SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
o [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 2003.
o [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ___________________ to
___________________.
Commission file number: 33-61888-FW
COMPRESSCO, INC.
(Exact name of small business issuer in its charter)
Delaware 72-1235449
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
1313 SE 25th Street, Oklahoma City, Oklahoma 73129
(Address of principal executive offices) (Zip Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 / /
The number of shares outstanding of the issuer's classes of Common Stock as of
September 30, 2003:
Common Stock, $1.00 Par Value - 153,235 shares
COMPRESSCO, INC.
Index to Form 10-QSB
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2003 and December
31, 2002
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2003 and 2002
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2003 and 2002
Notes to the Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Controls and Procedures
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
COMPRESSCO, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, 2003 December 31, 2002
------------------ -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 754,479 $ 317,707
Accounts receivable, net 4,002,339 2,238,850
Inventories 3,040,520 2,028,662
Prepaid expenses 259,388 245,359
Deferred income tax asset 57,570 57,570
-------------- --------------
Total current assets 8,114,296 4,888,148
PROPERTY AND EQUIPMENT:
Compressors 23,928,121 18,617,232
Less- Accumulated depreciation (4,120,173) (3,020,925)
--------------- --------------
Total compressors, net 19,807,948 15,596,307
-------------- --------------
Vehicles and Equipment 1,828,628 1,473,982
Less - Accumulated depreciation (654,446) (489,090)
--------------- --------------
Total vehicles and equipment, net 1,174,182 984,892
OTHER ASSETS 124,929 60,052
-------------- --------------
Total assets $ 29,221,355 $ 21,529,399
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITES:
Accounts payable $ 1,685,922 $ 523,089
Accrued liabilities 745,726 608,119
Deferred revenues 33,071 266,239
Current portion of long-term debt --- 560,012
-------------- --------------
Total current liabilities 2,464,719 1,957,459
LONG-TERM DEBT, net of current portion 16,708,263 13,077,850
DEFERRED INCOME TAXES 3,006,587 1,709,581
-------------- --------------
Total liabilities 22,179,569 16,744,890
-------------- -------------
COMMITMENTS (Note 4)
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value; 200,000 shares authorized;
no shares issued or outstanding __ __
Common stock, $1 par value; 500,000 shares authorized;
153,235 shares issued and outstanding 153,235 153,235
Warrants outstanding 100,000 100,000
Additional paid-in capital 2,663,715 2,663,715
Retained earnings 4,124,836 1,867,559
-------------- --------------
Total stockholders' equity 7,041,786 4,784,509
-------------- --------------
Total liabilities and stockholders' equity $ 29,221,355 $ 21,529,399
============== ==============
The accompanying notes are an integral part of these consolidated balance sheets.
COMPRESSCO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the For the For the Three For the Three
Nine Months Nine Months Months Ended Months Ended
Ended Ended September 30, September 30,
September 30, September 30, 2003 2002
2003 2002
REVENUES:
Rental revenue $ 12,564,897 $ 9,186,888 $ 4,726,446 $ 3,372,781
Sales - Compressors and parts 2,386,333 610,468 1,296,792 296,031
Service and other 1,020,302 753,197 383,360 264,937
------------- ------------- ------------- -------------
Total revenues 15,971,532 10,550,553 6,406,598 3,933,749
------------- ------------- ------------- -------------
COST OF SALES AND EXPENSES:
Cost of sales 1,467,205 346,282 795,973 173,240
Operating expenses 8,815,534 6,880,165 3,335,880 2,463,866
Depreciation and amortization expense 1,390,460 1,186,635 504,076 400,351
-------------- -------------- ------------- -------------
Total cost of sales and expenses 11,673,199 8,413,082 4,635,929 3,037,457
------------- ------------- ------------- -------------
OPERATING INCOME 4,298,333 2,137,471 1,770,669 896,292
OTHER INCOME (EXPENSE)
Gain on sale of assets 84,405 --- --- ---
Interest expense (828,455) (961,505) (267,171) (323,941)
-------------- -------------- ------------- -------------
Total other income (expense) (744,050) (961,505) (267,171) (323,941)
-------------- -------------- ------------- -------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 3,554,283 1,175,966 1,503,498 572,351
PROVISION FOR INCOME TAXES 1,297,006 470,352 510,444 228,941
------------- ------------- ------------- -------------
NET INCOME $ 2,257,277 $ 705,614 $ 993,054 $ 343,410
============= ============= ============= =============
Earnings per common share:
Basic $ 14.73 $ 4.60 $ 6.48 $ 2.24
============= ============= ============ ============
Diluted $ 11.05 $ 4.36 $ 4.70 $ 2.12
============= ============= ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
COMPRESSCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,257,277 $ 705,614
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 1,390,460 1,186,635
Amortization of discount on subordinated promissory notes 25,000 25,000
Amortization of deferred financing costs 46,461 28,785
Provision for bad debts 90,000 43,000
Other assets (28,445) 6,067
Gain on sale of operating equipment and natural gas well (84,405) ---
Deferred income tax 1,297,006 470,352
Changes in current assets and liabilities:
Accounts receivable (1,853,489) (303,789)
Notes receivable --- 23,662
Inventories (1,011,857) 162,459
Other current assets (14,029) (15,741)
Accounts payable 1,162,833 (67,480)
Accrued liabilities 137,610 (247,501)
Deferred revenues (233,168) ---
--------------- --------------
Net cash provided by operating activities 3,181,254 2,017,063
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to compressor rental units (5,372,900) (1,186,329)
Additions to vehicles and equipment (519,772) (240,379)
Proceeds from sales of operating equipment 189,700 2,621
-------------- --------------
Net cash used in investing activities (5,702,972) (1,424,087)
CASH FLOWS FROM FINANCING ACTIVITES:
Proceeds from new bank credit agreement 11,166,596 ---
Payment of bank line of credit (8,690,795) ---
Payments of term note payable (1,026,640) (419,999)
Proceeds from line of credit 10,249,141 8,860,508
Principal payments on line of credit (8,652,900) (8,859,928)
Deferred financing costs (86,912) ---
--------------- --------------
Net cash provided by (used in) financing activities 2,958,490 (419,419)
-------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 436,772 173,557
CASH AND CASH EQUIVALENTS, Beginning of period 317,707 53,624
-------------- --------------
CASH AND CASH EQUIVALENTS, End of period $ 754,479 $ 227,181
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Compressco, Inc., formerly Emerging Alpha Corporation (the "Company"), was
incorporated in the State of Delaware on February 10, 1993, for the purpose of
acquiring business opportunities. On October 29, 1999, the Company purchased
Compressco Field Services, Inc., an Oklahoma corporation, and Compressco Testing
L.L.C. The two companies are wholly owned subsidiaries of the Company.
The Company is engaged primarily in the manufacture, rental and service of
natural gas compressors that provide economical well head compression to mature,
low pressure natural gas wells. The Company's compressors are currently sold and
rented to natural gas producers located primarily in the mid-continent
hydrocarbon producing regions of the United States and western Canada.
Compressco Testing L.L.C. is a natural gas measurement, testing and service
company, based in Oklahoma City, that began operations in September 1999.
In October 2001, the Company established a wholly owned Canadian subsidiary,
Compressco Canada, Inc., to market the sale and rental of compressors in Canada.
During the fall of 2001 the Company hired a Canadian representative, opened an
office and began to service the Canadian market. As of September 30, 2003 the
Company had 75 compressors on rental and had sold 20 compressors in Canada.
2. BASIS OF PRESENTATION
The consolidated balance sheet as of September 30, 2003 and the consolidated
statements of operations and cash flows for the nine months ended September 30,
2003 and 2002 are unaudited. In the opinion of management, such consolidated
financial statements include all adjustments, consisting only of normal
recurring adjustments necessary for a fair presentation of the financial
position, results of operations and cash flows for the periods presented.
The consolidated balance sheet data as of December 31, 2002 was derived from
audited consolidated financial statements, but does not include all disclosures
required by generally accepted accounting principles. The consolidated financial
statements presented herein should be read in connection with the Company's
December 31, 2002 consolidated financial statements included in the Company's
Form 10-KSB.
The results of operations for the three and nine months ended September 30, 2003
are not necessarily indicative of the results of operations to be expected for
the full fiscal year ending December 31, 2003.
3. LONG-TERM DEBT
Long-term debt consists of the following as of September 30, 2003:
(a) On December 22, 2000, the Company offered an issue of 13% subordinated
promissory notes (the "Notes") and stock warrants (see Note 5) to qualified
private investors. As of September 30, 2003, $5,550,000 of the Notes were
issued. Of the $5,550,000 in proceeds, $100,000 was allocated to the stock
warrants. The Notes are subordinated unsecured obligations of the Company
and rank junior to all existing indebtedness of the Company. In March 2003,
the Company and the holders of the Notes agreed to amend the Notes to
extend the maturity to March 31, 2005, change the interest rate from 13%
per annum to 10% effective April 1, 2003 and make the Notes convertible by
the holder into common stock of the Company at anytime prior to maturity at
a conversion price of $150 per share. The Notes mature on the earlier of
(1) the consummation of an underwritten public offering of the Company's
capital stock or (2) March 31, 2005. The Company may, at any time prepay
any part of the principal balance on the Notes, in increments of $10,000,
without premium or penalty prior to maturity. Interest is payable quarterly
in arrears.
(b) The Company entered into a new credit agreement on June 30, 2003 with a
bank and repaid all amounts due on its prior line of credit and term
facilities. Under the new credit agreement the Company may borrow up to the
lesser of $17,500,000 or the sum of (i) 85% of the aggregate amount of
eligible receivables, (ii) 50% of the aggregate amount of eligible
inventory, and (iii) the lower of 80% of the appraised orderly liquidated
value or the net book value of its compressor fleet. In addition no
additional borrowings are allowed if utilization of the compressor fleet
falls below 70%. The balance outstanding under the line of credit agreement
as of September 30, 2003 was $11,166,596. The borrowing under the credit
facility bear interest between 0.25% and 0.5% over Wall Street Journal
Prime Rate (4.50% at September 30, 2003) or between 3.0% and 3.25% over
LIBOR (4.27% at September 30, 2003) based on the Company's ratio of debt to
earnings before interest, taxes, depreciation and amortization. Interest is
due quarterly with all outstanding borrowings due at maturity on the
earlier of June 30, 2006 or 45 days prior to the maturity of the $5,550,000
subordinated promissory notes currently due March 31, 2005. The loan is
secured with the assets and compressor rental agreements of the Company.
The Company's credit facility imposes a number of financial and restrictive
covenants that among things, limit the Company's ability to incur
additional indebtedness, create liens and pay dividends. As of September
30, 2003, the Company was in compliance with its loan covenant ratios.
Management expects that the Company will be in compliance with the
covenants under the credit facility for at least the next twelve months. In
addition, no additional draws are permitted under the credit facility if
utilization of the compressor fleet falls below 70%. As of September 30,
2003, the utilization rate of the compressor fleet was 95.7%.
4. COMMITMENTS
The Company entered into a purchase agreement on December 14, 2000, with a
supplier to purchase 1,000 compressor engines by December 31, 2002. As of
September 30, 2003, the Company had taken delivery of 387 engines from the
supplier including 140 engines during the first nine months of 2003. The
purchase agreement was amended on February 24, 2003 to provide that the Company
shall purchase 13 engines per month commencing January 1, 2003 and not less than
156 engines per year until the remaining balance of engines have been purchased.
The purchase agreement provides that the Company's liability to the supplier for
any failure to purchase the full amount of engines is limited to (i) pay for the
engines delivered, (ii) reasonable direct out of pocket cost incurred by the
supplier in acquiring material for production of the number of engines
contemplated by the agreement and (iii) the reasonable costs incurred by the
supplier for the work in progress at the time of termination of the agreement
including labor costs and reasonable quantities of parts and materials ordered
by the supplier.
5. STOCKHOLDERS' EQUITY
In connection with the offering of the Notes discussed in Note 3, the Company
issued stock warrants to purchase 420 shares of the Company's common stock per
every $50,000 amount of Notes purchased. The warrants have an exercise price of
$120 per share. At September 30, 2003 total stock warrants of 46,620 had been
issued. The warrants are exercisable upon issue, and expire on March 31, 2005.
The Company obtained a valuation as to the amount to be assigned to the warrants
from the total proceeds received from the issuance of the subordinated
promissory notes. The value was determined using the Valrex model, which is an
option valuation model that uses established option pricing theory to price
nontrading options and warrants. Based on the valuation estimate, the value
assigned to the warrants is $100,000. This amount is shown as outstanding
warrants in stockholders' equity and as a discount to the subordinated
promissory notes. The discount is being amortized over the three-year life of
the stock warrants as additional interest expense.
6. EARNINGS PER COMMON SHARE
Basic earnings per share is calculated using the weighted average number of
shares issued and outstanding during the period. Diluted weighted average shares
is calculated using the effect of exercising stock options and stock warrants
and the conversion of subordinated promissory notes into common shares. Basic
and diluted earnings per common share are calculated as follows:
2003 2002
-------------------------------- --------------------------------
Per Share Per Share
Net Income Shares Amount Net Income Shares Amount
---------- ------- ------- --------- ------ --------
Nine Months Ended September 30
- ------------------------------
Basic:
Income available to common
Stockholders $2,257,277 153,235 $14.73 $ 705,614 153,235 $4.60
====== =====
Diluted:
Effect of stock options and warrants -------- 40,303 ------- 8,625
Effect of conversion of subordinated
promissory notes 290,751 37,000 ------- --------
------- ------ ------- --------
Income available to common
stockholders plus assumed
exercises of stock options and
stock warrants and conversion
of subordinated promissory notes $2,548,028 230,538 $ 11.05 $ 705,614 161,860 $4.36
========== ======= ======= ========== ======= =====
Three Months Ended September 30
- -------------------------------
Basic:
Income available to common
shareholders $ 993,054 153,235 $ 6.48 $ 343,410 153,235 $2.24
======= =====
Diluted:
Effect of stock options and warrants -------- 40,303 -------- 8,625
Effect of conversion of subordinated
promissory notes 91,575 37,000 -------- --------
------ ------ --------- --------
Income available to common
stockholders plus assumed
exercises of stock options and
stock warrants and conversion
of subordinated promissory notes $1,084,629 230,538 $ 4.70 $ 343,410 161,860 $2.12
========== ======= ======= ========== ======= =====
7. STOCK BASED COMPENSATION
The Company applies APB Opinion No. 25 in accounting for its fixed price stock
options. Accordingly, no compensation cost for options has been recognized in
the financial statements. The chart below sets forth the Company's net income
per share for the nine and three months ended September 30, 2003 and 2002, as
reported and on a pro forma basis as if the compensation cost of stock options
had been determined consistent with SFAS 123.
Nine Months Ended Three Months Ended
September 30 September 30
2003 2002 2003 2002
Net Income, as reported $ 2,257,277 $ 705,614 $ 993,054 $ 343,410
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (73,688) (75,743) (27,200) (26,428)
------- ------- ------- ------
Pro forma net income $ 2,183,589 $ 629,871 $ 965,854 $ 316,982
========= ======= ========= =======
Basic Income per Share:
As reported $ 14.73 $ 4.60 $ 6.48 $ 2.24
Pro forma 14.25 4.11 6.30 2.07
Diluted Income per Share:
As reported $ 11.05 $ 4.36 $ 4.70 $ 2.12
Pro forma 10.73 3.89 4.59 1.96
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company is engaged primarily in the manufacture, rental and service of
natural gas compressors that provide economical well head compression to mature,
low pressure natural gas wells. The Company's compressors are currently sold and
rented to natural gas producers located primarily in the mid-continent
hydrocarbon producing regions of the United States and western Canada.
Compressco Testing L.L.C. is a natural gas measurement, testing and service
company, based in Oklahoma City, that began operations in September 1999.
In October 2001, the Company established a wholly owned Canadian subsidiary,
Compressco Canada, Inc., to market the sale and rental of compressors in Canada.
During the fall of 2001 the Company hired a Canadian representative, opened an
office and began to service the Canadian market. As of September 30, 2003 the
Company had 75 compressors on rental and had sold 20 compressors in Canada
including 46 compressors placed on rental and 18 compressors were sold during
the nine months ended September 30, 2003.
The following table sets forth selected consolidated financial information for
the year ended December 31, 2002 and as of September 30, 2003 and for the nine
months and three months ended September 30, 2003 and 2002 and is qualified in
its entirety by the consolidated financial statements appearing elsewhere in
this Form 10-QSB.
Results of Operations
SELECTED CONSOLIDATED FINANCIAL DATA
STATEMENT OF OPERATIONS DATA:
Nine Months Ended Three Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Operating Revenues.............. $ 15,971,532 $ 10,550,553 $ 6,406,598 $ 3,933,749
Cost of Sales and Expenses...... 11,673,199 8,413,082 4,635,929 3,037,457
Operating Income................ 4,298,333 2,137,471 1,770,669 896,292
Net Income...................... $ 2,257,277 $ 705,614 $ 993,054 $ 343,410
BALANCE SHEET DATA (AT END OF PERIOD):
September 30, 2003 December 31, 2002
------------------ -----------------
Cash and Cash Equivalents............... $ 754,479 $ 317,707
Total Assets............................ 29,221,355 21,529,399
Total Liabilities....................... 22,179,569 16,744,890
Stockholders' Equity.................... $ 7,041,786 $ 4,784,509
The following discussion regarding the consolidated financial statements of the
Company should be read in conjunction with the consolidated financial statements
and notes thereto appearing elsewhere in this report.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINEMONTHS ENDED SEPTEMBER 30,
2002
The revenues for the nine months ended September 30, 2003 of $15,971,532
increased by $5,420,979, or 51.4% for the comparable period in 2002. The
following table sets forth the components of our revenues for the nine months
ended September 30, 2003 and 2002:
2003 2002
---- ----
Revenue:
Rental revenue $12,564,897 $ 9,186,888
Sale of compressors and parts 2,386,333 610,468
Service and other 1,020,302 753,197
------------ -------------
Total revenue $15,971,532 $ 10,550,553
=========== ============
The Company had 991 compressors in service as of September 30, 2003 compared to
752 as of September 30, 2002. During the nine months ended September 30, 2003
the compressors in service increased by a net of 230 units, an increase of 30%,
compared to an increase of 103 units in the first nine months of 2002. In the
nine months ended September 30, 2003 the Company sold 42 compressors compared to
11 compressors sold in first nine months of 2002. The increase in the number of
net units set and compressors sold in 2003 was due to our increased domestic
sales staff in 2003, increased activity in our Canadian operations, combined
with the higher price of natural gas during 2003.
The cost of sales and operating expenses for the 2003 period were $10,282,739,
or 64.4% of operating revenues, compared to $7,226,447, or 68.4%, in the 2002
period. Operating expenses for the 2003 period were $8,815,534, or 64.9% of
rental and service revenues, compared to $6,880,165, or 69.2% for the 2002
period. The decrease in cost of sales and operating expenses as a percent of
revenues in 2003 was due to the growth in rental revenue in 2003, resulting from
increasing the rental units in service and increased rental rates with lower
increases in operating expenses to support the increased number of units and the
increase in the number of compressors sold in 2003.
The Company manufactured 236 compressors in the 2003 period compared to 47 in
the 2002 period. The increase in the number of compressors manufactured was due
to higher demand as a result of our increased domestic sales staff in 2003,
increased activity in our Canadian operation, combined with the higher price of
natural gas in 2003. The Company had 45 compressors off rental as of September
30, 2003 compared to 79 units off rental as of September 30, 2002. The Company
is manufacturing new compressors, as needed, for domestic and Canadian
operations.
Depreciation and amortization expense increased in the 2003 period to $1,390,460
compared to $1,186,635 for the 2002 period. The increase was due to the increase
in the Company's compressor fleet in 2003 to 1,036 units from 831 units as of
September 30, 2002.
Interest expense for the 2003 period was $828,455 compared to $961,505 for the
2002 period. The decrease was due to lower interest rates in 2003 compared to
2002. Provision for income taxes for the 2003 period was $1,297,006 (36.5%
effective rate) compared to $470,352 (40% effective rate) for 2002. The decrease
in the effective income tax rate in 2003 was primarily due to utilizing the
Canadian income tax loss carry forward from 2002 to offset Canadian income
generated in 2003.
Net income was $2,257,277 for the 2003 period compared to $705,614 for the 2002
period. The increase in net income was primarily due to the growth in the
Company's compressor rental fleet and increase in the number of compressors sold
in 2003.
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
The revenues for the three months ended September 30, 2003 of $6,406,598
increased by $2,472,849, or 62.9% for the comparable period in 2002. The
following table sets forth the components of our revenues for the three months
ended September 30, 2003 and 2002:
2003 2002
---- ----
Revenue:
Rental revenue $4,726,446 $3,372,781
Sale of compressors and parts 1,296,792 296,031
Service and other 383,360 264,937
------------ ------------
Total revenue $6,406,598 $3,933,749
========== ==========
The Company had 991 compressors in service as of September 30, 2003 compared to
752 as of September 30, 2002. During the three months ended September 30, 2003
the compressors in service increased by a net of 99 units compared to an
increase of 49 units in the same period in 2002. In the three months ended
September 30, 2003, the Company sold 25 compressors compared to 5 compressors
sold in the 2002 period. The increase in the number of net units set and
compressors sold in 2003 was due to our increased domestic sales staff in 2003,
increased activity in our Canadian operation, combined with the higher price of
natural gas during 2003.
The cost of sales and operating expenses for the 2003 period were $4,131,853, or
64.4% of operating revenues, compared to $2,637,106, or 67.0%, in the 2002
period. Operating expenses for the 2003 period were $3,335,880 or 65.3% of
rental and service revenues, compared to $2,463,866, or 67.7% for the 2002
period. The decrease in cost of sales and operating expenses as a percent of
revenues in 2003 was due to the growth in rental revenue in 2003, resulting from
increasing the rental units in service and increased rental rates with lower
increases in operating expenses to support the increased number of units and the
increase in the number of compressors sold in 2003.
The Company manufactured 109compressors in the 2003 period compared to 39 in the
2002 period. The increase in the number of compressors manufactured was due to
higher demand as a result of our increased domestic sales staff in 2003,
increased activity in our Canadian operation, combined with the higher price of
natural gas in 2003. The Company had 45 compressors off rental as of September
30, 2003 compared to 79 units off rental as of September 30, 2002. The Company
is manufacturing new compressors, as needed, for domestic and Canadian
operations.
Depreciation and amortization expense increased in the 2003 period to $504,076
compared to $400,351 for the 2002 period. The increase was due to the increase
in the Company's compressor fleet in 2003 to 1,036 units from 831 units at
September 30, 2002.
Interest expense for the 2003 period was $267,171 compared to $323,941 for the
2002 period. The decrease was due to lower interest rates in 2003 compared to
2002.
Provision for income taxes for the 2003 period was $510,444 (34% effective rate)
compared to $228,941 (40% effective rate) for 2002. The decrease in the
effective income tax rate in 2003 was primarily due to utilizing the Canadian
income tax loss carry forward from 2002 to offset Canadian income generated in
2003.
Net income was $993,054 for the 2003 period compared to $343,410 for the 2002
period. The increase in net income was primarily due to the growth in the
Company's compressor rental fleet and increase in the number of compressors sold
in 2003.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 2003, the Company entered into a credit agreement with a bank and
repaid all amounts due on its prior line of credit and term facilities. Under
the new credit agreement the Company may borrow up to the lesser of $17,500,000
or the sum of (i) 85% of the aggregate amount of eligible receivables, (ii) 50%
of the aggregate amount of eligible inventory, and (iii) the lower of 80% of the
appraised orderly liquidated value or the net book value of its compressor
fleet. In addition no additional borrowings are allowed if utilization of the
compressor fleet falls below 70%. The balance outstanding under the line of
credit agreement as of September 30, 2003 was $11,166,596. The borrowings under
the credit facility bear interest between 0.25% and 0.5% over Wall Street
Journal Prime Rate (4.50% at September 30, 2003) or between 3.0% and 3.25% over
LIBOR (4.27% at September 30, 2003) based on the Company's ratio of debt to
earnings before interest, taxes, depreciation and amortization. Interest is due
quarterly with all outstanding borrowings due at maturity on the earlier of June
30, 2006 or 45 days prior to the maturity of the $5,550,000 subordinated
promissory notes currently due March 31, 2005. The loan is secured with the
assets and compressor rental agreements of the Company. The Company's credit
facility imposes a number of financial and restrictive covenants that among
things, limit the Company's ability to incur additional indebtedness, create
liens and pay dividends. As of September 30, 2003, the Company was in compliance
with its loan covenant ratios. Management believes that the Company will be in
compliance with the covenants under the credit facility for at least the next
twelve months. In addition, no additional draws are permitted under the credit
facility if utilization of the compressor fleet falls below 70%. As of September
30, 2003 the utilization rate of the compressor fleet was 95.7%.
In December 2000 and January 2001, the Company offered its 13% subordinated
promissory notes (the "Notes") and stock warrants in a private placement. As of
September 30, 2003, $5,550,000 of the Notes were issued. Of the $5,550,000 in
proceeds, $100,000 was allocated to the stock warrants. The notes are
subordinated unsecured obligations of the Company and rank junior to all
existing indebtedness of the Company. In March 2003 the Company and the holders
of the Notes agreed to amend the Notes to extend the maturity to March 31, 2005,
change the interest rate from 13% per annum to 10% effective April 1, 2003 and
make convertible by the holder into common stock of the Company at anytime prior
to maturity at a conversion price of $150 per share. The Notes mature on the
earlier of (1) the consummation of an underwritten public offering of the
Company's capital stock or (2) March 31, 2005. The Company may, at any time
prepay any part of the principal balance on the Notes, in increments of $10,000,
without premium or penalty prior to maturity. Interest is payable quarterly in
arrears.
In March 2000, the Company issued 70,002 shares of its common stock through a
private placement for $30.00 per share or total equity proceeds of $2,100,060.
The equity proceeds were used in part to repay borrowings under the Company's
line of credit and the remaining proceeds were used primarily to fund the growth
in our compressor fleet.
The Company believes that cash flow from operations and funds available under
its credit facilities will provide the necessary working capital to fund the
Company's requirements for current operations through 2003. However, in
connection with any expansion of operations or acquisition activities, it is
likely that the Company will need additional sources of debt or equity
financing. The Company cannot provide assurance that these funds will be
available, or if available will be available on satisfactory terms.
IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS
In connection with forward-looking statements contained in this Form 10-QSB and
those that may be made in the future by or on behalf of the Company which are
identified as forward-looking by such words as "believes," "intends" or words of
a similar nature, the Company notes that there are various factors that could
cause actual results to differ materially from those set forth in any such
forward-looking statements. The forward-looking statements contained in this
Form 10-QSB were prepared by management and are qualified by, and subject to,
significant business, economic, competitive, regulatory and other uncertainties
and contingencies, all of which are difficult or impossible to predict and many
of which are beyond the control of the Company. Accordingly, there can be no
assurance that the forward-looking statements contained in this Form 10-QSB will
be realized or the actual results will not be significantly higher or lower.
These forward-looking statements have not been audited by, examined by, compiled
by or subjected to agreed-upon procedures by independent accountants, and no
third-party has independently verified or reviewed such statements. Readers of
this Form 10-QSB should consider these facts in evaluating the information
contained herein. In addition, the business and operations of the Company are
subject to substantial risks which increase the uncertainty inherent in the
forward-looking statements contained in this Form 10-QSB. The inclusion of the
forward-looking statements contained in this Form 10-QSB should not be regarded
as a representation by the Company or any other person that the forward-looking
statements contained in this Form 10-QSB will be achieved. In light of the
foregoing, readers of this Form 10-QSB are cautioned not to place undue reliance
on the forward-looking statements contained herein.
ITEM 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. We maintain
disclosure controls and procedures designed to provide reasonable assurance that
information required to be disclosed in the reports we file with the SEC is
recorded, processed, summarized and reported within the time periods specified
in the rules of the SEC. As of September 30, 2003 we carried out an evaluation,
under the supervision and the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, of the design and operation
of these disclosure controls and procedures pursuant to the Exchange Act Rule
13a-14. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective in timely alerting them to material information relating to the
company (including our consolidated subsidiaries) required to be included in our
periodic SEC filings.
(b) Changes in internal controls. There were no significant changes in
internal controls or other factors that could significantly affect our internal
controls subsequent to the date of our evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
A special meeting of the shareholders was held on July 16, 2003 to
vote on a proposal to amend and restate our certificate of
incorporation to increase the number of authorized shares of the
Company's common stock, par value $1.00 per share, from 200,000
shares to 500,000 shares and increase the number of authorized
shares of the Company's preferred stock, par value $1.00 per
share, from 50,000 shares to 200,000, which amendment has been
proposed by the Board of Directors of the Company.
The above proposal was approved by a vote of 111,363 shares for
the proposal and 575 shares against the proposal and 75 shares
abstaining.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits of the Company are included
herein.
3. Certificate of Incorporation and Bylaws
*3.1 Restated Certificate of Incorporation
*3.2 Bylaws
*3.3 Proposed Certificate of Amendment to the Restated
Certificate of Incorporation
10. Material Contracts
*10.1 1993 Stock Option Plan
*10.2 Form of Stock Option Agreements with Messrs. Keenan,
Killeen, Jarrell and Chaffe with Schedule of
Details
**10.3 Stock Purchase Agreement, dated as of October 29,
1999, by and between the Company and the
Stockholders of Gas Jack, Inc.
***10.4 Securities Purchase Agreement, dated as of December
22, 2000, between the Company and each investor
party thereto.
***10.5 Stock Warrant Agreement, dated as of December 22,
2000, between the Company and each investor party
thereto.
***10.6 Subordinated Promissory Note, dated December 22, 2000,
issued by the Company to each purchaser of the
notes.
***10.7 Registration Rights Agreement, dated as of December
22, 2000, between the Company and each investor
party thereto.
****10.8 Credit Agreement, dated June 30, 2003, by and among
Comercia Bank - Texas, the Company and Compressco
Field Services, Inc.
****31 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
****32 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
No reports were filed in the quarter ended September 30, 2003
- ---------------------------
* Filed with Registration Statement on Form SB-2, File No. 33-61888-FW and
incorporated by reference herein.
** Filed with Form 8-K (October 29, 1999) and incorporated by reference
herein.
*** Filed with Form 10-KSB (December 31, 2000) and incorporated by reference
herein.
**** Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on November 14, 2003.
COMPRESSCO, INC.
By: /S/ BROOKS MIMS TALTON
--------------------------------
Brooks Mims Talton
Chief Executive Officer
By: /S/ GARY MCBRIDE
--------------------------------
Gary McBride
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Exhibit 31
Certification of Chief Executive Officer
As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Brooks Mims Talton, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Compressco,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly 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 quarterly
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 quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly 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 quarterly report whether 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.
Dated: November 14, 2003 /S/ BROOKS MIMS TALTON
-----------------------------
Brooks Mims Talton
Chief Executive Officer
Exhibit 32
Certification of Chief Financial Officer
As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Gary McBride, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Compressco,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly 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 quarterly
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 quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly 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 quarterly report whether 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.
Dated: November 14, 2003 /S/ GARY McBride
---------------------------------
Gary McBride
Chief Financial Officer
Certification of Chief Executive Officer
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 and accompanies the quarterly report on Form 10-QSB (the "form") for the
quarter ended September 30, 2003 of Compressco, Inc. (the "Issuer").
I, Brooks Mims Talton, the Chief Executive Officer of Issuer certify that to the
best of my knowledge:
(i) the Form 10-QSB fully complies with the requirements of section
13(a) or section 15(d) of the Securities Exchange Act of 1934 (15
U.S.C. 78m(a) or 78o(d)); and
(ii) the information contained in the Form 10-QSB fairly presents, in
all material respects, the financial condition and results of
operations of the Issuer.
Dated: November 14, 2003
By: /S/ BROOKS MIMS TALTON
-----------------------
Chief Executive Officer
Subscribed and sworn to before me
this 14th day of November 2003.
/S/ Jodi Thompson
- --------------------
Name: Jodi Thompson
Title: Notary Public
My commission expires:
April 23, 2005
Certification of Chief Financial Officer
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 and accompanies the quarterly report on Form 10-QSB (the "form") for the
quarter ended September 30, 2003 of Compressco, Inc. (the "Issuer").
I, Gary McBride, the Chief Financial Officer of Issuer certify that to the best
of my knowledge:
(i) the Form 10-QSB fully complies with the requirements of section
13(a) or section 15(d) of the Securities Exchange Act of 1934 (15
U.S.C. 78m(a) or 78o(d)); and
(ii) the information contained in the Form 10-QSB fairly presents, in
all material respects, the financial condition and results of
operations of the Issuer.
Dated: November 14, 2003
By: /S/ GARY MCBRIDE
------------------
Chief Financial Officer
Subscribed and sworn to before me
this 14th day of November 2003.
/S/ Jodi Thompson
- --------------------
Name: Jodi Thompson
Title: Notary Public
My commission expires:
April 23, 2005