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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 March 31, 1998
----------------------------
[ ] 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
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OEC COMPRESSION 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 May 14, 1998 - 29,161,643
Transitional Small Business Format (Check one): Yes _____; No __X__
1
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OEC COMPRESSION CORPORATION
TABLE OF CONTENTS
<TABLE>
PAGE
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<S> <C>
PART I
FINANCIAL INFORMATION:
Item 1 - Financial Statements
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Operations
Three Months Ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of the
Consolidated Financial Statements 8
PART II
OTHER INFORMATION:
Item 6 - (a) Exhibits 11
Signatures 12
</TABLE>
2
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OEC COMPRESSION CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
MARCH 31,
1998 DECEMBER 31,
UNAUDITED 1997
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(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 31 $ 1
Accounts receivable, less allowance for doubtful accounts
of $99 and $75 in 1998 and 1997, respectively 2,401 2,782
Income tax receivable 526 212
Compressors and compressor parts inventory 3,115 2,674
Other 271 282
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Total current assets 6,344 5,951
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Property and equipment, net (Note 2) 80,431 76,888
Note receivable - related party 347 332
Goodwill and other intangibles, net of amortization of
$1,854 in 1998 and $1,819 in 1997 1,072 1,175
Other assets, net 19 19
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Total Assets $88,213 $84,365
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Current Liabilities:
Current portion of long-term debt $ -- $ 5
Current portion of capital lease payable 389 251
Accounts payable and accrued liabilities 3,450 4,435
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Total current liabilities 3,839 4,691
Long-term debt 41,147 39,076
Capital lease obligation 1,609 213
Deferred income taxes 10,605 10,142
Other 89 90
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Total Liabilities 57,289 54,212
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Minority interest 1,917 1,418
Commitments (Note 4)
Stockholders' Equity:
Preferred stock, $1.00 par value, 1,000,000
shares authorized, none issued -- --
Common stock, $.01 par value, 60,000,000 shares
authorized, 29,170,710 and 29,080,710 shares
issued and 29,161,643 and 29,071,643 outstanding
in 1998 and 1997, respectively 292 290
Additional paid-in capital 31,840 31,797
Accumulated deficit (3,116) (3,343)
Treasury stock, at cost (9,067 shares in 1998 and 1997,
respectively) (9) (9)
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Total stockholders' equity 29,007 28,735
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Total Liabilities and Stockholders' Equity $88,213 $84,365
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</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
3
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OEC COMPRESSION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
THREE MONTHS ENDED MARCH 31,
1998 1997
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(In thousands, except for per share amounts)
<S> <C> <C>
Revenues:
Compressor rentals and service fees $5,243 $1,672
Compressor sales and re-manufacturing 220 289
Oil & gas sales 670 614
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Total revenues 6,133 2,575
Expenses:
Operating costs - compressors 2,040 706
Cost of compressor sales and re-manufacturing 233 233
Operating costs - oil and gas 224 192
Depreciation, depletion and amortization 1,401 588
General and administrative 794 627
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Total expenses 4,692 2,346
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Income from operations 1,441 229
Other income (expense):
Interest income and other 30 --
Interest expense (989) (128)
Minority interest in results of oil and gas operations (36) --
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(995) (128)
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Income before income taxes and extraordinary item 446 101
Income tax expense (177) (38)
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Net income before extraordinary item 269 63
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Extraordinary item:
Write off of unamortized debt issue costs
on debt retirement (net of $28 tax) (42) --
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Net income $ 227 $ 63
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Basic and diluted net income before
extraordinary item per common share $ .01 $ .00
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Extraordinary item $ .00 $ .00
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Basic and diluted income per common share $ .01 $ .00
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</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
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OEC COMPRESSION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
THREE MONTHS ENDED MARCH 31,
1998 1997
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(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 227 $ 63
Adjustments to reconcile net income to net cash
provided by operating activities:
Depletion, depreciation, and amortization 1,401 588
Accretion of discount on debt 12 --
Write off of unamortized debt issue costs 42 --
Deferred income taxes 491 (9)
Minority interest in results of oil and gas operations 36 --
Changes in Operating assets and liabilities:
Accounts receivable and other 386 (34)
Notes receivable (15) 1
Compressor and compressor parts inventory (441) (558)
Accounts payable and accrued liabilities (1,081) 186
Other (308) (30)
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Net cash provided by operating activities 750 207
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Cash flows from investing activities:
Acquisitions of compressor and other equipment (2,841) (3,130)
Proceeds from disposition of compressor
and other equipment 5 --
Additions to oil and gas properties (74) (506)
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Net cash used in investing activities (2,910) (3,636)
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Cash flows from financing activities:
Proceeds of long-term debt 4,884 4,890
Payments on long-term debt (2,735) (1,458)
Payments on capital lease payable (95) --
Debt issue costs (10) --
Proceeds from stock transactions 45 --
Stock issue costs -- (10)
Capital contributions 101 --
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Net cash provided by financing activities 2,190 3,422
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Net increase (decrease) in cash and cash equivalents 30 (7)
Cash and cash equivalents, beginning of period 1 10
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Cash and cash equivalents, end of period $ 31 $ 3
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</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
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OEC COMPRESSION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
UNAUDITED
<TABLE>
THREE MONTHS ENDED MARCH 31,
1998 1997
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(In thousands)
<S> <C> <C>
Supplemental disclosure of cash flow information:
Interest paid $ 714 $ 249
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Income taxes paid $ -- $ --
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Non-cash investing and financing activities:
Capital leases of compressor equipment $1,629 $ --
Contribution of oil and gas properties by minority
interest owner $ 362 $ --
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
6
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OEC COMPRESSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION AND BASIS OF PRESENTATION
OEC Compression Corporation, formerly Equity Compression Services
Corporation, formerly Hawkins Energy Corporation (the "Company") is engaged in
the leasing, contract management, outsourcing, 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 consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries Ouachita Energy Corporation ("Ouachita"), Equity
Compressors, Inc. ("Equity Compressors"), Equity Leasing Corporation, Sunterra
Energy Corporation ("Sunterra") and its oil and gas venture Sunterra Petroleum
Company, L.L.C., ("Sunterra L.L.C."), which was 73% owned at March 31, 1998.
In February 1998, Equity Compressors, Inc. was merged into Ouachita Energy
Corporation. All intercompany transactions have been eliminated.
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 OEC Compression Corporation
and its wholly owned subsidiaries as of March 31, 1998, and the results of its
operations and cash flows for the periods ended March 31, 1998 and 1997.
The financial statements should be read in conjunction with the Company's
Form 10-KSB for the year ended December 31, 1997. 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
<TABLE>
MARCH 31, DECEMBER 31,
1998 1997
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(In thousands)
<S> <C> <C>
Land and building $ 1,708 $ 1,693
Compressor equipment 80,024 76,056
Oil and gas properties, on the full cost method 37,854 37,374
Other equipment 2,796 2,317
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122,382 117,440
Less accumulated depreciation, depletion and
amortization 41,951 40,552
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Net property and equipment $ 80,431 $ 76,888
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</TABLE>
NOTE 3 TRANSACTIONS WITH RELATED PARTIES
The Company maintains a rent and expense sharing agreement with an
affiliate. At March 31, 1998, the Company was owed approximately $19,000 from
the affiliate.
The Company earned compressor rental revenues from affiliates totaling
$100,000 in the first quarter 1998, and $11,000 in the first quarter 1997. At
March 31, 1998 the Company was owed approximately $41,000 on rental revenues
earned in 1998.
7
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 March 31, 1998 are $6.4 million and $4.5 million in 1998 and
1999, respectively.
NOTE 5 EARNINGS PER SHARE
Earnings per share is computed based on the weighted average number of
shares of common stock outstanding during the period.
The following is a reconciliation of basic and diluted earnings per share (EPS)
computations for the three months ended March 31:
<TABLE>
1998 1997
(IN THOUSANDS)
<S> <C> <C>
Basic:
Net Income $ 227 $ 63
Common stock 29,130 21,040
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Basic EPS $ .01 $ .00
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Effect of dilutive securities:
Warrants 4,967 --
Common stock options 523 358
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5,490 358
Diluted:
Net Income $ 227 $ 63
Common stock and dilutive securities 34,620 21,398
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Diluted EPS $ .01 $ .00
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</TABLE>
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
FIRST QUARTER 1998 VERSUS FIRST QUARTER 1997
In the first quarter of 1998, the Company had net income of $227,000
compared to net income of $63,000 for the first quarter of 1997. The
Company's income from operations increased 529% for the three months ended
March 31, 1998 when compared to the same period in 1997. The improvement is
due to increased revenues associated with the acquisition of Ouachita and
increased rental income on the existing fleet.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Compressor rental and contract revenues increased 214% for the three
months ended March 31, 1998 when compared to the same period in 1997, due to
increased revenues related to the acquisition of Ouachita and the deployment of
additional compression horsepower in the existing fleet. The average
horsepower utilization rate for the three months ended March 1998 increased to
81% as compared to 80% during the same period in 1997. Revenues from the sale
of compressors and re-manufacturing services decreased 24% for the three months
ended March 31, 1998 when compared to the same period in 1997 due to the
Company's concentration of shop labor on the maintaining and enhancing of the
rental/contract compressor fleet.
Compressor operating costs incurred on rental and contract units increased
189% for the three months ended March 31, 1998 from the same period in 1997, as
a result of increased horsepower on leases from the existing fleet and the
fleet size increase due to the Ouachita acquisition. The cost of compressor
and re-manufacturing sales remained constant for the three months ended March
31, 1998 when compared to the same period in 1997. Operating margins decreased
25% on compressor and re-manufacturing sales due primarily to the recognition
of approximately $72,000 of 1997 expenses related to third party service work
classified as inventory at December 31, 1997, which were determined to be
unrecoverable in the first quarter of 1998.
Revenues from oil and gas sales increased 9.0% for the three months ended
March 31, 1998 when compared to the same period in 1997. The volume of natural
gas produced increased by 88% which offset the 26% decrease in the price of
natural gas received by the Company. The volume of oil produced increased 16%
which lowered the impact of a 31% decline in the average oil price per barrel
received by the Company. The increase in volume is a result of the successful
completion of three natural gas wells and the properties contributed by Prize
since October 1, 1997 associated with the formation of Sunterra L.L.C. Oil
and gas operating costs for the three months ended March 31, 1998 were 17%
higher than for the same period in 1997 due to the increase in the number of
producing wells.
Total depreciation, depletion and amortization increased 138% for the
three months ended March 31, 1998 when compared to the same periods in 1997.
Depreciation of the compressor fleet increased 137% for the three months ended
March 31, 1998 from the same period in 1997 due to additions to the compressor
fleet during 1998 and the increase in depreciation expense related to the
acquisition of Ouachita. 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 proved reserves. Depreciation, depletion
and amortization on oil and gas properties increased 68% in the three months
ended March 31, 1998 when compared to the same periods in 1997 due to higher
volumes of oil and gas produced.
General and administrative expense increased 27% for the three months
ended March 31, 1998 compared to the same period in 1997, due to expenses
associated with the Company's increased level of operations subsequent to the
acquisition of Ouachita and the incremental cost of operating a substantially
larger compressor fleet.
Interest expense increased by 673% for the three months ended March 31,
1998 compared to the same period in 1997 as a result of increased debt to fund
the Ouachita acquisition and growth in the compressor fleet.
Associated with the Company's debt facility discussed below, unamortized
debt issue cost, of approximately $70,000, associated with the prior credit
facility were expensed in the first quarter of 1998 as an extraordinary item.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
FINANCIAL CONDITION AND LIQUIDITY
On March 30, 1998, the Company replaced its previously existing $20
million senior bank credit facility with a new senior bank credit facility.
The initial maximum commitment is $40 million, which can be expanded to $60
million with the future addition of other participating financial institutions.
The facility is a borrowing base revolver effective March, 2000, converting to
a three year term loan with a seven year principal amortization. The initial
borrowing base is the $40 million initial commitment. The credit facility is
collateralized by subsequently all of the assets of the Company with the
exception of the Company's oil and gas properties which have been pledged on
the related venture's bank credit facility. At May 14, 1998, the unused
portion was approximately $15.7 million.
Net cash provided by operating activities increased to $750,000 in 1998
from $207,000 in 1997 primarily due to decreased levels of accounts receivable
and increased levels of depreciation expense. Net cash used in investing
activities decreased to $2.9 million in 1998 from $3.6 million in 1997 due to a
reduction in cash additions to oil and gas properties and the compressor fleet
when compared to 1997. Net cash provided by financing activities decreased to
$2.2 million from $3.4 million in 1997 as a result of increased payments on
long-term debt when compared to 1997. At March 31, 1998, the Company had
current assets of approximately $6.3 million and current liabilities of $3.8
million. The Company anticipates that 1998 cash flow from operations, as well
as the Company's new senior bank credit facility 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
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(a) Exhibits:
Exhibit
No. Description
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27 Financial Data Schedule
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.
OEC COMPRESSION CORPORATION
DATE: May 15, 1998 By: /s/ Matthew S. Ramsey
-------------------------------------
MATTHEW S. RAMSEY
President and Chief Executive Officer
DATE: May 15, 1998 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
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27 Financial Data Schedule
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 31
<SECURITIES> 0
<RECEIVABLES> 2,500
<ALLOWANCES> 99
<INVENTORY> 3,115
<CURRENT-ASSETS> 6,344
<PP&E> 122,382
<DEPRECIATION> 41,951
<TOTAL-ASSETS> 88,213
<CURRENT-LIABILITIES> 3,839
<BONDS> 0
0
0
<COMMON> 292
<OTHER-SE> 28,715
<TOTAL-LIABILITY-AND-EQUITY> 88,213
<SALES> 6,133
<TOTAL-REVENUES> 6,133
<CGS> 2,497
<TOTAL-COSTS> 4,692
<OTHER-EXPENSES> 6
<LOSS-PROVISION> 24
<INTEREST-EXPENSE> 989
<INCOME-PRETAX> 446
<INCOME-TAX> 177
<INCOME-CONTINUING> 269
<DISCONTINUED> 0
<EXTRAORDINARY> (42)
<CHANGES> 0
<NET-INCOME> 227
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
