<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE QUARTERLY PERIOD ENDED September 30, 1997
-------------------------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE TRANSITION PERIOD FROM ______________________ TO ______________________.
COMMISSION FILE NUMBER 0-18205
----------------
EQUITY COMPRESSION SERVICES CORPORATION
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(Exact name of small business issuer as specified in its charter)
Oklahoma 73-1345732
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2501 Cedar Springs Road, Suite 600, Dallas, Texas 75201
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(Address of principal executive offices) (Zip Code)
214-953-9560
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(Issuer's telephone number)
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 _____
Number of Shares of Common Stock Outstanding on November 14, 1997 - 29,892,668
Transitional Small Business Format (Check one): Yes _____; No __X__
1
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EQUITY COMPRESSION SERVICES CORPORATION
TABLE OF CONTENTS
PAGE
----
PART I
FINANCIAL INFORMATION:
Item 1 - Financial Statements
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996 . . . . . . . . . . . . . . 3
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1997 and 1996 . . . . . . 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996. . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 7
Item 2 - Management's Discussion and Analysis of the
Consolidated Financial Statements. . . . . . . . . . . . . . . . . . 9
PART II
OTHER INFORMATION:
Item 6 - (a) Exhibits . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 6 - (b) Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 11
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2
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EQUITY COMPRESSION SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
SEPTEMBER 30, DECEMBER 31,
1997 1996
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(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2 $ 10
Accounts receivable, less allowance for doubtful accounts
of $142 and $76 in 1997 and 1996, respectively 1,756 1,220
Accounts receivable -- related party -- 25
Notes receivable 613 6
Compressors and compressor parts inventory 3,608 1,476
Other 376 46
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Total current assets 6,355 2,783
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Property and equipment, net (Note 2) 72,547 22,280
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Goodwill and other intangibles, net of amortization of
$1,783 in 1997 and $1,742 in 1996 1,148 742
Other assets, net 1 5
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Total Assets $80,051 $25,810
------- -------
------- -------
Current Liabilities:
Current portion of long-term debt $ 15 $ 177
Current portion of capital lease payable 186 --
Accounts payable and accrued liabilities 4,012 2,304
Income Tax Payable -- 13
------- -------
Total current liabilities 4,213 2,494
Long-term debt 36,771 4,864
Deferred income taxes 11,083 3,566
Capital lease payable 373 --
Other 89 89
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Total Liabilities 52,529 11,013
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Commitments (Note 4)
Stockholders' Equity:
Preferred stock, $1.00 par value, 1,000,000
shares authorized, none issued -- --
Common stock, $.01 par value, 40,000,000 shares
authorized, 28,731,735 and 21,049,235 shares
issued and 28,775,168 and 21,040,168 outstanding
in 1997 and 1996, respectively 288 210
Additional paid-in capital 30,215 17,692
Accumulated deficit (2,972) (1,656)
Treasury stock, at cost (9,067 and 9,067 shares in
1997 and 1996, respectively) (9) (9)
Deferred expense - contingent warrants -- (1,440)
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Total stockholders' equity 27,522 14,797
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Total Liabilities and Stockholders' Equity $80,051 $25,810
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
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EQUITY COMPRESSION SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------
1997 1996 1997 1996
-------- ------- ------- -------
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Oil & gas sales $ 696 $ 428 $ 1,884 $ 1,278
Compressor sales and re-manufacturing 238 207 766 1,036
Compressor rentals and service fees 3,831 1,571 7,258 4,793
-------- ------- ------- -------
Total revenues 4,765 2,206 9,908 7,107
-------- ------- ------- -------
Expenses:
Operating costs - oil and gas 188 139 564 394
Cost of compressor sales and re-manufacturing 229 171 693 789
Operating costs - compressors 1,417 331 2,754 1,913
Depreciation, depletion and amortization 1,232 578 2,461 1,649
General and administrative 935 423 2,285 1,317
Loss on sale of assets -- 359 -- 298
-------- ------- ------- -------
Total expenses 4,001 2,001 8,757 6,360
-------- ------- ------- -------
Income from operations 764 205 1,151 747
-------- ------- ------- -------
Other income (expense):
Interest income and other 14 4 15 27
Interest expense (596) (222) (934) (702)
Contingent warrant expense (1,440) -- (1,440) --
-------- ------- ------- -------
(2,022) (218) (2,359) (675)
-------- ------- ------- -------
Income (loss) before income taxes (1,258) (13) (1,208) 72
Income tax benefit (expense) (87) 1 (106) (40)
-------- ------- ------- -------
Net income (loss) $ (1,345) $ (12) $(1,314) $ 32
-------- ------- ------- -------
-------- ------- ------- -------
Loss per common share $ (.05) $ -- $ (.05) $ --
-------- ------- ------- -------
-------- ------- ------- -------
Weighted average number of shares outstanding 25,763 13,040 24,331 13,014
-------- ------- ------- -------
-------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
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EQUITY COMPRESSION SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,314) $ 32
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depletion, depreciation, and amortization 2,461 1,649
Deferred income taxes 92 (66)
Loss on sale -- 298
Contingent warrant expense 1,440 --
Changes in operating assets and liabilities:
Accounts receivable and other (56) 722
Notes receivable 9 570
Compressor and compressor parts inventory (1,556) (19)
Accounts payable and accrued liabilities (654) (490)
Other (286) --
-------- --------
Net cash provided by operating activities 136 2,696
-------- --------
Cash flows from investing activities:
Acquisitions of compressor and other equipment (6,942) (2,559)
Proceeds from disposition of compressor
and other equipment -- 534
Additions to oil and gas properties (718) (209)
Proceeds of dispositions of oil and gas properties -- 174
Business acquisition, net of cash acquired (23,792) --
Increase in organization costs and other intangibles (453) (128)
-------- --------
Net cash used in investing activities (31,905) (2,188)
-------- --------
Cash flows from financing activities:
Proceeds of long-term debt 34,984 130
Payments on long-term debt (3,239) (839)
Payments on capital lease payable (43) --
Sale of treasury stock -- 40
Proceeds from stock transactions 59 --
-------- --------
Net cash provided by (used in) financing activities 31,761 (669)
-------- --------
Net decrease in cash
and cash equivalents (8) (161)
Cash and cash equivalents,
beginning of period 10 177
-------- --------
Cash and cash equivalents,
end of period $ 2 $ 16
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
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EQUITY COMPRESSION SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
-------- --------
(In thousands)
Supplemental disclosure of cash flow information:
Interest paid $ 761 $ 786
-------- --------
-------- --------
Income taxes paid $ 30 $ 16
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-------- --------
The accompanying notes are an integral part of the
consolidated financial statements.
6
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EQUITY COMPRESSION SERVICES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION AND BASIS OF PRESENTATION
Equity Compression Services Corporation (the "Company"), formerly Hawkins
Energy Corporation, is engaged in the leasing, re-manufacturing and direct sale
of gas compression equipment to operators of producing natural gas wells and gas
gathering systems and in the production of natural gas and oil. Its principal
geographical operating areas lie within the states of Alabama, Mississippi,
Louisiana, Oklahoma, Arkansas, Kansas and Texas.
The accompanying consolidated financial statements present the financial
position and results of operations of the Company and its wholly owned
subsidiaries, Ouachita Energy Corporation ("Ouachita"), Equity Compressors, Inc.
("Equity Compressors") and Sunterra Energy Corporation.
In the opinion of the Company, the accompanying financial statements
contain all adjustments necessary (all of which are of a normal recurring
nature) to present fairly the financial position of Equity Compression Services
Corporation and its wholly owned subsidiaries as of September 30, 1997, and the
results of its operations and cash flows for the periods ended September 30,
1997 and 1996.
The financial statements should be read in conjunction with the Company's
Form 10-KSB for the year ended December 31, 1996. The year end Consolidated
Balance Sheet data was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
NOTE 2 PROPERTY AND EQUIPMENT
SEPTEMBER 30, DECEMBER 31,
1997 1996
---- ----
(In thousands)
Land and building. . . . . . . . . . . . . . . . . . . $ 1,962 $ 307
Oil and gas properties, on the full cost method. . . . 35,819 35,102
Compressor equipment . . . . . . . . . . . . . . . . . 72,204 23,489
Other equipment. . . . . . . . . . . . . . . . . . . . 2,067 479
-------- -------
112,052 59,377
Less accumulated depreciation, depletion and
amortization . . . . . . . . . . . . . . . . . . . . 39,505 37,097
-------- -------
Net property and equipment . . . . . . . . . . . . . . $ 72,547 $22,280
-------- -------
-------- -------
NOTE 3 TRANSACTIONS WITH RELATED PARTIES
Amounts paid in the nine months ended September 30 by the Company to an
affiliate for general and administrative overhead including rent and production
and drilling overhead is as follows: $0 in 1997 and $53,000 in 1996.
NOTE 4 COMMITMENTS
The Company leases compressor equipment under contracts with terms ranging
from month to month to five years. The future revenues to be received under
contracts at September 30, 1997 are $1.9 million and $5.4 million in 1997 and
1998, respectively.
7
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The Company leases facilities for its corporate and field offices with
lease terms ranging from month to month to three years. The Company has certain
other operating leases for other facilities' office equipment. Future minimum
rental payments under these leases total $110,000, $419,000, $406,000,and
$394,000 for 1997, 1998, 1999 and 2000, respectively. The Company's rental
expense amounted to $400,000 and $318,000 for the nine months ended September
30, 1997 and 1996 respectively.
NOTE 5 SALE OF COMMON STOCK AND ISSUANCE OF CONTINGENT WARRANTS
Effective December 19, 1996, the Company sold to a private investment group
(HACL) 8,000,000 shares of its common stock and warrants which, upon satisfying
certain vesting requirements, will entitle the purchase of an additional
8,000,000 shares of its common stock at a price of $.91 per share, for aggregate
consideration of $4,400,000. The Company has reported the cash consideration
received, net of related costs, of $4,400,000 as an addition to common stock and
paid-in-capital. Additionally, the Company calculated the theoretical "fair
value" of the warrants (per Black Scholes Model) to be $1,440,000, which the
Company reported as an addition to paid-in-capital offset by a contingent
warrant deferred expense contra-equity account. A committee of the Board of
Directors determined that the warrants fully vested during the third quarter of
1997. The fair value of the warrants, $1,440,000, was expensed in the third
quarter of 1997.
NOTE 6 EARNINGS PER SHARE
Earnings per share is computed based on the weighted average number of
shares of common stock outstanding during the period.
NOTE 7 ACQUISITION OF SUBSIDIARY
On August 6, 1997, the Company closed its previously announced
acquisition of 100% of the common stock of Ouachita Energy Corporation and
the majority of the assets of both Ouachita Compression Group, LLC and
Ouachita Energy Partners, LTD. Under the terms of the acquisition agreements
that were closed effective July 31, 1997, the Ouachita companies'
shareholders received 7.6 million shares of the Company's common stock and
approximately $24 million in cash. The Company funded the cash portion of
the purchase through $20 million in proceeds from the issuance and sale to
Prudential Insurance Company of America, of $5 million of 7 year floating
rate senior notes and $15 million of 10.16% senior subordinated notes with
8-10 year maturities, with the balance drawn under its existing $20 million
Bank Credit Facility. Prudential Insurance Company of America also received
warrants to acquire 1 million shares of the company's common stock at an
exercise price of $2.80 per share. The Company's borrowing base under the
Bank Credit Facility was increased from $12.7 million to $20 million upon the
close of the transaction. The principal assets acquired consisted of a
compressor fleet aggregating roughly 100,000 horsepower and a refabrication
facility in West Monroe, Louisiana. The acquisition was accounted for using
the purchase method of accounting, and accordingly, the results of operations
of Ouachita are included in the Company's results of operation since the date
of acquisition.
NOTE 8 SUBSEQUENT EVENT
On October 30, 1997 the Company through its wholly owned subsidiary,
Sunterra Energy Corporation, entered into a joint venture with Prize
Petroleum, L.L.C. of Tulsa, Oklahoma to form Sunterra Petroleum Company,
L.L.C. The new venture is capitalized with oil and gas properties and cash
commitments with a value in excess of $9 million. The company will
focus on oil and gas acquisitions with development opportunities. A $10
million bank credit facility has been provided for the new entity.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is Management's discussion and analysis of certain
significant factors which have affected the Company's earnings and financial
condition during the periods included in the accompanying Consolidated Balance
Sheets, Statements of Operations and Cash Flows.
RESULTS OF OPERATIONS
1997 VERSUS 1996
In the three months ended September 30, 1997, the Company had a net loss
of $1,345,000 compared to a net loss of $12,000 in the three months ended
September 30, 1996. For the nine months ended September 30, 1997, the
Company reported a net loss of $1,314,000 compared to net income of $32,000
for the same period ended September 30, 1996, due principally to the
recognition of $1,440,000 of expense associated with the issuance of warrants
recognized in the third quarter of 1997. (See Note 5) The Company's income
from operations increased 273% and 54% for the three and nine months ended
September 30, 1997 when compared to the same period in 1996 due to the
acquisition of Ouachita and increased rental income on the existing fleet.
Revenues from oil and gas sales increased 63% and 47% for the three and
nine months ended September 30, 1997 when compared to the same period in 1996
due to a 15% increase in the average price of natural gas received by the
Company and a 69% increase in the volume of BBls and 34% increase in volumes of
MCF sold by the Company. This increase in volume is the result of the
successful completion of two producing gas wells, two producing oil wells and a
secondary oil recovery project located in Texas. Oil and gas operating costs
increased 35% and 43% for the three and nine months ended September 30, 1997
when compared to the same period in 1996 due to increase in production taxes and
expenses related to the increase in two producing wells.
Revenues from the sale of compressors and remanufacturing services
increased 15% for the three months ended September 30, 1997 when compared to the
same period in 1996 due to increased jobs in the shop. Sales of compressors and
remanufacturing services decreased 26% for the nine months ended September 30,
1997 when compared to the same period in 1996 due to the absence of one large
job when compared to 1996 and the Company's concentration of shop labor on the
maintaining and enhancing of the rental/contract compressor fleet. Compressor
rental and contract revenues increased 144% and 51% in the three and nine months
ended September 30, 1997 when compared to 1996, due to increased revenue related
to the acquisition of Ouachita and the deployment of additional compression
horsepower in the existing fleet. The average horsepower utilization rate for
the nine months ended September 1997 increased to 81.3% as compared to 75%
during the same period in 1996.
The cost of compressor and remanufacturing sales increased 34% and
decreased 25% in the three and nine months ended September 30, 1997 from the
same periods in 1996, consistent with the increase and decrease in related sales
for the three and nine months ended 1997 respectively. Compressor operating
costs incurred on rental and contract units increased 328% and 45% in the three
and nine months ended September 30, 1997 from the same period in 1996, as a
result of increased horsepower on leases from the existing fleet and the fleet
size increase due to the Ouachita acquisition. Additionally, the third quarter
of 1996 contains a $266,000 reduction in compressor operating costs relating to
the Company's overhead capitalization rates. These costs had been expensed over
the first two quarters of 1996.
Total depreciation, depletion and amortization increased 113% and 49% in
the three and nine months ended September 30, 1997 when compared to the same
periods in 1996. Depletion, depreciation and amortization of the composite cost
of evaluated oil and gas properties is computed on the units-of-production
method based on estimated proven reserves. Such expense increased 9% and 4% in
the three and nine months ended September 30, 1997 when compared to the same
period in 1996 due to higher volumes of oil and gas produced. Depreciation of
the compressor fleet increased 139% and 60% in the three and nine
9
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months ended September 30, 1997 from the same periods in 1996 due to
additions to the compressor fleet during 1997 and the increase in
depreciation expense related to the acquisition of Ouachita.
General and administrative expense increased 121% and 74% in the three and
nine months ended September 30, 1997 compared to the same periods in 1996, due
to costs related to the relocation of the Company's corporate office, severance
packages paid to former employees and expenses associated with the Company's
acquisition of Ouachita.
Interest expense increased by 168% and 33% in the three and nine months
ended September 30, 1997 compared to the same periods in 1996 as a result of
increased debt to finance the acquisition of Ouachita.
FINANCIAL CONDITION AND LIQUIDITY
In March 1997, the Company refinanced its existing bank credit facility to
increase the amounts available for new investment and working capital. The debt
is structured as a two year revolving line of credit with a $20 million maximum
commitment (previous commitment was $12 million) and had a borrowing base of
$12.7 million effective June 1, 1997. Under the terms of the credit agreement,
the outstanding balance at the revolving period's maturity will be converted to
a term note payable over 60 months. The credit agreement contains a variety of
covenants and a material adverse change clause. The covenants require the
Company to maintain certain ratios, prohibit the payment of cash dividends and
establish maximum annual capital expenditures. The debt is collateralized by
substantially all the assets of the Company. At September 30, 1997, the Company
had utilized $16.8 million of its credit line.
As a result of the acquisition of Ouachita Energy Corporation, the existing
bank facility note was increased to $40 million. The Company's borrowing base
also increased to $20 million. (See Note 7)
Net cash provided by operating activities of $136,000 for the nine months
ended September 30, 1997 represents a decrease from cash provided by
operating activities of $2,696,000 for the same period in 1996. The decrease
primarily reflects increases in compressor and compressor parts inventory,
increases in prepaid expenses, increases in accounts receivable and a
decrease in accounts payable. The increase of $1,537,000 in compressor and
compressor parts inventory relates to newly acquired compressors during 1997.
Net cash used in investing activities increased to $31.9 million in 1997
from $2.2 million in 1996 due to additions to the compressor rental fleet,
the acquisition of Ouachita and a increase in debt issue costs associated
with the acquisition. Net cash provided by financing activities was $31.8
million compared to net cash used in financing activities of $669,000 in 1996
as a result of the addition of $20 million in Senior and Senior Subordinated
notes (See Note 7) to finance the acquisition of Ouachita and additional
borrowings from the revolving line of credit. At September 30, 1997, the
Company had current assets of $6.4 million and current liabilities of $4.2
million. The Company anticipates that 1997 cash flow from operations and the
Company's revolving credit line will be sufficient to fund the Company's
working capital and capital expenditure needs.
10
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS
(a) Exhibits:
EXHIBIT
NO. DESCRIPTION
------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed Form 8-K on August 6, 1997 reporting that the Company
had completed the acquisition of Ouachita Energy Corporation.
The Company filed Form 8-K/A on October 21, 1997 amending the Form 8-K
filed on August 6, 1997 to include the audited Financial Statements of
Ouachita Energy Corporation and Pro Forma Financial Statements
relating to the acquisition of Ouachita Energy Corporation.
11
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SIGNATURES
Pursuant to the requirements of Sections 13 of 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.
EQUITY COMPRESSION SERVICES CORPORATION
DATE: November 14, 1997 By: /s/ Matthew S. Ramsey
-----------------------------------
MATTHEW S. RAMSEY
President and Chief Executive Officer
DATE: November 14, 1997 By: /s/ Jack D. Brannon
-----------------------------------
JACK D. BRANNON
Senior Vice President and Chief
Financial Officer
12
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EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
27 Financial Data Schedule
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2
<SECURITIES> 0
<RECEIVABLES> 1,756
<ALLOWANCES> 142
<INVENTORY> 3,608
<CURRENT-ASSETS> 6,355
<PP&E> 112,052
<DEPRECIATION> 39,505
<TOTAL-ASSETS> 80,051
<CURRENT-LIABILITIES> 4,027
<BONDS> 0
0
0
<COMMON> 288
<OTHER-SE> 27,234
<TOTAL-LIABILITY-AND-EQUITY> 80,051
<SALES> 2,650
<TOTAL-REVENUES> 9,908
<CGS> 1,257
<TOTAL-COSTS> 8,757
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 934
<INCOME-PRETAX> (1,208)
<INCOME-TAX> (106)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,314)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
