenses paid to or for the underwriter ($157,500), and
other expenses of the offering ($479,680). Such amounts were not paid directly
or indirectly to the directors, the officers or to persons owning 10% or more of
any class of our equity securities or to our affiliates. Rather, such payments
were to others. After deducting the total expenses, we received net offering
proceeds of approximately $6,529,170. Through February 28, 2003, the net
offering proceeds have been used for:
o $3,458,464 to reduce indebtedness;
o $844,721 for the manufacture of gas compressors to be placed
in our rental fleet and leased over the next one to two years;
and
o $2,225,985 the remainder for working capital.
None of the net offering proceeds were used to make payments to the
directors, the officers or to persons owning 10% or more of any class of our
equity securities or to any affiliates. Rather such payments were to others.
Our uses of the net proceeds do not represent a material change in the
use of proceeds described in our prospectus.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and attached notes thereto and the other
financial information included elsewhere in this Report. This discussion
contains forward looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these forward
looking statements as a result of any number of factors, including those set
forth under the section entitled "Risk Factors" and elsewhere in this Report.
Overview
We combine the operations of Rotary Gas Systems, NGE Leasing and Great
Lakes Compression. These entities provide products and services to the oil and
gas industry and are engaged in (1) the manufacture, sale and rental of natural
gas compressors to enhance the productivity of oil and gas wells, and (2) the
manufacture, sale and rental of flares and flare ignition systems for plant and
production facilities. We are the parent company and provide administrative and
management support and, therefore, have expenses associated with that activity.
17
We acquired the compression related assets of Great Lakes from Dominion
Michigan on March 29, 2001. This acquisition significantly increased the number
of compressor units that we own and service and thereby increased our revenue
and operating income beginning April 1, 2001.
Results of Operations
Fiscal Year Ended December 31, 2002 Compared to Fiscal Year Ended
December 31, 2001
Great Lakes Natural Gas
Compression Services
Rotary Gas NGE Leasing (1) Group Total
----------- ----------- ----------- ----------- -----------
Twelve Months Ended December 31, 2002
Revenue $ 3,298 $ 2,319 $ 4,680 $ -- $ 10,297
Gross margin 1,329 1,669 1,727 -- 4,725
Selling, general and administrative expense 791 161 268 497 1,717
Depreciation 122 439 558 47 1,166
Interest expense 9 392 537 38 976
Other income (expense) 4 15 -- -- 19
Equity in earnings from joint venture -- 485 -- -- 485
----------- ----------- ----------- ----------- -----------
Net income before income taxes $ 411 $ 1,177 $ 384 $ (582) $ 1,370
=========== =========== =========== =========== ===========
Twelve Months Ended December 31, 2001
Revenue $ 3,841 $ 1,519 $ 3,402 $ -- $ 8,762
Gross margin 1,231 1,076 1,513 -- 3,820
Selling, general and administrative expense 962 234 297 225 1,718
Depreciation 104 252 423 124 903
Interest expense 4 395 489 36 924
Other income (expense) 19 130 3 45 197
Equity in earnings from joint venture -- 224 -- -- 224
----------- ----------- ----------- ----------- -----------
Net income before income taxes $ 180 $ 549 $ 307 $ (306) $ 696
=========== =========== =========== =========== ===========
(1) We purchased the compression related assets of Great Lakes from
Dominion Michigan on March 29, 2001. Therefore, the information for the
period ending March 31, 2001, is not included.
Rotary Gas Systems Operations
Revenue from outside sources decreased from $3,841,000 to $3,298,000,
or approximately 16%, for the twelve months ended December 31, 2001 compared to
the same period ended December 31, 2002. Because our products are custom-built,
fluctuations in revenue from outside sources are expected. Our main focus is to
build our rental fleet and associated lease revenue in NGE Leasing, which in the
long term is believed to be more profitable and have a more stable cash flow.
For the year ended December 31, 2002, approximately 76% of our plant output was
used to build gas compressors for NGE Leasing. We feel that our plant capacity
is achievable in the foreseeable future by adding personnel and using the Great
Lakes Compression facility if an overrun occurs.
18
Our gross margin percentage increased to 40% for the year ended
December 31, 2002, from 32% for the same period ended December 31, 2001. The
increase resulted mainly from a change in our product mix. Specifically, a
greater part of sales during the period ending December 31, 2002, included
flares, parts and rebuilds, which normally have a higher margin than gas
compressors and service. It is notable that the margin on our individual
compressors can vary because they are normally custom designed and manufactured.
Selling, general and administrative expense decreased from $962,000, to
$791,000 for the year ended December 31, 2002, as compared to the same period
ended December 31, 2001. This was mainly the result of the reduction of selling
expenses related to the discontinuance of our air compressor line. We
discontinued this air compressor line in the development stage in order to
concentrate on our main product, gas compression.
Depreciation expense increased to $122,000 for the year ended December
31, 2002, compared to $104,000 for the year ended December 31, 2001. This
increase was mainly due to the purchase of additional vehicles, shop and office
equipment.
There was a $5,000 increase in interest expense for the year ended
December 31, 2002 compared to the same period ended December 31, 2001, this
increase was mainly due to financing the purchase of additional vehicles.
NGE Leasing Operations
Revenue from rental of natural gas compressors increased 52% for the
year ended December 31, 2002, compared to the same period in 2001. This increase
is the result of the increase in our rental fleet of which 96 new compressors
were added during the year ended December 31, 2002, as compared to the addition
of 43 during the year ended December 31, 2001. Rotary Gas Systems manufactured
the compressors.
The gross margin percentage increased 1% from 70% for the year ended
December 31, 2001 to 71% for the same period in 2002. The cost of revenue is
comprised mainly of expenses associated with the maintenance of the gas
compressor rental activity
Selling, general and administrative expense decreased from $234,000 in
the year December 31, 2001 to $161,000 for the year ended December 31, 2002.
This was mainly the result of a decrease in legal and insurance expense.
Depreciation expense increased 74% from $252,000 from the year ended
December to $439,000 for the year ended December 31, 2002. This increase was the
result of new gas compressor rental units being added to the rental fleet during
the period.
There was a decrease in interest expense of $3,000 for the year ended
December 31, 2002 as compared to the same period ended in 2001.
19
Equity in earnings from joint venture increased 116% from $224,000
during the year ended December 31, 2001 to $485,000 during the year ended
December 31, 2002. This joint venture, called Hy-Bon Rotary Compression, LLC,
serves a mutual area of interest in which we contribute gas compressor units for
rental. The increase is due to net profits associated with the additional units
leased in 2002 as compared in 2001.
Great Lakes Compression
We acquired the compression related assets of Great Lakes Compression
from Dominion Michigan as of March 29, 2001. Therefore, there is no historical
comparative data for the year ended December 31, 2001.
Natural Gas Services Group
Selling, general and administrative expense increased to $497,000 for
the year ended December 31, 2002 from $225,000 for the year ended December 31,
2001, an increase of 121%. This was mainly the result of an added expense for
warrants granted to certain officers and directors as consideration for their
guarantee of restructured corporate bank debt, an increase in accrual for
officer bonuses normally paid at year end, and additional cost incurred for our
public offering and for public relations expenses.
Amortization and depreciation expense decreased from $124,000 for the
year ended December 31, 2001 to $47,000 for the year ended December 31, 2002, a
decrease of 62%. This decrease was mainly the result of changes in the
accounting method for amortizing goodwill.
Interest expense increased to $38,000 from $36,000 for the year ended
December 31, 2002 compared to the same period ended December 31, 2001, a 6%
increase. This increase was the result of financing the purchase on three new
service vehicles.
Critical Accounting Policies and Practices
We have identified the policies below as critical to our business
operations and the understanding of our results of operations. In the ordinary
course of business, we have made a number of estimates and assumptions relating
to the reporting of results of operations and financial condition in the
preparation of our financial statements in conformity with accounting principles
generally accepted in the United States. Actual results could differ
significantly from those estimates under different assumptions and conditions.
We believe that the following discussion addresses our most critical accounting
policies, which are those that are most important to the portrayal of our
financial condition and results of operations and require our most difficult,
subjective, and complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain.
Our critical accounting policies are as follows:
o revenue recognition;
20
o estimating the allowance for doubtful accounts;
o accounting for income taxes;
o valuation of long-lived and intangible assets and goodwill;
and
o valuation of inventory
Revenue recognition
We recognize revenue from sales of compressors or flare systems at the
time of shipment and passage of title when collectability is reasonably assured.
We also offer certain of our customers the right to return products that do not
function properly within a limited time after delivery. We continuously monitor
and track such product returns and we record a provision for the estimated
amount of such future returns, based on historical experience and any
notification we receive of pending returns. While such returns have historically
been within our expectations and the provisions established, we cannot guarantee
that we will continue to experience the same return rates that we have in the
past. Any significant increase in product failure rates and the resulting credit
returns could have a material adverse impact on our operating results for the
period or periods in which such returns occur.
When product is billed to customers based on contractual agreements,
but has not yet been shipped, payments are recorded as deferred revenue, pending
shipment.
Rental and lease revenue are recognized over the terms of the
respective lease agreements based upon the classification of the lease.
Service and maintenance revenue is recognized as service is provided or
over the term of the agreement, as applicable.
Allowance for doubtful accounts receivable
We perform ongoing credit evaluations of our customers and adjust
credit limits based upon payment history and the customer's current credit
worthiness, as determined by our review of their current credit information. We
continuously monitor collections and payments from our customers and maintain a
provision for estimated credit losses based upon our historical experience and
any specific customer collection issues that we have identified. While such
credit losses have historically been within our expectations and the provisions
established, we cannot guarantee that we will continue to experience the same
credit loss rates that we have in the past. Since our accounts receivable are
concentrated in approximately three customers at December 31, 2002, a
significant change in the liquidity or financial position of any one of these
customers could have a material adverse impact on the collectability of our
accounts receivables and our future operating results.
21
Accounting for income taxes
As part of the process of preparing our consolidated financial
statements we are required to estimate our Federal income taxes as well as
income taxes in each of the states in which we operate. This process involves us
estimating our actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included in our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense in
the tax provision in the statement of operations.
Significant management judgment is required in determining our
provision for income taxes, our deferred tax assets and liabilities and any
valuation allowance recorded against our net deferred tax assets.
Valuation of long-lived and intangible assets and goodwill
We assess the impairment of identifiable intangibles, long-lived assets
and related goodwill whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. Factors we consider important which
could trigger an impairment review include the following:
o significant underperformance relative to expected historical
or projected future operating results;
o significant changes in the manner of our use of the acquired
assets or the strategy for our overall business; and
o significant negative industry or economic trends;
When we determine that the carrying value of intangibles, long-lived
assets and related goodwill may not be recoverable based upon the existence of
one or more of the above indicators of impairment, we measure any impairment
based on a projected discounted cash flow method using a discount rate
determined by our management to be commensurate with the risk inherent in our
current business model.
In 2002, Statement of Financial Accounting Standards ("FAS") No. 142,
"Goodwill and Other Intangible Assets" became effective and as a result, we
ceased to amortize approximately $2.6 million of goodwill as of January 1, 2002.
In lieu of amortization, we are required to perform an initial impairment review
of our goodwill in 2002 and an annual impairment review thereafter. Based upon a
valuation we obtained in July 2002 of our reporting units with goodwill, we did
not record an impairment charge during 2002.
22
Inventories
We value our inventory at the lower of the actual cost to purchase
and/or manufacture the inventory or the current estimated market value of the
inventory. We regularly review inventory quantities on hand and record a
provision for excess and obsolete inventory based primarily on our estimated
forecast of product demand and production requirements.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Statement Board, or FASB,
approved for issuance Statement of Accounting Shareholders, or FAS, No. 143,
Asset Retirement Obligations. FAS 143 establishes accounting requirements for
retirement obligations associated with tangible long-lived assets, including 1)
the timing of the liability recognition, 2) initial measurement of the
liability, 3) allocation of asset retirement cost to expense, 4) subsequent
measurement of the liability and 5) financial statement disclosures. FAS 143
requires that an asset retirement cost should be capitalized as part of the cost
of the related long-lived asset and subsequently allocated to expense using a
systematic and rational method. We adopted the statement on January 1, 2003, as
required. The transition adjustment resulting from the adoption of FAS 143 will
be reported as a cumulative effect of a change in accounting principle. We do
not believe that the adoption of this statement will have a material effect on
our financial position, results of operations, or cash flows.
In October 2001, the FASB approved FAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. FAS 144 replaces FAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. The new accounting model for long-lived assets to be disposed of
by sale applies to all long-lived assets, including discontinued operations, and
replaces the provisions of Accounting Principles Board Opinion No. 30, Reporting
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, for the disposal of segments of a business. FAS requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. FAS 144 also broadens the reporting of discontinued operations to
include all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. The provisions of FAS 144
apply to us effective January 1, 2003. The adoption of this statement will have
a material effect on our financial position, results of operations, or cash
flows.
In July 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, or FAS 146. FAS 146 requires companies to recognize costs associated
with exit or disposal activities when they are incurred rather than at the date
23
of a commitment to an exit or disposal plan. Examples of costs covered by FAS
146 include lease termination costs and certain employee severance costs that
are associated with a restructuring, discontinued operation, plant closing, or
other exit or disposal activity. FAS 146 is to be applied prospectively to exit
or disposal activities initiated after December 31, 2002. The adoption of FAS
146 is not expected to have a material effect on our financial position or
results of its operations.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No.148, Accounting for Stock-Based Compensation - Transition and
Disclosure - an Amendment of FASB Statement 123, or FAS 123. For entities that
change their accounting for stock-based compensation from the intrinsic method
to the fair value method under FAS 123, the fair value method is to be applied
prospectively to those awards granted after the beginning of the period of
adoption, the prospective method. The amendment permits two additional
transition methods for adoption of the fair value method. In addition to the
prospective method, the entity can choose to either (i) restate all periods
presented, retroactive restatement method, or (ii) recognize compensation cost
from the beginning of the fiscal year of adoption as if the fair value method
had been used to account for awards, modified prospective method. For fiscal
years beginning December 15, 2003, the prospective method will no longer be
allowed. We currently account for stock-based compensation using the intrinsic
value method as proscribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and plan on continuing using this
method to account for stock options; therefore, we do not intend to adopt the
transition requirements as specified in FAS 148. We adopted the disclosure
requirements as of December 31, 2002.
Seasonality and Economic Conditions
Our sales are affected by the timing of planned development and
construction projects by energy industry customers.
We do not believe that inflation had a material impact upon our results
of operations during the year ended December 31, 2002, or during the years ended
December 31, 2002 and 2001.
Liquidity and Capital Resources
We have funded our operations through public and private offerings of
our common and preferred stock, subordinated debt, and bank debt. At December
31, 2002, we had cash and cash equivalents of approximately $2,713,638, a
working capital of approximately $2,415,000 and debt of approximately $8,846,000
of which approximately $1,750,000 was classified as current. We had
approximately $2,206,000 of net cash flow from operating activities during the
first twelve months ending December 31, 2002. This was primarily from net income
of approximately $723,000 plus depreciation and amortization of approximately
$1,166,000 and increases in deferred taxes of approximately $562,000, and
decrease in accounts receivable of approximately $277,000. Proceeds were
primarily used to fund the manufacture and fabrication of additional units for
our rental fleet of gas compressors and to help fund the cash portion of the
payment for the compression related assets of Dominion Michigan during the first
quarter of 2001.
24
Market Risk
We significantly rely upon debt financing provided by various financial
institutions. Most of these instruments contain interest provisions that are at
least a percentage point above the published prime rate. This creates a
vulnerability to us relative to the movement of the prime rate. Should the prime
rate increase, our cost of funds will increase and affect our ability to obtain
additional debt. We have not engaged in any hedging activities to offset such
risks.
Risk Factors
You should carefully consider the following risks. The risks and
uncertainties described below are not the only ones facing us. Additional risks
and uncertainties that are not presently known to us or that we currently deem
immaterial may also impair our business.
If any of the events described in the following risks actually occur,
our business, financial condition and results of operations could be materially
adversely affected. In such case, the trading prices of our common stock or
warrants could decline and you could lose all or part of your investment.
Our current debt is large and may negatively impact our current and
future financial stability.
As of December 31,2002 we had an aggregate of approximately $8,846,000
of outstanding indebtedness not including accounts payable and accrued expenses
of approximately $601,000. As a result of our significant indebtedness, we might
not have the ability to incur any substantial additional indebtedness. The level
of our indebtedness could have several important effects on our future
operations, including:
o our ability to obtain additional financing for working
capital, acquisitions, capital expenditures and other purposes
may be limited;
o a significant portion of our cash flow from operations may be
dedicated to the payment of principal and interest on our
debt, thereby reducing funds available for other purposes; and
o our significant leverage could make us more vulnerable to
economic downturns.
If we are unable to service our debt, we will likely be forced to take remedial
steps that are contrary to our business plan.
As of December 31, 2002, our debt service requirements on a monthly,
quarterly and annual basis were $144,000, $434,000 and $1,700,037, respectively.
it is possible that our business will not generate sufficient cash flow from
operations to meet our debt service requirements and the payment of principal
when due. If this were to occur, we may be forced to:
25
o sell assets at disadvantageous prices;
o obtain additional financing; or
o refinance all or a portion of our indebtedness on terms that
may be very unfavorable to us.
Our current bank loan contains covenants that limit our operating and financial
flexibility and, if breached, could expose us to severe remedial provisions.
Under the terms of the bank loan, we must:
o comply with a debt to asset ratio;
o maintain minimum levels of tangible net worth;
o not exceed specified levels of debt;
o comply with a cash flow to fixed charges ratio;
o comply with a debt to net worth ratio; and
o not incur additional debt over a specified amount.
Our ability to meet the financial ratios and tests under our bank loan
can be affected by events beyond our control, and we may not be able to satisfy
those ratios and tests. A breach under either could permit the bank to
accelerate the debt so that it is immediately due and payable. No further
borrowings would be available under the credit facility. If we were unable to
repay the debt, the bank could proceed against our assets.
Approximately 80% of our compressor leases are leased for terms of six months or
less that, if terminated, would adversely impact our revenue and our ability to
recover our initial equipment costs.
Approximately 80% of our compressor leases are for terms of up to six
months. There is a possibility that these leases could be terminated by lessees
within short periods of time and that we may not be able to recover the cost of
the compressor for which a lease is terminated.
The anticipated revenue from the affiliate of Dominion Michigan cannot be
guaranteed.
In connection with our acquisition of the compression related assets of
Dominion Michigan, an affiliate of Dominion Michigan committed to purchase
compressors from us or enter into five year leases of compressors with us
totaling five-thousand horsepower. If, for any reason, the affiliate does not
fulfill this obligation to any material extent, our cash flow will be
significantly reduced and we may not be able to pay the principal or interest on
our debt as it becomes due.
26
We are dependent on a few suppliers for some of our compressor components and
the loss of one of these suppliers could cause a delay in the manufacturing of
our compressors and reduce our revenue.
We currently obtain approximately 35% of our compressor components from
two suppliers. We order from these suppliers as needed and we have no long-term
contracts with either supplier. If either of these suppliers should curtail its
operations or be unable to meet our needs, we would encounter delays in
supplying our customers with compressors until an alternative supplier, if any,
could be found. Such delays in our manufacturing process could reduce our
revenue and negatively impact our relationships with customers.
Decreased oil and gas industry expenditure levels would adversely affect our
revenue.
Our revenue is derived from expenditures in the oil and gas industry
which, in turn, are based on budgets to explore for, develop and produce oil and
natural gas. If these expenditures decline, our revenue will suffer. The
industry's willingness to explore, develop and produce depends largely upon the
prevailing view of future oil and gas prices. Many factors affect the supply and
demand for oil and gas and, therefore, influence product prices including:
o the level of oil and gas production;
o the levels of oil and gas inventories;
o the expected cost of developing new reserves;
o the cost of producing oil and gas;
o the level of drilling activity;
o inclement weather;
o worldwide economic activity;
o regulatory and other federal and state requirements in the
United States;
o the ability of the Organization of Petroleum Exporting
Countries to set and maintain production levels and prices for
oil;
o terrorist activities in the United States and elsewhere;
o the cost of developing alternate energy sources;
o environmental regulation; and
o tax policies.
27
If the demand for oil and gas decreases, then demand for our
compressors likely will decrease.
The intense competition in our industry could result in reduced profitability
and loss of market share for us.
We sell or lease our products and sell our services in competitive
markets. In most of our business segments, we compete with the oil and gas
industry's largest equipment and service providers who have greater name
recognition than we do. These companies also have substantially greater
financial resources, larger operations and greater budgets for marketing,
research and development than we do. They may be better able to compete in
making equipment available quickly and more efficiently, meeting delivery
schedules or reducing prices. As a result, we could lose customers and market
share to those competitors. These companies may also be better positioned than
us to successfully endure down turns in the oil and gas industry.
Our operations may be adversely affected if our current competitors or
new market entrants introduce new products or services with better prices,
features, performance or other competitive characteristics than our products and
services. Competitive pressures or other factors also may result in significant
price competition that could harm our revenue and our business.
We might be unable to employ adequate technical personnel which could hamper our
plans for expansion or increase our costs.
Many of the compressors that we sell or lease are technically complex
and often must perform in harsh conditions. We believe that our success depends
upon our ability to employ and retain a sufficient number of technical personnel
who have the ability to design, utilize, enhance and maintain these compressors.
Our ability to expand our operations depends in part on our ability to increase
our skilled labor force. The demand for skilled workers is high and supply is
limited. A significant increase in the wages paid by competing employers could
result in a reduction of our skilled labor force or cause an increase in the
wage rates that we must pay or both. If either of these events were to occur,
our cost structure could increase and our operations and growth potential could
be impaired.
If we do not develop, produce and commercialize new competitive technologies and
products, our revenue may decline.
The markets for natural gas compressor products and services and for
flare systems, ignition systems and components for plant and production
facilities are characterized by continual technological developments. As a
result, substantial improvements in the scope and quality of product function
and performance can occur over a short period of time. If we are not able to
develop commercially competitive products in a timely manner in response to
changes in technology, our business and revenue may be adversely affected.
28
We may encounter financial constraints or technical or other
difficulties that could delay introduction of new products and services in the
future. Our competitors may introduce new products before we do and achieve a
competitive advantage.
Additionally, the time and expense invested in product development may
not result in commercial applications that provide revenue. We could be required
to write off our entire investment in a new product that does not reach
commercial viability. Moreover, we may experience operating losses after new
products are introduced and commercialized because of high start-up costs,
unexpected manufacturing costs or problems, or lack of demand.
We are subject to extensive environmental laws and regulations that could
require us to take costly compliance actions that could harm our financial
condition.
Our manufacturing and maintenance operations are significantly affected
by stringent and complex federal, state and local laws and regulations governing
the discharge of substances into the environment or otherwise relating to
environmental protection. In these operations, we generate and manage hazardous
wastes such as solvents, thinner, waste paint, waste oil, washdown wastes, and
sandblast material. We attempt to use generally accepted operating and disposal
practices and, with respect to acquisitions, will attempt to identify and assess
whether there is any environmental risk before completing an acquisition. Based
on the nature of the industry, however, hydrocarbons or other wastes may have
been disposed of or released on or under properties owned, leased, or operated
by us or on or under other locations where such wastes have been taken for
disposal. The waste on these properties may be subject to federal or state
environmental laws that could require us to remove the wastes or remediate sites
where they have been released. We could be exposed to liability for cleanup
costs, natural resource and other damages as a result of our conduct or the
conduct of, or conditions caused by, prior operators or other third parties.
Environmental laws and regulations have changed in the past, and they are likely
to change in the future. If existing regulatory requirements or enforcement
policies change, we may be required to make significant unanticipated capital
and operating expenditures.
Any failure by us to comply with applicable environmental laws and
regulations may result in governmental authorities taking actions against our
business that could harm our operations and financial condition, including the:
o issuance of administrative, civil and criminal penalties;
o denial or revocation of permits or other authorizations;
o reduction or cessation in operations; and
o performance of site investigatory, remedial or other
corrective actions.
29
We could be subject to substantial liability claims that could harm our
financial condition.
Our products are used in hazardous drilling and production applications
where an accident or a failure of a product can cause personal injury, loss of
life, damage to property, equipment or the environment, or suspension of
operations.
While we maintain insurance coverage, we face the following risks under
our insurance coverage:
o we may not be able to continue to obtain insurance on
commercially reasonable terms;
o we may be faced with types of liabilities that will not be
covered by our insurance, such as damages from significant
product liabilities and from environmental contamination;
o the dollar amount of any liabilities may exceed our policy
limits; and
o we do not maintain coverage against the risk of interruption
of our business.
Any claims made under our policy will likely cause our premiums to
increase. Any future damages caused by our products or services that are not
covered by insurance, are in excess of policy limits or are subject to
substantial deductibles, would reduce our earnings and our cash available for
operations.
Liability to customers under warranties may materially and adversely affect our
earnings.
We provide warranties as to the proper operation and conformance to
specifications of the equipment we manufacture. Our equipment is complex and
often deployed in harsh environments. Failure of this equipment to operate
properly or to meet specifications may increase our costs by requiring
additional engineering resources and services, replacement of parts and
equipment or monetary reimbursement to a customer. We have in the past received
warranty claims and we expect to continue to receive them in the future. To the
extent that we incur substantial warranty claims in any period, our reputation,
our ability to obtain future business and our earnings could be materially and
adversely affected.
Loss of key members of our management could adversely affect our business while
we attempt to find their replacements.
We depend on the continued employment and performance of Wayne L.
Vinson, our President and the President of Rotary Gas Systems, Scott W.
Sparkman, our Secretary and the Executive Vice President of NGE Leasing, Alan P.
Kurus, our Vice President-Sales and Marketing, Earl R. Wait, our Treasurer and
Chief Financial Officer, and other key members of our management. If any of our
30
key managers resigns or becomes unable to continue in his present role and is
not adequately replaced, our business operations could be materially adversely
affected. We do not maintain any "key man" life insurance for any of our
officers, except for policies totaling $1,500,000 on the life of Wayne L.
Vinson. We are the beneficiary of these policies.
We are reliant on our current customers for future cash flows and the loss of
one or more of our current customers could adversely affect our results of
operations.
Our business is dependent not only on securing new customers but also
on maintaining current customers. Dominion Exploration & Production, Inc., an
affiliate of Dominion Resources, Inc., accounted for approximately 30% and
approximately 26% of our consolidated revenue during the twelve months ended
December 31, 2002 and the year ended December 31, 2001, respectively. The loss
of one or more of our significant customers would have an adverse effect on our
revenue and results of operations.
Provisions contained in our governing documents could hinder a change in our
control.
Our articles of incorporation and bylaws contain provisions that may
discourage acquisition bids and may limit the price investors are willing to pay
for our common stock and warrants. Our articles of incorporation and bylaws
provide that:
o directors will be elected for three-year terms, with
approximately one-third of the board of directors standing for
election each year;
o cumulative voting is not allowed which limits the ability of
minority shareholders to elect any directors;
o the unanimous vote of the board of directors or the
affirmative vote of the holders of not less than 80% of the
votes entitled to be cast by the holders of all shares
entitled to vote in the election of directors is required to
change the size of the board of directors; and
o directors may only be removed for cause by holders of not less
than 80% of the votes entitled to be cast on the matter.
Our board of directors has the authority to issue up to five million
shares of preferred stock. The board of directors can fix the terms of the
preferred stock without any action on the part of our shareholders. The issuance
of shares of preferred stock may delay or prevent a change in control
transaction. In addition, preferred stock could be used in connection with the
board of director's adoption of a shareholders' rights plan (also known as a
poison pill), which would make it much more difficult to effect a change in
control of our company through acquiring or controlling blocks of stock. Also,
after completion of this offering, our directors and officers as a group will
continue to beneficially own stock. Although this is not a majority of our
stock, it confers substantial voting power in the election of directors and
31
management of our company. This would make it difficult for other minority
shareholders to effect a change in control or otherwise extend any significant
control over the management of our company. This may adversely affect the market
price and interfere with the voting and other rights of our common stock.
If our common stock does not trade for a certain price per share after April 24,
2003, our preferred stock will not automatically convert into our common stock.
Our currently outstanding 381,654 shares of 10% Convertible Series A
Preferred Stock will automatically convert into shares of our common stock if,
after April 24, 2003, our common stock trades at or above $6.50 per share for 20
consecutive trading days. Until such event occurs, we will be required to:
o continue to pay the preferred stock dividend;
o permit the preferred stock holders to vote as a separate class
where required by Colorado law; and
o pay the holders of preferred stock a preference upon our
liquidation.
The same consequences would likely result from any additional preferred
stock that our board of directors may authorize for issuance in the future, as
well as additional rights and preferences that could be included in the terms of
the preferred stock.
We will have a comparatively low number of shares of common stock and warrants
outstanding and, therefore, our common stock and warrants may suffer from
limited liquidity and their prices will likely be volatile and their value may
be adversely affected.
Because the number of freely transferable shares of our common stock
and number of our warrants will be low, the trading prices of our common stock
and warrants will likely be subject to significant price fluctuations and
limited liquidity. This may adversely affect the value of your investment. In
addition, our common stock and warrants could be subject to fluctuations in
response to variations in quarterly operating results, changes in management,
future announcements concerning us, general trends in the industry and other
events or factors as well as those described above.
We must evaluate our intangible assets annually for impairment.
Our intangible assets are recorded at cost less accumulated
amortization and consist of goodwill and patent costs. Through December 31,
2001, goodwill was amortized using the straight-line method over 15 years and
patent costs were amortized over 13 to 15 years.
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets." FAS 142 provides that: 1) goodwill and intangible assets with
indefinite lives will no longer be amortized; 2) goodwill and intangible assets
with indefinite lives must be tested for impairment at least annually; and 3)
the amortization period for intangible assets with finite lives will no longer
32
be limited to forty years. In the event that we determine our intangible assets
with indefinite lives have been impaired, we must record a write-down of those
assets on our statement of operations during the period of impairment. Our
determination of impairment will be based on various factors, including any of
the following factors, if they materialize:
o significant underperformance relative to expected historical
or projected future operating results;
o significant changes in the manner of our use of the acquired
assets or the strategy for our overall business;
o significant negative industry or economic trends;
o significant decline in our stock price for a sustained period;
and
o our market capitalization relative to net book value.
We adopted FAS 142 as of January 1, 2002. Based on an independent
valuation in July 2002 of our reporting units with goodwill, adoption of FAS 142
did not have a material adverse effect on us through at least 2002. In the
future it could result in impairments of our intangible assets or goodwill. We
expect to continue to amortize our intangible assets with finite lives over the
same time periods as previously used, and we will test our intangible assets
with indefinite lives for impairment at least once each year. In addition, we
are required to assess the consumptive life, or longevity, of our intangible
assets with finite lives and adjust their amortization periods accordingly. Our
net intangible assets were recorded on our balance sheet at approximately
$2,730,000 as of December 31, 2002, and we expect the carrying value of net
intangible assets will increase significantly if we acquire additional
businesses. Any impairments in future periods of those assets, or a reduction in
their consumptive lives, could materially and adversely affect our statement of
operations and financial position.
33
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The table below contains information about our executive officers and
directors:
Name Age Position
---- --- --------
Wallace O. Sellers(1)(2) 73 Director, Chairman
Wayne L. Vinson 44 Director, President and Chief
Executive Officer
Scott W. Sparkman 41 Director and Secretary
Charles G. Curtis(1)(2) 70 Director
James T. Grigsby(1)(2) 55 Director
Alan P. Kurus 49 Vice President - Sales and Marketing
Earl R. Wait 59 Chief Financial Officer and Treasurer
---------------------
(1) Member of our audit committee
(2) Member of our compensation committee
The Board of Directors has been divided into three classes with
directors serving staggered three-year terms. At each annual meeting of
stockholders, one class of directors is elected for a full term of three years
to succeed those directors in the class whose term is expiring. With respect to
the existing Board of Directors, the terms of Mr. Curtis and Mr. Sellers will
expire in 2005, the terms of Mr. Sparkman and Mr. Grigsby will expire in 2003;
and the term of Mr. Vinson in 2004. All officers serve at the discretion of the
Board of Directors.
The following sets forth biographical information for at least the past
five years for our directors and executive officers.
Wallace O. Sellers is one of our founders and has served as a director
and the Chairman of our Board of Directors since December 17, 1998, and as the
Chairman of the Board of Directors of Great Lakes Compression since February
2001. Although Mr. Sellers retired in December 1994, he served as Vice-Chairman
of the Board and Chairman of the Executive Committee of Enhance Financial
Services, Inc., a financial guaranty reinsurer, from January 1995 to 2001. From
November 1986 to December 1991 he was President and Chief Executive Officer of
Enhance. Mr. Sellers serves as a director of Danielson Holding Corp., an
insurance holding company which is a reporting company under the Securities
Exchange Act of 1934. From 1951 to 1986 Mr. Sellers was employed by Merrill
Lynch, Pierce, Fenner & Smith Incorporated, an investment banker, in various
capacities, including Director of the Municipal and Corporate Bond Division and
Director of the Securities Research Division. Immediately prior to his
retirement from Merrill Lynch, he served as Senior Vice President and Director
of Strategic Development. Mr. Sellers received a BA degree from the University
of New Mexico, an MA degree from New York University and attended the Advanced
Management Program at Harvard University. Mr. Sellers is a Chartered Financial
Analyst.
34
Wayne L. Vinson has served as one of our directors since April 2000, as
our President and Chief Executive Officer since July 2001, as our Executive Vice
President from October 31, 2000 to July 2001, as the President of Rotary (and
its predecessor, Hi-Tech) since February 1994, as a director of NGE between 1996
and 1998 and as Executive Vice President of Great Lakes Compression since
February 2001. He also served as our Vice President from April 2000 to October
2000. From January 1990 to June 1995, Mr. Vinson served as Vice President and
since June 1995 he has served as President of Vinson Operating Company, an oil
and gas well operator. Mr. Vinson has more than 22 years of experience in the
energy services industry.
Scott W. Sparkman has been one of our directors since 1998, has served
as Executive Vice-President of NGE since July 2001, has served as a director
since December 1998 and as Secretary and Treasurer of NGE since March 1999 and
has served as the Secretary of Great Lakes Compression since February 2001. Mr.
Sparkman served as the President of NGE from December 1998 to July 2001. From
May 1997 to July 1998, Mr. Sparkman served as Project Manager and Comptroller
for Business Development Strategies, Inc., a designer of internet websites. Mr.
Sparkman pursued personal business interests from May 1996 to May 1997. From
February 1991 to May 1996, Mr. Sparkman served as Vice President and Director,
later as President and Director, of Diamond S Safety Services, Inc., a seller
and servicer of hydrogen sulfide monitoring equipment. Mr. Sparkman filed for
personal bankruptcy in 1998 as a result of personal debt created when there was
a decline in the need for the oilfield services that were provided by a company
that was owned by Mr. Sparkman. He received a BBA degree from Texas A&M
University.
Charles G. Curtis has been one of our directors since April 2001. Since
1992, Mr. Curtis has been the President and Chief Executive Officer of Curtis
One, Inc. d/b/a/ Roll Stair, a manufacturer of aluminum and steel mobile stools
and mobile ladders. From 1988 to 1992, Mr. Curtis was the President and Chief
Executive Officer of Cramer, Inc. a manufacturer of office furniture. Mr. Curtis
has a B.S. degree from the United States Naval Academy and a MSAE degree from
the University of Southern California.
James T. Grigsby has served as one of our directors since 1999 and as
one of the directors of Great Lakes Compression since February 2001. Since 1996,
Mr. Grigsby has been a director of and a consultant to Blue River Paint Co., a
development stage environmental friendly coatings technology company. From 1996
to 1997, Mr. Grigsby was a consultant to Outlook Window Partnership, a regional
wood window manufacturer. From 1989 to 1996, Mr. Grigsby was President and Chief
Executive Officer of Seal Right Windows, Inc. and Chief Executive Officer of
Oldach Window Corp., manufacturers of wood, wood-clad and vinyl windows and
doors. Mr. Grigsby received a BS degree from the University of Michigan and an
MBA degree from Stanford University.
35
Alan P. Kurus has served as our Vice President - Sales and Marketing
since March 2001 and one of our employees since October 2000. From 1997 to 2000,
Mr. Kurus was Vice President - Sales and Marketing of CompAir Americas, a
manufacturer of compressors. From 1993 to 1997, Mr. Kurus was the Director of
Sales for Le ROI International, a manufacturer of compressors.
Earl R. Wait has served as our Chief Financial Officer since May 2000
and our Treasurer since 1998. Mr. Wait was our Chief Accounting Officer from
1998 to May 2000. Mr. Wait has been the Chief Financial Officer and
Secretary/Treasurer of Flare King and then Rotary since April 1993, the
Assistant Secretary/Treasurer for Hi-Tech since June 1996, the Controller and
Assistant Secretary/Treasurer for Hi-Tech from 1994 to 1999, a director of NGE
since July 1999 and the Chief Accounting Officer and Treasurer of Great Lakes
Compression since February 2001. Mr. Wait is a certified public accountant with
an MBA in management and has more than 25 years of experience in the energy
industry.
The following sets forth biographical information for at least the past
five years for two of our employees whom we consider to be key employees.
Wallace C. Sparkman, age 73, is one of our founders and has been the
President of NGE since July 2001, a director of NGE since February 1996, the
President of Rotary (and its predecessor, Flare King) from April 1993 to April
1997. Mr. Sparkman served as our President from May 2000 to July 2001 and as the
President of Great Lakes Compression from February 2001 to July 2001. Mr.
Sparkman was Vice President of NGE from February 1996 to November 1999. Since
December 1998, Mr. Sparkman has acted as a consultant to our Board of Directors.
From 1985 to 1998, Mr. Sparkman acted as a management consultant to various
entities and acted as a principal in forming several privately-owned companies.
Mr. Sparkman was a co-founder of Sparkman Energy Corporation, a natural gas
gathering and transmission company, in 1979 and served as its Chairman of the
Board, President and Chief Executive Officer until 1985, when ownership control
changed. From 1968 to 1979, Mr. Sparkman held various executive positions and
served as a director of Tejas Gas Corporation, a natural gas gathering and
transmission company. At the time of his resignation from Tejas Gas Corporation
in 1979, Mr. Sparkman was President and Chief Executive Officer. Mr. Sparkman
has more than 34 years of experience in the energy service industry.
Ronald D. Bingham, age 58, has served as the President of Great Lakes
Compression since 2001. From March 2001 to July 2001, Mr. Bingham was the
General Manager of Great Lakes Compression. From January 1989 to March 2001, Mr.
Bingham was the District Manager for Waukesha Pearce Industries, Inc., a
distributor of Waukesha natural gas engines. Mr. Bingham is a member of the
Michigan Oil and Gas Association and received a bachelors degree in Graphic Arts
from Sam Houston State University.
All of the officers and key employees devote substantially all of their
working time to our business.
36
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our
officers and directors and persons who beneficially own more than 10% of our
outstanding common stock to file reports of beneficial ownership with the
Securities and Exchange Commission and to furnish us with copies of the reports.
Based solely on a review of the Forms 3, 4 and 5 and amendments thereto
furnished to us from October 21, 2002, until December 31, 2002, no persons who
were either one of our directors or officers or who beneficially owned more than
10% of our common stock failed to file on a timely basis reports required by
Section 16(a) of the Securities Exchange Act of 1934 except that Charles G.
Curtis filed an amendment to his Form 3 to add 10% Convertible Series A
Preferred Stock he owned, filed an amendment to a Form 4 to include common stock
and warrants that were not previously reported and was late in filing a Form 4
to report the granting of an option to him; Diamond S DGT Trust was late in
filing its Form 3; James T. Grigsby filed an amendment to his Form 4 to report
warrants that were previously not included on his Form 4 and was late in filing
a Form 4 to report the granting of an option to him; Alan P. Kurus filed
amendments to his Form 3 to change the nature of his ownership of common stock
and to report a stock option that he owned; Sharon Renee Pipes was late in
filing her Form 3; Wallace O. Sellers was late in filing a Form 4 to report the
granting of an option to him; and Earl R. Wait filed an amendment to his Form 3
to report a stock option that he owned.
ITEM 10. EXECUTIVE COMPENSATION
Executive Compensation
The following table sets forth information regarding the compensation
paid during the years ended December 31, 2002, 2001 and 2000 by us to Wayne L.
Vinson and Earl R. Wait, our only executive officers whose combined salary and
bonuses exceeded $100,000 during the year ended December 31, 2002.
Long-Term
Annual Compensation Compensation Awards
------------------- -------------------
Name Securities Underlying
Principal Position Year Salary Bonus Options
- ------------------ ---- ------ ----- ---------------------
Wayne L. Vinson 2002 $ 120,000(1) $ 39,452 -0- (2)
Executive Vice President 2001 $ 102,692(1) $ 25,583 -0-
until 7/25/01 2000 74,423(1) 25,604 -0-
President since 7/25/01
Earl R. Wait 2002 $ 90,000 $ 29,589 15,000
Chief Financial Officer 2001 85,385 23,164 -0-
2000 80,088 7,416 -0-
- --------------------------
37
(1) Does not include any compensation paid to the wife of Wayne L. Vinson
for her services as our accounts payable and payroll clerk for 2002,
2001 and 2000, respectively.
(2) CAV-RDV, Ltd., a Texas limited partnership for the benefit of the
children of Wayne L. Vinson, was issued a five year warrant to purchase
15,756 shares of our common stock at $2.50 per share in consideration
for CAV-RDV, Ltd. guaranteeing a portion of our debt. The children are
eighteen years old or older and Mr. Vinson is not a partner in CAV-RDV,
Ltd. and disclaims beneficial ownership of the warrants.
We have established a bonus program for our officers. At the end of
each of our fiscal years, our Board of Directors reviews our operating history
and determines whether or not any bonuses should be paid to our officers. If so,
the Board of Directors determines what amount should be allocated. The Board of
Directors may discontinue the bonus program at any time.
Option Grants in Last Fiscal Year
The following table sets forth information pertaining to option grants
to Wayne L. Vinson and Earl R. Wait, our only executive officers whose combined
salary and bonuses exceeded $100,000 during the year ended December 31, 2002:
% of Total
Number of Options
Securities Granted to
Underlying Employees in
Name Options Fiscal Year Exercise Price Expiration Date
- ---- ------- ------------- -------------- ---------------
Wayne L. Vinson 0 0% N/A N/A
Earl R. Wait 15,000 35% $3.25 4/23/2012
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
The following table sets forth information pertaining to option
exercises by, and fiscal year end option values of options held by to Wayne L.
Vinson and Earl R. Wait, our only executive officers whose combined salary and
bonuses exceeded $100,000 during the year ended December 31, 2002:
38
Fiscal Year End Option Values
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired Value Options at Fiscal Year End at Fiscal Year End
Name On Exercise Received Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ----------- -------- -------------------------- -------------------------
Wayne L. Vinson 0 0 0/0 0/0
Earl R. Wait 0 0 0/15,000 0/$9,450
Compensation of Directors
Our directors who are not employees are paid $1,000 per quarter and at
December 31 of each year will be issued a five year option to purchase 2,500
shares of our common stock at the then market value. We also reimburse our
directors for accountable expenses incurred on our behalf.
1998 Stock Option Plan
We have adopted the 1998 Stock Option Plan which provides for the
issuance of options to purchase up to 150,000 shares of our common stock. The
purpose of the plan is to attract and retain the best available personnel for
positions of substantial responsibility and to provide additional incentive to
employees and consultants and to promote the success of our business. The plan
is administered by the Board of Directors or a compensation committee consisting
of two or more non-employee directors, if appointed. At its discretion, the
administrator of the plan may determine the persons to whom options may be
granted and the terms upon which such options will be granted. In addition, the
administrator of the plan may interpret the plan and may adopt, amend and
rescind rules and regulations for its administration. Options to purchase 12,000
shares of our common stock at an exercise price of $2.00 per share, options to
purchase 42,000 shares of our common stock at an exercise price of $3.25 per
share, and options to purchase 7,500 shares of our common stock at an exercise
price of $3.88 per share have been granted under the plan and are outstanding.
Limitations on Directors' and Officers' Liability
Our Articles of Incorporation provide our officers and directors with
certain limitations on liability to us or any of our shareholders for damages
for breach of fiduciary duty as a director or officer involving certain acts or
omissions of any such director or officer.
This limitation on liability may have the effect of reducing the
likelihood of derivative litigation against directors and officers and may
discourage or deter shareholders or management from bringing a lawsuit against
directors and officers for breach of their duty of care even though such an
action, if successful, might otherwise have benefited us and our shareholders.
39
Our Articles of Incorporation and bylaws provide certain
indemnification privileges to our directors, employees, agents and officers
against liabilities incurred in legal proceedings. Also, our directors,
employees, agents or officers who are successful, on the merits or otherwise, in
defense of any proceeding to which he or she was a party, are entitled to
receive indemnification against expenses, including attorneys' fees, incurred in
connection with the proceeding.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
We are not aware of any pending litigation or proceeding involving any
of our directors, officers, employees or agents as to which indemnification is
being or may be sought, and we are not aware of any other pending or threatened
litigation that may result in claims for indemnification by any of our
directors, officers, employees or agents.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth, as of the February 28, 2003, the
beneficial ownership of our common stock: (i) by each of our directors and
executive officers; (ii) by all of our executive officers and directors as a
group; and (iii) by all persons known by us to beneficially own more than five
percent of our common stock.
Shares of
Common Stock Percent
Beneficially Beneficially
Name and Address Owned Owned
- ---------------- ------------ ------------
Wallace O. and Naudain Sellers 698,159(1) 14.3%
P.O. Box 106, 6539 Upper York Road
Solebury, PA 18963-0106
Wayne L. Vinson 0(2) 0.0%
4404 Lennox Drive
Midland, TX 79707
Scott W. Sparkman 516,467(3) 10.6%
1604 Ventura Avenue
Midland, TX 79705
40
Charles G. Curtis 70,500(4) 1.4%
1 Penrose Lane
Colorado Springs, CO 80906
James T. Grigsby 81,700(5) 1.8%
3345 Grimsby Lane
Lincoln, NE 68502
Alan P. Kurus 40,704(6) 0.8%
2000 Centerview
Midland, TX 79706
Earl R. Wait 75,000(7) 1.5%
109 Seco
Portland, TX 78374
All directors and executive officers as a group 1,482,530 29.3%
(seven persons)
CAV-RDV, Ltd. 486,006(2) 9.8%
1541 Shannon Drive
Lewisville, TX 75077
RWG Investments LLC 394,000(8) 7.6%
5980 Wildwood Drive
Rapid City, SD 57902
Richard L. Yadon 288,865(9) 5.9%
P.O. Box 8715
Midland, TX 79708-8715
- ---------------------------------------
(1) Includes 300,000 shares of common stock owned by the Wallace Sellers,
July 11, 2002 GRAT, warrants to purchase 21,936 shares of common stock,
9,032 shares of common stock and 5,000 shares of common stock at $ 2.50
per share, at $3.25 per share and at $6.25 per share, respectively,
owned by Wallace Sellers, an option to purchase 2,500 shares of common
stock at $3.88 per share owned by Wallace Sellers, 34,691 shares of
common stock owned by Naudain Sellers, and 300,000 shares of common
stock owned by the Naudain Sellers, July 11, 2002 GRAT. Wallace and
Naudain Sellers are husband and wife. Wallace Sellers is the trustee of
his wife's trust and his wife is the trustee of his trust. The
beneficiaries of the trusts are two trusts. The beneficiaries of one
trust are Naudain Sellers and their three children and the
beneficiaries of the other trust are their three children.
(2) CAV-RDV, Ltd., a Texas limited partnership for the benefit of the
children of Wayne L. Vinson, owns 470,250 shares of common stock and
warrants to purchase 15,756 shares of common stock at $2.50 per share
and 2,122 shares of common stock at $3.25 per share, respectively. Both
children are 18 years old or older and Mr. Vinson is not a partner in
CAV-RDV, Ltd. Mr. Vinson disclaims beneficial ownership of any of the
shares of common stock.
(3) Includes 20,000 shares of common stock owned by Scott W. Sparkman and
475,000 shares of common stock and warrants to purchase 21,467 shares
of common stock at $2.50 per share owned by Diamond S DGT, a trust for
which Mr. Sparkman is a co-trustee and co-beneficiary with his sister.
(4) Represents warrants to purchase 40,000 shares of common stock at $3.25
per share, an option to purchase 2,500 shares of common stock at $3.88
per share, warrants to purchase 5,000 shares of common stock at $6.25
per share, and 18,000 shares of common stock which may be obtained upon
conversion of shares of our 10% Convertible Series A Preferred Stock.
41
(5) Includes warrants to purchase 9,600 shares at $6.25 per share and an
option to purchase 2,500 shares at $3.88 per share.
(6) Represents warrants to purchase 31,704 shares of common stock at $3.25
per share owned by Mr. Kurus' individual retirement account and
includes an option to purchase 9,000 shares of common stock at $3.25
per share that begins to vest in April 2003.
(7) Includes an option to purchase 15,000 shares of common stock at $3.25
per share that begins to vest in April 2003.
(8) Includes an option to purchase 100,000 shares of common stock at $2.00
per share, warrants to purchase 32,000 shares of common stock at $3.25
per share and 12,000 shares of common stock which may be obtained upon
conversion of shares of our 10% Convertible Series A Preferred Stock.
RWG Investments LLC is a limited liability company the beneficial owner
of which is Roland W. Gentner, 5980 Wildwood Drive, Rapid City, South
Dakota 57902.
(9) Includes warrants to purchase 14,683 shares of common stock at $2.50
per share.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March 2001, we issued warrants that will expire on December 31,
2006, to purchase shares of our common stock at $2.50 per share to the following
persons for guaranteeing the amount of our debt indicated:
Number of Shares Amount of
Name Underlying Warrants Debt Guaranteed
---- ------------------- ---------------
Wallace O. Sellers 21,936 $548,399
Wallace C. Sparkman(1) 21,467 536,671
CAV-RDV, Ltd.(2) 15,756 393,902
Richard L. Yadon 9,365 234,121
- ---------------------------
(1) Wallace C. Sparkman subsequently transferred his warrants for 21,467
shares to Diamond S DGT, a trust of which Scott W. Sparkman is the
trustee and a beneficiary. Wallace C. Sparkman has represented to us
that he has no beneficial interest in Diamond S DGT.
(2) CAV-RDV, Ltd., is a Texas limited partnership for the benefit of the
children of Wayne L. Vinson. Both children are eighteen years old or
older and Mr. Vinson is not a partner in CAV-RDV, Ltd. Mr. Vinson
disclaims beneficial ownership of the warrants.
None of the guarantees is still in effect.
In April 2002, we issued five year warrants to purchase shares of our
common stock at $3.25 per share to the following persons for guaranteeing our
restructured bank debt indicated:
Number of Shares Amount of Additional
Name Underlying Warrants Debt Guaranteed
---- ------------------- --------------------
Wallace O. Sellers 9,032 $451,601
CAV-RDV, Ltd.(1) 2,122 106,098
Richard L. Yadon 5,318 265,879
- ---------------------------
(1) CAV-RDV, Ltd., is a Texas limited partnership for the benefit of the
children of Wayne L. Vinson. Both children are eighteen years old or
older and Mr. Vinson is not a partner in CAV-RDV, Ltd. Mr. Vinson
disclaims beneficial ownership of the warrants.
42
None of the guarantees is still in effect.
Wayne L. Vinson, Earl R. Wait and Wallace C. Sparkman have also
guaranteed approximately $197,000, $84,000 and $92,000, respectively, of
additional debt for us without consideration. This debt was incurred when we
acquired vehicles, equipment and software. The following schedule provides
information as to the remaining debt balances as of June 30, 2002:
Balance at Interest Maturity
Guarantor June 30, 2002 Rate Date
--------- ------------- --------- ----------
Earl Wait $ 22,983 1.90% 3/26/2004
Earl Wait 50,153 10.50% 10/10/2005
Wallace Sparkman 84,405 10% 10/15/2010
Wayne Vinson 5,248 9.50% 12/15/2002
Wayne Vinson 5,879 Prime + 1.0% 7/15/2003
Wayne Vinson 20,636 1.90% 4/22/2004
Wayne Vinson 10,563 7.50% 6/21/2004
In October, 1999, RWG Investments, LLC was granted a five year option
to purchase 100,000 shares of our common stock at $2.00 per share in
consideration of one of its members serving as an advisor to us.
Hunter Wise Financial Group LLC served as our investment banker and
advisor in connection with our acquisition of the compression related assets of
Dominion Michigan for which we paid Hunter Wise a total fee of $440,000. James
T. Grigsby, one of our directors, has a 1% interest in Hunter Wise.
Charles G. Curtis, one of our directors, Alan P. Kurus, one of our
officers, and RWG Investments, LLC, a beneficial owner of more than 5% of our
outstanding stock, purchased our notes and five year warrants to purchase common
stock in a private offering that commenced in October 2000 and concluded in May
2001. Mr. Curtis purchased $100,000 of the notes and warrants, Mr. Kurus
purchased approximately $79,000 of the notes and warrants and RWG Investments,
LLC purchased $80,000 of the notes and warrants. The notes and warrants
purchased by Mr. Curtis, Mr. Kurus and RWG Investments, LLC were on the same
terms and conditions as sales to non-affiliated purchasers in the private
offering.
43
Charles G. Curtis, one of our directors, and RWG Investments, LLC, a
beneficial owner of more than 5% of our outstanding stock, purchased 18,000
shares and 12,000 shares, respectively, or $58,500 and $39,000, respectively, of
our 10% Convertible Series A Preferred Stock in a private offering that
commenced in July 2001. The shares purchased by Mr. Curtis and RWG Investments,
LLC were on the same terms and conditions as sales to non-affiliated purchasers
in the private offering.
Wallace O. Sellers, Charles G. Curtis and James T. Grigsby, our
independent directors, were each paid $1,000 and were each issued an option to
purchase 2,500 shares of our common stock at $3.88 per share for serving as our
directors during the year ended December 31, 2002.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following is a list of all exhibits filed as part of this Form
10-KSB:
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
2.1 Purchase and Sale Agreement by and between Hy-Bon Engineering
Company, Inc. and NGE Leasing, Inc.*
3.1 Articles of incorporation.**
3.2 Amendment to articles of incorporation dated March 31, 1999,
and filed on May 25, 1999.**
3.3 Amendment to articles of incorporation dated July 25, 2001, and
filed on July 30, 2001.**
3.4 Bylaws.**
4.1 Form of warrant certificate.**
4.2 Form of warrant agent agreement.**
4.3 Form of lock-up agreement.**
4.4 Form of representative's option for the purchase of common
stock**
4.5 Form of representative's option for the purchase of warrants**
10.1 1998 Stock Option Plan.**
10.2 Asset Purchase Agreement between Natural Gas Acquisition
Corporation and Great Lakes Compression, Inc. dated January 1,
2001.**
10.3 Amendment to Guaranty Agreement between Natural Gas Services
Group, Inc. and Dominion Michigan Production Services, Inc.**
10.4 Loan Agreement between Natural Gas Services Group, Inc.,
Wallace Sparkman, Wallace O. Sellers, CAV-RDV, Ltd., Diamente
Investments, L.P., Rotary Gas Systems, Inc., NGE Leasing, Inc.
and Western National Bank dated September 15, 1999, and First
Amendment dated March 9, 2001, Second Amendment dated March 20,
2001, and Third Amendment dated July 25, 2001.**
10.5 Employment Agreement between Natural Gas Services Group, Inc.
and Alan Kurus dated August 31, 2000.**
10.6 Employment Agreement between Natural Gas Services Group, Inc.
and Wayne Vinson dated January 1, 1999**.
44
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
10.7 Employment Agreement between Natural Gas Services Group, Inc.
and Earl R. Wait dated January 1, 1999.**
10.8 Form of Series A 10% Subordinated Notes due December 31,
2006.**
10.9 Form of Five-Year Warrants to Purchase Common Stock.**
10.10 Warrants issued to Berry-Shino Securities, Inc.**
10.11 Warrants issued to Neidiger, Tucker, Bruner, Inc.**
10.12 Form of warrant issued in March 2001 for guaranteeing debt.**
10.13 Form of warrant issued in April 2002 for guaranteeing debt.**
10.14 Exhibits 3(c)(1), 3(c)(2), 3(c)(3), 3(1)(4), 13(d)(1), 13(d)(2)
and 13(d)(3) to Asset Purchase Agreement between Natural Gas
Acquisition Corporation and Great Lakes Compression, Inc. dated
January 1, 2001.**
10.15 Sixth Amendment dated May 6, 2002, to Loan Agreement between
Natural Gas Services Group, Inc., Wallace Sparkman, Wallace O.
Sellers, CAV-RDV, Ltd., Diamente Investments, L.P., Rotary Gas
Systems, Inc., NGE Leasing, Inc. and Western National Bank.**
10.16 Certain exhibits to Loan Agreement between Natural Gas Services
Group, Inc., Wallace Sparkman, Wallace O. Sellers, CAV-RDV,
Ltd., Diamente Investments, L.P., Rotary Gas Systems, Inc., NGE
Leasing, Inc. and Western National Bank dated September 15,
1999.**
10.18 Articles of Organization of Hy-Bon Rotary Compression, L.L.C.
dated April 17, 2000 and filed on April 20, 2001.**
10.19 Regulations of Hy-Bon Rotary Compression, L.L.C.**
10.20 Fourth Amendment dated December 12, 2002, and Fifth Amendment
dated April 2, 2002, to Loan Agreement between Natural Gas
Services Group, Inc., Wallace Sparkman, Wallace D. Sellers,
CAV-RDV, Ltd., Diamente Investments, L.P., Rotary Gas Systems,
Inc., NGE Leasing, Inc. and Western National Bank.**
10.21 Multiple Advance Term Promissory Note dated April 3, 2002, in
the amount of $1,853,340 from Natural Gas Securities Group,
Inc. to Western National Bank**
10.22 Consolidated Term Promissory Note dated April 3, 2002, in the
amount of $2,146,660.93 from Natural Gas Services Group, Inc.
to Western National Bank.**
10.23 Revolving Line of Credit Promissory Note dated April 3, 2002,
in the amount of $750,000 from Natural Gas Services Group, Inc.
to Western National Bank.**
45
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
10.24 Seventh Amendment dated September 30, 2002 to Loan Agreement
between Natural Gas Services Group, Inc., Wallace Sparkman,
Wallace D. Sellers, CAV-RDV, Ltd. Diamente Investments, L.P.,
Rotary Gas Systems, Inc., NGE Leasing, Inc. and Western
National Bank.**
10.25 Termination of Employment Agreement Letter relating to the
Employment Agreement of Alan Kurus***
10.26 Termination of Employment Agreement Letter relating to the
Employment Agreement of Wayne L. Vinson***
10.27 Termination of Employment Agreement Letter relating to the
Employment Agreement of Earl R. Wait***
21 Subsidiaries of the registrant.**
99.1 Certification required by Section 906 of the Sarbanes-Oxley Act
of 2002.***
99.2 Certification required by Section 906 of the Sarbanes-Oxley Act
of 2002.***
* Exhibit 2.1 is incorporated by reference to Exhibit 2.1 filed as an
exhibit to the Current Report on Form 8-K of Natural Gas Services
Group, Inc. dated February 28, 2003
** Exhibits 3.1 through 10.24 and 21 are incorporated by reference to the
exhibits filed as exhibits to Registration Statement No. 333-88314 of
Natural Gas Services Group, Inc.
*** Exhibits 10.25, 10.26, 10.27, 99.1 and 99.2 are filed herewith.
(b) Reports on Form 8-K
None.
Item 14. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Natural Gas' management,
including our chief executive officer and the principal accounting officer, we
have evaluated the effectiveness of the our disclosure controls and procedures
as of a date within 90 days prior to the filing of this report. They have
concluded that these disclosure controls provide reasonable assurance that
Natural Gas can collect process and disclose, within the time periods specified
in the Commission's rules and forms, the information required to be disclosed in
its periodic Exchange Act reports.
There have been no significant changes in Natural Gas' internal controls or in
other factors that could significantly affect its internal controls subsequent
to the date of their most recent evaluation.
46
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Natural Gas Services Group, Inc.
We have audited the accompanying consolidated balance sheet of Natural Gas
Services Group, Inc. and Subsidiaries (the "Company") as of December 31, 2002,
and the related consolidated statements of income, stockholders' equity and cash
flows for the years ended December 31, 2002 and 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2002, and the results of its operations and its cash flows for the
years ended December 31, 2002 and 2001 in conformity with accounting principles
generally accepted in the United States of America.
HEIN + ASSOCIATES LLP
Dallas, Texas
February 21, 2003
F-1
NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2002
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 2,713,638
Trade accounts receivable, no allowance for doubtful accounts considered necessary 709,122
Lease receivable, net of unearned interest of $23,723 97,813
Inventory 1,475,794
Prepaid expenses and other 87,643
-----------
Total current assets 5,084,010
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,209,512 15,694,946
GOODWILL, net of accumulated amortization of $325,192 2,589,654
PATENTS, net of accumulated amortization of $109,939 141,426
LEASE RECEIVABLE, net of unearned interest of $8,837 112,699
INVESTMENT IN JOINT VENTURE 198,313
OTHER ASSETS 116,039
-----------
Total assets $23,937,087
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease $ 1,750,223
Accounts payable and accrued liabilities 600,762
Deferred income 317,561
-----------
Total current liabilities 2,668,546
LONG-TERM DEBT AND CAPITAL LEASE, less current portion 5,752,181
SUBORDINATED NOTES, net of discount of $194,874 1,344,387
DEFERRED TAX LIABILITY 1,171,000
COMMITMENT (Note 12)
STOCKHOLDERS' EQUITY:
Preferred stock, 5,000,000 shares authorized, par value $0.01:
10 % Convertible Series A: 1,177,000 shares authorized 381,654 shares outstanding; 10%
cumulative, liquidation preference of $1,240,376 3,817
Common stock, 30,000,000 shares authorized, par value $0.01; 4,857,632 shares issued and
outstanding 48,576
Additional paid-in capital 10,968,733
Retained earnings 1,979,847
-----------
Total stockholders' equity 13,000,973
-----------
Total liabilities and stockholders' equity $23,937,087
===========
See accompanying notes to these consolidated financial statements.
F-2
NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
2002 2001
------------ ------------
REVENUE:
Sales, net $ 4,335,721 $ 4,506,190
Service and maintenance income 1,562,650 1,160,916
Leasing income and interest 4,398,170 3,095,001
------------ ------------
Total revenue 10,296,541 8,762,107
COSTS OF REVENUE:
Cost of sales 3,078,429 3,046,067
Cost of service 1,326,572 986,779
Cost of leasing 1,166,530 909,299
------------ ------------
Total costs of revenue 5,571,531 4,942,145
------------ ------------
GROSS PROFIT 4,725,010 3,819,962
OPERATING EXPENSES:
Selling expenses 499,721 612,670
General and administrative 1,218,513 1,105,290
Depreciation and amortization 1,166,004 903,166
------------ ------------
Total operating expenses 2,884,238 2,621,126
------------ ------------
INCOME FROM OPERATIONS 1,840,772 1,198,836
OTHER INCOME (EXPENSE):
Interest expense (975,719) (924,382)
Equity in earnings of joint venture 485,109 224,231
Other income 19,386 197,208
------------ ------------
Total other income (expense) (471,224) (502,943)
------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,369,548 695,893
PROVISION FOR INCOME TAXES:
Current 25,900 9,100
Deferred 557,563 304,800
------------ ------------
Total income tax expense 583,463 313,900
------------ ------------
NET INCOME 786,085 381,993
PREFERRED DIVIDENDS 106,624 10,908
------------ ------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 679,461 $ 371,085
============ ============
NET INCOME PER COMMON SHARE:
Basic $ 0.19 $ 0.11
============ ============
Diluted $ 0.16 $ 0.11
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 3,649,413 3,357,632
Diluted 4,305,053 3,483,987
See accompanying notes to these consolidated financial statements.
F-3
NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
PREFERRED STOCK COMMON STOCK
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
BALANCES, January 1, 2001 -- $ -- 3,357,632 $ 33,576
Issuance of preferred stock 377,154 3,772 -- --
Warrants issued in connection with
subordinated notes -- -- -- --
Warrants issued for debt guaranty -- -- -- --
Dividends on preferred stock -- -- -- --
Net income -- -- -- --
------------ ------------ ------------ ------------
BALANCES, January 1, 2002 377,154 3,772 3,357,632 33,576
Issuance of preferred stock 4,500 45 -- --
Issuance of common stock and warrants -- -- 1,500,000 15,000
Warrants issued for debt guaranty -- -- -- --
Repurchase of warrants -- -- -- --
Dividends on preferred stock -- -- -- --
Net income -- -- -- --
------------ ------------ ------------ ------------
BALANCES, December 31, 2002 381,654 $ 3,817 4,857,632 $ 48,576
============ ============ ============ ============
ADDITIONAL TOTAL
PAID-IN RETAINED STOCKHOLDERS'
CAPITAL EARNINGS EQUITY
------------ ------------ ------------
BALANCES, January 1, 2001 $ 3,423,854 $ 929,301 $ 4,386,731
Issuance of preferred stock 899,461 -- 903,233
Warrants issued in connection with
subordinated notes 96,364 -- 96,364
Warrants issued for debt guaranty 23,137 -- 23,137
Dividends on preferred stock -- (10,908) (10,908)
Net income -- 381,993 381,993
------------ ------------ ------------
BALANCES, January 1, 2002 4,442,816 1,300,386 5,780,550
Issuance of preferred stock 12,722 -- 12,767
Issuance of common stock and warrants 6,514,170 -- 6,529,170
Warrants issued for debt guaranty 42,025 -- 42,025
Repurchase of warrants (43,000) -- (43,000)
Dividends on preferred stock -- (106,624) (106,624)
Net income -- 786,085 786,085
------------ ------------ ------------
BALANCES, December 31, 2002 $ 10,968,733 $ 1,979,847 $ 13,000,973
============ ============ ============
See accompanying notes to these consolidated financial statements.
F-4
NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2002 2001
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 786,085 $ 381,993
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,166,004 903,166
Deferred taxes 557,563 304,800
Amortization of debt issuance costs 70,369 64,956
Gain on disposal of assets (15,066) (117,387)
Warrants issued for debt guarantee 42,025 23,137
Equity in earnings of joint venture (485,109) (224,231)
Changes in current assets:
Trade and other receivables 276,588 (360,868)
Inventory 139,614 (593,403)
Prepaid expenses and other (11,888) 25,190
Changes in current liabilities:
Accounts payable and accrued liabilities (348,549) 472,779
Deferred income 134,187 (9,826)
Other changes (105,870) (30,551)
-------------- --------------
Net cash provided by operating activities 2,205,953 839,755
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (4,414,952) (2,220,110)
Proceeds from sale of property and equipment 40,000 328,500
Decrease in lease receivable 84,908 73,711
Distributions from joint venture 405,466 124,353
Cash paid for acquisition -- (1,393,113)
-------------- --------------
Net cash used in investing activities (3,884,578) (3,086,659)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from lines of credit 1,956,893 750,000
Proceeds from long-term debt -- 249,761
Repayments of long-term debt (4,463,612) (592,258)
Dividends on preferred stock (106,624) (10,908)
Net proceeds from sale of common stock 6,529,170 --
Net proceeds from preferred stock 12,767 903,233
Proceeds from note offering, net of offering costs -- 1,310,839
Purchase warrants from underwriter (43,000) --
-------------- --------------
Net cash provided by financing activities 3,885,594 2,610,667
NET INCREASE IN CASH 2,206,969 363,763
CASH, beginning of year 506,669 142,906
-------------- --------------
CASH, end of year $ 2,713,638 $ 506,669
============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 975,719 $ 872,239
============== ==============
Income taxes paid $ 4,110 $ 2,566
============== ==============
Purchase of property and equipment for note payable $ 1,956,893 $ 7,148,949
============== ==============
See accompanying notes to these consolidated financial statements.
F-5
NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Organization and Principles of Consolidation
--------------------------------------------
Natural Gas Services Group, Inc. (the "Company" or "NGSG") (a Colorado
corporation) was formed on December 18, 1998 for the purposes of combining
the operations of certain manufacturing, service and leasing entities.
NGSG currently conducts its operations through the following wholly-owned
subsidiaries:
o Rotary Gas Systems, Inc. ("RGS") (a Texas corporation) is engaged in
the manufacturing and distribution of natural gas compressor packages
for use in the petroleum industry and natural gas flare stacks and
ignition systems for use in oilfield, refinery, petrochemical plant ,
and landfill applications in New Mexico, California and Texas.
o NGE Leasing, Inc. ("NGE") (a Texas corporation) is engaged in leasing
natural gas compressor packages to entities in the petroleum industry
and irrigation motor units to entities in the agricultural industry.
NGE's leasing income is concentrated in New Mexico, California and
Texas.
o Great Lakes Compression, Inc., ("GLC") (a Colorado corporation) was
formed in March 2001 and acquired the assets and certain operations of
a business that fabricates, leases, and services natural gas
compressors to producers of oil and natural gas, primarily in
Michigan.
The accompanying financial statements present the consolidated results of
the Company and its wholly-owned subsidiaries. Investments in joint
ventures in which the Company does not have majority voting control are
accounted for by the equity method. All intercompany balances and
transactions have been eliminated in consolidation.
Cash Equivalents
----------------
For purposes of reporting cash flows, the Company considers all short-term
investments with an original maturity of three months or less to be cash
equivalents.
Inventory
---------
Inventory is valued at the lower of cost or market. The cost of inventories
are determined by the first-in, first-out method. At December 31, 2002,
inventory consisted of the following:
Raw materials $ 1,303,785
Work in process 172,009
------------
$ 1,475,794
============
Property and Equipment
----------------------
Property and equipment are recorded at cost less accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the assets, which
range from five to thirty years.
Gains and losses resulting from sales and dispositions of property and
equipment are included in current operations. Maintenance and repairs are
charged to operations as incurred.
F-6
NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Patents
-------
The Company has patents for a flare tip ignition device and flare tip
burner pilot. The costs of the patents are being amortized on a
straight-line basis over nine years, the remaining life of the patents when
acquired. Amortization expense for patents of $27,484 was recognized for
each of the years ended December 31, 2002 and 2001. Amortization expense
for each of the next five years is expected to be $27,484 per year.
Goodwill
--------
Goodwill represents the cost in excess of fair value of the identifiable
net assets acquired in various acquisitions and was being amortized on a
straight-line basis over 20 years. Amortization expense of $124,425 was
recognized for the year ended December 31, 2001. The Company ceased
amortization of goodwill effective January 1, 2002 in accordance with
Statement of Financial Accounting Standards ("FAS") No. 142. See Note 14.
FAS 142 requires that goodwill be tested for impairment at least annually.
The Company completed its initial test for goodwill impairment during the
second quarter 2002, at which time no impairment was indicated.
Long-Lived Assets
-----------------
The Company's policy is to periodically review the net realizable value of
its long-lived assets, including patents and goodwill, through an
assessment of the estimated future cash flows related to such assets. In
the event that assets are found to be carried at amounts in excess of
estimated undiscounted future cash flows, then the assets will be adjusted
for impairment to a level commensurate with a discounted cash flow analysis
of the underlying assets. Based upon its most recent analysis, the Company
believes no impairment of long-lived assets exists at December 31, 2002.
Advertising Costs
-----------------
Advertising costs are expensed as incurred. Total advertising expense was
$49,720 in 2002 and $56,335 in 2001.
Revenue Recognition
-------------------
Revenue from the sales of custom and fabricated and rebuilt compressors,
and flare systems is recognized upon shipment of the equipment to
customers. Exchange and rebuilt compressor revenue is recognized when both
the replacement compressor has been delivered and the rebuild assessment
has been completed. Revenue from compressor service, and retrofitting
services is recognized upon providing services to the customer. Operating
lease revenue is recognized over the term of the agreements. Maintenance
agreement revenue is recognized as services are rendered. Deferred income
represents items that have been billed to customers based on contractual
agreements, but have not yet been shipped. Rental and lease revenue is
recognized over the terms of the respective lease agreements based upon the
classification of the lease.
Stock-Based Compensation
------------------------
The Company accounts for stock-based awards to employees using the
intrinsic value method described in Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to Employees, and its related
interpretations. Accordingly, no compensation expense has been recognized
in the accompanying consolidated financial statements for stock-based
awards to employees when the exercise price of the award is equal to or
greater than the quoted market price of the stock on the date of the grant.
F-7
NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FAS No. 123, Accounting for Stock-Based Compensation, and FAS No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure - an
Amendment of FASB Statement No. 123, requires disclosures as if the Company
had applied the fair value method to employee awards rather than the
intrinsic value method. The fair value of stock-based awards to employees
is calculated through the use of option pricing models, which were
developed for use in estimating the fair value of traded options, which
have no vesting restrictions and are fully transferable. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
Company's fair value calculations for awards from stock option plans in
2002 were made using the Black-Scholes option pricing model with the
following weighted average assumptions: expected term, ten years from the
date of grant; stock price volatility 50%; risk free interest rate 5.2% and
4.0% and no dividends during the expected term as the Company does not have
a history of paying cash dividends. There were no options issued in 2001.
If the computed fair values of the stock-based awards had been amortized to
expense over the vesting period of the awards, net income and net income
per share, basic and diluted, would have been as follows:
YEAR ENDED
DECEMBER 31,
2002
-------------
Net income, as reported $ 786,085
Add: Stock-based employee compensation included in
reported net income --
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards (39,000)
-----------
Net income, pro forma $ 747,085
-----------
Net income per share:
Basic, as reported $ 0.19
===========
Basic, pro forma $ 0.18
===========
Diluted, as reported $ 0.16
===========
Diluted, pro forma $ 0.15
===========
Weighted average fair value of options granted during the year $ 2.24
===========
Description of Leasing Arrangements
-----------------------------------
The Company's leasing operations principally consist of the leasing of
natural gas compressor packages and flare stacks. The Company has one
seven-year lease of natural gas irrigation engines to an agricultural
entity that is classified as a sales-type lease. The remaining leases are
all classified as operating leases. See Note 5.
Income Taxes
------------
The Company files a consolidated tax return with its subsidiaries. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases,
and operating losses and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled.
F-8
NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
----------------
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management
to make estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual results could differ
from those estimates. Significant estimates include the valuation of assets
and goodwill acquired in acquisitions. It is at least reasonably possible
these estimates could be revised in the near term and the revisions would
be material.
Recently Issued Accounting Pronouncements
-----------------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") approved
for issuance FAS 143, Asset Retirement Obligations. FAS 143 establishes
accounting requirements for retirement obligations associated with tangible
long-lived assets, including 1) the timing of the liability recognition, 2)
initial measurement of the liability, 3) allocation of asset retirement
cost to expense, 4) subsequent measurement of the liability and 5)
financial statement disclosures. FAS 143 requires that an asset retirement
cost should be capitalized as part of the cost of the related long-lived
asset and subsequently allocated to expense using a systematic and rational
method. The Company will adopt the statement effective on January 1, 2003,
as required. The transition adjustment resulting from the adoption of FAS
143 will be reported as a cumulative effect of a change in accounting
principle. The Company does not believe that the adoption of this statement
will have a material effect on its financial position, results of
operations, or cash flows.
In October 2001, the FASB approved for issuance FAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. FAS 144 replaces SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. The new accounting model for long-lived assets to
be disposed of by sale applies to all long-lived assets, including
discontinued operations, and replaces the provisions of APB Opinion No. 30,
Reporting Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, for the disposal of segments of a business. FAS 144
requires that those long-lived assets be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. Therefore, discontinued
operations will no longer be measured at net realizable value or include
amounts for operating losses that have not yet occurred. FAS 144 also
broadens the reporting of discontinued operations to include all components
of an entity with operations that can be distinguished from the rest of the
entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction. The provisions of FAS 144 applied to the
Company beginning January 1, 2002 and did not have a material effect on its
financial position, results of operations, or cash flows.
In July 2002, the FASB issued FAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. FAS 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred
rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by FAS 146 include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
FAS 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The adoption of FAS 146 is not expected
to have a material effect on the Company's financial position or results of
its operations.
F-9
NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2002, the FASB issued FAS No.148, Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement
123. For entities that change their accounting for stock-based compensation
from the intrinsic method to the fair value method under FAS 123, the fair
value method is to be applied prospectively to those awards granted after
the beginning of the period of adoption (the prospective method). The
amendment permits two additional transition methods for adoption of the
fair value method. In addition to the prospective method, the entity can
choose to either (i) restate all periods presented (retroactive restatement
method) or (ii) recognize compensation cost from the beginning of the
fiscal year of adoption as if the fair value method had been used to
account for awards (modified prospective method). For fiscal years
beginning December 15, 2003, the prospective method will no longer be
allowed. The Company currently accounts for its stock-based compensation
using the intrinsic value method as proscribed by APB Opinion No. 25,
Accounting for Stock Issued to Employees, and plans on continuing using
this method to account for stock options; therefore, it does not intend to
adopt the transition requirements as specified in FAS 148. The Company has
adopted the new FAS 148 disclosure requirements with these financial
statements.
2. ACQUISITION
-----------
In March 2001, the Company acquired the assets, primarily compressors,
office furniture and fixtures, building and land, of Dominion Michigan
Production Services, Inc. ("Dominion") for a total purchase price of $8
million, subject to adjustment. $1 million of the purchase price was paid
in cash with the remainder financed by the seller (see Note 7). The
transaction was accounted for under the purchase method of accounting and
the purchase price was allocated to the net assets acquired based on their
estimated fair values. The excess of cost over the fair value of net assets
acquired totaled approximately $741,000 and was recorded as goodwill as of
the acquisition date. The operating results of the acquired business have
been included in the Company's financial statements beginning April 1,
2001. The following unaudited pro forma information has been prepared as if
the acquisition of the assets of Dominion had occurred at the beginning of
the year ended December 31, 2001. Such information is not necessarily
reflective of the actual results that would have occurred had the
acquisition occurred on that date.
Net sales $ 9,563,146
Net income 429,276
Net income per common share $ 0.13
Net income per common share, assuming dilution $ 0.12
In connection with the acquisition, a total fee of $440,000 was paid to the
investment banker/advisor. A director of the Company has a 1% interest in
the investment banker/advisor.
F-10
NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PROPERTY AND EQUIPMENT
----------------------
Property and equipment consists of the following at December 31, 2002:
Land and building $ 1,345,740
Leasehold improvements 124,902
Equipment and furniture 604,134
Rental equipment 15,092,994
Vehicles 736,688
------------
17,904,458
Less accumulated depreciation (2,209,512)
------------
$ 15,694,946
============
Depreciation expense for property and equipment of $1,137,520 and $751,257
was recognized for the years ended December 31, 2002 and 2001,
respectively.
4. INVESTMENT IN JOINT VENTURE
---------------------------
The Company owns a non-controlling 50% interest in a joint venture, Hy-Bon
Rotary Compression, LLC ("Hy-Bon"). Hy-Bon leases natural gas compressors
provided by each party and provides the related service and maintenance to
the customers. Income is split between the parties based on the revenue of
their respective compressors on lease. The Company's investment is
accounted for on the equity method, in which the Company recognizes its
share of the earnings or loss of the joint venture determined in accordance
with the Hy-Bon operating agreement. The Company's total equity method
investment in Hy-Bon at December 31, 2002 totaled $198,313. The Company's
equity in the earnings of Hy-Bon was $485,109 and $224,231 in 2002 and
2001, respectively. Summarized financial information of Hy-Bon follows:
December 31,
2002
------------
BALANCE SHEET:
ASSETS:
Current assets $ 393,271
Equipment, net 65,857
------------
Total assets $ 459,128
============
LIABILITIES:
Current liabilities $ 84,666
Notes payable 27,951
Members' capital 346,511
------------
Total liabilities and equity $ 459,128
============
For the Years Ended December 31,
--------------------------------
2002 2001
-------------- --------------
STATEMENT OF OPERATIONS:
Total revenue $ 1,296,728 $ 644,170
Total expenses 388,483 193,756
-------------- --------------
Net income $ 908,245 $ 450,414
============== ==============
Subsequent to December 31, 2002, the Company agreed to purchase the
compressors owned by the other party that are used in the joint venture for
$2,150,000.
F-11
NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LEASING ACTIVITY
----------------
The following lists the components of the net investment in the Company's
sales-type lease as of December 31, 2002:
Total minimum lease payments receivable $ 243,072
Less unearned income (32,560)
-----------
$ 210,512
===========
Future minimum lease payments are approximately $122,000 per year until the
lease expiration in December 2004.
The Company leases natural gas compressor packages to entities in the
petroleum industry. These leases are classified as operating leases and
generally have original lease terms of one to five years and continue on a
month-to-month basis thereafter. Future minimum lease payments for leases
not on a month-to-month basis at December 31, 2002 are as follows:
Year Ended December 31,
-----------------------
2003 $ 799,831
2004 828,085
2005 861,208
2006 245,743
-----------
Total $ 2,734,867
===========
6. LINE OF CREDIT
--------------
The Company has a line of credit with a financial institution that allows
for borrowings up to $750,000, bears interest at the prime rate plus 1%
(5.25% at December 31, 2002) and requires monthly interest payments with
principal due at maturity on March 15, 2003. The line of credit is
collateralized by substantially all of the assets of the Company. At
December 31, 2002, there was no outstanding balance on this line of credit.
The line of credit and first three notes listed in Note 7 are with the same
bank and include certain covenants, the most restrictive of which require
the Company to maintain certain working capital, debt to equity and cash
flow ratios and certain minimum net worth. The Company was in compliance
with all covenants except the cash flow ratio at December 31, 2002. The
bank granted the Company a waiver until June 30, 2003 for its
non-compliance with the cash flow ratio.
F-12
NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT
Long-term debt at December 31, 2002 consisted of the following:
Notepayable to a bank, interest at bank's prime rate plus 1.0% (5.25%
at December 31, 2002), monthly payments of principal of $58,333 plus
interest, until maturity in October 15, 2007. The note is
collateralized by substantially all of the assets of the Company. See
Note 6 regarding loan covenants. $ 3,383,334
Note payable to a bank, interest at prime rate plus 1% (5.25% at
December 31, 2002), monthly payments of principal of $30,889 plus
interest until maturity on November 15, 2007. The note is
collateralized by substantially all of the assets of the Company. See
Note 6 regarding loan covenants. 1,853,340
Note payable to a bank, interest at prime rate plus 1% (5.25% at
December 31, 2002), monthly payments of principal of $45,746 plus
interest until maturity on March 15, 2006. The note is collateralized
by substantially all of the assets of the Company. See Note 6
regarding loan covenants. 1,734,947
Notepayable to a bank, interest at 11%, monthly payments of principal
and interest totaling $2,614, until maturity in September 2010,
collateralized by a building. 214,321
Note payable to an individual, interest at 10%, monthly payments of
principal and interest totaling $1,255 until maturity in August 2010.
This note is collateralized by a building. 80,443
Various notes payable to a bank, interest rates ranging from prime
plus 1% (5.25% at December 31, 2002) to 7.75%, monthly payments of
principal and interest until maturity dates ranging from July 2003 to
July 2004. These notes are collateralized by various vehicles. 60,545
Capital lease 43,540
Other notes payable, various terms 131,934
------------
Total 7,502,404
------------
Less current portion (1,750,223)
------------
$ 5,752,181
============
F-13
NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maturities of long-term debt based on contractual requirements for the years
ending December 31 are as follows:
2003 $ 1,750,223
2004 1,720,683
2005 1,675,968
2006 1,180,057
2007 977,654
Thereafter 197,819
------------
$ 7,502,404
============
8. SUBORDINATED NOTES
------------------
On October 31, 2000, the Company initiated a private placement of
subordinated debt units. Each unit consists 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. Interest only is
payable annually, with all principal due at maturity. The warrants were
valued at their estimated fair market value resulting in a discount
relating to the warrants of $87,128. Proceeds from this offering totaled
$1,539,260. Under the terms of the offering, all proceeds from the notes
must be used for the operations of NGE Leasing. In connection with the
offering, a placement agent was paid a 10% cash commission and 3%
non-accountable expense allowance totaling $200,104, and was issued
warrants in the same form as those issued in the offering for a total of
61,570 shares. The warrants were valued at their estimated fair market
value of $9,236. Total debt issuance costs of $237,658 are recorded as a
debt discount and the total debt discount of $324,786 is being amortized
using the effective interest rate method over the life of the notes. The
balance of the subordinated debt, net of unamortized discount of $194,874,
is $1,344,387 at December 31, 2002.
Certain stockholders, officers and directors purchased units in this
offering, (totaling $259,261 in notes and warrants representing 103,704
shares) on the same terms and conditions as non-affiliated purchasers in
the offering.
9. INCOME TAXES
------------
The provision for income taxes consists of the following:
2002 2001
---------- ----------
Current provision:
Federal $ -- $ --
State 25,900 9,100
---------- ----------
25,900 9,100
Deferred provision:
Federal 491,363 269,100
State 66,200 35,700
---------- ----------
557,563 304,800
---------- ----------
$ 583,463 $ 313,900
========== ==========
F-14
NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income tax effects of temporary differences that give rise to
significant portions of deferred income tax assets and (liabilities) are as
follows:
2002
-----------
Deferred income tax assets:
Net operating loss $ 892,000
Other 48,000
-----------
Total deferred income tax assets 940,000
-----------
Deferred income tax liabilities:
Property and equipment (1,962,000)
Goodwill and other intangible assets (149,000)
-----------
Total deferred income tax liabilities (2,111,000)
-----------
Net deferred income tax liabilities $(1,171,000)
===========
The effective tax rate differs from the statutory rate as follows:
2002 2001
----------- -----------
Statutory rate 34% 34%
State and local taxes 7% 6%
Non-deductible goodwill amortization -- 14%
Other non-deductible expenses 2% --
Other -- (9%)
----------- -----------
Effective rate 43% 45%
=========== ===========
At December 31, 2002, the Company had available federal net operating loss
("NOL") carryforwards of approximately $2,420,000, which may be used to
reduce future taxable income and begin to expire in 2020 through 2022.
10. STOCKHOLDERS' EQUITY
--------------------
Initial Public Offering
-----------------------
In October, 2002, the Company closed an initial public offering in which it
sold 1,500,000 shares of common stock and warrants to purchase 1,500,000
shares of common stock for a total of $7,875,000. Costs and commissions
associated with the offering totaled $1,345,830. The warrants are
exercisable anytime through October 2006 at $6.25 per share. In connection
with this offering, the underwriter received options to purchase 150,000
shares of common stock at $6.25 per share and warrants to purchase 150,000
shares at $0.3125 per share.
Warrants
--------
In April 2002 and March 2001, five-year warrants to purchase 16,472 shares
of common stock at $3.25 per share and 68,524 shares at $2.50 per share,
respectively, were issued to certain board members and stockholders as
compensation for their debt guarantees. These warrants were immediately
exercisable and were recorded at their estimated fair values of $42,025 in
2002 and $23,137 in 2001.
Preferred Stock
---------------
The Company has a total of 5,000,000 authorized preferred shares, with
rights and preferences as designated by the Board of Directors. Of the
preferred shares, 1,177,000 shares are designated 10% Convertible Series A
Preferred Stock. The Series A shares have a cumulative annual dividend rate
of 10%, when and if declared by the Board of Directors payable thirty days
F-15
NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
after the end of each quarter. Holders are entitled to one vote per share
and the Series A shares are convertible into common stock initially at a
price of $3.25 per share, subject to adjustment based on the market price
and various other contingencies. In addition, Series A shares will
automatically be converted to common stock on a one-for-one basis if or
when the Company's common stock trades on a public exchange at a price of
$6.50 per share or greater for twenty consecutive days. The Series A shares
have a liquidation preference of $3.25 per share plus accrued and unpaid
dividends over common stock.
The Company initiated a private placement of its Series A shares in July
2001. Under the terms of the placement agreement, the Company offered a
maximum of 770,000 Series A shares at a price of $3.25 per share. As of
December 31, 2001, the Company had received gross proceeds of $1,225,751
from the offering, net of $322,518 of offering costs, for 377,154 Series A
shares. Included in the offering costs, are a 10% commission and 3%
non-accountable expense allowance paid to the placement agent. In 2002,
additional proceeds of $14,625 were received representing 4,500 additional
Series A shares issued. Total Series A shares outstanding at December 31,
2002 were 381,654. A total of 18,000 and 12,000 Series A shares were issued
in the offering to a director and a stockholder, respectively, on the same
terms and conditions as those sold to non-affiliated purchasers in the
private offering.
11. STOCK-BASED COMPENSATION
------------------------
Stock Options
-------------
In December 1998, the Board of Directors adopted the 1998 Stock Option Plan
(the "Plan"). 150,000 shares of common stock have been reserved for
issuance under the Plan. All options granted under the Plan will expire ten
years after date of grant. The option price is to be determined by the
Board of Directors on date of grant.
In September 1999, the Company granted 27,000 non-qualified stock options
to certain employees to purchase the Company's common stock at $2.00 per
share. The options vest over three years and expire in 2009.
In April 2002, the Company granted 42,000 non-qualified stock options to
certain employees to purchase the Company's common stock at $3.25 per
share. The options vest over three years and expire in April 2012. Also, in
December 2002, the Company granted 7,500 non-qualified stock options to the
three outside directors to purchase the Company's common stock at $3.88 per
share any time through December 2012.
In September 1999, the Company granted 100,000 non-qualified stock options
to an advisory director to purchase the Company's common stock at $2.00 per
share anytime through September 30, 2004. These options were not granted
pursuant to the Plan described above.
F-16
NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of activity for the stock options outstanding for the
years ended December 31, 2002 and 2001:
DECEMBER 31, 2002 DECEMBER 31, 2001
--------------------- ---------------------
Weighted Weighted
Number Average Number Average
Of Exercise Of Exercise
Shares Price Shares Price
--------- --------- --------- ---------
Outstanding, beginning of year 112,000 $ 2.00 112,000 $ 2.00
Canceled or expired -- -- -- --
Granted 49,500 3.35 -- --
Exercised -- -- -- --
--------- --------- --------- ---------
Outstanding, end of year 161,500 $ 2.41 112,000 $ 2.00
========= ========= ========= =========
Exercisable, end of year 128,800 $ 2.21 112,000 $ 2.00
========= ========= ========= =========
12. COMMITMENT
----------
401(k) Plan
-----------
Effective January 1, 2001, the Company offered a 401(k) Plan (the "Plan")
to all employees that had reached the age of eighteen and had completed six
months of service. The participants may contribute up to 15% of their
salary. Employer contributions are subject to Board discretion and are
subject to a vesting schedule of 20% each year after the first year and
100% after six years. The Company contributed $50,233 to the Plan in 2002.
13. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
------------------------------------------------
Sales to one customer in the year ended December 31, 2002 and one customer
in the year ended December 31, 2001 amounted to a total of 30% and 26% of
consolidated revenue, respectively. No other single customer accounted for
more than 10% of the Company's sales in 2002 or 2001. At December 31, 2002,
the Company had one customer that accounted for 12% of the Company's trade
accounts receivable. The Company generally does not obtain collateral, but
requires deposits of as much as 50% on large custom contracts. The Company
performs periodic credit evaluations on its customers' financial condition
and believes that no allowance for doubtful accounts for trade receivables
is necessary at December 31, 2002.
14. GOODWILL - ADOPTION OF STATEMENT 142
------------------------------------
The Company adopted FAS 142 on January 1, 2002, at which time it ceased the
amortization of goodwill. At December 31, 2002, the Company's goodwill had
a carrying value of $2,589,654. Pursuant to FAS 142, the Company completed
its initial test for goodwill impairment in 2002 and no impairment was
indicated. The following table sets forth the effect of the adoption of FAS
142 on the 2001 financial statements as if it had been adopted on January
1, 2001.
F-17
NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR
ENDED
DECEMBER 31,
2001
------------
Reported net income $ 381,993
Add back: Goodwill amortization, net of
tax effect 124,425
------------
Adjusted net income $ 506,418
============
Basic earnings per share:
Reported net income $ .11
Goodwill amortization .04
------------
Adjusted net income $ .15
============
Diluted earnings per share:
Reported net income $ .11
Goodwill amortization .03
------------
Adjusted net income $ .14
============
15. 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 on its subsidiary entities.
The Company's reportable operating segments have been determined as
separately identifiable business units. The Company measures segment
earnings as income before income taxes. The following amounts are
expressed in thousands:
F-18
NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RGS NGE GLC NGSG Elim. Total
--------- --------- --------- --------- --------- ---------
For the year ended December 31,
2002:
Revenue from external customers $ 3,298 $ 2,319 $ 4,680 $ -- $ -- $ 10,297
Inter-segment revenue 5,756 45 20 -- (5,821) --
Gross profit 1,329 1,669 1,727 -- -- 4,725
Depreciation and amortization 122 439 558 47 -- 1,166
Interest expense 9 392 537 38 -- 976
Other income 4 15 -- -- -- 19
Equity in the net income of investee
accounted for by the equity method -- 485 -- -- -- 485
Income taxes -- -- -- 583 -- 583
Net income 411 1,177 364 (1,166) -- 786
As of December 31, 2002:
Segment assets 3,779 10,905 8,587 666 -- 23,937
Goodwill 1,873 -- 717 -- -- 2,590
For the year ended December 31,
2001:
Revenue from external customers $ 3,841 $ 1,519 $ 3,402 $ -- $ -- $ 8,762
Inter-segment revenue 2,691 -- -- -- (2,691) --
Gross profit 1,231 1,076 1,513 -- -- 3,820
Depreciation and amortization 104 252 423 124 -- 903
Interest expense 4 395 489 36 -- 924
Other income 19 130 3 45 -- 197
Equity in the net income of investee
accounted for by the equity method -- 224 -- -- -- 224
Income taxes -- -- -- 314 -- 314
Net income 180 549 307 (654) -- 382
As of December 31, 2001:
Segment assets 1,200 6,107 9,181 2,322 -- 18,810
Goodwill 1,873 -- 717 -- -- 2,590
F-19
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: March 28, 2003 NATURAL GAS SERVICES GROUP, INC.
----------------
/s/ Wayne L. Vinson
----------------------------------------
Wayne L. Vinson, President and Principal
Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates stated:
Signature Title Date
- --------- ----- ----
/s/ Wallace O. Sellers Director March 28, 2003
- -------------------------
Wallace O. Sellers
/s/Wayne L. Vinson Director March 28, 2003
- -------------------------
Wayne L. Vinson
/s/ Scott W. Sparkman Director March 28, 2003
- -------------------------
Scott W. Sparkman
/s/ Charles G. Curtis Director March 28, 2003
- -------------------------
Charles G. Curtis
/s/ James T. Grigsby Director March 28, 2003
- -------------------------
James T. Grigsby
CERTIFICATION
I, Wayne L. Vinson, certify that:
1. I have reviewed this annual report on Form 10-KSB of Natural Gas
Services Group, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 28, 2003 /s/ Wayne L. Vinson
-------------- --------------------------------
Wayne L. Vinson
Title: Chief Executive Officer
CERTIFICATION
I, Earl R. Wait, certify that:
I have reviewed this annual report on Form 10-KSB of Natural Gas
Services Group, Inc.;
Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 28, 2003 /s/ Earl R. Wait
-------------- --------------------------------
Earl R. Wait
Title: Chief Financial Officer
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
2.1 Purchase and Sale Agreement by and between Hy-Bon Engineering
Company, Inc. and NGE Leasing, Inc.*
3.1 Articles of incorporation.**
3.2 Amendment to articles of incorporation dated March 31, 1999,
and filed on May 25, 1999.**
3.3 Amendment to articles of incorporation dated July 25, 2001, and
filed on July 30, 2001.**
3.4 Bylaws.**
4.1 Form of warrant certificate.**
4.2 Form of warrant agent agreement.**
4.3 Form of lock-up agreement.**
4.4 Form of representative's option for the purchase of common
stock**
4.5 Form of representative's option for the purchase of warrants**
10.1 1998 Stock Option Plan.**
10.2 Asset Purchase Agreement between Natural Gas Acquisition
Corporation and Great Lakes Compression, Inc. dated January 1,
2001.**
10.3 Amendment to Guaranty Agreement between Natural Gas Services
Group, Inc. and Dominion Michigan Production Services, Inc.**
10.4 Loan Agreement between Natural Gas Services Group, Inc.,
Wallace Sparkman, Wallace O. Sellers, CAV-RDV, Ltd., Diamente
Investments, L.P., Rotary Gas Systems, Inc., NGE Leasing, Inc.
and Western National Bank dated September 15, 1999, and First
Amendment dated March 9, 2001, Second Amendment dated March 20,
2001, and Third Amendment dated July 25, 2001.**
10.5 Employment Agreement between Natural Gas Services Group, Inc.
and Alan Kurus dated August 31, 2000.**
10.6 Employment Agreement between Natural Gas Services Group, Inc.
and Wayne Vinson dated January 1, 1999**.
10.7 Employment Agreement between Natural Gas Services Group, Inc.
and Earl R. Wait dated January 1, 1999.**
10.8 Form of Series A 10% Subordinated Notes due December 31,
2006.**
10.9 Form of Five-Year Warrants to Purchase Common Stock.**
10.10 Warrants issued to Berry-Shino Securities, Inc.**
10.11 Warrants issued to Neidiger, Tucker, Bruner, Inc.**
10.12 Form of warrant issued in March 2001 for guaranteeing debt.**
10.13 Form of warrant issued in April 2002 for guaranteeing debt.**
10.14 Exhibits 3(c)(1), 3(c)(2), 3(c)(3), 3(1)(4), 13(d)(1), 13(d)(2)
and 13(d)(3) to Asset Purchase Agreement between Natural Gas
Acquisition Corporation and Great Lakes Compression, Inc. dated
January 1, 2001.**
10.15 Sixth Amendment dated May 6, 2002, to Loan Agreement between
Natural Gas Services Group, Inc., Wallace Sparkman, Wallace O.
Sellers, CAV-RDV, Ltd., Diamente Investments, L.P., Rotary Gas
Systems, Inc., NGE Leasing, Inc. and Western National Bank.**
10.16 Certain exhibits to Loan Agreement between Natural Gas Services
Group, Inc., Wallace Sparkman, Wallace O. Sellers, CAV-RDV,
Ltd., Diamente Investments, L.P., Rotary Gas Systems, Inc., NGE
Leasing, Inc. and Western National Bank dated September 15,
1999.**
10.18 Articles of Organization of Hy-Bon Rotary Compression, L.L.C.
dated April 17, 2000 and filed on April 20, 2001.**
10.19 Regulations of Hy-Bon Rotary Compression, L.L.C.**
10.20 Fourth Amendment dated December 12, 2002, and Fifth Amendment
dated April 2, 2002, to Loan Agreement between Natural Gas
Services Group, Inc., Wallace Sparkman, Wallace D. Sellers,
CAV-RDV, Ltd., Diamente Investments, L.P., Rotary Gas Systems,
Inc., NGE Leasing, Inc. and Western National Bank.**
10.21 Multiple Advance Term Promissory Note dated April 3, 2002, in
the amount of $1,853,340 from Natural Gas Securities Group,
Inc. to Western National Bank**
10.22 Consolidated Term Promissory Note dated April 3, 2002, in the
amount of $2,146,660.93 from Natural Gas Services Group, Inc.
to Western National Bank.**
10.23 Revolving Line of Credit Promissory Note dated April 3, 2002,
in the amount of $750,000 from Natural Gas Services Group, Inc.
to Western National Bank.**
10.24 Seventh Amendment dated September 30, 2002 to Loan Agreement
between Natural Gas Services Group, Inc., Wallace Sparkman,
Wallace D. Sellers, CAV-RDV, Ltd. Diamente Investments, L.P.,
Rotary Gas Systems, Inc., NGE Leasing, Inc. and Western
National Bank.**
10.25 Termination of Employment Agreement Letter relating to the
Employment Agreement of Alan Kurus***
10.26 Termination of Employment Agreement Letter relating to the
Employment Agreement of Wayne L. Vinson***
10.27 Termination of Employment Agreement Letter relating to the
Employment Agreement of Earl R. Wait***
21 Subsidiaries of the registrant.**
99.1 Certification required by Section 906 of the Sarbanes-Oxley Act
of 2002.***
99.2 Certification required by Section 906 of the Sarbanes-Oxley Act
of 2002.***
* Exhibit 2.1 is incorporated by reference to Exhibit 2.1 filed as an
exhibit to the Current Report on Form 8-K of Natural Gas Services
Group, Inc. dated February 28, 2003
** Exhibits 3.1 through 10.24 and 21 are incorporated by reference to the
exhibits filed as exhibits to Registration Statement No. 333-88314 of
Natural Gas Services Group, Inc.
*** Exhibits 10.25, 10.26, 10.27, 99.1 and 99.2 are filed herewith.
Exhibit 10.25 Natural Gas Services Group, Inc. I hereby agree to the termination of my employment agreement dated August 31, 2000 with Natural Gas Services Group, Inc. [or mention subsidiary] effective as of January 1, 2003. _______________________________ Alan Kurus Agreed and accepted by: Natural Gas Services Group, Inc. By: _________________________ Name: _________________________ Title:_________________________
Exhibit 10.26 Natural Gas Services Group, Inc. I hereby agree to the termination of my employment agreement dated January 1, 1999 with Natural Gas Services Group, Inc. [or mention subsidiary] effective as of January 1, 2003. Article Seven is waived by both parties in its entirety. _______________________________ Wayne Vinson Agreed and accepted by: Natural Gas Services Group, Inc. By: ___________________________ Name:__________________________ Title:_________________________
Exhibit 10.27 Natural Gas Services Group, Inc. I hereby agree to the termination of my employment agreement dated January 1, 1999 with Natural Gas Services Group, Inc. [or mention subsidiary] effective as of January 1, 2003. _______________________________ Earl Wait Agreed and accepted by: Natural Gas Services Group, Inc. By: ___________________________ Name:__________________________ Title:_________________________
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. ss.1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Natural Gas Services Group,
Inc. (the "Company") on Form 10-KSB for the period ended December 31, 2002, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Wayne L. Vinson, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirement so Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ Wayne L. Vinson
-----------------------------
Wayne L. Vinson
Chief Executive Officer
March 28, 2003
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. ss.1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Natural Gas Services Group,
Inc. (the "Company") on Form 10-KSB for the period ended December 31, 2002, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Earl R. Wait, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirement so Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ Earl R. Wait
---------------------------
Earl R. Wait
Chief Financial Officer
March 28, 2003