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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 September 30, 1999
--------------------------------------------
[ ] 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 (IRS 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
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Number of Shares of Common Stock Outstanding on November 22, 1999 28,986,711
Transitional Small Business Format (Check one): Yes ; No X
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<PAGE>
OEC COMPRESSION CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
PART I ----
FINANCIAL INFORMATION:
<S> <C> <C>
Item 1 - Financial Statements
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998............................ 3
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1999 and 1998............. 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998....................... 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 ................................................13
Signatures ...........................................................14
2
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OEC COMPRESSION CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
UNAUDITED
(in thousands)
Current Assets:
Cash and cash equivalents........................................... $ 400 $ 7
Accounts receivable, less allowances for doubtful accounts
of $99 and $109 in 1999 and 1998, respectively.................... 1,696 3,309
Interest receivable - related party................................. 46 30
Compressors and compressor parts inventory.......................... 5,994 6,293
Other............................................................... 483 300
--------- ---------
Total current assets............................................. 8,619 9,939
Property and equipment, net (Note 2).................................. 95,020 94,592
Note receivable - related party....................................... 332 332
Goodwill and other intangibles, net of amortization of
$810 in 1999 and $409 in 1998....................................... 1,671 2,057
Other assets, net..................................................... 1 1
--------- ---------
Total assets..................................................... $ 105,643 $ 106,921
========= =========
Current Liabilities:
Current portion of capital lease obligations........................ $ 179 $ 319
Notes payable & current portion of long-term debt 4,875
Accounts payable and accrued liabilities............................ 4,434 5,290
--------- ---------
Total current liabilities........................................ 9,488 5,609
Long-term debt........................................................ 56,414 58,829
Capital lease obligations............................................. 1,228 1,354
Deferred income taxes................................................. 9,763 10,216
Other................................................................. 0 89
--------- ---------
Total Liabilities................................................ 76,893 76,097
Minority interest..................................................... - 2,032
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, 29,171,211 shares issued and
28,986,711 and 29,162,044 shares outstanding in 1999
and 1998, respectively........................................ 291 291
Additional paid-in capital.......................................... 31,841 31,841
Accumulated deficit................................................. (3,114) (3,331)
Treasury stock, at cost, 184,500 and 9,167 shares in 1999
and 1998, respectively............................................ (268) (9)
--------- ---------
Total stockholders' equity ........................................ 28,748 28,792
--------- ---------
Total Liabilities and Stockholders' Equity....................... $ 105,643 $ 106,921
========= =========
</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>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Gas compression & treating $ 5,819 $ 5,893 $ 17,484 $ 16,986
Compressor, parts, sales and service 82 113 286 520
Oil & gas sales - 493 1,399 1,686
-------- -------- --------- ---------
Total revenues 5,901 6,499 19,169 19,192
-------- -------- --------- ---------
Expenses:
Operating costs - Gas compression & treating 2,475 2,426 7,358 6,776
Cost of compressor, parts, service 59 97 180 502
Operating costs - oil and gas - 130 510 526
Depreciation, depletion and amortization 1,504 1,485 4,829 4,197
General and administrative 865 1,138 2,939 2,940
-------- -------- --------- ---------
Total expenses 4,903 5,276 15,816 14,941
-------- -------- --------- ---------
Income from operations 998 1,223 3,353 4,251
-------- -------- --------- ---------
Other income (expense):
Gain on sale of assets 313 13 335 18
Interest income and other 7 72 78 172
Interest expense (1,323) (1,241) (3,915) (3,283)
Minority interest in results of oil and gas operations 0 (46) (88) (116)
-------- -------- --------- ---------
(1,003) (1,202) (3,590) (3,209)
-------- -------- --------- ---------
Income (loss) before income taxes
and extraordinary item (5) 21 (237) 1,042
Income tax benefit (expense) 378 (17) 454 (418)
-------- -------- --------- ---------
Net income (loss) before extraordinary item 373 4 217 624
-------- -------- --------- ---------
Extraordinary item:
Write-off of unamortized debt issue costs
on debt retirement (net of $28 tax) - - - (42)
-------- -------- --------- ---------
Net income (loss) $ 373 $ 4 $ 217 $ 582
======== ======== ========= =========
Basic and dilutive net income (loss) before
Extraordinary item per common share $ .01 $ .00 $ .01 $ .02
======== ======== ========= =========
Extraordinary item $ .00 $ .00 $ .00 $ .00
======== ======== ========= =========
Basic and dilutive net income (loss) per common
Share $ .01 $ .00 $ .01 $ .02
======== ======== ========= =========
</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>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
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<S> <C> <C>
( In thousands)
Cash flows from operating activities:
Net income (loss)........................................................... $ 217 $ 582
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization.................................... 4,784 4,197
Deferred income taxes....................................................... (454) 445
Minority interest in results of oil and gas operations...................... 88 116
Other....................................................................... -- 61
Changes in operating assets and liabilities:
Accounts and notes receivable............................................... 677 317
Compressor and compressor parts inventory................................... 300 (4,327)
Accounts payable and accrued liabilities.................................... 6 (1,922)
Other....................................................................... 1,384 (137)
---------- ---------
Net cash provided by operating activities................................. 7,002 (668)
---------- ---------
Cash flows from investing activities:
Acquisitions of compressor and other equipment.............................. (9,217) (14,971)
Proceeds from disposition of compressor, other equipment 783
and oil and gas properties................................................ 954
Additions to oil and gas properties......................................... (108) (396)
Increase in goodwill and other assets....................................... 20 --
---------- ---------
Net cash used in investing activities.................................... (8,351) (14,584)
---------- ---------
Cash flows from financing activities:
Proceeds of long-term debt.................................................. 2,477 40,225
Payments on long-term debt.................................................. (469) (24,777)
Payments on capital lease obligations....................................... (266) (335)
Proceeds of stock issuance.................................................. -- 45
Minority interest capital contributions..................................... -- 100
---------- ---------
Net cash provided by financing activities................................ 1,742 15,258
---------- ---------
Net increase in cash and cash equivalents..................................... 393 6
Cash and cash equivalents, beginning of period................................ 7 1
---------- ---------
Cash and cash equivalents, end of period...................................... $ 400 $ 7
========== =========
</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>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
( In thousands)
Supplemental disclosure of cash flow information:
Interest paid............................................................... $ 3,915 $ 2,799
========== =========
Income taxes paid........................................................... $ -- $ --
========== =========
Non-Cash investing and financing activities:
Capital leases of compressor equipment...................................... $ -- $ 1,629
Contribution of oil and gas properties by minority interest
owner..................................................................... $ -- $ 362
Sale of aircraft in exchange for common stock.............................. $ 259 $ --
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
OEC COMPRESSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
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 and gas treating plants 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,
New Mexico and Texas.
The consolidated financial statements include the accounts of the
Company, its wholly owned subsidiaries Ouachita Energy Corporation
("Ouachita"), Equity Leasing Corporation, Sunterra Energy Corporation
("Sunterra"). On July 2, 1999 Sunterra sold 100% of its partnership interest
in Sunterra Petroleum, L.L.C. to Prize Petroleum.
In the opinion of the Company, the accompanying financial statements
contain all adjustments necessary to present fairly the financial position of
OEC Compression Corporation and its wholly owned subsidiaries as of September
30, 1999, and the results of its operations and cash flows for the periods
ended September 30, 1999 and 1998. Certain prior year amounts have been
reclassified to conform with the current year presentation.
The financial statements should be read in conjunction with the
Company's Form 10-KSB for the year-ended December 31, 1998. 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>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Land and building..................................................... $ 1,938 $ 1,856
Compressor equipment.................................................. 104,203 90,202
Oil and gas properties, on the full cost method....................... -- 37,584
Gas Plant 2,600 --
Other equipment....................................................... 3,932 3,561
--------- ---------
112,673 133,203
Less accumulated depreciation, depletion and amortization............. 17,653 44,685
--------- ---------
Net property and equipment............................................ $ 95,020 $ 88,518
========= =========
</TABLE>
NOTE 3 TRANSACTIONS WITH RELATED PARTIES
The Company transacts business with certain companies, which are
directly controlled by members of the Company's Board of Directors and
employees. The terms of these transactions are equivalent to the terms of
transactions conducted with non-related parties.
NOTE 4 COMMITMENTS
The Company leases compressor equipment under contracts with terms
ranging from a month to month basis to a five year commitment. The future
revenues to be received under contracts at September 30, 1999 are $1.8
million, $3.8 million, $1.6 million, $478,000, $234,000 and $8,000,in 1999,
2000, 2001, 2002, 2003 and 2004, respectively.
7
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 EARNINGS PER SHARE
Earnings per share (EPS) 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 dilutive EPS computations:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 1998 1999 1998
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C>
Basic:
Net income (loss) $ 373 $ 4 $ 217 $ 582
Common stock 28,987 29,162 29,040 29,151
--------- --------- --------- ---------
Basic EPS $ .01 $ .00 $ .01 $ .02
========= ========= ========= =========
Effect of dilutive securities:
Warrants 1,135 4,342 1,135 4,706
Common stock options 97 233 97 271
--------- --------- --------- ---------
1,232 4,575 1,232 4,978
Dilutive:
Net income (loss) $ 373 $ 4 $ 217 $ 582
Common stock and dilutive securities 30,219 33,737 30,272 34,128
--------- --------- --------- ---------
Dilutive EPS $ .01 $ .00 $ .01 $ .02
========= ========= ========= =========
</TABLE>
NOTE 6 INDUSTRY SEGMENT INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 1998 1999 1998
(in thousands)
<S> <C> <C> <C> <C>
Compressor operations:
Net Revenues $ 5,901 $ 6,006 $ 17,770 $ 17,506
Operating income 998 1,113 2,894 3,862
Identifiable assets 105,643 95,060 105,643 95,060
Capital expenditures 4,394 2,293 11,068 13,945
Depreciation and amortization $ 1,504 $ 1,360 $ 4,829 $ 3,821
Oil and gas:
Net revenues $ $ 493 $ 1,399 $ 1,686
Operating income 10 459 389
Identifiable assets 11,231 0 11,231
Capital expenditures 164 108 429
Depreciation, depletion and amortization $ $ 125 $ 0 $ 376
</TABLE>
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 SUBSEQUENT EVENTS
On September 24, 1999, the Company entered into a non-binding letter of
intent to merge with a group of companies commonly referred to as Energy
Transfer Company ("ETC"). The ETC group is a privately held group of
companies with operations focused on the midstream energy sector: natural gas
gathering, treating, marketing and some pure well service operations.
Majority ownership of the ETC company group is held by Ray C. Davis and Kelcy
L. Warren. Davis and Warren have been members of the Company's board of
directors since December 1996. Effective with the execution of the letter of
intent, Mathew S. Ramsey resigned as President and Chief Executive Officer of
the Company and Davis and Warren were jointly appointed to the Office of the
Chief Executive and will also serve as Co-Chairman of the Board.
The merger or combination of the ETC companies with the Company is
conditioned on the parties reaching agreement as to valuation of both the ETC
assets and the Company's assets, successful completion of due diligence and
is subject to the approval of the Company's Board of Directors and a vote by
the Shareholders. The Company's Board of Directors established a Special
Committee of the Board to evaluate the ETC transaction and, if successful,
negotiate a final structure to present to the full Board. The Special
Committee consists of Charles Butler (committee chairman), James Finley,
Dennis Estis, Clifford Lewis and Don Smith. The Special Committee has
retained Wasserstein Perella & Co. as its financial advisor. If a successful
combination or transaction can be agreed upon, the Company expects to close
the transaction prior to the end of the first quarter of Fiscal Year 2000.
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.
Certain matters discussed in this Report on Form 10-Q are
"forward-looking statements" intended to qualify for the safe harbors from
liability established by the Private Securities Litigation Reform Act of
1995. These forward-looking statements can generally be identified as such
because the context of the statement will include words such as the Company
"believes", "anticipates", "expects", "estimates" or words of similar import.
Similarly, statements that describe the Company's future plans, objectives or
goals are also forward-looking statements. Such forward-looking statements
are subject to certain risks and uncertainties which could cause actual
results to differ materially from those anticipated as of the date of this
report. The risks and uncertainties include (1) the loss of market share
through competition, (2) a prolonged substantial reduction in natural gas
prices which would cause a decline in the demand for the Company's
compression and oil and gas production equipment, (3) the introduction of
competing technologies by other companies, (4) new governmental safety,
health and environmental regulations which could require significant capital
expenditures by the Company and (5) changes in economics in the markets in
which the Company operates. The forward-looking statements included herein
are only made as of the date of this report and the Company undertakes no
obligation to publicly update such forward-looking statements to reflect
subsequent events or circumstances.
RESULTS OF OPERATIONS
3RD QUARTER, 1999 VERSUS 3RD QUARTER, 1998
Total revenues for the Third Quarter of 1999 were $5.9 million representing a
$598,000 reduction from the comparative quarter in 1998. The 100% loss of oil
and gas revenues due to the sale of the Company's interest in Sunterra
Petroleum L.L.C. on July 2, 1999 accounted for $493,000 (82%) of the revenue
reduction. Gas compression and treating revenues fell $74,000 (1%).
Compressor, parts sales & service revenues were reduced $31,000 (27%) due to
the Company's continued focus on natural gas compression operation and
treating services versus equipment and parts sales.
Gas Compression & treating costs rose $49,000 (2%) over the comparative 1998
quarter. The Sunterra Peroleum L.L.C. interest sale eliminated all oil and
gas production costs in the current quarter.
9
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Compressor, parts sales & service costs fell $38,000 (39%) in line with
reduced revenues. Depreciation, depletion and amortization costs rose less
than 1% from the comparative 1998 quarter reflecting similar levels of
compression activity. Selling, general & administrative expense fell $273,000
(-24%) to $865,000 as a result of the Company's continued focus in the
current quarter on cost reductions.
Income from Operations declined $225,000 (18%). Cashflow, defined here as
earnings before interest, taxes, depreciation, amortization and gains on
asset sales, declined 8% to $2.5 million. Both declines were due to the loss
of income from Sunterra Petroleum L.L.C., somewhat offset by the decline in
selling, general & administrative expense.
On July 2, 1999, the Company's wholly owned subsidiary, Sunterra Energy, sold
100% of its 73% interest in Sunterra Petroleum L.L..C. ("Sunterra") to Prize
Petroleum. Sunterra owned and operated oil and gas producing properties. The
consideration was $1 million in cash and a 100% interest in the Will-o-Mills
gas treating plant in Val Verde County, Texas. The Will-o-Mills plant is a
300 GPM amine plant designed to extract carbon dioxide from gas contracted to
the plant for treating to pipeline quality conditions. The Company recognized
a $310,000 gain on sale of the partnership during the third quarter of 1999.
Interest expense rose $82,000 (7%) due to increased borrowings over the
previous year to fund compression capital projects.
The Company generated a pretax loss of $5,000 versus a pretax profit of
$21,000 profit in the same quarter in 1998. The Company generated a net tax
benefit of $378,000 with a gain of $383,000 resulting from the Sunterra sale.
As result, the Company had net earnings for the quarter of $373,000 versus
$4,000 for the comparative 1998 quarter.
In July, 1999, the Company sold approximately 5,000 horsepower of idle
compression equipment (approximately 2% of the total fleet) in a single
transaction for $2 million cash. The purchase and sale agreement contains put
and call features that permit 1) the Company to repurchase, at its option
("Call"), the equipment by the end of the year at cost and 2) the purchaser
to ("Put") the equipment back to the Company and recover the purchase price
plus interest. The put and call features expire at the end of 1999. The
Company has treated the transaction as a loan for accounting purposes until
such time as the put and call features have exercised or expire. To that end,
the $2 million sale has been recorded as a $2 million note during the third
quarter of 1999.
9 MONTHS ENDING SEPTEMBER 30, 1999 VERSUS 9 MONTHS ENDING SEPTEMBER 30, 1998
Total revenues for the nine months ending September 30, 1999 were $19.2
million, virtually unchanged from the comparative nine months in 1998. Gas
Compression & treating revenues rose $498,000 (4%). Oil and gas revenues fell
$287,000 (17%) due predominantly to the Sunterra sale in July of 1999.
Compressor, parts sales & service revenues were reduced $234,000 (45%) due to
the Company's continued focus on natural gas compression operation and
treating services versus equipment and parts sales.
Gas Compression & treating costs rose $582,000 (9%) over the comparative 1998
nine month period. Oil and gas production costs fell 3% to $510,000.
Compressor, parts sales & service costs fell $322,000 (64%) as the Company's
continued focus on compression and treating operations restricted equipment
and parts sales to predominantly higher margin opportunities. Depreciation,
depletion and amortization costs rose 15% from the comparative 1998 quarter
due to the higher average capital investment in the equipment deployed during
the period as compared to the equipment deployed in 1998. Selling, general &
administrative expense remained unchanged at $2.9 million.
Income from Operations declined 21% to $3.4 million. Oil and gas operating
income, defined as oil and gas revenues less oil and gas operating costs,
declined $271,000 (23%) primarily due to the lack of income in the period's
last three months as a result of Sunterra sale. The lack of oil and gas
income along with the 15% increase in depreciation, depletion and
amortization costs were the principal causes of the operating income decline.
Gas compression and treating operating income, defined as compression and
treating revenues less associated direct costs were $10.1 million, a less
than 1% variance from the same period in 1998. Cashflow, defined here as
earnings before interest, taxes, depreciation, amortization and gains on
asset sales, declined 3% to $8.2 million.
10
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On July 2, 1999, the Company's wholly owned subsidiary, Sunterra Energy, sold
100% of its 73% interest in Sunterra Petroleum L.L..C. ("Sunterra") to Prize
Petroleum. Sunterra owned and operated oil and gas producing properties. The
consideration was $1 million in cash and a 100% interest in the Will-o-Mills
gas treating plant in Val Verde County, Texas. The Will-o-Mills plant is a
300 GPM amine plant designed to extract carbon dioxide from gas contracted to
the plant for treating to pipeline quality conditions. $310,000 of the
$335,000 of gain on sale of assets during the first nine months of 1999 was a
result of the Sunterra sale. Interest expense rose 19% to $3.9 million due to
the equivalent level of higher average borrowings during the period as
compared to the same period in 1998.
The Company had a nine-month year to date pretax loss of $237,000 versus
pretax income of $1 million for the same period in 1998. The Company
generated a net tax benefit of $454,000 with $310,000 resulting from the
Sunterra sale. As result, the Company had net earnings before extraordinary
items for the nine-month period of $217,000 versus $624,000 for the
comparative 1998 period. The 1998 period included a write-off of unamortized
debt costs as result of the Company's refinancing its senior debt in March
1998. The extraordinary expense of $42,000 (net of tax) reduced the
comparative nine-month year to date net income to $582,000.
The decrease in earnings can be primarilly attributed to the July Sunterra
sale and increased depreciation and interest expense. From February through
July of 1999, the Company encountered a slowdown in the demand for
compression services as its customer base, mostly oil and gas independents,
scaled back their capital budgets in response to the lower oil and gas prices
being received in the 1998 and early 1999 period. Many large compression
projects were placed on hold by the Company's customer base due to their
restricted capital budgets. Compression industry statistics indicate a slight
across the board decrease in demand for compression services during this
period. Additionally, a large percentage of the customer base, in a move to
gain cost efficiencies, reviewed and "right sized" many of their compression
projects for the current compression requirements. As a result, the Company
went through a relatively large turnover between its idle and deployed
compression equipment, predominantly through the February - June period, to
supply its customers identified compression project changes. The resulting
equipment turnover increased capital costs for investment in idle equipment
being deployed in the turnover with no offsetting material increase in
revenues. The Company has witnessed a healthy increase in compression demand
in recent months corresponding with increased energy prices.
YEAR 2000
The Company has prepared a Year 2000 Plan and has formed a committee to
implement this plan. The committee has reviewed all Company hardware,
software and embedded systems for Year 2000 compliance. As part of the
review, the Company tested all critical compressor equipment and systems to
the extent possible. The Company incurred no material costs in testing its
internal compressor equipment and systems. The Company will send letters to
significant vendors, customers and other third-party providers to ascertain
compliance on the part of those outside parties for which non-compliance
would significantly affect the Company's operations. In the event the Company
determines a third-party to be non-compliant and believes such non-compliance
to be a significant risk, the Company will develop a contingency plan for
each such third-party. At September 30, 1999 the committee was approximately
90% complete with regard to implementing the Company's Year 2000 plan with
regard to third-parties. The Company anticipates that the plan will be
completed by November 30, 1999. The Company expects that implementation of
its Year 2000 Plan as described herein will ensure that the Year 2000 issue
will have no material impact on the Company's operating efficiency.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
FINANCIAL CONDITION AND LIQUIDITY
The Company maintains a senior bank credit facility with a current maximum
commitment of $40 million which can be expanded to $60 million with the
future addition of other participating financial institutions. The facility
is currently a borrowing base revolver convertible in March, 2000 to a three
year term loan with a seven year principal amortization. The credit facility
is secured by the Company's compressor fleet. The current borrowing base is
$45.5 million; however, borrowings are limited to the current $40
11
<PAGE>
million commitment until such time as additional financial institutions
participate in the credit facility. As of November 19, 1999, the Company had
borrowed up to its current maximum commitment of $40 million.
The Company has been in discussions both with additional banks on
participating in the senior bank credit facility as well as with private
institutions on providing private equity capital to support the continued
growth of the Company's operations. Company management believes the announced
potential merger with the ETC companies (see Note 7, Subsequent Events)
effectively blocks the ability to successfully negotiate long-term capital
commitments with either banks or private institutions until the outcome of
the merger negotiations is known. The Company has made a request to one of
its existing lenders to provide interim borrowings of up to $3 million to
supplement existing working capital and support equipment deployment during
the negotiation of the ETC merger transaction. The Company has paid a pricing
fee to the lender as the first stage of the lender's approval process.
Company management believes the Company will receive a formal commitment for
the interim financing within the next 20 days.
Covenants related to the debt agreements include the maintenance of specified
levels of working capital, tangible net worth and debt service ratios as
defined by the agreements. Additionally, the agreements prohibit the payment
of dividends, the repurchase of the Company's common stock and restrict
certain additional borrowings. During the third quarter 1999, the Company was
not in compliance with certain financial covenants in its credit facilities.
Compliance waivers from the two lenders have been requested. To date, one
lender has waived compliance. The remaining lender is processing the request.
The Company believes the remaining compliance waiver will be received
following the payment of a compliance fee.
The Company relies primarily on the collection of revenues associated with
its natural gas compression and treating service contracts to fund the
Company's working capital and capital expenditure needs. Borrowings from the
Company's senior credit facility are used mostly to finance the Company's
growth. The coordination of the cashflow from operations and borrowings from
the senior credit facility allows the Company to optimize its cashflow.
Net cash provided by operating activities increased to $7 million for the
first nine months of 1999 versus $189,000 for the comparative 1998 period.
The increase was due to increased depreciation costs, improved receivables
turnover and increases in accounts payables. Net cash used in investing
activities decreased $3.5 million to $8.4 million due to reduced growth
levels in the compression fleet. Net cash provided by financing activities
declined $10 million to $1.7 million due to decreased borrowings of long term
debt. As described above, the Company is fully advanced on its existing bank
commitment with no current access to the $5.5 million borrowing base above
the bank commitment. The Company is negotiating with an existing lender to
supply the previously described interim borrowing facility during the ETC
merger negotiations. The Company will either complete negotiations for the
interim borrowing, recruit an additional lender into its senior bank
facility, raise additional equity or slow its future growth.
12
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS
(a) Exhibits:
Exhibit
No. Description
--- -----------
27 Financial Data Schedule
13
<PAGE>
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: August 23, 1999 By: /s/ Ray C. Davis
--------------------------------------------------
RAY C. DAVIS
Co-President and Co-Chief Executive Officer
DATE: August 23, 1999 By: /s/ Kelcy L. Warren
--------------------------------------------------
KELCY L. WARREN
Co-President and Co-Chief Executive Officer
DATE: August 23, 1999 By: /s/ Jack D. Brannon
--------------------------------------------------
JACK D. BRANNON
Sr. Vice President and Chief Financial Officer
14
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
--- -----------
27 Financial Data Schedule
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 400
<SECURITIES> 0
<RECEIVABLES> 1,795
<ALLOWANCES> 99
<INVENTORY> 5,994
<CURRENT-ASSETS> 8,619
<PP&E> 112,673
<DEPRECIATION> 17,653
<TOTAL-ASSETS> 105,643
<CURRENT-LIABILITIES> 9,488
<BONDS> 56,414
0
0
<COMMON> 291
<OTHER-SE> 28,457
<TOTAL-LIABILITY-AND-EQUITY> 105,643
<SALES> 3,353
<TOTAL-REVENUES> 19,169
<CGS> 15,816
<TOTAL-COSTS> 15,816
<OTHER-EXPENSES> 88
<LOSS-PROVISION> 78
<INTEREST-EXPENSE> 3,915
<INCOME-PRETAX> (237)
<INCOME-TAX> 454
<INCOME-CONTINUING> 217
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 217
<EPS-BASIC> .01
<EPS-DILUTED> .01
</TABLE>
