**U. S. SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-QSB**

 

**ý****  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterlyperiod ended June 30, 2003**

 

**o****  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OFTHE EXCHANGE ACT**

 

**For the transitionperiod from**

**                 to                **

 

**Commission FileNo.  1-4766**

 

**GATEWAY ENERGY CORPORATION**

(Exact name of small business issuer as specified in its charter)

 

| **Delaware**                                                    |   | **44-0651207**                           |
|-----------------------------------------------------------------|--------|------------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer Identification  Number) |
|                                                            |   |                                     |
| **500 Dallas Street, Suite 2615  Houston, TX  77002**      |
| (Address of principal executive offices)                        |
|                                                            |   |                                     |
| **(713) 336-0844**                                              |
| (Issuer’s telephone number)                                |

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

As of August 10, 2003, the Issuer had 15,426,317 shares of itscommon stock outstanding.

 

Transitional Small Business DisclosureFormat: Yes       o        No       ý

 

 

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**FORM 10-QSB**

**Part I**

 
| **Item   1.** | **Financial Statements**                                                                                                              |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------|
|               |                                                                                                                                  |
|               | Unaudited Consolidated Balance Sheet as of June 30, 2003                                                                         |
|               |                                                                                                                                  |
|               | Unaudited Consolidated Statements of  Operations for the three months and six months ended June 30, 2003 and  June 30, 2002 |
|               |                                                                                                                                  |
|               | Unaudited Consolidated Statements of Cash  Flows for the six months ended June 30, 2003 and June 30, 2002                   |
|               |                                                                                                                                  |
|               | Notes to Consolidated Financial Statements                                                                                            |

 

2

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**GATEWAYENERGY CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEET**

**June 30,2003**

**(Unaudited)**

** **
| **ASSETS**                                                                                                   |   |        |       |
|--------------------------------------------------------------------------------------------------------------|--------|-------------|------------|
| Current Assets                                                                                               |   |        |       |
| Cash and cash equivalents                                                                                    |   | $           | 311,726    |   |
| Certificates of deposit                                                                                      |   | 130,663     |       |
| Trade accounts receivable, net  of reserve of $130,832                                                       |   | 1,235,582   |       |
| Inventories, at average cost                                                                                 |   | 51,273      |       |
| Prepaid expenses and other  assets                                                                           |   | 172,931     |       |
| Total current assets                                                                                         |   | 1,902,175   |       |
|                                                                                                         |   |        |       |
| Property and Equipment, at cost                                                                              |   |        |       |
| Gas gathering, processing and  transportation                                                                |   | 10,284,876  |       |
| Office furniture and other  equipment                                                                        |   | 807,075     |       |
|                                                                                                         |   | 11,091,951  |       |
| Less accumulated depreciation  and amortization                                                              |   | 3,404,140   |       |
|                                                                                                         |   | 7,687,811   |       |
| Other Assets                                                                                                 |   |        |       |
| Investment in AET license, net  of accumulated  amortization  of $106,836                                    |   | 314,214     |       |
| Other                                                                                                        |   | 116,854     |       |
|                                                                                                         |   | 431,068     |       |
|                                                                                                         |   | $           | 10,021,054 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                |   |        |       |
| Current Liabilities                                                                                          |   |        |       |
| Accounts payable                                                                                             |   | $           | 1,378,664  |   |
| Accrued expenses and other  liabilities                                                                      |   | 278,746     |       |
| Notes payable                                                                                                |   | 152,850     |       |
| Current maturities of long-term  debt                                                                        |   | 756,480     |       |
| Total current liabilities                                                                                    |   | 2,566,740   |       |
|                                                                                                         |   |        |       |
| Noncurrent Liabilities                                                                                       |   |        |       |
| Future asset retirement  obligations                                                                         |   | 209,243     |       |
|                                                                                                         |   |        |       |
| Long-term Debt, less current  maturities                                                                     |   | 2,536,041   |       |
|                                                                                                         |   |        |       |
| Stockholders’ Equity                                                                                    |   |        |       |
| Preferred stock – $1.00 par  value; 10,000 shares authorized; no shares issued and outstanding          |   | —      |       |
| Common stock – $0.25 par value;  35,000,000 shares authorized; 15,426,317 shares issued and outstanding |   | 3,856,577   |       |
| Additional paid-in capital                                                                                   |   | 16,026,330  |       |
| Accumulated deficit                                                                                          |   | (15,173,877 | )          |
|                                                                                                         |   | 4,709,030   |       |
|                                                                                                         |   | $           | 10,021,054 |   |

 

The accompanying notes are an integral partof this statement.

 

3

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**GATEWAYENERGY CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
|                                                                               |   | **Three  Months Ended  June 30,** |       | **Six Months  Ended  June 30,** |       |
|------------------------------------------------------------------------------------|--------|----------------------------------------|------------|--------------------------------------|------------|
|                                                                               |   | **2003**                               |       | **2002**                             |       | **2003** |   | **2002** |   |
| Operating revenues                                                                 |   |                                   |       |                                 |       |   |   |   |   |
| Natural gas sales                                                                  |   | $                                      | 2,241,009  |                                 | $          | 1,217,646 |   | $ | 4,931,580 |   | $ | 2,434,073 |   |
| Transportation of natural gas and liquids                                          |   | 134,129                                |       | 166,989                              |       | 241,281 |   | 314,849 |   |
| Treating and other                                                                 |   | 42,357                                 |       | 41,169                               |       | 78,726 |   | 100,797 |   |
|                                                                               |   | 2,417,495                              |       | 1,425,804                            |       | 5,251,587 |   | 2,849,719 |   |
| Operating  costs and expenses                                                      |   |                                   |       |                                 |       |   |   |   |   |
| Cost of natural gas purchased                                                      |   | 1,972,725                              |       | 994,677                              |       | 4,081,535 |   | 1,777,869 |   |
| Operation and maintenance                                                          |   | 232,276                                |       | 220,320                              |       | 460,676 |   | 438,410 |   |
| Depreciation and amortization                                                      |   | 143,123                                |       | 133,828                              |       | 276,943 |   | 266,673 |   |
| General and administrative                                                         |   | 454,873                                |       | 493,413                              |       | 850,229 |   | 981,839 |   |
|                                                                               |   | 2,802,997                              |       | 1,842,238                            |       | 5,669,383 |   | 3,464,791 |   |
| Operating loss                                                                     |   | (385,502                               | )          | (416,434                             | )          | (417,796 | ) | (615,072 | ) |
|                                                                               |   |                                   |       |                                 |       |   |   |   |   |
| Other income (expense)                                                             |   |                                   |       |                                 |       |   |   |   |   |
| Interest income                                                                    |   | 5,672                                  |       | 11,442                               |       | 12,626 |   | 27,013 |   |
| Interest expense                                                                   |   | (82,734                                | )          | (54,701                              | )          | (140,746 | ) | (102,625 | ) |
| Interest capitalized                                                               |   | 13,240                                 |       | 11,322                               |       | 24,466 |   | 14,401 |   |
| Gain (loss) on disposal of assets                                                  |   | —                                 |       | —                               |       | 5,807 |   | — |   |
| Other income (expense), net                                                        |   | 7,862                                  |       | 18,234                               |       | 9,016 |   | 37,594 |   |
|                                                                               |   | (55,960                                | )          | (13,703                              | )          | (88,831 | ) | (23,617 | ) |
| Loss from continuing operations                                                    |   | (441,462                               | )          | (430,137                             | )          | (506,627 | ) | (638,689 | ) |
|                                                                               |   |                                   |       |                                 |       |   |   |   |   |
| Discontinued operations                                                            |   |                                   |       |                                 |       |   |   |   |   |
| Operations of properties sold                                                      |   | —                                 |       | 35,080                               |       | — |   | 14,501 |   |
|                                                                               |   |                                   |       |                                 |       |   |   |   |   |
| Loss before cumulative effect  of change in accounting principle                   |   | (441,462                               | )          | (395,057                             | )          | (506,627 | ) | (624,188 | ) |
|                                                                               |   |                                   |       |                                 |       |   |   |   |   |
| Cumulative effect of change in  accounting for future asset retirement obligations |   | —                                 |       | —                               |       | (105,777 | ) | — |   |
|                                                                               |   |                                   |       |                                 |       |   |   |   |   |
| Net loss                                                                           |   | $                                      | (441,462   | )                                    | $          | (395,057 | ) | $ | (612,404 | ) | $ | (624,188 | ) |
|                                                                               |   |                                   |       |                                 |       |   |   |   |   |
| Basic and diluted loss per  share                                                  |   |                                   |       |                                 |       |   |   |   |   |
| Continuing operations                                                              |   | $                                      | (0.03      | )                                    | $          | (0.03 | ) | $ | (0.03 | ) | $ | (0.04 | ) |
| Discontinued operations                                                            |   | —                                 |       | —                               |       | — |   | — |   |
| Cumulative effect of change in  accounting principle                               |   | —                                 |       | —                               |       | (0.01 | ) | — |   |
| Net loss                                                                           |   | $                                      | (0.03      | )                                    | $          | (0.03 | ) | $ | (0.04 | ) | $ | (0.04 | ) |
|                                                                               |   |                                   |       |                                 |       |   |   |   |   |
| Weighted average number of  common shares outstanding                              |   |                                   |       |                                 |       |   |   |   |   |
| Basic                                                                              |   | 15,426,317                             |       | 15,373,719                           |       | 15,426,317 |   | 15,364,351 |   |
| Diluted                                                                            |   | 15,458,609                             |       | 15,405,435                           |       | 15,453,399 |   | 15,397,480 |   |
|                                                                               |   |                                   | ** ** |                                 | ** ** |   | ** ** |   | ** ** |
| Pro Forma amounts assuming the  new principle is applied retroactively             |   |                                   |       |                                 |       |   |   |   |   |
| Loss from continuing operations                                                    |   | $                                      | (441,462   | )                                    | $          | (433,981 | ) | $ | (506,627 | ) | $ | (646,376 | ) |
| Loss per basic and diluted  common share outstanding                               |   | $                                      | (0.03      | )                                    | $          | (0.03 | ) | $ | (0.03 | ) | $ | (0.04 | ) |
| Net Loss                                                                           |   | $                                      | (441,462   | )                                    | $          | (398,901 | ) | $ | (506,627 | ) | $ | (631,875 | ) |
| Net loss per basic and diluted  common share outstanding                           |   | $                                      | (0.03      | )                                    | $          | (0.03 | ) | $ | (0.03 | ) | $ | (0.04 | ) |

 

The accompanying notes are an integral partof these statements.

 

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**GATEWAYENERGY CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
|                                                                                          |   | **Six Months Ended June 30,** |     |
|-----------------------------------------------------------------------------------------------|--------|------------------------------------|----------|
|                                                                                          |   | **2003**                           |     | **2002** |   |
| Cash flows from operating  activities                                                         |   |                               |     |   |   |
| Net loss                                                                                      |   | $                                  | (612,404 | ) | $ | (624,188 | ) |
| Adjustments to reconcile net  loss to net cash used in operating activities:                  |   |                               |     |   |   |
| Cumulative effect of change in  accounting principal                                          |   | 105,777                            |     | — |   |
| Depreciation and amortization  (including $66,319 related to discontinued operations in 2002) |   | 276,943                            |     | 332,992 |   |
| Gain on sale of properties                                                                    |   | (5,807                             | )        | (919 | ) |
| Stock compensation expense                                                                    |   | 21,425                             |     | — |   |
| Accretion expense                                                                             |   | 7,236                              |     | — |   |
| Other non-cash expenses, net                                                                  |   | 13,838                             |     | 13,834 |   |
| Change in assets and  liabilities:                                                            |   |                               |     |   |   |
| Trade accounts receivable                                                                     |   | (293,337                           | )        | 32,614 |   |
| Inventories                                                                                   |   | (2,428                             | )        | (441 | ) |
| Prepaid expenses and other  current assets                                                    |   | (27,395                            | )        | (124,049 | ) |
| Accounts payable                                                                              |   | 637,232                            |     | 139,872 |   |
| Accrued expenses and other  liabilities                                                       |   | 148,404                            |     | (41,859 | ) |
| Net cash provided (used) by  operating activities                                             |   | 269,484                            |     | (272,144 | ) |
|                                                                                          |   |                               |     |   |   |
| Cash flows from investing  activities                                                         |   |                               |     |   |   |
| Capital expenditures                                                                          |   | (1,911,594                         | )        | (701,960 | ) |
| Proceeds from sale of  properties                                                             |   | 14,500                             |     | 1,000 |   |
| Note receivable                                                                               |   | —                             |     | 54,465 |   |
| Decrease in certificate of  deposit                                                           |   | 522,932                            |     | 17,569 |   |
| Other                                                                                         |   | 1,249                              |     | — |   |
| Net cash used in investing  activities                                                        |   | (1,372,913                         | )        | (628,926 | ) |
|                                                                                          |   |                               |     |   |   |
| Cash flows from financing  activities                                                         |   |                               |     |   |   |
| Proceeds from borrowings                                                                      |   | 2,192,886                          |     | 1,396,473 |   |
| Payments on borrowings                                                                        |   | (819,139                           | )        | (294,978 | ) |
| Debt issue costs                                                                              |   | (39,480                            | )        | — |   |
| Net cash provided by financing  activities                                                    |   | 1,334,267                          |     | 1,101,495 |   |
|                                                                                          |   |                               |     |   |   |
| Net increase in cash and cash  equivalents                                                    |   | 230,838                            |     | 200,425 |   |
| Cash and cash equivalents at  beginning of period                                             |   | 80,888                             |     | 141,337 |   |
|                                                                                          |   |                               |     |   |   |
| Cash and cash equivalents at  end of period                                                   |   | $                                  | 311,726  |   | $ | 341,762 |   |
|                                                                                          |   |                               |     |   |   |
| Supplemental Disclosures of  Cash Flow Information:                                           |   |                               |     |   |   |
| Cash paid for interest  (including capitalized interest)                                      |   | $                                  | 118,482  |   | $ | 90,745 |   |

 

The accompanying notes are an integral partof these statements.

 

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**GATEWAYENERGY CORPORATION AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**(1)****                                                                                 Principlesof Consolidation and Nature of Business**

 

Theconsolidated financial statements include the accounts of Gateway EnergyCorporation and its wholly owned subsidiary companies, Gateway PipelineCompany, Gateway Offshore Pipeline Company, Gateway Energy Marketing Company,Fort Cobb Fuel Authority, L.L.C. and Gateway Processing Company.  All significant intercompany transactionshave been eliminated in consolidation.

 

Theaccompanying consolidated financial statements have been prepared by theCompany, without audit.  In the opinionof management, such financial statements reflect all adjustments necessary fora fair presentation of the financial position and results of operations inaccordance with accounting principles generally accepted in the United Statesof America. The financial statements should be read in conjunction with thefinancial statements and the notes thereto included in the Company’s AnnualReport on Form 10-KSB for the year ended December 31, 2002.

 

The Companyowns and operates natural gas gathering, transportation and distributionsystems and related facilities in Texas and Oklahoma, and offshore in Texas andfederal waters of the Gulf of Mexico. The Company also pursues projects thatemploy its nitrogen rejection technology, and is actively evaluating severalsuch projects.  These projects arelocated in geographic areas with well known concentrations of high nitrogennatural gas reserves.  The Company has atechnological advantage in this niche, due to its exclusive U.S. license forthe nitrogen rejection process. Additionally, a substantial portion of the natural gas reserves in thelower 48 states contains nitrogen, either alone or in conjunction with othercontaminants, in excess of the maximum percentage by volume acceptable to mostpipeline companies.

 

**(2)****                                 Summaryof Significant Accounting Policies**

 

A summary of the significant accountingpolicies consistently applied in the preparation of the accompanyingconsolidated financial statements follows. Certain reclassifications have been made to the prior period statementsto be consistent with the current presentation.

 

*Revenue Recognition Policy*

 

The Company’ssales revenues are generated under back-to-back purchase and salescontracts.  Sales revenues arerecognized at the redelivery point, which is the point at which title to thegas transfers.  The Company’stransportation revenues are generated under contracts which have a stated feeper unit of production (Mcf, MMBtu, or Bbl) gathered or transported.  Transportation revenues are recognized atthe redelivery point, which is the point at which another party takes physicalcustody of the gas or liquid hydrocarbons.

 

*Property and Equipment*

 

Property and equipment is stated at cost,plus capitalized interest costs on major pipeline projects during theirconstruction period.  Additions andimprovements that add to the productive capacity or extend the useful life ofan asset are capitalized.  Expendituresfor maintenance and repairs are charged to expense as incurred.  Depreciation is provided using thestraight-line method over estimated useful lives ranging from 6 to 30 years forpipeline systems, gas plant and processing equipment, and from 2 to 10 yearsfor office furniture and other equipment. Upon disposition or retirement of pipeline components or gas plantcomponents, any gain or loss is charged or credited to accumulated depreciation.  When entire pipeline systems, gas plants orother property and equipment are retired or sold, any resulting gain or loss iscredited to or charged against operations.

 

For the six months ended June 30, 2003and 2002, depreciation expense was $262,589 and $252,006, respectively.

 

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Impairment losses are recognized forlong-lived assets used in operations when indicators of impairment are presentand the undiscounted cash flows are not sufficient to recover the assets’carrying value.  The amount ofimpairment is measured by comparing the fair value of the asset to its carryingamount.

 

*Other Assets*

 

The Company’s primary other asset, itslicense for a patented process to remove nitrogen from streams of natural gas,is being amortized to expense over the average 17-year life of the underlyingpatents.

 

*Cash Equivalents and Supplemental Disclosure of Noncash Investing andFinancing Activities*

 

For purposes of the consolidated statementsof cash flows, the Company considers all highly liquid debt instrumentspurchased with original maturities of three months or less to be cashequivalents.

 

The Company recognized future assetretirement obligations related to prior periods totaling $202,007 pursuant toStatement of Financial Accounting Standards (“SFAS”) No. 143, discussedbelow.  A portion of such costs—$96,230(net of accumulated depreciation of $15,883)—was capitalized to gas gathering,processing and transportation assets to be depreciated over the remaining usefullife of the assets.  The remainder ofthese prior year costs was expensed as the cumulative (noncash) effect ofchange in accounting principle.

 

*Income Taxes*

 

Deferred tax assets and liabilities arerecognized for the expected future tax consequences of events that have beenincluded in the financial statements or income tax returns. Under this method,deferred tax assets and liabilities are determined based on the differencebetween the financial statement and tax bases of assets and liabilities as measuredby the enacted tax rates expected to apply when these differences reverse.Deferred tax assets are reduced by a valuation allowance when it is more likelythan not that they will not be realized. The deferred tax provision is the result of changes in deferred taxassets and liabilities.

 

*Stock-Based Compensation*

 

The Company accounts for its stock-basedemployee compensation plan under the recognition and measurement principles ofAccounting Principles Board (“APB”) Opinion No. 25, “Accounting for StockIssued to Employees”, and related Interpretations.  No stock-based employee compensation cost (except for thecompensation expense related to certain repriced options) is reflected in netloss, as all options granted under the plan had an exercise price equal to themarket value of the underlying common stock at the date of grant.

 

During May 2003 the company granted79,998 common stock options to its nonemployee directors as part of theirannual compensation for service to the Company.  Of the total options granted, 50,000 were granted from the 1998Outside Directors Stock Option Plan (a non-approved plan) and 29,998 weregranted from the 1998 Stock Option Plan. The options were valued at $23,683 using the Black-Scholes modeldiscussed below and charged to general and administrative expense for the threemonths and six months ended June 30, 2003.

 

At June 30, 2003, the fair value of theCompany’s stock-based awards to employees was estimated using a Black-Scholesoption pricing model.  The Black-Scholesmodel was developed for use in estimating the fair value of traded optionswhich have no vesting restrictions and are fully transferable.  In addition, the Black-Scholes modelrequires the input of highly subjective assumptions including the

 

7

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expected stock price volatility.  Because the Company’s stock-based awardshave characteristics significantly different from those of traded options, andbecause changes in the subjective input can materially affect the fair valueestimate, in management’s opinion, the existing models do not necessarilyprovide a reliable single measure of the fair value of its stock-based awardsto employees.  The fair value of theCompany’s stock-based awards (including the repriced options) was estimatedassuming no expected dividends and the following weighted average assumptionsas of June 30, 2003 and 2002:

 
|                             |   | **June 30,** |   |
|----------------------------------|--------|-------------------|--------|
|                             |   | **2003**          |   | **2002** |   |
| Expected life in years           |   | 5.5               |   | 5.9 |   |
| Expected stock  price volatility |   | 92                | %      | 96 | % |
| Risk-free interest  rate         |   | 3.82              | %      | 4.56 | % |
| Average fair  value per option   |   | $                 | 0.26   |   | $ | 0.27 |   |
|                                  |        |                   |        |  |  |  |  |

 

For pro forma purposes, the estimated valueof the Company’s stock-based awards to employees is amortized over the options’vesting period.  The following tableillustrates the effect on net loss and net loss per share if the Company hadapplied the fair value recognition provisions of SFAS No. 123, “Accounting forStock-Based Compensation”, to its stock-based employee compensation for thethree months and six months ended June 30, 2003 and 2002:

 
|                                                                                                                                         |   | **Three Months  Ended June 30,** |       | **Six Months  Ended June 30,** |       |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|------------|-------------------------------------|------------|
|                                                                                                                                         |   | **2003**                              |       | **2002**                            |       | **2003** |   | **2002** |   |
|                                                                                                                                         |   |                                  | ** ** |                                | ** ** |   | ** ** |   | ** ** |
| Net loss – as reported                                                                                                                  |   | $                                     | (441,462   | )                                   | $          | (395,057 | ) | $ | (612,404 | ) | $ | (624,188 | ) |
| Deduct total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |   | (5,228                                | )          | (4,773                              | )          | (8,994 | ) | (9,786 | ) |
| Net loss – pro forma                                                                                                                    |   | $                                     | (446,690   | )                                   | $          | (399,830 | ) | $ | (621,398 | ) | $ | (633,974 | ) |
|                                                                                                                                         |   |                                  |       |                                |       |   |   |   |   |
| Basic and diluted net loss per share – as  reported                                                                                     |   | $                                     | (0.03      | )                                   | $          | (0.03 | ) | $ | (0.04 | ) | $ | (0.04 | ) |
| Basic and diluted net loss per share – pro  forma                                                                                       |   | $                                     | (0.03      | )                                   | $          | (0.03 | ) | $ | (0.04 | ) | $ | (0.04 | ) |

 

*Earnings Per Share*

 

Basic earnings per share is computed bydividing net earnings or loss by the weighted average number of common sharesoutstanding during the period.  Dilutedearnings per share is computed by dividing net earnings or loss by the weightedaverage number of shares outstanding, after giving effect to potentially dilutivecommon share equivalents outstanding during the period.  Potentially dilutive common shareequivalents are not included in the computation of diluted earnings per shareif they are anti-dilutive.  Diluted lossper common share is the same as basic for all periods presented because theeffect of potentially dilutive common shares arising from outstanding stockoptions and warrants was anti-dilutive. For the three months ended June 30, 2003 and 2002, the potentiallydilutive common shares were 32,292 and 31,716, respectively.   For the six months ended June 30, 2003and 2002, the potentially dilutive common shares were 27,082 and 33,129,respectively.

 

8

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*Accounting Pronouncements and Recent Regulatory Developments*

 

InJune 2001, the Financial Accounting Standards Board (“FASB”) issued SFASNo. 143, “Accounting for Asset Retirement Obligations”, which requires that thefair value of the liability for asset retirement costs be recognized in anentity’s balance sheet, as both a liability and an increase in the carryingvalues of such assets, in the periods in which such liabilities can bereasonably estimated.  It also requiresallocation of such asset retirement cost to expense over its useful life.  The Company has adopted this statement,which is effective for fiscal years beginning after June 15, 2002.

 

The cumulativeeffect of adopting this statement was to increase net loss for the six monthsended June 30, 2003 by $105,777, or less than $0.01 per common share.  The present value of the estimated futureasset retirement obligation is shown on the balance sheet as a noncurrentliability, and the same amount was capitalized to gas gathering, processing and transportation equipment.  In future periods, until the assets areultimately sold or retired, the Company will recognize (i) depreciation expenseon the additional capitalized costs; (ii) accretion expense as the presentvalue of the future asset retirement obligation increases with the passage oftime, and; (iii) the impact, if any, of changes in estimates of theliability.  The pro forma amounts on theincome statement show the effects of retroactive application of the statementon loss from continuing operations and net loss as if the new method was alreadyin effect prior to the periods presented.

 

InApril 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 onDerivative Instruments and Hedging Activities”, which clarifies the financialaccounting and reporting for derivative instruments, including certaininstruments imbedded in other contracts. This statement is effective for contracts entered into or modified afterJune 30, 2003.  The impact ofadopting this statement on the consolidated financial position or results ofoperations will not be material.

 

InMay 2003, the FASB issued SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity”, whichestablishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity.  This statement is effective for financialinstruments entered into or modified after May 31, 2003.  The impact of adopting this statement on theconsolidated financial position or results of operations will not be material.

 

InMay 2003, the Securities and Exchange Commission issued final rulesconcerning management’s report on internal control over financial reporting andcertification of disclosures in Exchange Act periodic reports.  These rules are in response to section 404of the Sarbanes-Oxley Act of 2002. Under the final rules, management’s annual internal control report willhave to contain: (1) a statement of management’s responsibility forestablishing and maintaining adequate internal control over financial reportingfor the company; (2) a statement identifying the framework used by managementto evaluate the effectiveness of this internal control; (3) management’sassessment of the effectiveness of this internal control as of the end of thecompany’s most recent fiscal year; and (4) a statement that its auditor hasissued an attestation report on management’s assessment.  The effective date of the rules, because theCompany is not an accelerated filer, as defined therein, is January 1,2005.

 

*Use of Estimates*

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

9

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**(3)****                                                                                 Acquisitionsand Divestitures**

 

The Companymade total capital expenditures of approximately $1,911,594 in the six monthsended June 30, 2003, primarily in connection with the construction of thepipelines servicing the Madisonville Plant—a four-inch gathering line, athree-inch injection line and the ten-inch pipeline to transport the pipelinequality gas (the “Pipeline Facilities”). As of June 30, 2003, the Pipeline Facilities were constructed andoperational and the Madisonville Plant was still in its start-up phase.  See discussion of the Madisonville Plant inNote 5 and the project financing in Note 4 to the consolidated financialstatements.

 

The Companysold from its onshore segment 14 non-core natural gas gathering systems locatedin Texas, Oklahoma and Louisiana, effective August 1, 2002.  Cash of $839,000 was received at closing inthe third quarter of 2002, and a contingent payment of up to $260,000 may bereceived in the fourth quarter of 2003 based on the subsequent performance ofthe assets.  Additionally, effectiveSeptember 30, 2002, the Company sold its interest in an onshore jointventure that owned a south Texas natural gas gathering system for $85,000cash.  A net gain of $63,865 wasrecognized in the 2002 financial statements in connection with these sales, notincluding the contingent payment.  Aportion of the aggregate proceeds from the sales was used by the Company tofinance construction of the Pipeline Facilities.  The operations of the assets sold have been presented in theconsolidated statement of operations as discontinued operations for the sixmonths ended June 30, 2002.

 

**(4)****                                 Debt**

* *

*Notes Payable*

 

The Company’soperating line of credit agreement provided for maximum available borrowings of$500,000 through June 2003. Interest was payable monthly at 5.3% per annum and principal was due ondemand, or if no demand was made, at maturity. The Company liquidated the $500,000 certificate of deposit which servedas collateral for the line and repaid the line of credit during June 2003.

 

The Company’srevolving credit agreement provides for maximum available borrowings of up to$250,000 through May 22, 2004. Principal outstanding under the agreement accrues interest at a variablerate, based on the bank’s prime rate index plus 1.25%, with a minimum rate of8%.  The balance under the agreement isdue upon demand, or if no demand is made, at maturity, and is renewableannually.  Costs of obtaining this debtare being charged to interest expense ratably over the maturity period of thenote.  Fort Cobb uses the proceeds fromtime to time for general working capital purposes.  The agreement, along with the Fort Cobb Term Note discussedbelow, is collateralized with the assets of Fort Cobb and guaranteed by theCompany.  The Company had $97,150 of availableborrowings under the agreement as of June 30, 2003.

 

*Long-term Debt*

 

Long-term debt at June 30, 2003consisted of the following:

 
| Subordinated notes                  |   | $         | 215,878   |   |
|-------------------------------------|--------|-----------|-----------|--------|
| Term note – Fort Cobb          |   | 621,934   |      |
| Term note – Madisonville       |   | 1,500,000 |      |
| Balloon note – Madisonville    |   | 900,000   |      |
| Term note – Fort Cobb vehicles |   | 54,709    |      |
|                                |   | 3,292,521 |      |
| Less current maturities             |   | 756,480   |      |
|                                |   | $         | 2,536,041 |   |

 

10

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*Subordinated Notes*

 

In connectionwith the Recapitalization that was effective March 1, 1997, the Companyissued subordinated promissory notes with a face amount of $1,171,700.  The stated interest rate is 10% payablequarterly with equal annual principal payments beginning on March 1, 2000and continuing through March 1, 2004. The Company calculated the fair market value of the notes to be $978,000at March 1, 1997 and recorded the difference between fair value and theface amount as discount on subordinated notes. The discount is being amortized to interest expense using the interestmethod over the term of the subordinated notes.  Such charge to interest expense was $6,917 for the six monthsended June 30, 2003 and 2002.  As aresult, the effective interest rate of the subordinated notes is 15%.

 

AtMarch 1, 2003, principal and interest totaling $246,044 which was dueunder these notes on March 1, 2003 remained unpaid.  Under the terms of the subordinated notes,the Company has a sixty-day period in which to make this payment and preventacceleration of the remaining outstanding principal.  The Company made the March 1, 2003 payments, plus additionalinterest, on April 29, 2003 as soon as the Balloon Note, discussed below,was funded.

 

*Term Note – Fort Cobb*

 

EffectiveJune 1, 2001, Fort Cobb borrowed $750,000 from a bank.  Principal outstanding under the note accruesinterest at a variable rate, based on the bank’s prime rate index plus 11⁄4%,with a minimum rate of 8%.  The interestrate at June 30, 2003 was 8%.  Thenote requires monthly payments of approximately $13,000, with the balance underthe note due June 1, 2008.  Costsof obtaining this debt are being charged to interest expense ratably over thematurity period of the note.  Fort Cobbused the proceeds to refinance its borrowings from the Company, and the Companyused the proceeds for general corporate purposes.

 

*Term Note – Madisonville*

 

EffectiveFebruary 21, 2002, Gateway Pipeline Company and Gateway Processing Company(the “Borrowers”) entered into a term credit agreement with a bank.  During July 2003 the agreement wasamended, effective March 31, 2003, to extend the interest only period toSeptember 30, 2003.  All otherterms and conditions of the agreement, including the maturity date, remainedthe same.  Under the agreement, asamended effective March 31, 2003, the Borrowers borrowed $1.5 million inmultiple advances.  The monthly notepayments through September 30, 2003 represent interest only at a fixedrate of 71⁄4%.  Thereafter the noterequires 26 monthly payments of principal and interest of $54,818.54, with afinal payment of unpaid principal, and accrued but unpaid interest due at theDecember 31, 2005 maturity date. Costs of securing this debt are being charged to interest expenseratably over the maturity period of the note. The Borrowers used the proceeds to finance the construction of thePipeline Facilities.  The agreement iscollateralized with the Company’s economic interest in the Madisonville projectand the Waxahachie pipeline system, and the Company has guaranteed the loan andpledged the common stock of the Borrowers. The agreement contains cross collateral and cross default provisionslinking it to the Balloon Note, described below.

 

*Balloon Note – Madisonville*

* *

EffectiveMarch 31, 2003, the Company entered into a balloon credit agreement (the“Balloon Note”).  Under the Balloon Noteagreement, the Borrowers borrowed $900,000 in multiple advances.  Principal outstanding under the Balloon Noteaccrues interest at a fixed rate of 71⁄4% and the note will mature afterthirty-six months.  The monthly notepayments represent interest only on the total balance outstanding.   Costs of securing this debt will be chargedto interest expense ratably over the maturity period of the note.  The Borrowers used the proceeds to financethe remaining construction costs of the

 

11

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Pipeline Facilities, and tofund the principal and interest payments which were due under the Company’ssubordinated note agreements on March 1, 2003.

 

The BalloonNote is collateralized with letters of credit obtained through Allen DrillingAcquisition Company, a Nebraska corporation (“ADAC”).  Charles A. Holtgraves, a director of the Company, is Presidentand a director of ADAC, and Larry J. Horbach, a director of the Company, isSecretary and a director of ADAC.  Mr.Holtgraves owns directly no shares of ADAC common stock, and owns 14.65% of anentity that owns 55.56% of the ADAC senior preferred stock.  Such preferred stock has a stated dividendrate equal to two-thirds (66-2/3%) of any Madisonville payments received byADAC pursuant to the Agreement discussed below.  Mr. Horbach owns no ADAC common or preferred stock.

 

Under theterms of the agreement with ADAC, dated March 6, 2003 (the “Agreement”),ADAC agreed to provide security acceptable to the Company’s primary bank toallow the Company to borrow the proceeds of the Balloon Note.  In exchange, ADAC will receive, during theterm of the Balloon Note, one-half (50%) of the price upside portion only, ifany, of the monthly fee to be received by the Company pursuant to theMadisonville project agreements.  Underthe Agreement, ADAC will have the option to either: (i) receive at the end ofthe term of the Balloon Note a lump-sum payment, which when added to thepayments received, if any, for the price upside portion, will result in a 15%pre-tax internal rate of return on the $900,000, or (ii) pay off the BalloonNote on or before the end of the Balloon Note term in exchange for a one-third(33-1/3%) ownership interest in the Pipeline Facilities from that dateforward.  The Company is obligated topay the periodic interest payments to the bank during the three-year term ofthe Balloon Note.  Further, the Companygranted liens, subordinate to the Company’s bank liens, on the Company’s economicinterest in the Madisonville project, its Waxahachie pipeline system, and itsFort Cobb subsidiary.  The agreementcontains cross collateral and cross default provisions linking it to theMadisonville Term Note, described above.

 

*Term Note – Fort Cobb Vehicles*

 

EffectiveMarch 2003, Fort Cobb borrowed $57,900 from a bank to buy threereplacement service vehicles.  The noterequires monthly principal and interest payments of $1,386.50, reflectinginterest at 6.99%, and matures on March 25, 2007.

 

*Letters of Credit*

 

As ofJune 30, 2003, the Company had outstanding letters of credit totaling$525,000.

 

**(5)**                                 Commitments andContingencies

 

InJune 2001 the Company announced that Gateway Processing Company enteredinto a long-term agreement with a producer to purchase non-pipeline qualitynatural gas near Madisonville, Texas. Concurrently, Gateway Processing entered into an agreement with HanoverCompression Limited Partnership (“Hanover”), an affiliate of The Hanover Company,under which Hanover will treat the gas to remove impurities from the gas toenable the gas to meet pipeline sales quality specifications.

 

Ofsignificance to Gateway, Hanover chose to employ the state-of-the-art,patented, absorption based technology developed by Advanced Extraction Technologies,Inc., for which Gateway has the exclusive U.S. license, to remove the nitrogenfrom the gas.

 

Hanover’sfacilities (the “Madisonville Plant”), designed initially to treat 18,000 Mcfper day, and the related Pipeline Facilities are now on production and are inthe start-up phase.  Typically duringthis phase various process bottlenecks and mechanical problems are encountered,analyzed and repaired.  The MadisonvillePlant is expected to become fully operational during August 2003.  See Note (4) for a

 

12

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description of the Company’sfinancing related to this project.  Inconnection with securing the Balloon Note, the Company is obligated at ADAC’soption to either: (i) pay at the end of the term of the Balloon Note alump-sum, which when added to the payments made, if any, for the price upsideportion, will result in ADAC receiving a 15% pre-tax internal rate of return onthe $900,000, or (ii) convey to ADAC a one-third (33-1/3%) ownership interest inthe Pipeline Facilities in exchange for ADAC paying off the Balloon Note on orbefore the end of the Balloon Note term. The Company is obligated to pay the periodic interest payments to thebank during the three-year term of the Balloon Note.

 

The Company and its subsidiaries are partiesto litigation and claims arising in the normal course of business.  Management, after consultation with legalcounsel, believes that the liabilities, if any, arising from such litigationand claims, will not be material to the consolidated financial statements.

 

**(6)****                                 SegmentDisclosures**

 

All of theCompany’s operations are in the domestic U.S. and the Gulf of Mexico in Texasand federal waters.  The Company’smanagement reviews and evaluates the operations separately of three mainsegments—Onshore Operations, Offshore Operations and Fort Cobb Operations.  Each segment is an aggregation of operationssubject to similar economic and regulatory conditions such that they are likelyto have similar long-term prospects for financial performance.  Onshore Operations include natural gasgathering, transportation and distribution activities in Texas andOklahoma.  Offshore Operations includenatural gas and liquid hydrocarbon gathering and transportation activities inthe Gulf of Mexico in Texas and federal waters.  The principal markets for the Onshore segment are industrialcustomers, and for the Offshore segment they are affiliates of large intrastateand interstate pipeline companies.  FortCobb Operations are comprised of a local natural gas distribution company inOklahoma.  This segment supplies naturalgas to approximately 2,350 customers, principally for irrigation and cropdrying fuel for farming cooperatives, and residential fuel.

 

During 2002the Company sold 14 of its onshore pipeline systems and its interest in a jointventure that owned a south Texas natural gas gathering system (the “SoldProperties”), and the operating results of those properties are presented inthe accompanying statement of operations for the three months and the sixmonths ended June 30, 2002 as discontinued operations.  The figures for those periods presentedbelow have been restated to remove the operating results of the SoldProperties.

 

The accountingpolicies of the reportable segments are the same as those described in Note 2to the Consolidated Financial Statements. The Company evaluates the segments based on operating margin, defined asrevenues less cost of purchased gas and operating and maintenance expenses.  Such amounts are before general andadministrative expense, depreciation, interest income or expense or incometaxes.  Inter-segment revenues of$155,000 and $93,000 were eliminated during consolidation for the three monthsended June 30, 2003 and 2002. Inter-segment revenues of $638,000 and $307,000 were eliminated duringconsolidation for the six months ended June 30, 2003 and 2002.

 

Summarizedfinancial information of the Company’s reportable segments,and a reconciliationof operating margin to consolidated net loss, is presented below:

 
|                                                 |   | **Three  Months Ended  June 30,** |       | **Six Months  Ended  June 30,** |       |
|------------------------------------------------------|--------|----------------------------------------|------------|--------------------------------------|------------|
|                                                 |   | **2003**                               |       | **2002**                             |       | **2003** |   | **2002** |   |
| **Onshore Operations**                               |   |                                   |       |                                 |       |   |   |   |   |
| Revenues                                             |   | $                                      | 1,967,097  |                                 | $          | 1,030,106 |   | $ | 3,947,828 |   | $ | 1,725,705 |   |
| Operating margin                                     |   | 144,287                                |       | 94,724                               |       | 362,068 |   | 203,038 |   |
| Depreciation and amortization                        |   | 58,681                                 |       | 49,149                               |       | 108,094 |   | 97,013 |   |
| Total assets                                         |   | 6,151,209                              |       | 5,264,576                            |       | 6,151,209 |   | 5,264,576 |   |
|                                                 |   |                                   |       |                                 |       |   |   |   |   |
| **Offshore Operations**                              |   |                                   |       |                                 |       |   |   |   |   |
| Revenues                                             |   | 164,806                                |       | 206,132                              |       | 308,071 |   | 408,164 |   |
| Operating margin                                     |   | 101,022                                |       | 143,510                              |       | 178,024 |   | 279,956 |   |
| Depreciation and amortization                        |   | 35,941                                 |       | 35,413                               |       | 71,850 |   | 70,826 |   |
| Total assets                                         |   | 1,729,238                              |       | 1,849,029                            |       | 1,729,238 |   | 1,849,029 |   |
|                                                 |   |                                   |       |                                 |       |   |   |   |   |
| **Fort Cobb Operations**                             |   |                                   |       |                                 |       |   |   |   |   |
| Revenues                                             |   | 285,592                                |       | 189,566                              |       | 995,688 |   | 715,850 |   |
| Operating margin                                     |   | (32,815                                | )          | (27,427                              | )          | 169,284 |   | 150,446 |   |
| Depreciation and amortization                        |   | 48,501                                 |       | 49,266                               |       | 96,999 |   | 98,834 |   |
| Total assets                                         |   | 2,140,607                              |       | 2,177,839                            |       | 2,140,607 |   | 2,177,839 |   |
|                                                 |   |                                   |       |                                 |       |   |   |   |   |
| **Total**                                            |   |                                   |       |                                 |       |   |   |   |   |
| Revenues                                             |   | 2,417,495                              |       | 1,425,804                            |       | 5,251,587 |   | 2,849,719 |   |
| Operating margin                                     |   | 212,494                                |       | 210,807                              |       | 709,376 |   | 633,440 |   |
| Depreciation and amortization                        |   | 143,123                                |       | 133,828                              |       | 276,943 |   | 266,673 |   |
| Total assets                                         |   | 10,021,054                             |       | 9,291,444                            |       | 10,021,054 |   | 9,291,444 |   |
|                                                 |   |                                   |       |                                 |       |   |   |   |   |
| **Reconciliation to net loss**                       |   |                                   | ** ** |                                 | ** ** |   | ** ** |   | ** ** |
| Operating margin                                     |   | $                                      | 212,494    |                                 | $          | 210,807 |   | $ | 709,376 |   | $ | 633,440 |   |
| Depreciation and amortization                        |   | 143,123                                |       | 133,828                              |       | 276,943 |   | 266,673 |   |
| General & administrative                         |   | 454,873                                |       | 493,413                              |       | 850,229 |   | 981,839 |   |
| Other income (expense), net                          |   | (55,960                                | )          | (13,703                              | )          | (88,831 | ) | (23,617 | ) |
| Discontinued operations                              |   | —                                 |       | 35,080                               |       | — |   | 14,501 |   |
| Cumulative effect of change in accounting  principal |   | —                                 |       | —                               |       | (105,777 | ) | — |   |
| Net loss                                             |   | $                                      | (441,462   | )                                    | $          | (395,057 | ) | $ | (612,404 | ) | $ | (624,188 | ) |

 

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**Item 2.****                                                           Management’sDiscussion and Analysis of Financial Condition andResults of Operations.**

 

The following management’s discussion andanalysis contains trend analysis and other forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended.  Actual results could differ materially fromthose projected in the forward-looking statements throughout this document as aresult of the risk factors set forth below in the section entitled *FactorsAffecting Future Results* and elsewhere in this document.

 

**CriticalAccounting Policies**

 

The following accounting policies areconsidered by management to be the most critical to the fair presentation ofthe Company’s financial condition, results of operations and cash flows.  The policies are consistently applied in thepreparation of the accompanying consolidated financial statements; however,certain reclassifications have been made to the prior period statements to beconsistent with the current presentation.

 

*Revenue Recognition Policy*

 

The Company’ssales revenues are generated under back-to-back purchase and salescontracts.  Sales revenues arerecognized at the redelivery point, which is the point at which title to thegas transfers.  The Company’stransportation revenues are generated under contracts which have a stated feeper unit of production (Mcf, MMBtu, or Bbl) gathered or transported.  Transportation revenues are recognized atthe redelivery point, which is the point at which another party takes physicalcustody of the gas or liquid hydrocarbons.

 

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*Property and Equipment*

 

Property and equipment is stated at cost,plus capitalized interest costs on major pipeline projects during theirconstruction period.  Additions andimprovements that add to the productive capacity or extend the useful life ofan asset are capitalized.  Expendituresfor maintenance and repairs are charged to expense as incurred.  Depreciation is provided using thestraight-line method over estimated useful lives ranging from 6 to 30 years forpipeline systems, gas plant and processing equipment, and from 2 to 10 yearsfor office furniture and other equipment. Upon disposition or retirement of pipeline components or gas plantcomponents, any gain or loss is charged or credited to accumulateddepreciation.  When entire pipeline systems,gas plants or other property and equipment are retired or sold, any resultinggain or loss is credited to or charged against operations.

 

Impairment losses are recognized forlong-lived assets used in operations when indicators of impairment are presentand the undiscounted cash flows are not sufficient to recover the assets’carrying value.  The amount ofimpairment is measured by comparing the fair value of the asset to its carryingamount.

 

*Accounting Pronouncements and Recent Regulatory Developments*

 

InJune 2001, the FASB issued SFAS No. 143, “Accounting for Asset RetirementObligations”, which requires that the fair value of the liability for assetretirement costs be recognized in an entity’s balance sheet, as both aliability and an increase in the carrying values of such assets, in the periodsin which such liabilities can be reasonably estimated.  It also requires allocation of such assetretirement cost to expense over its useful life.  The Company has adopted this statement, which is effective forfiscal years beginning after June 15, 2002.

 

The cumulativeeffect of adopting this statement was to increase net loss in the three monthsended March 31, 2003 by $105,777, or $0.01 per common share.  The present value of the estimated futureasset retirement obligation is shown on the balance sheet as a noncurrentliability, and the same amount was capitalized to gas gathering, processing and transportation equipment.  In future periods, until the assets areultimately sold or retired, the Company will recognize (i) depreciation expenseon the additional capitalized costs; (ii) accretion expense as the presentvalue of the future asset retirement obligation increases with the passage oftime, and; (iii) the impact, if any, of changes in estimates of theliability.  The pro forma amounts on theincome statement have been adjusted to show the effects of retroactiveapplication of the statement on depreciation and accretion expense that wouldhave been recognized had the new method been in effect for the prior periods.

 

InApril 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 onDerivative Instruments and Hedging Activities”, which clarifies the financialaccounting and reporting for derivative instruments, including certaininstruments imbedded in other contracts. This statement is effective for contracts entered into or modified afterJune 30, 2003.  The impact ofadopting this statement on the consolidated financial position or results ofoperations will not be material.

 

InMay 2003, the FASB issued SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity”, whichestablishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity.  This statement is effective for financialinstruments entered into or modified after May 31, 2003.  The impact of adopting this statement on theconsolidated financial position or results of operations will not be material.

 

InMay 2003, the Securities and Exchange Commission issued final rulesconcerning management’s report on internal control over financial reporting andcertification of disclosures in Exchange Act periodic reports.  These rules are in response to section 404of the Sarbanes-Oxley Act of 2002. Under the final rules, management’s annual internal control report willhave to contain: (1) a statement of management’s responsibility forestablishing and maintaining adequate internal control over financial reportingfor the company; (2) a statement identifying the framework used by management to

 

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evaluate the effectiveness ofthis internal control; (3) management’s assessment of the effectiveness of thisinternal control as of the end of the company’s most recent fiscal year; and(4) a statement that its auditor has issued an attestation report onmanagement’s assessment.  The effectivedate of the rules, because the Company is not an accelerated filer, as definedtherein, is January 1, 2005.

 

*Other Assets*

 

The Company’s primary other asset, itslicense for a patented process to remove nitrogen from streams of natural gas,is being amortized to expense over the average 17-year life of the underlyingpatents.

 

*Use of Estimates*

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

**Results of Operations**

*** ***

*General*

 

The Henry Hubclosing index price for natural gas during the six months ended June 30,2003 averaged $5.99 per MMBtu, compared to $5.03 for the same period of theprior year.  In the accompanyingfinancial statements, the Company’s revenues from sales of natural gas, alongwith the cost of purchased gas, increased proportionately from prior yearlevels.  Because the Company buys andsells gas under “back-to-back” purchase and sale contracts designed to minimizecommodity price risk, the Company’s net operating margin is relativelyinsensitive to fluctuations in the market price of gas.  Accordingly, the Company evaluates each ofits activities based on the operating margin it produces.  The Company defines operating margin asrevenues, less the cost of purchased gas and operating and maintenanceexpenses.  Management reviews and evaluatesthe operations of three main segments—Onshore operations, Offshore operationsand Fort Cobb operations.

 

During 2002the Company sold 14 of its onshore pipeline systems and its interest in a jointventure that owned a south Texas natural gas gathering system (the “SoldProperties”), and the operating results of those properties are presented inthe accompanying statement of operations for the three months and six monthsended June 30, 2002 as discontinued operations.  The figures for those periods presented below have been restatedto remove the operating results of the Sold Properties.

 

**Threemonths Ended June 30, 2003 Compared to June 30, 2002**

# * *

*Total Operations*

 

The followingtable sets forth information for the three months ended June 30, 2003 and2002:

 
|                          |   | **2003** |      | **2002** |   |
|-------------------------------|--------|----------|-----------|----------|--------|
| Revenues                      |   | $        | 2,417,495 |     | $      | 1,425,804 |   |
| Operating margin              |   | 212,494  |      | 210,807  |   |
| Depreciation and amortization |   | 143,123  |      | 133,828  |   |
|                               |        |          |           |          |        |  |  |

 

Operatingmargin for the three months ended June 30, 2003 increased $2,000 comparedto the same period of the prior year. Onshore operating margin increased $49,000, Offshore operating margindecreased $42,000, and Fort Cobb operating margin decreased $5,000.  Revenues were higher than the prior perioddue to higher average sales prices, and the startup of the MadisonvillePlant.  The average Henry Hub indexprice was $5.40 for the three months, compared to $5.02 for the priorperiod.  Sales are expected to increasefurther as the Madisonville Plant emerges from its startup phase and throughput

 

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volumes increase.  Operating margin was not proportionallyaffected due to the corresponding increase in the cost of purchased gas.  These segments are discussed individually belowin greater detail.

 

*Onshore Operations*

 

The followingtable sets forth information for the three months ended June 30, 2003 and2002:

 
|                          |   | **2003** |      | **2002** |   |
|-------------------------------|--------|----------|-----------|----------|--------|
| Revenues                      |   | $        | 1,967,097 |     | $      | 1,030,106 |   |
| Operating margin              |   | 144,287  |      | 94,724   |   |
| Depreciation and amortization |   | 58,681   |      | 49,149   |   |
|                               |        |          |           |          |        |  |  |

 

Operating marginfor Onshore operations increased in the second quarter by $49,000 from the sameperiod of the prior year, mainly due to changes in gas transportation terms ofa major natural gas pipeline, because the Company constructed new facilities toallow access to another pipeline and additional supply sources since the priorperiod.  Operating margin was also updue to the contribution for part of the quarter of the Madisonville Plant.  Operating margin is expected to increasefurther as the Madisonville Plant emerges from its startup phase and throughputvolumes increase.

 

*Offshore Operations*

 

The followingtable sets forth information for the three months ended June 30, 2003 and2002:

 
|                          |   | **2003** |    | **2002** |   |
|-------------------------------|--------|----------|---------|----------|--------|
| Revenues                      |   | $        | 164,806 |     | $      | 206,132 |   |
| Operating margin              |   | 101,022  |    | 143,510  |   |
| Depreciation and amortization |   | 35,941   |    | 35,413   |   |
|                               |        |          |         |          |        |  |  |

 

Operatingmargin for Offshore operations decreased in the second quarter by $42,000 fromthe same period of the prior year.  Thedecrease was primarily due to declines in natural gas and liquids volumestransported through the Company’s Pirates’ Beach system.

 

*Fort Cobb Operations*

 

The followingtable sets forth information for the three months ended June 30, 2003 and2002:

 
|                          |   | **2003** |    | **2002** |   |
|-------------------------------|--------|----------|---------|----------|--------|
| Revenues                      |   | $        | 285,592 |     | $      | 189,566 |   |
| Operating margin              |   | (32,815  | )       | (27,427  | )      |
| Depreciation and amortization |   | 48,501   |    | 49,266   |   |
|                               |        |          |         |          |        |  |  |

 

Operatingmargin for Fort Cobb operations decreased $5,000 in the three months endedJune 30, 2003 from the same period of the prior year, due to slightlylower gas sales volumes.  Fort Cobb’sbusiness peaks in the third and fourth quarters because a significant portionof its load comes from supplying irrigation and crop-drying customers.

 

*Operations Support*

 

The followingtable sets forth information for the three months ended June 30, 2003 and2002:

 
|                        |   | **2003** |    | **2002** |   |
|-----------------------------|--------|----------|---------|----------|--------|
| General and administrative  |   | $        | 454,873 |     | $      | 493,413 |   |
| Interest income             |   | 5,672    |    | 11,442   |   |
| Interest expense            |   | (82,734  | )       | (54,701  | )      |
| Interest capitalized        |   | 13,240   |    | 11,322   |   |
| Other income (expense), net |   | 7,862    |    | 18,234   |   |
| Discontinued operations     |   | —   |    | 35,080   |   |
|                             |        |          |         |          |        |  |  |

 

17

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General andadministrative expenses for the quarter are 8% lower than for the same periodof last year, primarily due to lower salaries, wages and related employeecosts, partially offset by higher legal fees.

 

Interestincome varies directly with the balance on deposit in the Company’scertificates of deposit and short-term money market accounts.  Interest expense fluctuates directly withthe amount of outstanding long-term debt and the amount of borrowings under theCompany’s operating line of credit and revolving credit agreement.

 

Other incomefor the periods includes late fees and penalties charged its customers by FortCobb and miscellaneous adjustments.

 

**SixMonths Ended June 30, 2003 Compared to June 30, 2002**

# * *

*Total Operations*

* *

The followingtable sets forth information for the six months ended June 30, 2003 and2002:

 
|                          |   | **2003** |      | **2002** |   |
|-------------------------------|--------|----------|-----------|----------|--------|
| Revenues                      |   | $        | 5,251,587 |     | $      | 2,849,719 |   |
| Operating margin              |   | 709,376  |      | 633,440  |   |
| Depreciation and amortization |   | 276,943  |      | 266,673  |   |
|                               |        |          |           |          |        |  |  |

 

Operatingmargin for the six months ended June 30, 2003 increased $76,000 comparedto the same period of the prior year. Onshore operating margin increased $159,000, Fort Cobb operating marginincreased $19,000, and Offshore operating margin decreased $102,000.  Revenues were higher than the prior perioddue to higher average sales prices.  Theaverage Henry Hub index price was $5.99 for the six months, compared to $5.03for the prior period.  Operating marginswere not proportionally affected due to the corresponding increase in the costof purchased gas.  These segments arediscussed individually below in greater detail.

 

# *Onshore Operations*

 

The followingtable sets forth information for the six months ended June 30, 2003 and2002:

 
|                          |   | **2003** |      | **2002** |   |
|-------------------------------|--------|----------|-----------|----------|--------|
| Revenues                      |   | $        | 3,947,828 |     | $      | 1,725,705 |   |
| Operating margin              |   | 362,068  |      | 203,038  |   |
| Depreciation and amortization |   | 108,094  |      | 97,013   |   |
|                               |        |          |           |          |        |  |  |

 

Operatingmargin for onshore operations increased $159,000 in the six months endedJune 30, 2003 from the same period of the prior year, mainly due tochanges in gas transportation terms of a major natural gas pipeline, becausethe Company constructed new facilities to allow access to another pipeline andadditional supply sources since the prior period.  Operating margin was also up due to the contribution for part ofthe quarter of the Madisonville Plant. Operating margin is expected to increase further as the MadisonvillePlant emerges from its startup phase and throughput volumes increase.

 

*Offshore Operations*

 

The followingtable sets forth information for the six months ended June 30, 2003 and2002:

 
|                          |   | **2003** |    | **2002** |   |
|-------------------------------|--------|----------|---------|----------|--------|
| Revenues                      |   | $        | 308,071 |     | $      | 408,164 |   |
| Operating margin              |   | 178,024  |    | 279,956  |   |
| Depreciation and amortization |   | 71,850   |    | 70,826   |   |
|                               |        |          |         |          |        |  |  |

 

Operatingmargin for Offshore operations decreased $102,000 in the six months endedJune 30, 2003 from the same period of the prior year.  The decrease was primarily due to declinesin natural gas and liquids volumes transported through the Company’s Pirates’Beach system.

 

18

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*Fort Cobb Operations*

 

The followingtable sets forth information for the six months ended June 30, 2003 and2002:

 

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|                          |   | **2003** |    | **2002** |   |
|-------------------------------|--------|----------|---------|----------|--------|
| Revenues                      |   | $        | 995,688 |     | $      | 715,850 |   |
| Operating margin              |   | 169,284  |    | 150,446  |   |
| Depreciation and amortization |   | 96,999   |    | 98,834   |   |
|                               |        |          |         |          |        |  |  |

 

Operatingmargin for Fort Cobb operations increased $19,000 in the six months endedJune 30, 2003 from the same period of the prior year, due to higher gassales volumes during the first quarter of the year.  Fort Cobb’s business peaks in the third and fourth quartersbecause a significant portion of its load comes from supplying irrigation andcrop-drying customers.

 

*Operations Support*

 

The followingtable sets forth information for the six months ended June 30, 2003 and2002:

 
|                                                 |   | **2003** |    | **2002** |   |
|------------------------------------------------------|--------|----------|---------|----------|--------|
| General and administrative                           |   | $        | 850,229 |     | $      | 981,839 |   |
| Interest income                                      |   | 12,626   |    | 27,013   |   |
| Interest expense                                     |   | (140,746 | )       | (102,625 | )      |
| Interest capitalized                                 |   | 24,466   |    | 14,401   |   |
| Gain on disposal of assets                           |   | 5,807    |    | 919      |   |
| Other income (expense), net                          |   | 9,016    |    | 36,675   |   |
| Discontinued operations                              |   | —   |    | 14,501   |   |
| Cumulative effect of change in accounting  principal |   | (105,777 | )       | —   |   |
|                                                      |        |          |         |          |        |  |  |

 

General andadministrative expenses decreased 13% in the six months ended June 30,2003 compared to the same period of the prior year, primarily due to lowersalaries, wages and related employee costs, rent and office expenses, partiallyoffset by higher legal fees.

 

Interestincome varies directly with the balance on deposit in the Company’scertificates of deposit and short-term money market accounts.  Interest expense fluctuates directly withthe amount of outstanding long-term debt and the amount of borrowings under theCompany’s operating line of credit and revolving credit agreement.

 

Other incomefor the periods includes late fees and penalties charged its customers by FortCobb and miscellaneous adjustments.

 

**Liquidityand Capital Resources**

 

Going forward,the Company’s strategy is to maximize the potential of currently ownedproperties, to construct new pipeline systems and treating facilities, and toacquire properties that meet its economic performance hurdles.

 

The Companysold 14 non-core onshore natural gas gathering systems located in Texas,Oklahoma and Louisiana, effective August 1, 2002.  Cash of $839,000 was received at closing,and a contingent payment of up to $260,000 may be due in the fourth quarter of2003 based on the subsequent performance of the assets.  Additionally, the Company sold its interestin an onshore joint venture that owned a south Texas natural gas gatheringsystem for $85,000.  The sale of thesenon-core assets (approximately 58 miles of pipeline) is part of an overallstrategy begun several years ago to rationalize the Company’s asset base, sellthose that are non-core and focus on and expand those that generate the mostcash flow and/or provide the greatest growth potential.  The Company has cash and cash equivalentsand certificates of deposit totaling $442,389 at June 30, 2003.

 

The Company’soperating line of credit agreement provided for maximum available borrowings of$500,000 through June 2003. Interest was payable monthly at 5.3% per annum and principal was due

 

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on demand, or if no demand wasmade, at maturity.  The Companyliquidated the $500,000 certificate of deposit which served as collateral forthe line and repaid the line of credit during June 2003.

 

The Company’srevolving credit agreement provides for maximum available borrowings up to$250,000 through May 22, 2004. Principal outstanding under the agreement accrues interest at a variablerate, based on the bank’s prime rate index plus 11⁄4%, with a minimum rate of8%.  The balance under the agreement isdue upon demand, or if no demand is made, at maturity and is renewableannually.  Fort Cobb uses the proceedsfrom time to time for general working capital purposes. The agreement iscollateralized with the assets of Fort Cobb, and guaranteed by theCompany.  The Company had $97,150 ofavailable borrowings under the agreement as of June 30, 2003.

 

EffectiveJune 1, 2001, Fort Cobb borrowed $750,000 from a bank.  Principal outstanding under the note accruesinterest at a variable rate, based on the bank’s prime rate index plus 11⁄4%,with a minimum rate of 8%.  The noterequires monthly payments of approximately $13,000, with the balance under thenote due June 1, 2008.  Fort Cobbused the proceeds to refinance its borrowings.

 

Effective February 21,2002, Gateway Pipeline Company and Gateway Processing Company (the “Borrowers”)entered into a term credit agreement with a bank.  During July 2003 the agreement was amended, effective March 31,2003, to extend the interest only period to September 30, 2003.  All other terms and conditions of theagreement, including the maturity date, remained the same.  Under the agreement, as amended effectiveMarch 31, 2003, the Borrowers borrowed $1.5 million in multipleadvances.  The monthly note payments throughSeptember 30, 2003 represent interest only at a fixed rate of 71⁄4%.  Thereafter the note requires 26 monthlypayments of principal and interest of $54,818.54, with a final payment ofunpaid principal, and accrued but unpaid interest due at the December 31,2005 maturity date.  Costs ofsecuring this debt are being charged to interest expense ratably over thematurity period of the note.  The Borrowers used the proceeds to financethe construction of the Pipeline Facilities. The agreement is collateralized with the Company’s economic interest inthe Madisonville project and the Waxahachie pipeline system, and the Companyhas guaranteed the loan and pledged the common stock of the Borrowers.  The agreement contains cross collateral andcross default provisions linking it to the Balloon Note, described below.

 

AtMarch 1, 2003, principal and interest totaling $246,044, which was dueunder the Company’s subordinated notes on March 1, 2003 remainedunpaid.  Under the terms of thesubordinated notes, the Company has a sixty-day period in which to make thispayment and prevent acceleration of the remaining outstanding principal.  The Company made the March 1, 2003 payments, plusadditional interest, on April 29,2003.

 

EffectiveMarch 31, 2003, the Company entered into a balloon credit agreement (the“Balloon Note”).  Under the Balloon Noteagreement, the Borrowers borrowed $900,000 in multiple advances.  Principal outstanding under the Balloon Noteaccrues interest at a fixed rate of 71⁄4% and the note will mature afterthirty-six months.  The monthly notepayments represent interest only on the total balance outstanding.   Costs of securing this debt will be chargedto interest expense ratably over the maturity period of the note.  The Borrowers used the proceeds to financethe remaining construction costs of the Pipeline Facilities, and to fund theprincipal and interest payments which were due under the Company’s subordinatednote agreements on March 1, 2003.

 

The BalloonNote is collateralized with letters of credit obtained through Allen DrillingAcquisition Company, a Nebraska corporation (“ADAC”).  Charles A. Holtgraves, a director of the Company, is Presidentand a director of ADAC, and Larry J. Horbach, a director of the Company, isSecretary and a director of ADAC.  Mr.Holtgraves owns directly no shares of ADAC common stock, and owns 14.65% of anentity that owns 55.56% of the ADAC senior preferred stock.  Such preferred stock has a stated dividendrate equal to two-thirds (66-2/3%) of any Madisonville payments received byADAC pursuant to the Agreement discussed below.  Mr. Horbach owns no ADAC common or preferred stock.

 

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Under theterms of the agreement with ADAC, dated March 6, 2003 (the “Agreement”),ADAC agreed to provide security acceptable to the Company’s primary bank toallow the Company to borrow the proceeds of the Balloon Note.  In exchange, ADAC will receive, during theterm of the Balloon Note, one-half (50%) of the price upside portion only, ifany, of the monthly fee to be received by the Company pursuant to theMadisonville project agreements.  Underthe Agreement, ADAC has the option to either: (i) receive at the end of theterm of the Balloon Note a lump-sum payment, which when added to the paymentsreceived, if any, for the price upside portion, will result in a 15% pre-taxinternal rate of return on the $900,000, or (ii) pay off the Balloon Note on orbefore the end of the Balloon Note term in exchange for a one-third (33-1/3%)ownership interest in the Pipeline Facilities from that date forward.  The Company is obligated to pay the periodicinterest payments to the bank during the three-year term of the Balloon Note.  Further, the Company granted liens,subordinate to the Company’s bank liens, on the Company’s economic interest inthe Madisonville project, its Waxahachie pipeline system, and its Fort Cobbsubsidiary.

 

Effective March 2003,Fort Cobb borrowed $57,900 from a bank to buy three replacement servicevehicles.  The note requires monthlyprincipal and interest payments of $1,386.50, reflecting interest at 6.99%, andmatures on March 25, 2007.

 

Absentsignificant acquisitions or development projects, the Company will continue tofund its operations through internally generated funds and available cash andbank borrowings as needed.  The Companybelieves its cash flows from such sources will be sufficient to fund itsongoing operations for the foreseeable future. Any significant property acquisitions or development projects will requireoutside project financing.

 

AtJune 30, 2003, the Company’s long-term debt to total capitalization wasapproximately 35%.

 

Natural gasprices as represented by the NYMEX Henry Hub index averaged $5.99 and $5.03 forthe six months ended June 30, 2003 and 2002.  The natural gas industry is generally optimistic about long-termprospects based on expected demand, the cost of developing prospects and thesales price of natural gas.  TheCompany’s operating margin is not directly affected by the price of natural gassince gas gathering and transportation are generally based on  fee arrangements and sales are made underback-to-back purchase and sales arrangements. However, natural gas prices can affect exploration and development andresult in higher or lower volumes available for gathering and transportation.

 

**Off-BalanceSheet Arrangements**

 

In connectionwith the sale of 14 non-core natural gas gathering systems located in Texas,Oklahoma and Louisiana effective August 1, 2002, the Company may be due acontingent payment of up to $260,000 in the fourth quarter of 2003 based on thesubsequent performance of the assets.

 

In connectionwith securing the Balloon Note, the Company will be obligated at ADAC’s optionto either: (i) pay at the end of the term of the Balloon Note a lump-sum, whichwhen added to the payments made, if any, for the price upside portion, willresult in ADAC receiving a 15% pre-tax internal rate of return on the $900,000,or (ii) convey to ADAC a one-third (33-1/3%) ownership interest in the PipelineFacilities in exchange for ADAC paying off the Balloon Note on or before theend of the Balloon Note term.

 

**FactorsAffecting Future Results**

 

The principalobjective of the Company is to enhance stockholder value through the executionof certain strategies. These strategies include, among other things: (i)focusing on gathering, transporting, distributing and treating natural gas;(ii) expanding the Company’s asset base in core geographic areas; (iii)participating in the development of sub-quality natural gas reserves to createdemand for our services, and; (iv) acquiring or constructing properties in oneor more new core areas.

 

The Company isactively pursuing several projects that will employ its nitrogen rejectiontechnology.  The Company has atechnological advantage in this niche, due to its exclusive U.S. license

 

22

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for the nitrogen rejectionprocess.  The Company’s process competesfavorably with other processes, as it can cost effectively adapt to variablegas flow rates and variable levels of nitrogen content in the gas.  And, unlike the major competing process, itis unaffected by the presence of carbon dioxide in the gas.  It can therefore economically treatrelatively small volumes of gas—as little as 5,000 Mcf per day—where variablegas flow and composition is common. Successful completion of these projects will depend upon the ability ofthe Company to market the technology to the producer community, and to obtainfinancing on terms satisfactory to the Company for construction of nitrogenrejection plants and/or acquisition of working interests in the high nitrogenproperties.

 

High nitrogengas is natural gas that contains nitrogen, either alone or in conjunction withother inerts, in excess of the maximum percentage (usually 4%) by volumeacceptable to most pipeline companies. About 16% of the domestic natural gas resource base (approximately 24Tcf of proven reserves) is estimated by the Gas Technology Institute to besubquality because of the nitrogen content. Most of the country’s current high nitrogen natural gas production islocated in southwestern Kansas; however, there are substantial high nitrogennatural gas reserves in other parts of the country.  The Company’s target projects are located in geographic areaswith well known concentrations of high nitrogen natural gas reserves.  Much of this high nitrogen natural gasremains undeveloped or shut-in because it cannot meet pipeline qualityspecifications and it is geographically separated from the large (100,000 Mcfper day or larger) cryogenic nitrogen rejection plants located primarily inKansas.  The Company’s process is wellsuited to treat these “stranded” reserves.

 

Creation oflong-term value for the common stockholder depends in part upon successfulacquisition or construction of additional assets which will add to cash flowsand generate attractive returns.  Accessto reasonably priced long-term capital will significantly impact the Company’sability to acquire or construct additional properties, enabling overhead coststo be spread over a larger asset base. There are many companies participatingin the midstream segment of the natural gas industry, many with resourcesgreater than the Company. Greater competition for profitable operations canincrease prices and make it more difficult to acquire assets at reasonablemultiples of cash flow.  However, muchof the Company’s focus is on high nitrogen natural gas projects where there islimited competition.  Such projects willhave to be developed or constructed using creative financing methods.  The Company believes that, with itsexperienced personnel and its licensed nitrogen rejection process, it will beable to compete in this environment and will be able to find and financeattractive investments which will compliment its existing properties.

 

Operations aresignificantly affected by factors which are outside the Company’s control.  Gas gathering and processing is dependent onthroughput volume.  Pipeline throughput isdependent on natural gas production which is significantly affected by naturalgas prices as prices affect the willingness of producers to invest the requiredcapital to obtain geological and geophysical information, to drill developmentor exploratory wells, and to rework or maximize production on existing wells.Natural gas prices are currently at levels which should provide adequateincentive to producers; however, there is no assurance that such prices willremain at current levels, and that producers will react positively to thecurrent prices.

 

Natural gasretail sales are affected by weather. Much of the retail demand is for cropirrigation and drying.  Above normalprecipitation in the growing season and hot, dry weather in the fall cansignificantly reduce demand for natural gas on the Fort Cobb distributionsystem.

 

**Item3.  Controls and Procedures**

 

As ofAugust 14, 2003, under the supervision and with the participation of theCompany’s Chief Executive Officer and the Chief Financial Officer, managementhas evaluated the effectiveness of the design and operation of the Company’sdisclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and the ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures were effective as of that date. There were no significant changes in the

 

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Company’s internal controlsduring the fiscal quarter covered by this report that have materially affected,or are reasonably likely to materially affect, the Company’s internal controlover financial reporting.

 

24

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###### **Part II**

**Item1.****                                                           LegalProceedings**

None

 

**Item2.****                                                           Changesin Securities**

None

 

**Item3.****                                                           DefaultsUpon Senior Securities**

None

 

**Item4.****                                                           Submissionof Matters to a Vote of Security Holders**

At the AnnualMeeting of Stockholders held on May 21, 2003, the eight individuals withthe greatest number of votes in favor were elected to serve as directors forthe upcoming year:

 
| **Name**               |   | **Votes For** |   | **Votes  Withheld** |
|------------------------|--------|---------------|--------|---------------------|
| Michael T.  Fadden     |   | 8,346,539     |   | 407,426             |
| John B.  Ewing, Jr.    |   | 8,346,539     |   | 407,426             |
| Scott D.  Heflin       |   | 8,346,539     |   | 407,426             |
| Earl P.  Hoffman       |   | 8,346,539     |   | 407,426             |
| Charles A.  Holtgraves |   | 8,346,539     |   | 407,426             |
| Larry J.  Horbach      |   | 8,346,539     |   | 407,426             |
| Gary A.  McConnell     |   | 8,346,539     |   | 407,426             |
| Abe Yeddis             |   | 8,346,537     |   | 407,428             |
| John J.  Buterin       |   | 1,991,116     |   | 0                   |
| Thomas G.  Stoll       |   | 1,991,116     |   | 0                   |
| Philip A.  Wilson      |   | 1,991,116     |   | 0                   |

 

At the AnnualMeeting of Stockholders held on May 21, 2003, the stockholders ratifiedthe appointment of Deloitte & Touche LLP as the Company’s auditors with avote of 8,563,652 for, 136,421 against and 2,045,008 votes abstaining.

 

**Item5.****                                                           OtherInformation**

None

 

**Item6.****                                                           Exhibitsand Reports on Form 8-K.**

a)              Exhibits:

4(b)(4)             First Amendment to Amended and RestatedCredit Agreement with Southwest Bank of Texas, dated March 31, 2003, forthe Madisonville Term Note

11                                    Statement RegardingComputation of Per Share Earnings

31.1                           Section 302 Certification ofChief Executive Officer

31.2                           Section 302 Certification ofChief Financial Officer

32.1                           Officer certificationpursuant to Sarbanes-Oxley Act of 2002, Section 906.

 

b)             Reports on Form 8-K:

May 9, 2003 – Selected financial results for the quarter endedMarch 31, 2003.

 

25

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**SIGNATURES**

 

Pursuant to the requirements ofSection 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                 | /s/ Michael T. Fadden                   |                                    | /s/ Scott D. Heflin |   |
|----------------------|-----------------------------------------|-----------------------------------------|---------------------|--------|
|                 | Chief  Executive Officer and  President | Chief  Financial Officer and  Treasurer |
|                 |                                    |                                    |
| August 14, 2003 |                                    |
| (Date)               |                                    |

 

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