UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2004. [ ] Transition Report under 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 as specified in its charter) DELAWARE 72-1235449 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1313 Southeast 25th Street Oklahoma City, Oklahoma 73129 (Address of principal executive offices) (405) 677-0221 (Issuer's telephone number, including area code) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [ ] The number of shares outstanding of the issuer's classes of Common Stock as of March 31, 2004: Common Stock, $1.00 Par Value - 153,235 shares Transitional small business disclosure format: YES [ ] NO [X] COMPRESSCO, INC. Index to Form 10-QSB Part I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003 Consolidated Statements of Operations for the Three Months Ended March 31, 2004 and 2003 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003 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 Small Business Issuer Purchases of Equity Securities 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 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements COMPRESSCO, INC. CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, 2004 December 31, 2003 -------------- ----------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 305,480 $ 388,030 Accounts receivable, net 3,641,495 4,238,653 Inventories 4,578,766 3,427,074 Prepaid expenses 291,031 222,272 Deferred income tax asset 57,570 57,570 -------------- -------------- Total current assets 8,874,342 8,333,599 PROPERTY AND EQUIPMENT: Compressors 29,833,084 27,642,207 Less - Accumulated depreciation (5,113,871) (4,593,948) --------------- --------------- Total compressors, net 24,719,213 23,048,259 -------------- -------------- Vehicles and Equipment 2,082,823 1,970,129 Less - Accumulated depreciation (747,583) (738,965) --------------- --------------- Total vehicles and equipment, net 1,335,240 1,231,164 OTHER ASSETS 201,745 108,588 -------------- -------------- Total assets $ 35,130,540 $ 32,721,610 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITES: Current portion of long-term debt $ 19,151,051 $ ---- Accounts payable 1,644,129 1,778,308 Accrued liabilities 695,705 1,024,411 Income taxes payable 297,427 202,699 Deferred revenues 15,000 34,495 -------------- -------------- Total current liabilities 21,913,312 3,039,913 LONG-TERM DEBT, net of current portion ---- 17,916,596 DEFERRED INCOME TAXES 4,067,241 3,584,731 -------------- ------------- Total liabilities 25,980,553 24,541,240 -------------- ------------- 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 Accumulated other comprehensive income 56,604 79,837 Retained earnings 6,176,433 5,183,583 -------------- -------------- Total stockholders' equity 9,149,987 8,180,370 -------------- -------------- Total liabilities and stockholders' equity $ 35,130,540 $ 32,721,610 ============== ==============
The accompanying notes are an integral part of these consolidated balance sheets. 3 COMPRESSCO, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months Ended March 31, 2004 and 2003 (Unaudited) 2004 2003 REVENUES: Rental revenue $ 5,698,244 $ 3,668,536 Sales - Compressors and parts 957,084 346,035 Service and other 528,517 304,442 ----------- ------------ Total revenues 7,183,845 4,319,013 ------------ ------------ COST OF SALES AND EXPENSES: Cost of sales 580,656 219,939 Operating expenses 4,005,352 2,606,832 Depreciation and amortization expense 641,412 426,879 ------------ ------------ Total cost of sales and expenses 5,227,420 3,253,650 ------------ ------------ OPERATING INCOME 1,956,425 1,065,363 OTHER INCOME (EXPENSE) Interest expense (276,337) (289,903) Gain on sale of assets --- 84,405 ------------ ------------ Total other income (expense) (276,337) (205,498) ------------ ------------ INCOME BEFORE PROVISION FOR INCOME TAXES 1,680,088 859,865 PROVISION FOR INCOME TAXES (687,238) (335,174) ------------ ------------ NET INCOME $ 992,850 $ 524,691 ============= ============= Earnings per common share: Basic $ 6.48 $ 3.42 ============= ============= Diluted $ 4.60 $ 2.96 ============= ============= The accompanying notes are an integral part of these consolidated financial statements. 4 COMPRESSCO, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, 2004 and 2003 (Unaudited)
2004 2003 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,020,350 $ 524,691 Adjustments to reconcile net income to net cash provided by (used in) operating activities- Depreciation and amortization 641,412 426,879 Provision for bad debts 30,000 30,000 Amortization of discount on subordinated promissory notes --- 8,333 Amortization of deferred financing costs 7,242 9,633 Other assets (100,400) 5,713 (Gain) loss on sale of operating equipment and natural gas well 1,801 (94,157) Deferred income tax 482,510 335,174 Changes in current assets and liabilities: Accounts receivable 567,158 110,578 Inventories (1,151,692) (92,508) Other current assets (68,759) 14,195 Accounts payable (134,179) 252,758 Accrued liabilities (328,706) (241,548) Income taxes payable 204,728 --- Deferred revenues (19,495) (51,270) ----------- ---------- Net cash provided by operating activities 1,124,470 1,238,471 ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to compressor rental units (2,233,376) (1,036,225) Additions to vehicles and equipment (177,652) (125,601) Proceeds from sale of operating equipment 4,008 17,709 ----------- ---------- Net cash used in investing activities (2,407,020) (1,144,117) ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITES: Payments of notes payable --- (139,999) Proceeds from line of credit 1,200,000 4,411,559 Principal payments on line of credit --- (4,184,585) ----------- ---------- Net cash provided by financing activities 1,200,000 86,975 ----------- ---------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (82,550) 181,329 CASH AND CASH EQUIVALENTS, Beginning of period 388,030 317,707 ----------- ---------- CASH AND CASH EQUIVALENTS, End of period $ 305,480 $ 499,036 ================== ================= The accompanying notes are an integral part of these consolidated financial statements.
5 COMPRESSCO, INC. 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 March 31, 2004 the Company's Canadian subsidiary had 114 compressors on rental and has sold 36 compressors since inception. At March 31, 2004, the Company's Canadian subsidiary had 6 units off rental and 10 compressors in transit to Canada to be placed on rental. 2. BASIS OF PRESENTATION The consolidated balance sheet as of March 31, 2004 and the consolidated statements of operations and cash flows for the three months ended March 31, 2004 and 2003 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, 2003 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, 2003 consolidated financial statements included in the Company's Form 10-KSB. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2004. 3. DEBT Debt consists of the following at March 31, 2004: (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. At March 31, 2004, $5,550,000 of the Notes were outstanding. 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 subordinate 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% 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 6 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. The Notes are classified as current liabilities at March 31, 2004 and their maturity date is March 31, 2005. The Company plans to restructure the Notes in a manner acceptable to the Note holders prior to their maturity that will result in the Notes being converted to equity or extended. (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%. As of March 31, 2004 the utilization rate of the compressor fleet was 92%. The balance outstanding under the line of credit agreement as of March 31, 2004 was $13,566,596. The borrowing under the credit facility bears interest between 0.25% and 0.5% over Wall Street Journal Prime Rate (4.50% at March 31, 2004) or between 3.0% and 3.25% over LIBOR (4.27% at March 31, 2004) 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 March 31, 2004 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. The bank credit agreement is classified as a current liability at March 31, 2004 due to the maturity date being 45 days prior to the maturity of the subordinated promissory notes that are currently due March 31, 2005. The Company plans to restructure the subordinated promissory notes in a manner acceptable to the note holders prior to 45 days from their maturity that will result in the notes being converted to equity or extended and extending the maturity date of the bank credit agreement to June 30, 2006. 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. At March 31, 2004 the Company has taken delivery of 693 engines from the supplier including 145 during the first three months of 2004. 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 307 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 costs 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. The Company has complied with the requirements of the amended purchase agreement through March 31, 2004 and anticipates staying in compliance over the remaining life of the agreement. 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 March 31, 2004 total stock warrants of 46,620 were issued and outstanding. The warrants are exercisable upon issue, and expire on March 31, 2005. No stock warrants have been exercised as of March 31, 2004. 7 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 SHARE Basic and diluted earnings per common share for the three months ended March 31, 2004 and 2003 are calculated as follows:
2004 2003 ------------------------------- -------------------------------- Per Share Per Share Net Income Shares Amount Net Income Shares Amount ---------- ------ --------- ---------- ------ --------- Basic: Income available to common stockholders $ 992,850 153,235 $6.48 $ 524,691 153,235 $3.42 ===== ===== Diluted: Effect of stock options and warrants -------- 43,908 -------- 24,155 Effect of conversion of subordinated promissory notes 83,666 37,000 -------- ------ ------ ------ Income available to common stockholders plus assumed exercises of stock options and stock warrants and conversion of subordinated promissory notes $1,076,516 234,143 $4.60 $ 524,691 177,390 $2.96 ========== ======= ===== ========== ======= =====
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 three months ended March 31, 2004 and 2003, as reported and on a pro forma basis as if the compensation cost of stock options had been determined consistent with SFAS 123. 2004 2003 -------------- ------------- Net Income, as reported $ 992,850 $ 524,691 Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects (18,022) (21,922) -------- -------- Pro forma net income $ 974,828 $ 502,769 ========== ========= Basic Income per Share: As reported $ 6.48 $ 3.42 Pro forma 6.36 3.28 Diluted Income per Share: As reported $ 4.60 $ 2.96 Pro forma 4.16 2.83 8 8. COMPREHENSIVE INCOME Comprehensive income (loss) for the three months ended March 31, 2004 and 2003 are as follows: 2004 2003 ---- ---- Foreign currency translation adjustment net of income tax $(23,233) $ 12,181 Net income 992,850 524,691 ------- ------- Total comprehensive income $969,617 $536,872 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 leased 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 March 31, 2004 the Company's Canadian subsidiary had 114 compressors on rental and had sold 36 compressors since inception including 17 compressors placed on rental and 8 compressors which were sold during the three months ended March 31, 2004. At March 31, 2004, the Company's Canadian subsidiary had 6 units off rental and 10 compressors in transit to Canada to be placed on rental. The following table sets forth selected consolidated financial information for the year ended as of December 31, 2003 and as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 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: THREE MONTHS ENDED MARCH 31, ---------------------------- 2004 2003 ---------- ----------- Operating revenues.................... $7,183,845 $4,319,013 Cost of sales and expenses ........... 5,227,420 3,253,650 Operating income...................... 1,956,425 1,065,363 Net income............................ 992,850 524,691 March 31, 2004 December 31, 2003 -------------- ----------------- BALANCE SHEET DATA (AT END OF PERIOD): Cash and cash equivalents............. $ 305,480 $ 388,030 Total assets.......................... 35,130,540 32,721,610 Total liabilities..................... 25,980,553 24,541,240 Stockholders' equity.................. 9,149,987 8,180,370 The following discussion regarding the consolidated financial statements of the Company should be read in conjunction with the consolidated financial statements and notes thereto. 9 THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003 The revenues for the three months ended March 31, 2004 of $7,183,845 increased by $2,864,832, or 66.3% over the comparable period in 2003. The following table sets forth the components of our revenue for the three months ended March 31, 2004 and 2003: 2004 2003 ----------- ---------- Revenue: Rental revenue $5,698,244 $3,668,536 Sale of compressors and parts 957,084 346,035 Service and other 528,517 304,442 ------- ---------- Total revenue $7,183,845 $4,319,013 ========== ========== The Company had 1,145 compressors in service at March 31, 2004 compared to 819 at March 31, 2003, an increase of 326 or 39.8%. The three months ending March 31, 2004 had a net increase of 66 compressors on rental or an increase of 6% compared to a net increase of 58 compressors on rental during the first three months of 2003. In the three months ended March 31, 2004 the Company sold 15 compressors compared to 5 compressors sold in the first quarter of 2003. The increase in the number of net units placed on rental and compressors sold in 2004 was due primarily to our increased domestic sales staff in 2003, continued increased growth in our Canadian operation, combined with the continued higher price of natural gas in 2004, which increased demand. The cost of sales and operating expenses for the 2004 period was $4,586,008, or 63.8% of operating revenues, compared to $2,826,771, or 65.4%, in the 2003 period. Operating expenses for the 2004 period were $4,005,352, or 64.3% of rental and service revenues, compared to $2,606,832, or 65.6% for the 2003 period. The decrease in cost of sales and operating expenses as a percent of revenues in 2004 was due to the growth in rental revenue in 2004, resulting from increasing the rental units in service and increased number of compressors sold, with lower increases in operating expenses to support the increased units. The Company manufactured 91 compressors in the 2004 period compared to 35 in the 2003 period. The increase in the number of compressors manufactured was due to higher demand as a result of higher natural gas prices. The Company had 100 compressors off rental at March 31, 2004 compared to 52 off rental at March 31, 2003. The utilization rate of the compressor rental fleet was 92.0% at March 31, 2004 compared to 93.9% at March 31, 2003. The Company is manufacturing new compressors, as needed, for the US and Canadian operations. Depreciation and amortization expense increased in the 2004 period to $641,412 compared to $426,879 for the 2003 period. The increase is due to the growth in the Company's compressor fleet to 1,245 units at March 31, 2004 from 871 units at March 31, 2003. The 2004 period includes interest expense of $276,337 compared to $289,903 for the 2003 period. The decrease was due to lower interest rates in 2004 compared to 2003. Provision for income taxes for the 2004 period was $687,238 (40.9% effective rate) compared to $335,174 (38.9% effective rate) for 2003. The lower 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. The Company made the decision to discontinue the Providence Natural Gas business and sold the natural gas well it owned for a gain of $84,405 in January 2003. Net income was $992,850 for the 2004 period compared to $524,691 for the 2003 period. The increase in net income was primarily due to the growth of the company's rental fleet and increase in number of compressors sold in 2004. 10 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%. As of March 31, 2004 the utilization rate of the compressor fleet was 92%. The balance outstanding under the line of credit agreement as of March 31, 2004 was $13,566,596. The borrowings under the credit facility bear interest between 0.25% and 0.5% over Wall Street Journal Prime Rate (4.50% at March 31, 2004) or between 3.0% and 3.25% over LIBOR (4.27% at March 31, 2004) 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 March 31, 2004, 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. The bank credit agreement is classified as a current liability at March 31, 2004 due to the maturity date being 45 days prior to the maturity of the subordinated promissory notes that are currently due March 31, 2005. The Company plans to restructure the subordinated promissory notes in a manner acceptable to the note holders prior to 45 days from their maturity that will result in the notes being converted to equity or extended and extending the maturity date of the bank credit agreement to June 30, 2006. In December 2000 and January 2001, the Company offered its subordinated promissory notes and stock warrants in a private placement. At March 31, 2004, $5,550,000 of the subordinated promissory notes were outstanding. 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 subordinated promissory notes agreed to amend the promissory notes to extend the maturity date from December 31, 2003 to March 31, 2005, change the interest rate from 13% 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, and (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. The notes are classified as current liabilities at March 31, 2004 and their maturity date is March 31, 2005. The Company plans to restructure the Notes in a manner acceptable to the note holders prior to their maturity that will result in the notes being converted to equity or extended. 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 2004. 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. 11 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 March 31, 2004 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 control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 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 None Item 5. OTHER INFORMATION None 12 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 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 Comerica Bank - Texas, the Company and Compressco Field Services, Inc. *****10.9 Agreement to Amend the Subordinated Promissory Note and Stock Warrant Agreement, dated March 6, 2003, between the Company and each investor party thereto. *****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 8-K. No reports were filed in the quarter ended March 31, 2004 - -------------------------- * Filed with Registration Statement on Form SB-2, File NO. 33-61888-FW and incorporated herein. ** Filed with Current Report on Form 8-K (October 29, 1999) and incorporated by reference herein. *** Filed with Annual Report on 10-KSB for the year ended December 31, 2000 and incorporated by by reference herein. **** Filed with Quarterly Report on 10-QSB for the quarter ended September 30, 2003 and incorporated by reference herein. ***** Filed herewith. 13 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMPRESSCO, INC. Date: May 14, 2004 /S/ BROOKS MIMS TALTON ------------------------------- Brooks Mims Talton Chief Executive Officer Date: May 14, 2004 /S/ GARY MCBRIDE ------------------------------ Gary McBride Chief Financial Officer (Principal Financial and Accounting Officer) 14 Exhibit 31 Certification of Chief Executive Officer of Compressco, Inc. 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) designed such internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: May 14, 2004 /S/ BROOKS MIMS TALTON ---------------------------------- Brooks Mims Talton Chief Executive Officer 15 Certification of Chief Financial Officer of Compressco, Inc. 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) designed such internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: May 14, 2004 /S/ GARY MCBRIDE ---------------------------------- Gary McBride Chief Financial Officer 16 Exhibit 32 Certification of Chief Executive Officer of Compressco, Inc. This certification is provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and accompanies the quarterly report on Form 10-QSB for the quarter ended March 31, 2004 of Compressco, Inc. (the "Company"). I, Brooks Mims Talton, the Chief Executive Officer of the Company 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; 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 Company. Dated: May 14, 2004 By: /S/ BROOKS MIMS TALTON ---------------------- Chief Executive Officer Subscribed and sworn to before me this 14th day of May 2004. /S/ Jodi Thompson - --------------------------- Name: Jodi Thompson --------------- Title: Notary Public My commission expires: April 23, 2005 17 Certification of Chief Financial Officer of Compressco, Inc. This certification is provided pursuant to pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and accompanies the quarterly report on Form 10-QSB for the quarter ended March 31, 2004 of Compressco, Inc. (the "Company"). I, Gary McBride, the Chief Financial Officer of the Company 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; 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 Company. Dated: May 14, 2004 By: /S/ GARY MCBRIDE ---------------- Chief Financial Officer Subscribed and sworn to before me this 14th day of May 2004. /S/ Jodi Thompson - -------------------------- Name: Jodi Thompson --------------- Title: Notary Public My commission expires: April 23, 2005 18