<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 17, 1998
REGISTRATION NO. 333-48279
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
UNIVERSAL COMPRESSION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C>
TEXAS 7359 74-1282680
------------------------ ------------------------ ------------------------
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
4430 BRITTMOORE ROAD
HOUSTON, TEXAS 77041
(713) 466-4103
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ERNIE DANNER
CHIEF FINANCIAL OFFICER AND EXECUTIVE VICE PRESIDENT
4430 BRITTMOORE ROAD
HOUSTON, TEXAS 77041
(713) 466-4103
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Please send copies of all communications to:
ANDRE WEISS, ESQ.
SCHULTE ROTH & ZABEL LLP
900 THIRD AVENUE
NEW YORK, NEW YORK 10022
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
------------------------
If the only securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, please check the following box: / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS AND INFORMATION
RELATING TO THE COMPANY, ITS INDUSTRY AND THE U.S. AND INTERNATIONAL OIL AND GAS
BUSINESS THAT IS BASED ON THE BELIEFS OF THE MANAGEMENT OF THE COMPANY, AS WELL
AS ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO THE MANAGEMENT OF
THE COMPANY. WHEN USED IN THIS PROSPECTUS, THE WORDS "ESTIMATE," "PROJECT,"
"BELIEVE," "ANTICIPATE," "INTEND," "EXPECT" AND SIMILAR EXPRESSIONS ARE INTENDED
TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT THE CURRENT
VIEWS OF THE COMPANY WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
CONTEMPLATED IN SUCH FORWARD-LOOKING STATEMENTS, INCLUDING THOSE DISCUSSED UNDER
"RISK FACTORS." READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY
DOES NOT UNDERTAKE ANY OBLIGATION TO PUBLICLY RELEASE ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
i
<PAGE>
SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED SEPTEMBER 17, 1998
UNIVERSAL COMPRESSION, INC.
OFFER TO EXCHANGE UP TO $242,500,000 OF NEW
9 7/8% SENIOR DISCOUNT NOTES DUE 2008
FOR UP TO $242,500,000 OF ANY AND ALL OUTSTANDING
9 7/8% SENIOR DISCOUNT NOTES DUE 2008
------------------------------
Universal Compression, Inc., a Texas corporation ("Universal Compression" or
the "Company"), hereby offers to exchange (the "Exchange Offer"), upon the terms
and conditions set forth in this Prospectus (the "Prospectus") and the
accompanying Letter of Transmittal (the "Letter of Transmittal"), up to
$242,500,000 in aggregate principal amount of its 9 7/8% Senior Discount Notes
due 2008 (the "Exchange Notes") for a like principal amount of its 9 7/8% Senior
Discount Notes due 2008 (the "Original Notes" and, together with the Exchange
Notes, the "Notes").
The terms of the Exchange Notes are identical in all material respects
(including principal amount, interest rate and maturity) to the terms of the
Original Notes for which they may be exchanged pursuant to the Exchange Offer,
except that the Exchange Notes will generally be freely transferable by holders
thereof, and are not subject to any covenant of the Company regarding
registration. The Exchange Notes will be issued under the indenture governing
the Original Notes. The Exchange Notes will rank pari passu in right of payment
to existing and future senior indebtedness of the Company, including
indebtedness under the Credit Agreement (as defined). As of June 30, 1998, the
Company had approximately $268.6 million of senior indebtedness outstanding, of
which $113.3 would have been secured. Additionally, the Exchange Notes are
effectively senior to the Holdings Notes (as defined). For a complete
description of the terms of the Exchange Notes, see "Description of the Exchange
Notes."
Interest on the Exchange Notes will begin to accrue commencing February 15,
2003 until maturity and will be payable semi-annually on August 15 and
February 15 of each year, commencing August 15, 2003. The Notes will be
redeemable, in whole or in part, at the option of the Company on or after
February 15, 2003, at the redemption prices set forth herein, plus accrued and
unpaid interest to the date of redemption. In addition, at any time on or prior
to February 15, 2001, the Company may, at its option, redeem up to 35% of the
aggregate principal amount of the Notes originally issued with the net cash
proceeds of one or more Public Equity Offerings (as defined), at a redemption
price equal to 109.875% of the Accreted Value (as defined) of the Notes to be
redeemed plus accrued and unpaid interest to the date of redemption; provided,
however, that, after giving effect to any such redemption, at least 65% of the
aggregate principal amount of the Notes originally issued remain outstanding.
The Exchange Notes will not be subject to any mandatory sinking fund. Upon a
Change of Control (as defined), each holder will have the right, subject to
certain conditions, to require the Company to repurchase such holder's Notes at
a price equal to 101% of the Accreted Value thereof plus accrued and unpaid
interest to the date of repurchase. See "Description of the Exchange Notes" and
"Capitalization."
(Continued on next page)
------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 11, FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE EXCHANGE NOTES.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------------
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
(Cover page continued)
The Original Notes were issued and sold on February 20, 1998, in a
transaction (the "Offering") not registered under the Securities Act of 1933, as
amended (the "Securities Act"), in reliance upon the exemptions provided in
Section 4(2) of the Securities Act and Rule 144A under the Securities Act.
Accordingly, the Original Notes may not be reoffered, resold or otherwise
pledged, hypothecated or transferred unless so registered or unless an
applicable exemption from the registration requirements of the Securities Act is
available. The Exchange Notes are being offered hereunder in order to satisfy
certain of the obligations of the Company under the Registration Rights
Agreement, dated February 20, 1998, among the Company and BT Alex. Brown
Incorporated and Salomon Brothers Inc (the "Initial Purchasers"). See "The
Exchange Offer--Purpose of the Exchange Offer." The Company is making the
Exchange Offer in reliance upon an interpretation by the staff of the Securities
and Exchange Commission (the "Commission") set forth in a series of no-action
letters issued to third parties, although the Company has not sought, and does
not intend to seek, its own no-action letter and there can be no assurance that
the staff of the Commission would make a similar determination with respect to
the Exchange Offer. Based upon the Commission's interpretations, the Company
believes that the Exchange Notes issued pursuant to the Exchange Offer in
exchange for Original Notes may be offered for resale, resold and otherwise
transferred by holders thereof (other than any holder that is (i) an "affiliate"
of the Company within the meaning of Rule 405 under the Securities Act (an
"Affiliate"), (ii) a broker-dealer who acquired Original Notes directly from the
Company or (iii) a broker-dealer who acquired Original Notes as a result of
market making or other trading activities) without compliance with the
registration and prospectus delivery provisions of the Securities Act provided
that such Exchange Notes are acquired in the ordinary course of such holders'
business and such holders are not engaged in, and do not intend to engage in,
and have no arrangement or understanding with any person to participate in, a
distribution of such Exchange Notes. Any such holder that cannot rely upon such
interpretations must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction.
Each broker-dealer who receives Exchange Notes pursuant to the Exchange
Offer in exchange for Original Notes acquired for its own account as a result of
market-making activities or other trading activities may be a statutory
underwriter and must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes. The Letter of Transmittal that is filed as an exhibit to the
Registration Statement of which this Prospectus is part states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
Broker-dealers who acquired Original Notes as a result of market making or other
trading activities may use this Prospectus, as supplemented or amended, in
connection with resales of the Exchange Notes.
The Original Notes are designated for trading in the Private Offerings,
Resales and Trading through Automated Linkages ("PORTAL") market. The Exchange
Notes constitute a new issue of securities for which there is no established
trading market. Any Original Notes not tendered and accepted in the Exchange
Offer will remain outstanding. To the extent Original Notes are tendered and
accepted in the Exchange Offer, a holder's ability to sell untendered, and
tendered but unaccepted, Original Notes could be adversely affected. Following
consummation of the Exchange Offer, the holders of Original Notes will continue
to be subject to the existing restrictions on transfer thereof and the Company
may have no further obligations to such holders to provide for the registration
under the Securities Act of the Original Notes. No assurance can be given as to
the liquidity of the trading market for either the Original Notes or the
Exchange Notes.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Original Notes being tendered for exchange but is otherwise subject to
customary conditions. The Exchange Offer will expire at 5:00 p.m., New York City
time, on [ ], unless extended by the Company to such other date as
the Company, in its sole discretion, may determine (the "Expiration Date"). The
date of acceptance for exchange of the Original Notes (the "Exchange Date") will
be the first business day following the Expiration Date. Original Notes tendered
pursuant to the Exchange Offer may be withdrawn at any time prior to the
Expiration Date; otherwise such tenders are irrevocable. There will be no cash
proceeds to the Company from the Exchange Offer.
This Prospectus, as it may be amended or supplemented from time to time, may
be used by a broker-dealer in connection with resales of Exchange Notes received
for Original Notes where such Original Notes were acquired for its own account
as a result of market-making activities or other trading activities. The Company
will make copies of this Prospectus available to any broker-dealer for use in
connection with any such resale.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on
Form S-4 (the "Registration Statement") under the Securities Act with respect to
the Exchange Notes being offered by this Prospectus. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain portions of which have been omitted
pursuant to the rules and regulations of the Commission. Statements made in this
Prospectus as to any contract, agreement or other document are summaries of the
material terms of such contracts, agreements or other documents and are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement is qualified in its entirety by such reference.
The Company is not currently subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company has agreed that, whether or not it is required to do so by the rules and
regulations of the Commission, for so long as any of the Notes remain
outstanding, it will furnish to the holders of the Notes and, following
consummation of the Exchange Offer and to the extent permitted by applicable law
or regulations, file with the Commission (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including for each a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual
consolidated financial statements only, a report thereon by the Company's
independent auditors and (ii) all reports that would be filed with the
Commission on Form 8-K if the Company were required to file such reports. In
addition, for so long as any of the Notes remain outstanding, the Company has
agreed to make available to any prospective purchaser of the Notes or beneficial
owner of the Notes, in connection with any sale thereof, the information
required by Rule 144A(d)(4) under the Securities Act.
Reports and other information filed by the Company with the Commission, and
the Registration Statement and the exhibits and schedules thereto, may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and will also be available for inspection and copying at the regional
offices of the Commission at 7 World Trade Center, 13th Floor, New York, New
York 10048 and at 1801 California Street, Suite 4800, Denver, Colorado
80202-2648. Copies of such materials may also be obtained from the public
reference section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. Also, the Company will file such reports and other
information with the Commission pursuant to the Commission's EDGAR system. The
Commission maintains a Web site that contains reports and other information
regarding registrants that file electronically with the Commission pursuant to
the EDGAR system. The address of the Commission's Web site is
http://www.sec.gov.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES.
SPECIFICALLY, THE INITIAL PURCHASERS MAY OVERALLOT IN CONNECTION WITH THE
OFFERING, MAY BID FOR AND PURCHASE NOTES IN THE OPEN MARKET AND MAY IMPOSE
PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION."
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS AND INFORMATION
RELATING TO THE COMPANY, ITS INDUSTRY AND THE U.S. AND INTERNATIONAL OIL AND GAS
BUSINESS THAT IS BASED ON THE BELIEFS OF THE MANAGEMENT OF THE COMPANY, AS WELL
AS ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO THE MANAGEMENT OF
THE COMPANY. WHEN USED IN THIS PROSPECTUS, THE WORDS "ESTIMATE," "PROJECT,"
"BELIEVE," "ANTICIPATE," "INTEND," "EXPECT" AND SIMILAR EXPRESSIONS ARE INTENDED
TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT THE CURRENT
VIEWS OF THE COMPANY WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
CONTEMPLATED IN SUCH FORWARD-LOOKING STATEMENTS, INCLUDING THOSE DISCUSSED UNDER
"RISK FACTORS." READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY
DOES NOT UNDERTAKE ANY OBLIGATION TO PUBLICLY RELEASE ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including risk factors, the Company's financial statements and
other financial data, appearing elsewhere in this Prospectus. References
hereinafter in this Prospectus except where the context otherwise requires to
(i) the "Company" or "Universal Compression" means Universal Compression, Inc.
and its predecessor, Tidewater Compression Service, Inc., and (ii) "fiscal year"
means the fiscal year of the Company commencing April 1 through March 31, for
example, fiscal 1996 is the fiscal year ended March 31, 1996.
RISK FACTORS
See "Risk Factors" beginning on page 11 for a discussion of certain factors
that should be considered in evaluating an investment in the Notes.
THE EXCHANGE OFFER
On February 20, 1998, the Company completed the Offering (the "Offering")
of $242,500,000 aggregate principal amount of 9 7/8 Senior Discount Notes due
2008 for an aggregate purchase price of $149,962,000.
The Company entered into a Registration Rights Agreement with the Initial
Purchasers in connection with the Offering in which it agreed, among other
things, to deliver to holders of Notes this Prospectus and to complete the
Exchange Offer on or prior to October 18, 1998. Holders are entitled to exchange
in the Exchange Offer their Original Notes for Exchange Notes with substantially
identical terms. If the Company fails to file the Registration Statement within
210 days after the Issue Date (as defined), cause the Registration Statement to
be declared effective within 20 days after the Issue Date or consummate the
Exchange Offer on or prior to October 18, 1998, in each instance, interest will
accrue at a rate of .5% per annum for the first 90 days following such date,
such rate increasing by .5% per annum at the beginning of each subsequent 90-day
period, such interest to be payable in cash semiannually in arrears. See the
discussion under the heading "the Offering" and "Description of the Exchange
Notes" for further information regarding the Exchange Notes.
The Company believes that the Exchange Notes may be resold by holders
without compliance with the registration and prospectus delivery provisions of
the Securities Act, subject to certain conditions. Holders should read the
discussions under the headings "Summary of the Exchange Offer" and "the Exchange
Offer" for further information regarding the Exchange Offer and resales of the
Exchange Notes.
THE COMPANY
Universal Compression is a leading provider of natural gas compressor
rental, maintenance and operations services to the domestic oil and gas
industry, owning the second largest domestic gas compressor fleet, and has a
growing presence in key international markets, including Argentina, Venezuela,
the Pacific Rim, Europe and Canada. The Company has a broad base of over 500
customers and its 512,000 horsepower ("HP") gas compression rental fleet is
comprised of over 2,700 units. Founded in 1954, Universal Compression is the
only compression rental company with an operating presence in all active
domestic gas compression markets. As a complement to its rental operations,
Universal Compression designs and fabricates compression units for its own fleet
as well as for its global customer base. Universal Compression's involvement in
natural gas and oil production activities, rather than drilling, its geographic
diversity and its fleet standardization have contributed to the Company's high
operating margins and stable revenue and EBITDA. For the fiscal year ended
March 31, 1997, the Company generated revenue of $113.9 million, net income of
$7.8 million and EBITDA of $38.7 million. For the fiscal year ended March 31,
1998, on a pro forma basis (giving effect to the Transactions (as defined)), the
Company generated revenue of $108.8 million, net loss of $(1.1) million and
EBITDA of $46.7 million.
Compression equipment is primarily utilized in the production, processing,
transportation and storage of natural gas and in certain applications
facilitating the production of oil. Rental units are primarily employed in the
field compression segment encompassing production and gas gathering. Renting
compression equipment affords customers: (i) the ability to efficiently meet
changing compression requirements while limiting capital investments in such
equipment, (ii) access to the compression rental companies' technical skills
which often
1
<PAGE>
leads to improved production rates and (iii) overall reduction in compression
costs through the elimination of expenditures associated with owning and
maintaining compressor units.
The total domestic natural gas field compression market is approximately
16.0 million HP in size, including both operator owned and rental company units.
The domestic field compression segment grew by a compound annual growth rate
("CAGR") of approximately 8% from 1992 through 1996, driven by the growth in
natural gas consumption and, more significantly, by the increase in compression
required to service the nation's aging gas fields and new gas discoveries.
Throughout the same period, the domestic field compression rental market grew at
a CAGR of 13% to approximately 4.0 million HP. The higher growth in the rental
market as compared to the overall market is primarily attributable to the trend
by energy producers towards outsourcing their compression requirements. From
1992 to 1996, rental companies' share of the domestic field compression market
grew from 20% to 25%. In addition, industry sources expect significant growth in
the international field compression market, driven by anticipated high growth
rates in natural gas consumption and by an increased emphasis on cost effective
operations resulting from the ongoing privatization of national energy
organizations and by environmental restrictions on the "flaring" of natural gas.
The Company's principal executive offices are located at 4430 Brittmoore
Road, Houston, Texas 77041. Its main telephone number is (713) 466-4103.
THE TRANSACTIONS
Pursuant to a Stock Purchase Agreement, dated as of December 18, 1997 (the
"Stock Purchase Agreement"), between Tidewater Inc., a Delaware corporation
("Tidewater"), and TW Acquisition Corporation, a Delaware corporation ("TW"), on
February 20, 1998, TW acquired (the "Acquisition") 100% of the voting securities
of Tidewater Compression Service, Inc. for a purchase price of approximately
$350 million (the "Purchase Price"). Immediately following the Acquisition, TW
was merged with and into Tidewater Compression Service, Inc., which changed its
name to Universal Compression, Inc. See "Description of the Company
Acquisition." Universal Compression is a wholly-owned subsidiary of Universal
Compression Holdings, Inc. ("Holdings"), both of which were organized and are
controlled by Castle Harlan Partners III, L.P., a Delaware limited partnership
("CHP"). CHP, a private investment fund, is managed by Castle Harlan, Inc.
("CHI"), a merchant banking firm.
The following table sets forth the sources and uses of funds for the
Acquisition:
<TABLE>
<CAPTION>
AMOUNT
(DOLLARS
SOURCES OF FUNDS: IN THOUSANDS)
----------------
<S> <C>
Revolving Credit Facility(1)................................................... $ 35,000
Term Loan Credit Facility...................................................... 75,000
Gross Proceeds of the Notes.................................................... 149,962
Equity Contribution(2)......................................................... 104,079
----------------
$ 364,041
----------------
----------------
<CAPTION>
USE OF FUNDS:
<S> <C>
Purchase Price................................................................. $ 349,335
Working Capital................................................................ 1,680
Fees and Expenses(3)........................................................... 13,026
----------------
$ 364,041
----------------
----------------
</TABLE>
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(1) Total availability of $85 million.
(2) The $104.07 million equity contribution was comprised of a $79.9 million
cash contribution from CHP and other parties (the "Castle Harlan
Investment") and $24.17 million net proceeds from the issuance of Holdings
senior discount notes due 2009 (the "Holdings Notes"). See "Principal
Stockholders."
(3) Additional fees of approximately $3 million were paid subsequent to closing.
2
<PAGE>
COMPANY STRENGTHS
The Company believes it has certain strengths that provide it with
significant competitive advantages and a solid base from which to enhance its
leadership position and achieve growth, including the following:
LEADING DOMESTIC RENTAL FLEET WITH NATIONWIDE COVERAGE. The Company owns
the second largest domestic rental fleet of natural gas compressors and is the
only compression rental company that has an operating presence in all active gas
compressor markets in the U.S. The Company employs a highly trained staff of
over 250 field and shop service technicians operating from 23 field service and
three overhaul facilities. The Company's geographic diversity and nationwide
operations enable the Company to (i) provide responsive and cost effective
service to its rental customers, as well as for units owned by others,
(ii) increase revenue with relatively little incremental overhead expense and
(iii) offer its customers the ability to deal with one nationwide provider for
their compression equipment and service needs.
STRONG STABLE CASH FLOW. Over the past ten years, the Company's financial
performance has been generally unaffected by the short-term market cycles of the
oil and gas industry. The Company's historical results reflect stable operating
performance and attractive operating margins that are attributable to
(i) compression being an essential component of gas production, (ii) its
operations being tied to gas production, as opposed to drilling, which is more
cyclical in nature, (iii) compression equipment rental often being a lower cost
alternative for natural gas production companies, (iv) its broad customer base,
(v) its presence in diverse geographic regions, (vi) its compressors remaining
on-site for an average of two years and (vii) the durability of the Company's
compressor fleet.
STANDARDIZED, DURABLE AND WELL-MAINTAINED RENTAL FLEET. Universal
Compression has standardized its rental fleet around two equipment platforms,
including the world's largest rental fleet of the highly durable Ajax
compressors. This high level of fleet standardization and durability
(i) enables the Company to minimize its fleet maintenance capital requirements,
(ii) enables the Company to minimize inventory costs, (iii) facilitates low-cost
compressor resizing and (iv) allows the Company to develop strong technical
proficiency in its maintenance and overhauling operations. The Company believes
its deployed rental fleet is in excellent condition as the Company provides full
maintenance on substantially all of its deployed units.
STRATEGIC INTERNATIONAL POSITION. The Company has a growing presence in
the developing international gas compression markets of Argentina, Venezuela,
the Pacific Rim and Canada. As of June 30, 1998, the Company had 37 units
aggregating approximately 21,000 HP operating on contract in these markets. The
Company's international compression operations typically involve larger projects
with higher operating margins and longer-term contracts providing the Company
with a strong incentive to increase its focus in these markets. The Company's
growing international operating presence positions it to address the compression
needs of a broad international market which looks to proven and globally
experienced compression companies.
PROVEN MANAGEMENT. The Company has a senior management team that (other
than its Chief Financial Officer and General Counsel who were hired upon
consummation of the Acquisition (as defined)) averages over 18 years of
compression industry experience. This team has been working together since
January 1994 during which period the Company approximately doubled revenue and
profits. Management has achieved these results primarily by successfully
integrating and consolidating several acquisitions, including the 1994
acquisitions of Halliburton Compression Service ("Halliburton") and Brazos Gas
Compressing Company ("Brazos"), which in total added approximately 287,000 HP to
the Company's fleet, as well as by (i) improving its nationwide field service
and marketing capabilities, (ii) centralizing decision-making at its
headquarters, (iii) instituting uniform quality controls, (iv) standardizing
maintenance and central overhaul procedures and (v) implementing consistent
Company-wide pricing. For details on the qualifications of the Company's Chief
Financial Officer, Mr. Ernie Danner and General Counsel, Ms. Valerie L. Banner,
see the discussion under the heading "Management."
BUSINESS STRATEGY
Management and CHP (as defined) have developed a focused business strategy
designed to increase revenue and EBITDA which comprises the following key
elements:
INCREASE SIZE AND AVERAGE HP OF RENTAL FLEET. The Company recently
accelerated its fabrication of upper mid-range (over 500 HP) units for its
rental fleet in an effort to increase the overall size and average HP of its
fleet. Larger HP units are typically used in centralized field gathering and gas
processing, a rapidly growing
3
<PAGE>
segment of the compression industry. Larger HP units are (i) leased under
long-term contracts and (ii) experience lower per HP operating and maintenance
costs. The Company believes that its increased penetration of this market
segment will broaden its product line resulting in enhanced cross-selling
opportunities and increased utilization of its existing fleet. Management
believes that the Acquisition and related financings positions Universal
Compression to achieve its goal of increasing the overall size and average HP of
its fleet.
EXPAND IN SELECT INTERNATIONAL MARKETS. Increased international demand for
field gas compression is driven by rising natural gas demand and production due
to environmental concerns, growing local economies and the desire to develop a
stable local energy source permitting greater oil exports. International demand
for rental units is expected to grow as national oil entities increasingly
privatize and seek to eliminate capital expenditures, lower overall costs and
take advantage of greater technical skills afforded by gas compression rental
companies. With approximately 21,000 HP operating internationally, Universal
Compression has a strategic presence in the rapidly growing rental compression
markets of South America and the Pacific Rim. The Company plans to leverage its
existing presence and strong global reputation for the engineering and
fabrication of high specification gas and air compressors to expand its
offerings in these markets. Further, with increased capital directed toward
larger HP units, Universal Compression will aggressively pursue higher dollar
value, more lucrative international contracts.
EXPAND RENTAL FLEET AND CUSTOMER BASE THROUGH THE ACQUISITION AND LEASEBACK
OF COMPRESSORS. The Company estimates that domestic energy producers,
transporters and processors own and operate approximately 12.0 million HP of
field compression equipment, representing approximately 75% of the total
domestic field compression base. Producers and other industry participants are
increasingly outsourcing essential but non-core activities, including gas
compression services, to focus on core activities and reduce capital investment.
These outsourcing opportunities typically involve sizable fleets of operating
units that are purchased in place and leased back on a long-term basis. The
Company believes that with improved capital availability resulting from the
Acquisition and related financings, it is well positioned to capitalize on such
opportunities for significant fleet growth.
PURSUE INDUSTRY CONSOLIDATION OPPORTUNITIES. The rental compression
services industry has experienced significant consolidation over the past
several years but remains fragmented. In addition to opportunities to achieve
significant integration cost savings, consolidation is being driven by the
expanding needs of customers for the full range of compression services,
equipment and attendant technical skills. The Company initiated the current
phase of industry consolidation in 1994 with the acquisition of Halliburton and
Brazos. The Company believes that continuing industry consolidation will present
it with opportunities to acquire both smaller regional operators and larger
compression service companies and that, as a result of the Acquisition and
related financings, the Company is well positioned to pursue such opportunities.
COMPLEMENT CORE RENTAL BUSINESS WITH ANCILLARY SERVICES. The Company
offers a broad array of services to complement its core rental business. These
services include maintenance, turnkey installation, contract operations and unit
fabrication. These ancillary services enable Universal Compression to
(i) increase its customer base, (ii) increase rental revenue from its existing
fleet, (iii) improve customer loyalty and (iv) diversify its revenue base. In
addition, contract operations enable the Company to grow its business with
limited capital expenditures.
PROMOTE GROWTH THROUGH EMPLOYEE INCENTIVE PROGRAMS. The Company has begun
implementation of an employee incentive program that correlates annual and
long-term compensation with individual and Company performance. That program is
designed to result in the Company's management and employees being given the
opportunity to beneficially own approximately 12% of the common stock of the
Company's parent on a fully-diluted basis through cash investment, stock grants
and stock option awards. The Company believes such incentives will promote
internal growth and facilitate the successful implementation of the Company's
goals. See "Financial Statements of Universal Compression Inc."
4
<PAGE>
SUMMARY OF THE EXCHANGE OFFER
<TABLE>
<S> <C>
REGISTRATION RIGHTS AGREEMENT............. Holders are entitled, pursuant to the Registration Rights Agreement
(as defined), to exchange the Original Notes for Exchange Notes
having substantially identical terms. The Exchange Offer is intended
to satisfy these rights. After the Exchange Offer is complete,
Holders may no longer be entitled to any exchange or registration
rights with respect to the Original Notes. Holders of the Original
Notes who do not tender their Original Notes in the Exchange Offer or
whose Original Notes are not accepted for exchange will continue to
hold such Original Notes and will be entitled to all the rights and
preferences and will be subject to the limitations applicable thereto
set forth in the Indenture except for any such rights or limitations
which by their terms, terminate or cease to be effective as a result
of the making, and the acceptance for exchange of all validly
tendered Original Notes pursuant to the Exchange Offer.
THE EXCHANGE OFFER........................ Up to $242,500,000 aggregate principal amount of Exchange Notes are
being offered in exchange for a like aggregate principal amount of
Original Notes. The Company will issue registered Exchange Notes on
or promptly after the expiration of the Exchange Offer. For a
description of the procedures for tendering Original Notes, see "The
Exchange Offer--Procedures for Tendering Original Notes." The Company
may also be required to issue to the Initial Purchasers Private
Exchange Notes (as defined) in the event the Initial Purchasers are
holding Original Notes having, or reasonably likely to be determined
to have, the status of an unsold allotment in the initial
distribution. The Private Exchange Notes will be identical in all
material respects to Exchange Notes.
RESALES................................... Based on an interpretation by the staff of the Commission set forth
in no-action letters issued to third parties, the Company believes
that Exchange Notes issued pursuant to the Exchange Offer in exchange
for Original Notes may be offered for resale, resold and otherwise
transferred by holders thereof (other than (i) any such Holder which
is an "affiliate" of the Company within the meaning of Rule 405 under
the Securities Act, (ii) a broker-dealer who acquired Original Notes
directly from the Company or (iii) broker-dealers who acquired
Original Notes as a result of market-making or other trading
activities) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such Holders'
business, such Holders have no arrangement or understanding with any
person to participate in the distribution of such Exchange Notes and
neither such Holders nor any such other person is engaging in or
intends to engage in a distribution of such Exchange Notes. Each
broker-dealer that receives Exchange Notes for its own account in
exchange for Original Notes, where such Original Notes were acquired
by such broker-dealer as a result of market-making or other
activities must acknowledge that it will deliver a prospectus in
connection with any sale of such Exchange Notes. Any broker-dealer
that participates in a distribution of the Exchange Notes may not
participate in the Exchange Offer and will be deemed to be an
underwriter for purposes of the Securities Act. Any Holder who is an
affiliate of the Company or who uses the
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Exchange Offer to participate in a distribution of the Exchange Notes
to be acquired in the Exchange Offer may not rely on such
interpretation by the staff of the Commission and must comply with
the registration and prospectus delivery requirements of the
Securities Act in connection with any resales of such Exchange Notes.
See "Plan of Distribution."
EXPIRATION DATE........................... The Exchange Offer will expire at 5:00 p.m., New York City time, on
(such time on such date being hereinafter called the
"Expiration Date"), unless the Company decides to extend the expiration date.
CONDITIONS TO THE EXCHANGE OFFER.......... The Exchange Offer is not subject to any condition other than that
the Exchange Offer not violate applicable law or any applicable
interpretation of the Staff of the Commission.
PROCEDURES FOR TENDERING OUTSTANDING NOTES
HELD IN THE FORM OF BOOK-ENTRY
INTERESTS............................... The Original Notes were issued as global securities without interest
coupons. The Original Notes were deposited with The United States
Trust Company of New York, as book-entry depositary, when they were
issued. The United States Trust Company of New York issued a
certificateless depositary interest in each Original Note, which
represents a 100% interest in the Original Note, to The Depositary
Trust Company ("DTC"). Beneficial interests in the Original Notes,
which are held by direct or indirect participants in DTC through the
certificateless depositary interests (the "Book-Entry Interests"),
are shown on, and transfers of such Original Notes can be made only
through, records maintained in book-entry form by DTC (with respect
to its participants) and its participants.
Holders of Original Notes held in the form of a Book-Entry Interest
who wish to tender their Book-Entry Interest for exchange pursuant to
the Exchange Offer must transmit to The United States Trust Company
of New York, as exchange agent (the "Exchange Agent"), on or prior to
the Expiration Date:
(i) either:
(a) a properly completed and duly executed Letter of Transmittal,
which accompanies this Prospectus, or a facsimile of the Letter
of Transmittal, including all other documents required by the
Letter of Transmittal, to the Exchange Agent at the address set
forth on the cover page of the Letter of Transmittal; or
(b) a computer-generated message transmitted by means of DTC's
Automated Tender Offer Program system and received by the
Exchange Agent and forming a part of a confirmation of book entry
transfer in which such Holder acknowledges and agrees to be bound
by the Letter of Transmittal;
and (ii) either:
(a) a timely confirmation of book-entry transfer of such holder's
Original Notes into the Exchange Agent's account at DTC, pursuant
to the procedure for book-entry transfers described in this
Prospectus under the heading "The Exchange Offer--Book-Entry
Transfer" must be received by the Exchange Agent on or prior to
the Expiration Date; or
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
(b) the documents necessary for compliance with the guaranteed
delivery procedures described below.
PROCEDURES FOR TENDERING DEFINITIVE
REGISTERED NOTES........................ Subject to certain conditions, a holder of Book-Entry Interests in
the Original Notes is entitled to receive, in exchange for its
Book-Entry Interests, registered Original Notes which are in equal
principal amounts to its Book-Entry Interests. However, as of this
date, no registered Original Notes are issued and outstanding. If a
holder acquires registered Original Notes prior to the Expiration
Date, such holder must tender its registered Original Notes in
accordance with the procedures described in this Prospectus under the
heading "The Exchange Offer--Procedures for Tendering Definitive
Registered Notes."
SPECIAL PROCEDURES FOR BENEFICIAL
OWNERS.................................. A beneficial owner of Book-Entry Interests whose name does not appear
on a security position listing of DTC as the holder of such
Book-Entry Interests or a beneficial owner of registered Original
Notes that are registered in the name of a broker, dealer, commercial
bank, trust company or other nominee that wishes to tender such
Book-Entry Interests or registered Original Notes in the Exchange
Offer should contact such person in whose name its Book-Entry
Interest or registered Original Notes are registered promptly and
instruct such person to tender on its behalf.
GUARANTEED DELIVERY PROCEDURES............ If holders wish to tender their Original Notes and time will not
permit the required documents to reach the Exchange Agent by the
Expiration Date, or the procedure for book-entry transfer cannot be
completed on time or certificates for registered Original Notes
cannot be delivered on time, such holders may tender their Original
Notes pursuant to the procedures described in this Prospectus
under the heading "The Exchange Offer--Guaranteed Delivery
Procedures."
WITHDRAWAL RIGHTS......................... Holders may withdraw the tender of their Notes at any time prior to
5:00 p.m. New York City time on the Expiration Date.
CERTAIN U.S. FEDERAL INCOME TAX
CONSEQUENCES............................ The exchange of Notes will not be a taxable exchange for United
States federal income tax purposes. Holders will not recognize any
taxable gain or loss or any interest income as a result of such
exchange.
USE OF PROCEEDS........................... The Company will not receive any proceeds from the issuance of the
Exchange Notes pursuant to the Exchange Offer. The Company will pay
all expenses incident to the Exchange Offer.
EXCHANGE AGENT............................ The United States Trust Company of New York is serving as Exchange
Agent in connection with the Exchange Offer.
</TABLE>
7
<PAGE>
THE ORIGINAL NOTES
The form and terms of the Exchange Notes are the same as the form and terms
of the Original Notes, except that the Exchange Notes will be registered under
the Securities Act and, therefore, will not have legends restricting their
transfer and generally will not be entitled to registration under the Securities
Act. The Exchange Notes will evidence the same debt as the Original Notes and
both the Original Notes and the Exchange Notes are governed by the same
indenture.
<TABLE>
<S> <C>
SECURITIES OFFERED........................ $242,500,000 aggregate principal amount at maturity of 9 7/8% Senior
Discount Notes due 2008.
ISSUER.................................... Universal Compression, Inc. (formerly Tidewater Compression Service,
Inc.)
MATURITY DATE............................. February 15, 2008.
INTEREST PAYMENT DATES.................... The Original Notes were offered by the Company at a substantial
discount from their principal amount. Commencing February 15, 2003
interest will accrue until maturity on the Notes at the rate of
9 7/8% per annum and will be payable semi-annually on August 15 and
February 15, commencing August 15, 2003.
RANKING................................... The Original Notes are general unsecured senior obligations of the
Company and will rank pari passu in right of payment to existing and
future senior indebtedness of the Company, including indebtedness
under the Credit Agreement (as defined). The Original Notes are also
effectively subordinated to all secured indebtedness of the Company
and its subsidiaries to the extent of the assets secured by such
indebtedness. As of June 30, 1998, the Company had approximately
$268.6 million of senior indebtedness outstanding, of which
$113.3 million would have been secured. The Notes are effectively
senior to the Holdings Notes. Holdings is a holding company with no
material operations of its own. Accordingly, Holdings is dependent
upon the distribution of the earnings of its subsidiaries, including
the Company, whether in the form of dividends, advances or payments
on account of intercompany obligations, to service its debt
obligations.
OPTIONAL REDEMPTION....................... The Original Notes are redeemable, in whole or in part, at the option
of the Company on or after February 15, 2003, at the redemption
prices set forth herein, plus accrued and unpaid interest to the date
of redemption. In addition, at any time on or prior to February 15,
2001, the Company may, at its option, redeem up to 35% of the
aggregate principal amount of the Original Notes originally issued
with the net cash proceeds of one or more Public Equity Offerings, at
a redemption price equal to 109.875% of the Accreted Value of the
Notes to be redeemed plus accrued and unpaid interest to the date of
redemption; provided, however, that, after giving effect to any such
redemption, at least 65% of the aggregate principal amount of the
Original Notes originally issued remain outstanding.
CHANGE OF CONTROL......................... Upon a Change of Control, each holder has the right, subject to
certain conditions, to require the Company to repurchase such
holder's Original Notes at a price equal to 101% of the Accreted
Value thereof plus accrued and unpaid interest to the date of
repurchase.
CERTAIN COVENANTS......................... The Indenture governing the Original Notes (the "Indenture") contains
certain covenants that limit the ability of the Company and
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
its subsidiaries to, among other things, incur additional
indebtedness, pay dividends or make investments and certain other
restricted payments, consummate certain asset sales, enter into
certain transactions with affiliates, incur liens, impose
restrictions on the ability of a subsidiary to pay dividends or make
certain payments to the Company and its subsidiaries, merge or
consolidate with any other person or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of the assets
of the Company. In addition, under certain circumstances, the Company
will be required to offer to purchase the Original Notes, in whole or
in part, at a purchase price equal to 100% of the Accreted Value
thereof plus accrued and unpaid interest, if any, to the date of
repurchase, with the proceeds of certain Asset Sales. All of such
covenants are subject to significant qualifications and exceptions.
ORIGINAL ISSUE DISCOUNT................... The Exchange Notes should be treated as a continuation of the
Original Notes for Federal income tax purposes. The Original Notes
were issued with original issue discount for Federal income tax
purposes. See "Material United States Federal Income Tax
Considerations."
</TABLE>
For additional information regarding the Notes, see "Description of the
Notes."
USE OF PROCEEDS
There will be no cash proceeds to the Company from the Exchange Offer.
9
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA
The following table sets forth summary historical financial data for
Universal Compression, Inc. and its predecessor, Tidewater Compression Service,
Inc. ("Predecessor") and summary pro forma financial information. The summary
historical financial data for the Predecessor as of and for each of the years in
the two-year period ended March 31, 1997 and for the period from April 1, 1997
through February 20, 1998 and the summary historical financial data for Holdings
as of and for the 39 day period ending March 31, 1998 have been derived from the
respective audited financial statements, included elsewhere herein. The summary
financial data for the Predecessor for the three-months ending June 30, 1997 and
the summary consolidated financial data for Holdings for the three-months ending
June 30, 1998 have been derived from unaudited financial statements included
elsewhere herein, which in the opinion of management include all necessary and
recurring accounting adjustments to permit a fair presentation of the financial
statements. The pro forma financial information for the fiscal year ending
March 31, 1998 has been derived from and reflects the Acquisition and related
financings in the manner described under "Unaudited Pro Forma Financial
Statements and Other Data." The pro forma financial information is not
necessarily indicative of either future results of operations or the results
that might have occurred if the Acquisition and related financings had been
consummated on the indicated dates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The following table should be read in conjunction with "Unaudited Pro Forma
Financial Statements and Other Data," "Management's Discussion and Analysis of
Universal Compression Financial Condition and Results of Operations" and the
Financial Statements of Tidewater Compression Service, Inc. and Universal
Compression, Inc., including the related notes thereto, included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR
------------------------------------------------------------------------ COMPANY
-----------------
FISCAL YEAR ENDED MARCH 31, PERIOD FROM PERIOD FROM
THREE MONTH APRIL 1, 1997 TO DECEMBER 12, 1997
------------------------------------- PERIOD ENDED FEBRUARY 20, THROUGH MARCH 31,
1996 1997 JUNE 30, 1997 1998 1998(8)
----------------- ----------------- ------------- ---------------- -----------------
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Revenue............................. $ 110,464 $ 113,886 $26,381 $ 95,686 $ 13,119
Gross margin(1)..................... 51,685 48,332 13,035 47,752 6,891
Depreciation and amortization....... 26,997 26,163 6,554 23,310 1,560
General and administrative
expenses.......................... 10,508 11,004 2,509 8,669 1,305
Operating income(2)................. 14,180 11,165 3,972 15,773 4,026
Interest expense, net............... 3,706 -- 2 -- 2,896
Income tax expense (benefit)........ 3,745 4,724 1,527 6,271 529
Net income (loss)................... 5,972 7,842 2,623 10,759 617
OTHER DATA:
EBITDA(3)........................... $ 40,420 $ 38,729 $10,706 $ 40,340 $ 5,602
Acquisition(4)...................... -- -- -- -- 351,872
Cash flows from (used in):
Operating activities.............. 50,810 41,923 9,032 9,032 (699)
Investing activities.............. (1,270) (8,836) (3,291) (13,797) (353,145)
Financing activities.............. (49,506) (33,121) (5,741) (17,870) 356,226
Ratio of earnings to fixed
charges(5)........................ 3.5x 88.9x 130.7x 132.1x 1.3x
Pro Forma ratio of EBITDA to
adjusted interest expense(6)...... -- -- -- -- --
<CAPTION>
COMPANY
-----------------------------
PRO FORMA
FISCAL YEAR THREE MONTH
ENDED PERIOD ENDED
MARCH 31, 1998 JUNE 30, 1998
-------------- -------------
INCOME STATEMENT DATA:
<S> <C> <C>
Revenue............................. $108,805 $ 29,636
Gross margin(1)..................... 58,443 14,918
Depreciation and amortization....... 19,307 4,520
General and administrative
expenses.......................... 13,037 3,808
Operating income(2)................. 26,099 6,590
Interest expense, net............... 29,082 6,249
Income tax expense (benefit)........ (633) 147
Net income (loss)................... (1,077) 230
OTHER DATA:
EBITDA(3)........................... $ 46,679 $ 11,146
Acquisition(4)...................... --
Cash flows from (used in):
Operating activities.............. -- 6,216
Investing activities.............. -- (11,723)
Financing activities.............. -- 3,368
Ratio of earnings to fixed
charges(5)........................ 1.0x 1.0x
Pro Forma ratio of EBITDA to
adjusted interest expense(6)...... 1.8x --
AS OF AS OF
MARCH 31, 1998 JUNE 30, 1998
-------- ---------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital(7).................. $ 13,882 $ 15,687
Total assets........................ 379,108 382,475
Total debt.......................... 261,508 268,579
Stockholder's equity................ 105,797 106,025
</TABLE>
- ------------------
(1) Gross margin is defined as total revenue less (i) rental expense, (ii) cost
of sales (exclusive of depreciation and amortization), (iii) gain on asset
sales and (iv) interest income.
(2) Operating income is defined as income before income taxes less gain on asset
sales and interest income plus interest expense.
(3) EBITDA is defined as net income plus income taxes, interest expense,
depreciation and amortization. EBITDA represents a measure upon which
management assesses financial performance, and certain covenants in the
Company's borrowing arrangements will be tied to similar measures. EBITDA is
not a measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to operating income
or net income as an indicator of the Company's operating performance or to
net cash provided by operating activities as a measure of its liquidity.
Additionally, the EBITDA computation used herein may not be comparable to
other similarly titled measures of other companies.
(4) On February 20, 1998, the Company acquired 100% of the voting securities of
TCS for approximately $350 million. The results of TCS' operations have been
included in the Company's operations from the date of the acquisition.
(5) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as earnings before income taxes, plus fixed charges. Fixed
charges include interest expense on all indebtedness, amortization of
deferred financing fees, and one-third of rental expense on operating leases
representing that portion of rental expense deemed to be attributable to
interest.
(6) Adjusted interest expense is defined as total pro forma estimated interest
expense excluding amortization of deferred financing costs of $1 million.
(7) Working capital is defined as current assets minus current liabilities.
(8) The Company's financial information shown in this column is for the period
from December 12, 1997 (inception) through March 31, 1998. However, the
Company had no operations until the Acquisition on February 20, 1998.
10
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, including
"Selected Historical Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the Company's financial
statements and notes thereto included elsewhere herein, the following risk
factors should be considered carefully by holders of Original Notes prior to
making an investment in the Exchange Notes. The term "Note" or "Notes" includes
the Original Notes and the Exchange Notes.
SIGNIFICANT LEVERAGE AND DEBT SERVICE
As a result of the Acquisition, the Company has indebtedness that is
substantial in relation to its stockholder's equity, as well as interest and
debt service requirements which are significant compared to its cash flow from
operations. As of June 30, 1998, the Company had approximately $276 million of
outstanding indebtedness, including accounts payable and accrued liabilities,
and the Notes, which represented 72% of total capitalization. See
"Capitalization."
The Indenture permits the Company to incur additional indebtedness based
upon the Consolidated Fixed Charge Coverage Ratio (as defined) of the Company.
For example, on June 30, 1998, the Company's Consolidated Fixed Charge Coverage
Ratio was 1.75:1, which would have permitted the Company to incur additional
indebtedness of up to $76.4 million. Moreover, the Indenture permits the Company
to incur certain indebtedness designated as Permitted Indebtedness (as defined)
which is treated separately from indebtedness factored into determining the
Consolidated Fixed Charge Coverage Ratio. See "Description of the Exchange
Notes--Certain Covenants--Limitation on Incurrence of Additional Indebtedness."
The terms of the indenture in respect of the Holdings Notes are substantially
similar. Under the Revolving Credit Facility, the Company may, subject to
availability, incur an additional $45 million in Revolving Loans (as defined).
The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including, but not limited to the
following: (i) a substantial portion of the Company's cash flow from operations
must be dedicated to debt service and will not be available for operations and
other purposes, except that for the first five years immediately following the
Offering, debt service will be satisfied on a non-cash payment basis; (ii) the
Company's ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions or general corporate purposes may be
impaired; (iii) certain of the Company's borrowings are and will continue to be
at variable rates of interest, which exposes the Company to the risk of
increased interest rates and (iv) the Company's level of indebtedness could make
it more vulnerable to economic downturns and limit its ability to withstand
competitive pressures. In addition, although the Notes are effectively senior to
the Holdings Notes, any amounts paid to Holdings to service the Holding Notes
will reduce the cash available to the Company in subsequent periods to service
the obligations and the Notes. Furthermore, the Indenture governing the Holdings
Notes limits the ability of the Company to borrow additional funds.
The Company's ability to pay interest on the Notes and to satisfy its other
obligations will depend upon the Company's future operating performance, which
will be affected by prevailing economic conditions and financial, business and
other factors, many of which are beyond the Company's control. There can be no
assurance that the Company's operating results will be sufficient for the
Company to meet its obligations. The Company may be required to refinance the
Notes at maturity. No assurance can be given that, if required, the Company will
be able to refinance the Notes on terms acceptable to it, if at all. If the
Company is unable to service its indebtedness, it will be forced to adopt an
alternative strategy that may include actions such as reducing or delaying
capital expenditures or the expansion of the Company, selling assets,
restructuring or refinancing its indebtedness or seeking additional equity
capital. There can be no assurance that any of these strategies could be
effected on terms acceptable to the Company, if at all. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
CHANGE OF CONTROL AND THE NOTES
The Indenture provides that upon the occurrence of a Change of Control (as
defined), each Holder will have the right to require that the Company purchase
all or a portion of such Holder's Notes at a purchase price equal to 101% of the
Accreted Value thereof plus accrued and unpaid interest to the date of purchase.
If such an event
11
<PAGE>
occurs, there can be no assurance that the Company will have available funds
sufficient to pay the Change of Control purchase price for all the Notes that
might be delivered by Holders seeking the Company to purchase their Notes. The
Credit Agreement prohibits the purchase of Notes by the Company, under certain
circumstances, prior to full repayment of indebtedness under the Credit
Agreement and, upon a Change of Control, all amounts outstanding under the
Credit Agreement become due and payable. There can be no assurance that in the
event of a Change of Control the Company will have sufficient funds to repay
such indebtedness as well as to consummate the purchase of the Notes. The
failure of the Company to make or consummate such Note purchase or pay the
applicable Change of Control purchase price when due would result in an Event of
Default and would give the Trustee and the Holders of the Notes the rights
described under "Description of the Exchange Notes--Event of Default". In
addition to the obligations of the Company under the Indenture with respect to
the Notes in the event of a Change of Control, the Senior Secured Credit
Facilities contain a provision designating a change of control as described
therein as an event of default, which would obligate the Company to repay
amounts outstanding under the Credit Agreement upon an acceleration of the
indebtedness outstanding thereunder. See "Description of the Exchange
Notes--Change of Control."
Additionally, in the future, the Company could enter into acquisitions,
refinancings, recapitalizations, highly leveraged transactions or other
transactions that may not constitute a Change in Control under the Indenture,
but that could increase the amount of indebtedness outstanding or otherwise
affect the Company's capital structure, credit rating or adversely affect the
Holders of the Notes.
LIMITATIONS IMPOSED BY CERTAIN INDEBTEDNESS
The Indenture governing the Notes contains certain restrictive covenants
which will affect, and in many respects significantly limit or prohibit, among
other things, the ability of the Company to incur indebtedness, make prepayments
of certain indebtedness, make investments, engage in transactions with
affiliates, create liens, sell assets and engage in mergers and consolidations.
The Company believes that such restrictive covenants are not likely to have a
material adverse effect on its ability to make necessary capital investments.
The borrowings under the Senior Secured Credit Facilities are secured by
substantially all the assets of the Company. If the Company were unable to repay
borrowings under the Senior Secured Credit Facilities, the lenders thereunder
could proceed against the collateral securing the Senior Secured Credit
Facilities. If the indebtedness under the Senior Secured Credit Facilities were
to be accelerated, there can be no assurance that the assets of the Company
would be sufficient to repay such indebtedness and the Notes. See "Description
of Other Indebtedness."
RISK OF FRAUDULENT TRANSFER LIABILITY
Management of the Company believes that the indebtedness represented by the
Notes were incurred for proper purposes and in good faith, and that, based on
present forecasts, asset valuations and other financial information, the Company
is solvent, has sufficient capital for carrying on its business and is able to
pay its debts as they mature. Notwithstanding management's belief, if a court of
competent jurisdiction in a suit by an unpaid creditor or a representative of
creditors (such as a trustee in bankruptcy or a debtor-in-possession) were to
find that the Company did not receive fair consideration or reasonably
equivalent value for incurring the Notes and, at the time of the incurrence of
the Notes or such indebtedness, the Company was insolvent, was rendered
insolvent by reason of such incurrence, was engaged in a business or transaction
for which its remaining assets constituted unreasonably small capital, intended
to incur, or believed that it would incur, debts beyond its ability to pay as
such debts matured, or intended to hinder, delay or defraud its creditors, such
court could avoid such indebtedness. A likely consequence of such avoidance
would be the subordination of the indebtedness represented by the Notes to
existing and possibly future indebtedness and other liabilities of the Company.
The measure of insolvency for purposes of the foregoing will vary depending upon
the law of the relevant jurisdiction. Generally, however, a company would be
considered insolvent for purposes of the foregoing if the sum of that company's
liabilities is greater than all the company's properties at a fair valuation, or
if the present fair salable value of the company's assets is less than the
amount that will be required to pay its probable liability on its existing debts
as they become absolute and matured. There can be no assurance as to what
standards a court would apply to determine whether the Company was solvent at
the relevant time, or whether, whatever standard was applied, the Notes would
not be avoided on another of the grounds set forth above.
12
<PAGE>
INDUSTRY CONDITIONS
Gas compression operations may be materially dependent upon the levels of
activity in natural gas development, production, processing and transportation.
Such activity levels may be affected both by short-term and long-term trends in
natural gas prices. In recent years, natural gas prices and, therefore, the
level of drilling and exploration activity, have been extremely volatile. Any
prolonged substantial reduction in natural gas prices would, in all likelihood,
depress the level of exploration and development activity and result in a
decline in the demand for the Company's compression equipment and services. A
prolonged and significant decline in natural gas prices could have a material
adverse effect on the Company's business, results of operations and financial
condition.
SHORT-TERM LEASES; POSSIBLE INABILITY TO RE-LEASE COMPRESSORS
The initial term of the Company's leases generally varies based on
operating conditions and customer needs. In most events, the Company's initial
lease terms, unless extended by the lessee, are not generally sufficient for the
Company to recoup the average cost of acquiring or fabricating compressors under
currently prevailing lease rates. Accordingly, the Company assumes substantial
risk of not recovering its entire investment in the equipment it acquires or
fabricates through the initial term of the given lease. Although the Company has
historically been successful in re-leasing units in its inventory, there can be
no assurance that the Company will continue to be able to do so or that a
substantial number of its lessees will not terminate their leases at
approximately the same time, thereby causing an adverse accumulation of unleased
compressors in the Company's inventory. The inability of the Company to lease a
substantial portion of its compressors would have a material adverse effect upon
the Company's business, results of operations and financial condition. See
"Business--Operations."
DEPENDENCE ON SUPPLIERS
As a consequence of its highly standardized fleet, certain of the
components used in the Company's products are obtained from a single source or a
limited group of suppliers. The Company's reliance on such suppliers involves
several risks, including a potential inability to obtain an adequate supply of
required components in a timely manner, price increases and component quality.
Although the Company seeks to reduce dependence on those sole and limited source
suppliers, the partial or complete loss of certain of those sources could have
at least a temporary material adverse effect on the Company's results of
operations and damage customer relationships. Further, a significant increase in
the price of one or more of these components could materially adversely affect
the Company's results of operations.
SUBSTANTIAL CAPITAL INVESTMENTS
The Company currently anticipates it will continue to make substantial
capital investments in the expansion of the compressor rental fleet. The Company
believes that the restrictive covenants contained in the Indenture are not
likely to have a material adverse effect on its ability to make necessary
capital investments. Historically, the Company has financed these investments
through internally generated funds and contributions from Tidewater. If the
Company does not incur these expenditures while its competitors make substantial
fleet investments, the Company's market share may decline and its business may
be adversely affected. See "--Limitations Imposed by Certain Indebtedness."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company intends to continue to expand its business in South America and
the Pacific Rim and, ultimately, other international markets, directly and
through joint ventures. The Company's international operations are affected by
global economic and political conditions. In addition, changes in economic or
political conditions in any of the countries in which the Company operates could
result in exchange rate movement, new currency or exchange controls, other
restrictions being imposed on the operations of the Company or expropriation.
The Company's operations may also be adversely affected by significant
fluctuations in the value of the U.S. dollar to meet its obligations. See
"--Foreign Exchange Rate Risks; Repatriation Risks," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
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DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of key management, engineering, sales and marketing, customer
support, finance and manufacturing personnel, certain of whom would be difficult
to replace. See "Management--Directors and Executive Officers." The Company does
not maintain and does not intend to obtain key man life insurance for any of its
employees. The loss of the services of certain of these individuals could have a
material adverse effect on the Company. There can be no assurance that the
services of such personnel will continue to be available to the Company. In
connection with the Acquisition, the Company entered into employment agreements
with Messrs. Stephen A. Snider, Ernie Danner, Thomas E. Hartford, Robert D. Ryan
and Newton Schnoor, members of its senior management team. See
"Management--Executive Compensation; Employment Agreements." In addition, the
Company believes that its success depends on its ability to attract and retain
additional qualified employees and that the failure to recruit such other
skilled personnel could have a material adverse effect on the Company.
MANAGEMENT INFORMATION SYSTEMS
The Company believes that improvements in management and operational
controls, and operational, financial and management information systems are
needed to manage further growth. The Company also currently plans to augment its
information systems. In addition, Tidewater is conducting a program to review
and correct data processing issues relating to whether its systems will
recognize the year 2000 or will treat any date after December 31, 1999 as a date
during the twentieth century. The Company will be entitled to the benefits of
such program. There can be no assurance that the management information system
will produce the desired efficiencies or that other improvements will not be
needed. The failure to implement such improvements successfully could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Impact of the Year 2000."
AVAILABILITY AND INTEGRATION OF ACQUISITIONS
Since the Acqusition, the Company has adopted a new growth strategy and
plans to pursue the acquisition of other companies, assets and product lines
that either complement or expand its existing business. Any such acquisition may
be effected by Holdings, the Company or a subsidiary of either. Each such
acquisition will involve a number of potential risks, such as the diversion of
management's attention to the assimilation of the operations and personnel of
the acquired businesses and possible short-term adverse effects on the Company's
operating results during the integration process.
The Company is unable to predict whether or when any prospective candidate
will become available or the likelihood of a material acquisition being
completed. The Company may seek to finance any such acquisition through the
issuance of new debt and/or equity securities. If the Company proceeds with an
acquisition, and if such acquisition is relatively large and consideration is in
the form of cash, a substantial portion of the Company's financial resources
could be used in order to consummate any such acquisition. In addition, due to
the relatively large size of several potential acquisition opportunities, the
general risks inherent in acquisitions described above could be particularly
acute.
POTENTIAL LIABILITY AND INSURANCE
Natural gas service operations are subject to inherent risks, such as
equipment defects, malfunction and failures and natural disasters with resultant
uncontrollable flows of gas or well fluids, fires and explosions. These risks
could expose the Company to substantial liability for personal injury, wrongful
death, property damage, pollution and other environmental damages.
Although the Company has obtained insurance against certain of these risks,
no assurance can be given that such insurance will be adequate to cover the
Company's liabilities or will be generally available in the future or, if
available, that premiums will be commercially justifiable. If the Company were
to incur substantial liability and such damages were not covered by insurance or
were in excess of policy limits, or if the Company were to
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incur such liability at a time when it is not able to obtain liability
insurance, its business, results of operations and financial condition could be
materially adversely affected.
ENVIRONMENTAL REGULATION
The Company is subject to various federal, state and local laws and
regulatory standards in the areas of safety, health and the environment,
including regulations regarding emission controls. The Company believes that it
is in substantial compliance with such laws and regulations and that the phasing
in of emission controls and other known standards at the rate currently
contemplated by existing laws and regulations will not have a material adverse
effect on the Company's business, results of operations or financial condition.
However, various state and federal agencies from time to time may adopt new laws
and regulations or amend existing laws and regulations regarding environmental
protection that may impose stricter and more costly requirements. Such changes
to existing laws or regulations could require the Company to undertake
significant capital expenditures and could otherwise have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company routinely deals with natural gas, oil and other petroleum
products. As a result of its fabrication and overhaul operations, the Company
will generate, manage and dispose of hazardous wastes, such as solvents,
thinner, waste paint, waste oil, washdown wastes, and sandblast material.
Although the Company attempts to identify and address contamination before
acquiring properties, and although the Company attempts to utilize generally
accepted operating and disposal practices, hydrocarbons or other wastes may have
been disposed or released on or under properties owned, leased, or operated by
the Company or on or under other locations where such wastes have been taken for
disposal. These properties and the wastes disposed thereon may be subject to
federal or state environmental laws that could require the Company to remove the
wastes or remediate sites, which could have a material adverse effect on the
Company. See also "Business--Environmental Regulation."
COMPETITION
The natural gas compression service and fabrication business is highly
competitive. Overall, the Company experiences considerable competition from
companies with significantly greater financial resources and, on a regional
basis, from several smaller companies which compete directly with the Company.
The Company believes it is currently one of the largest natural gas compression
companies in the United States on the basis of aggregate rental HP.
FOREIGN EXCHANGE RATE RISKS; REPATRIATION RISKS
Although the Company and its subsidiaries attempt to match costs and
revenues in terms of local currencies, the Company anticipates that as it
continues its expansion on a global basis, there will be many instances in which
costs and revenues will not be matched with respect to currency denomination. As
a result, the Company anticipates that increasing portions of its revenues,
costs, assets and liabilities will be subject to fluctuations in foreign
currency valuations, and that such changes in exchange rates may have a material
adverse effect on the Company's business, results of operations, financial
condition and cash flow. While the Company may utilize foreign currency forward
contracts or other currency hedging mechanisms to minimize exposure to currency
fluctuation, there can be no assurance that such hedges will be implemented, or
if implemented, will achieve the desired effect. The Company may experience
economic loss and a negative impact on earnings solely as a result of foreign
currency exchange rate fluctuations. The markets in which the Company's
subsidiaries may conduct business could restrict the removal or conversion of
the local or foreign currency.
CONTROL OF COMPANY BY PRINCIPAL STOCKHOLDERS
Certain principal stockholders own and control in excess of 95% of
Holdings' outstanding voting stock. Accordingly, they have the ability to elect
the entire Board of Directors of the Company and, in general, to determine the
outcome of any other matter submitted to stockholders for their approval,
including the power to
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determine the outcome of all corporate transactions, such as mergers,
consolidations, and the sale of all or substantially all of the assets of
Holdings. See "Principal Stockholders."
ORIGINAL ISSUE DISCOUNT CONSEQUENCES
The Original Notes were issued at a substantial discount from their
principal amount. The Exchange Notes will be treated as continuations of the
Original Notes for Federal income tax purposes. Consequently, the holders of the
Exchange Notes generally will be required to include amounts in gross income for
federal income tax purposes in advance of receipt of any cash payment on the
Exchange Notes to which the income is attributable. See "Certain United States
Federal Income Tax Considerations" for a more detailed discussion of the federal
income tax consequences to the holders of the Exchange Notes of the purchase,
ownership and disposition of the Exchange Notes.
If a bankruptcy case is commenced by or against the Company under the
United States Bankruptcy Code, the claim of a holder of Exchange Notes with
respect to the principal amount thereof will likely be limited to an amount
equal to the sum of the Accreted Value as of the commencement of such case.
CONSEQUENCES OF FAILURE TO EXCHANGE
The issuance of the Exchange Notes in exchange for the Original Notes
pursuant to the Exchange Offer will be made only after a timely receipt by the
Company of such Original Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, holders of Original
Notes desiring to tender such Original Notes in exchange for Exchange Notes
should allow sufficient time to ensure timely delivery. The Company is under no
duty to give notification of defects or irregularities with respect to the
tenders of Original Notes for exchange.
Original Notes that are not tendered will, following the consummation of
the Exchange Offer, continue to be subject to the existing restrictions upon
transfer thereof and the Company will generally have no further obligation to
provide for the registration under the Securities Act of such Original Notes. In
addition, any holder of Original Notes who tenders in the Exchange Offer for the
purpose of participating in a distribution of the Exchange Notes may be deemed
to have received restricted securities and, if so, will be required to comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. To the extent that Original Notes are
tendered in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Original Notes could be adversely affected. Each broker or dealer
that receives Exchange Notes for its own account in exchange for Original Notes
where such Exchange Notes were acquired by such broker or dealer as a result of
market-making activities or other trading activities must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
See "Plan of Distribution."
LACK OF PUBLIC MARKET; RESTRICTIONS ON TRANSFERABILITY
The Exchange Notes are new securities for which there currently is no
market. Although the Initial Purchasers have informed the Company that they
currently intend to make a market in the Notes, they are not obligated to do so
and any such market making may be discontinued at any time without notice. In
addition, such market making activity may be limited during the pendency of the
Exchange Offer or the effectiveness of a shelf registration statement in lieu
thereof. Accordingly, there can be no assurance as to the development or
liquidity of any market for the Notes. The Notes have been designated for
trading by qualified buyers in the PORTAL Market. The Company does not intend to
apply for listing of the Notes on any securities exchange or for quotation
through the Nasdaq National Market.
The liquidity of, and trading market for, the Exchange Notes may be
adversely affected by general declines in the market for similar securities.
Such a decline may adversely affect such liquidity and trading markets
independent of the financial performance of, and prospects for, the Company.
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FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including, without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import, constitute "forward-looking
statements." Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or the oil and gas industry to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among others,
the following: general economic and business conditions; prospects for the oil
and gas industry; competition; changes in business strategy or development
plans; the loss of key personnel; the availability of capital; regulatory
developments; and other factors referenced in this Prospectus, including,
without limitation, regulatory developments and other factors referenced under
the captions "Prospectus Summary," "Description of The Company Acquisition,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements. The Company disclaims any obligation to update any such factors or
to publicly announce the results of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.
USE OF PROCEEDS
There will be no proceeds to the Company from an exchange pursuant to the
Exchange Offer. The net proceeds to the Company (after discounts, commissions
and estimated fees and expenses in the aggregate amount of approximately
$4.49 million related to the Offering) from the sale of the Original Notes in
the Offering were approximately $145.3 million. Such proceeds, together with the
proceeds of the Senior Secured Credit Facilities (see "Description of Other
Indebtedness"), the proceeds of the Holdings Notes and the proceeds from the
Castle Harlan Investment were used to pay (i) the Purchase Price, (ii) the fees
and expenses incurred in connection with the Acquisition and related financings,
and (iii) the ongoing working capital and capital expenditure requirements of
the Company. See "Description of the Company Acquisition."
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Original Notes were initially issued and sold by Universal Compression
on February 20, 1998, to the Initial Purchasers pursuant to a Purchase Agreement
(the "Purchase Agreement") entered into on February 13, 1998. The Initial
Purchasers subsequently sold the Original Notes to qualified institutional
buyers in reliance on Rule 144A under the Securities Act. Pursuant to the
Purchase Agreement, the Company and the Initial Purchasers entered into a
Registration Rights Agreement on February 20, 1998 (the "Registration Rights
Agreement"). Pursuant to the Registration Rights Agreement, the Company agreed
to use its best efforts to consummate the Exchange Offer on or prior to October
18, 1998. A copy of the Registration Rights Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part and the
description of the terms of the Registration Rights Agreement is qualified in
its entirety by reference thereto. The Registration Statement of which this
Prospectus is a part is intended to satisfy the Company's obligations with
respect to the registration of Notes in accordance with the terms of the
Registration Rights Agreement and the Indenture.
Following the consummation of the Exchange Offer, holders of Original Notes
not tendered in the Exchange Offer or whose tenders are not accepted in the
Exchange Offer will not have any further registration rights. Such holders will
continue to hold such Original Notes and will be entitled to all the rights and
preferences and will be subject to the limitations applicable thereto set forth
in the Indenture except for any such rights or limitations which, by their
terms, terminate or cease to be effective as a result of the making, and the
acceptance for exchange of all validly tendered Original Notes pursuant to the
Exchange Offer.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will accept any and
all Original Notes validly tendered and not withdrawn prior to 5:00 p.m., New
York City time on [ ], or such later time and date to which the Exchange
Offer is extended by the Company in its sole discretion (the "Expiration Date").
The Company will issue up to $242,500,000 aggregate principal amount of Exchange
Notes in exchange for a like principal amount of Original Notes. Holders may
tender some or all of their Original Notes pursuant to the Exchange Offer. The
Company will issue registered Exchange Notes on or promptly after the expiration
of the Exchange Offer.
The form and terms of the Exchange Notes are the same as the form and terms
of the Original Notes except that (i) the Exchange Notes will have been
registered under the Securities Act and thus will not bear restrictive legends
restricting their transfer pursuant to the Securities Act and (ii) the Exchange
Notes will not be subject to any covenant regarding registration under the
Securities Act, including any such rights under the Registration Rights
Agreement or the Indenture, which rights, in any event, may terminate with
respect to the Original Notes upon consummation of the Exchange Offer. The
Exchange Notes will evidence the same debt as the Original Notes (which they
replace) and will be issued under, and be entitled to the benefits of, the
Indenture, which also authorized the issuance of the Original Notes, such that
both the Exchange Notes and the Original Notes will be treated as a single class
of debt securities under the Indenture.
In addition to the Exchange Notes, the Company, pursuant to the
Registration Rights Agreement, may be required, upon the written request of the
Initial Purchasers, to issue to the Initial Purchasers notes identical in all
material respects to the Exchange Notes (except for the placement of a
restrictive legend) (the "Private Exchange Notes") in the event that, prior to
the consummation of the Exchange Offer, the Initial Purchasers hold Notes
having, or that are reasonably likely to be determined to have, the status of an
unsold allotment in the initial distribution. In this event, the Company may be
required to file a shelf registration statement with respect to such Private
Exchange Notes.
The Company shall be deemed to have accepted validly tendered Original
Notes when, as and if the Company has given oral or written notice thereof (oral
notice being promptly confirmed in writing) to The United States Trust Company
of New York, as Exchange Agent (the "Exchange Agent"). The Exchange Agent will
act as agent for the tendering holders of the Original Notes for the purposes of
receiving the Exchange Notes from the Company.
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Holders of Notes who tender Original Notes in the Exchange Offer will not
be required to pay brokerage commissions or fees or, subject to the instructions
in the Letter of Transmittal, transfer taxes with respect to the exchange of
Original Notes pursuant to the Exchange Offer.
EXTENSION; AMENDMENTS
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice (oral notice being promptly
confirmed in writing) and will make public announcement thereof, each prior to
9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Original Notes, (ii) to extend the Expiration Date, (iii) if any
of the conditions set forth below under, "--Conditions of the Exchange Offer"
shall not have been satisfied, to terminate the Exchange Offer or (iv) to amend
the terms of the Exchange Offer in any manner which, in its good faith judgment,
is advantageous to the holders of the Original Notes, whether before or after
any tender of the Original Notes. Any such delay, extension, termination or
amendment shall be effected by giving oral or written notice (oral notice being
promptly confirmed in writing) to the Exchange Agent, followed as promptly as
practicable by a public announcement thereof.
Without limiting the manner in which the Company may choose to make a
public announcement of any delay, extension, termination or amendment of the
Exchange Offer, the Company shall not have an obligation to publish, advertise,
or otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
PROCEDURES FOR TENDERING BOOK-ENTRY INTERESTS
The Original Notes (which for purposes of the Exchange Offer include
Book-Entry Interests therein and Original Notes in registered form ("Definitive
Registered Notes"), if any) were issued as global securities without interest
coupons (each, a "Global Note"). Concurrently with the issuance thereof, the
Global Notes were deposited with The United States Trust Company of New York, as
Book-Entry Depositary (the "Book-Entry Depositary"), which issued a
certificateless depositary interest (each, a "Depositary Interest") in each
Global Note representing a 100% interest therein to DTC. Beneficial interests in
the Global Notes held by direct or indirect participants in DTC through the
Depositary Interests (the "Book-Entry Interests") are shown on, and transfers
thereof are effected only through, records maintained in book-entry form by DTC
(with respect to its participants) and its participants.
Each holder (which for purposes of the Exchange Offer, includes any
participant in DTC whose name appears on a security position listing as a holder
of Book-Entry Interests) of Original Notes held in the form of Book-Entry
Interests who wishes to tender such Book-Entry Interests for exchange pursuant
to the Exchange Offer must transmit to the Exchange Agent on or prior to the
Expiration Date either (i) a properly completed and duly executed Letter of
Transmittal or a facsimile thereof, including all other documents required by
such Letter of Transmittal, to the Exchange Agent at the address set forth on
the cover page of the Letter of Transmittal or (ii) a computer-generated message
(an "Agent's Message"), transmitted by means of DTC's Automated Tender Offer
Program ("ATOP") system and received by the Exchange Agent and forming a part of
a book-entry transfer (a "Book-Entry Confirmation"), in which such holder
acknowledges and agrees to be bound by the terms of the Letter of Transmittal.
In addition, in order to deliver Original Notes held in the form of Book Entry
Interests (i) a timely Book-Entry Confirmation of book-entry transfer of such
Original Notes into the Exchange Agent's account at DTC pursuant to the
procedure for book-entry transfers described below under "--Book-Entry Transfer"
must be received by the Exchange Agent prior to the Expiration Date or (ii) the
holder must comply with the guaranteed delivery procedures described below.
The tender of an Original Note by a holder that is not withdrawn prior to
the Expiration Date will constitute an agreement between such holder and the
Company in accordance with the terms and subject to the conditions set forth
hereunder and in the Letter of Transmittal.
DELIVERY OF BOOK-ENTRY INTERESTS MUST BE EFFECTED BY BOOK-ENTRY TRANSFER AS
DESCRIBED UNDER "--BOOK-ENTRY TRANSFER." THE METHOD OF DELIVERY OF THE
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LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS
AT THE ELECTION AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS
RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY
INSURED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO
THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL SHOULD
BE SENT TO THE ISSUER.
PROCEDURES FOR TENDERING DEFINITIVE REGISTERED NOTES
Only registered holders of Definitive Registered Notes may tender such
Original Notes in the Exchange Offer. Each holder of Definitive Registered Notes
who wishes to tender such Definitive Registered Notes for exchange pursuant to
the Exchange Offer must transmit to the Exchange Agent on or prior to the
Expiration Date a properly completed and duly executed Letter of Transmittal or
a facsimile thereof, including all other documents required by such Letter of
Transmittal, to the Exchange Agent at the address set forth below under
"--Exchange Agent." In addition, in order to deliver Definitive Registered Notes
(i) the certificates representing such Definitive Registered Notes must be
received by the Exchange Agent prior to the Expiration Date or (ii) the holder
must comply with the guaranteed delivery procedures described below.
The tender by a holder (not withdrawn prior to Expiration Date) will
constitute an agreement between such holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF THE DEFINITIVE REGISTERED NOTES AND THE LETTER OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE
ELECTION AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED
THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR CERTIFICATES FOR DEFINITIVE
REGISTERED NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR
RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO
EFFECT THE ABOVE TRANSACTION FOR SUCH HOLDERS.
PROCEDURES APPLICABLE TO ALL HOLDERS
Any beneficial owner of Book-Entry Interests whose name does not appear on
a security position listing of DTC as a holder of such Book-Entry Interests and
any beneficial owner of Definitive Registered Notes that are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender such Book-Entry Interests or Definitive Registered Notes in
the Exchange Offer should contact such person in whose name such Book-Entry
Interests or Definitive Registered Notes are registered promptly and instruct
such holder to tender on such beneficial owner's behalf.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Original Notes surrendered for
exchange pursuant to the Letter of Transmittal or to which the notice of
withdrawal pertains are tendered (i) by a holder of the Original Notes who has
not completed the box entitled "Special Issuance Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible Institution (as defined
below). In the event that signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, such guarantees
must be by a firm which is a member of a registered national securities exchange
or a member of the National Association of Securities Dealers, Inc. or by a
commercial bank or trust company having an office or correspondent in the United
States (collectively, "Eligible Institutions").
If the Letter of Transmittal or notice of withdrawal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing and, unless waived by the Company,
proper evidence satisfactory to the Company of its authority to so act must be
submitted.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Original Notes will be
determined by the Company in its sole discretion, which determination will be
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final and binding. The Company reserves the absolute right to reject any and all
Original Notes not properly tendered or any Original Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Original Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of the Original Notes must be cured within such time as
the Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of the Original Notes, none of
the Company, the Exchange Agent or any other person shall incur any liability
for failure to give such notification. Tenders of the Original Notes will not be
deemed to have been made until any and all such defects or irregularities have
been cured or waived.
By transmitting an Agent's Message or executing a Letter of Transmittal,
each holder will represent to the Company and agree that, among other things,
(i) the Exchange Notes or interests therein to be acquired by such holder and
any beneficial owners thereof (the "Beneficial Owner(s)") in the Exchange Offer
are being acquired by such holder and any Beneficial Owner(s) in the ordinary
course of business of the holder and any such Beneficial Owner(s), (ii) the
holder and each Beneficial Owner are not participating, do not intend to
participate and have no arrangement or understanding with any person to
participate in the distribution of the Exchange Notes, (iii) the holder and each
Beneficial Owner acknowledge and agree that any person who is a broker-dealer
registered under the Exchange Act or is participating in the Exchange Offer for
the purpose of distributing the Exchange Notes must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction of the Exchange Notes and any interest therein
acquired by such person and cannot rely on the position of the staff of the SEC
set forth in certain no-action letters (see "--Resales of the Exchange Notes"),
(iv) the holder and each Beneficial Owner understands that a secondary resale
transaction described in clause (iii) above and any resales of the Exchange
Notes and any interest therein obtained by such holder in exchange for the
Original Notes originally acquired by such holder directly from the Company
should be covered by an effective registration statement containing the selling
security holder information required by Items 507 and 508, as applicable, of
Regulation S-K of the Commission and (v) neither the holder nor any Beneficial
Owner(s) is an "affiliate," as defined in Rule 405 promulgated under the
Securities Act, of the Company. Each broker-dealer that receives Exchange Notes
for its own account in exchange for Original Notes must represent that the
Original Notes tendered in the Exchange Offer were acquired by such
broker-dealer as a result of market-making activities or other trading
activities and must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes. By so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with the resales of Exchange Notes received in exchange for Original Notes where
Original Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has indicated its intention
to make this Prospectus (as it may be amended or supplemented) available to any
broker-dealer for use in connection with any such resale for a period of 180
days after the Expiration Date. See "Plan of Distribution."
ACCEPTANCE OF ORIGINAL NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Original Notes
properly tendered and will issue the Exchange Notes promptly after acceptance of
the Original Notes. See "--Conditions of the Exchange Offer." For purposes of
the Exchange Offer, the Company shall be deemed to have accepted properly
tendered Original Notes for exchange when, as and if the Company has given oral
or written notice thereof (oral notice being promptly confirmed in writing) to
the Exchange Agent.
RETURN OF ORIGINAL NOTES
If any tendered Original Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Original Notes are
withdrawn or are submitted for a greater principal amount than the holders
thereof desire to exchange, then such unaccepted, withdrawn or non-exchanged
Original Notes will be
21
<PAGE>
returned without expense to the tendering holder thereof. Under such
circumstances, Book-Entry Interests in Original Notes will be credited to an
account maintained with DTC as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will establish an account with respect to the Book-Entry
Interests at DTC for purposes of the Exchange Offer promptly after the date of
this Prospectus. All deliveries of Book-Entry Interests must be made by
book-entry transfer to the account maintained by the Exchange Agent at DTC. Any
financial institution that is a participant in DTC's systems may make book-entry
delivery of Book-Entry Interests by causing DTC to transfer such Book-Entry
Interests into the Exchange Agent's account in accordance with DTC's ATOP
procedures for transfer. Holders of Book-Entry Interests who are unable to
deliver a Book-Entry Confirmation of the tender of their Book-Entry Interests
into the Exchange Agent's account at DTC or all other documents required by the
Letter of Transmittal to the Exchange Agent on or prior to the Expiration Date,
must tender their Book-Entry Interests according to the guaranteed delivery
procedures described below.
GUARANTEED DELIVERY PROCEDURES
If a holder of Original Notes desires to tender such Original Notes and
time will not permit such holder's required documents to reach the Exchange
Agent, or the procedure for book-entry transfer cannot be completed or the
certificates relating to Definitive Registered Notes cannot be delivered, in
each case, on or prior to the Expiration Date, a tender may be effected if (i)
the tender is made through an Eligible Institution, (ii) on or prior to the
Expiration Date, the Exchange Agent receives from such Eligible Institution (a)
either a properly completed and duly executed Letter of Transmittal (or a
facsimile thereof) or a properly transmitted Agent's Message and (b) a Notice of
Guaranteed Delivery, substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery), setting forth the name and
address of such holder of Original Notes and the amount of Original Notes
tendered, stating that the tender is being made thereby and guaranteeing that
within five New York Stock Exchange ("NYSE") trading days after the date of
execution of the Notice of Guaranteed Delivery, a Book-Entry Confirmation or the
certificates relating to the Definitive Registered Notes and all other documents
required by the Letter of Transmittal will be deposited by the Eligible
Institution with the Exchange Agent, and (iii) a Book-Entry Confirmation or the
certificates relating to the Definitive Registered Notes and all other documents
required by the Letter of Transmittal are received by the Exchange Agent within
five NYSE trading days after the date of execution of the Notice of Guaranteed
Delivery.
WITHDRAWAL OF TENDERS
A tender of Original Notes may be withdrawn any time prior to the
Expiration Date.
For a withdrawal to be effective, (i) a written notice must be received by
the Exchange Agent at the address set forth below under "--Exchange Agent" or
(ii) the appropriate procedures of DTC's ATOP system must be complied with. Any
such notice of withdrawal with respect to Book-Entry Interests must (i) specify
the name of the person having tendered the Original Notes to be withdrawn and
identify the Original Notes to be withdrawn (including the principal amount of
such Original Notes) and (ii) specify the name and number of the account at DTC
to be credited with the withdrawn Original Notes and otherwise comply with the
procedures of DTC. Any such notice of withdrawal with respect to Definitive
Registered Notes must (x) specify the name of the person having tendered the
Definitive Registered Notes to be withdrawn and (y) identify the Definitive
Registered Notes to be withdrawn (including the certificate number and principal
amount of Original Notes). Any such written withdrawal must be signed by the
holder in the same manner as the original signature on the Letter of Transmittal
by which such Original Notes were tendered (including required signature
guarantees). All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company, in its sole
discretion and whose determination shall be final and binding on all parties.
Any Original Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Properly withdrawn Original
Notes may be retendered by following one of the procedures described above at
any time on or prior to the Expiration Date.
22
<PAGE>
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange Exchange Notes for, any Original
Notes, and may terminate the Exchange Offer as provided herein before the
acceptance of such Original Notes:
(a) if, in the sole judgment of the Company, the Exchange Offer would
violate any law, statute, rule or regulation or an interpretation thereof of the
staff of the Commission; or
(b) with respect to all Book-Entry Interests tendered, if on the
Expiration Date, the Book-Entry Depositary does not present the Global Notes to
The United States Trust Company of New York, as trustee ("Trustee").
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Original Notes and
return all tendered Original Notes to the tendering holders, (ii) extend the
Exchange Offer and retain all Original Notes tendered prior to the Expiration
Date, subject, however, to the rights of holders to withdraw such Original Notes
(see "--Withdrawal of Tenders") or (iii) waive such unsatisfied conditions with
respect to the Exchange Offer and accept all validly tendered Original Notes
which have not been withdrawn. If such waiver constitutes a material change to
the Exchange Offer, the Company will promptly disclose such waiver by means of a
prospectus supplement that will be distributed to the registered holders and the
Company will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the waiver and the manner of disclosure
to the registered holders, if the Exchange Offer would otherwise expire during
such five to ten business day period.
EXCHANGE AGENT
The United States Trust Company of New York has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Prospectus or of the Letter of Transmittal and
requests of or Notices of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
BY REGISTERED OR CERTIFIED MAIL, BY OVERNIGHT COURIER OR BY HAND:
The United States Trust
Company of New York
114 West 47th Street
New York, New York 10036
Attention: Gerard F. Ganey
or
BY FACSIMILE:
The United States Trust
Company of New York
Attention: Gerard F. Ganey
Facsimile Number: (212) 852-1627
In addition, Letters of Transmittal and any other required documentation
should be sent to the Exchange Agent at the address set forth above, except
where facsimile transmission is specifically authorized (e.g., withdrawals and
Notices of Guaranteed Delivery). DELIVERY OF THE LETTER OF TRANSMITTAL TO AN
ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION VIA FACSIMILE OTHER THAN
AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telecopy, telephone or in person by officers and regular
employees of the Company and its affiliates.
23
<PAGE>
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptance of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
its reasonable out-of-pocket expenses in connection therewith.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Original Notes pursuant to the Exchange Offer. If, however, a transfer
tax is imposed for any reason other than the exchange of the Original Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be payable
by the tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the amount
of such transfer taxes will be billed directly to the tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Original Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities within the meaning of Rule 144
of the Securities Act. Accordingly, such Original Notes may be resold only
(i) to the Company or any subsidiary thereof, (ii) so long as the Original Notes
are eligible for resale pursuant to Rule 144A, to a person whom the seller
reasonably believes is a qualified institutional buyer within the meaning of
Rule 144A under the Securities Act, purchasing for its own account or for the
account of a qualified institutional buyer to whom notice is given that the
resale, pledge or other transfer is being made in reliance on Rule 144A, (iii)
outside the United States to non-U.S. persons in an offshore transaction in
compliance with Rule 904 under the Securities Act, (iv) pursuant to an exemption
from registration in accordance with Rule 144 (if available), (v) to an
institutional "accredited investor" that, prior to such transfer, furnishes to
the Trustee a signed letter containing certain representations and agreements
relating to the registration of transfer of the Original Notes and, if such
transfer is in respect of a principal amount of Original Notes at the time of
transfer of less than $250,000, an opinion of counsel acceptable to the Company
that such transfer is in compliance with the Securities Act and (vi) pursuant to
an effective registration statement under the Securities Act, in each case in
accordance with any applicable securities laws of any state of the United States
and subject to certain requirements of the Trustee being met. The liquidity of
the Original Notes could be adversely affected by the Exchange Offer. See "Risk
Factors--Consequences of Failure to Exchange." Following the consummation of the
Exchange Offer, holders of the Original Notes will have no further registration
rights under the Registration Rights Agreement.
RESALES OF THE EXCHANGE NOTES
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that Exchange
Notes issued pursuant to the Exchange Offer in exchange for Original Notes may
be offered for resale, resold and otherwise transferred by holders thereof
(other than (i) any such holder which is an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act, (ii) a broker-dealer who
acquired Original Notes directly from the Company or (iii) broker-dealers who
acquired Original Notes as a result of market-making or other trading
activities) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are acquired
in the ordinary course of such holders' business, such holders have no
arrangement or understanding with any person to participate in the distribution
of such Exchange Notes and neither such holders nor any such other person is
engaging in or intends to engage in a distribution of such Exchange Notes. Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Original Notes, where such Original Notes were acquired by such broker-dealer as
a result of market-making or other activities, must acknowledge that it will
deliver a prospectus in connection with any sale of such Exchange Notes. Any
broker-dealer that participates in a distribution of the Exchange Notes may not
participate in the Exchange Offer and will be deemed to be an underwriter for
purposes of the Securities Act. Any holder who is an affiliate of the Company or
who uses the Exchange Offer to participate in a distribution of the Exchange
Notes to be acquired in the Exchange Offer may not rely on such interpretation
by the staff of the Commission and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resales of such Exchange Notes. See "Plan of Distribution."
24
<PAGE>
DESCRIPTION OF THE COMPANY ACQUISITION
On February 20, 1998, TW acquired 100% of the voting securities of
Tidewater Compression Service, Inc. for a cash payment of $348.1 million,
subject to adjustment as described below (the "Acquisition"). TW was formed by
CHP for the purpose of facilitating the Acquisition. TW obtained the funds
required to finance the cash payment, as well as the fees and expenses incurred
in connection with the Acquisition, in the following manner: (i) an aggregate
cash contribution of $104.07 million by Holdings derived from the Castle Harlan
Investment and net proceeds of the issuance of Holdings Notes of
$24.17 million; (ii) a Term Loan Credit Facility of $75 million and a Revolving
Credit Facility of $85 million ($35 million of which was drawn down at the
closing of the Acquisition), each with Bankers Trust Company, as agent, and
other lending institutions (collectively, the "Senior Secured Credit
Facilities"); and (iii) net proceeds from the issuance of the Original Notes, in
the amount of $145.3 million (together with clause (i) and clause (ii), the
"Financing", and together with the Acquisition, the "Transactions"). Immediately
following the consummation of the Acquisition, TW was merged into Tidewater
Compression Service, Inc., which changed its name to Universal Compression, Inc.
See "Description of Other Indebtedness."
Pursuant to the Stock Purchase Agreement, TW and Tidewater agreed to
allocate responsibility for various actual and potential liabilities in the
areas of employee benefits, insurance, environmental matters and tax. In
particular, with respect to employee benefits, Tidewater is required to make all
matching contributions that relate to contributions made by employees of the
Company to Tidewater's 401(k) savings plan prior to closing and to insure that
payments due under the plan with respect to former employees be made in
accordance with the terms of such plan. With respect to Tidewater's non-pension
benefit arrangements, Tidewater is responsible for all costs of coverage and all
amounts payable by reason of claims incurred by the Company's employees prior to
the closing date. TW, for its part, is obligated to honor all terms of a
severance policy covering the Company employees. In the area of insured
liabilities, Tidewater assumed certain of the Company's liabilities.
In addition, the Stock Purchase Agreement gave TW the right to cause its
environmental engineer to make an environmental assessment of the operations and
physical premises of the Company between December 18, 1997 and February 17, 1998
(the "Environmental Assessment"). The Environmental Assessment identified
conditions that may give rise to liabilities (including, among others, failure
to obtain air permits) and estimated the costs of remediating those conditions
(the "Estimated Remediation Costs"). In the event that remediation is undertaken
by the Company, then, pursuant to the Stock Purchase Agreement, the cost, to the
extent identified as part of the Environmental Assessment (the "Actual
Remediation Costs") shall be paid as follows: (i) Tidewater shall pay 75% and
the Company shall pay 25% of the first $4 million of Actual Remediation Costs;
(ii) Tidewater shall pay 83.33% and the Company shall pay 16.67% of the next
$6 million of Actual Remediation Costs; and (iii) Tidewater shall pay 100% of
the amount by which the Actual Remediation Costs exceed $10 million, but only to
the extent the Actual Remediation Costs do not exceed the Estimated Remediation
Cost. If the Actual Remediation Costs are less than the Estimated Remediation
Costs, the maximum amount the Company is obligated to pay is approximately $2.0
million. If Actual Remediation Costs exceed the Estimated Remediation Costs, the
Company will be responsible for approximately $2.0 million plus 100% of such
excess amount. The Company believes that the Actual Remediation Costs will not
exceed the Estimated Remediation Costs. Based upon the results of the
Environmental Assessment, Tidewater's obligation under the Stock Purchase
Agreement and potential obligations by third parties, the Company does not
believe that the Actual Remediation Costs will be material to the business,
results of operations, financial condition, or cash flow of the Company.
The Stock Purchase Agreement also requires Tidewater to indemnify the
Company from any taxes which are (i) imposed on Tidewater or (ii) imposed on the
Company in respect of its income, business, property or operations or for which
the Company may otherwise be liable for any taxable period ending on or before
the closing date. This indemnity survives the closing date and shall terminate
thirty (30) days after the expiration of the applicable statute of limitations.
Tidewater is also required to join the Company in an election to have the
provisions of Internal Revenue Code Section 338(h)(10) and similar provisions of
state law apply to the Acquisition. The effect of the election will be to enable
the Company to treat the Acquisition as an asset sale for tax purposes.
The Purchase Price was to be increased or decreased depending on whether
the Closing Date Working Capital (as defined in the Stock Purchase Agreement) of
the Company exceeded or was less than approximately $14.1 million. The final
calculation resulted in Closing Date Working Capital of $15.3 million. For
purposes of the Stock Purchase Agreement, Working Capital is generally defined
as current assets (net of all liabilities) of the
25
<PAGE>
Company plus capital expenditures for new compression equipment by the Company
on or after January 1, 1998 through the closing date and minus any equipment
sales proceeds on or after January 1, 1998 through the closing date.
The Company or Holdings may be required, pursuant to the Purchase Price
Adjustment Agreement (the "PPA Agreement") entered into with Tidewater, to make
additional payments upon the occurrence of one of the following "Liquidity
Events": (i) any public or private sale of common stock of the Company or
Holdings; (ii) the sale of all or substantially all of the assets of the Company
or Holdings; (iii) the merger or consolidation of the Company or Holdings into
or with any other entity or entities; (iv) any recapitalization of the Company
that has the direct or indirect effect of changing the par value of its capital
stock, its stated capital or capital surplus; or (v) any similar transaction
involving Holdings or the Company. The payment, which will be in the same form
as the consideration is paid to CHP upon the completion of such transaction,
will not be required to be paid unless the initial investors in Holdings named
under "Principal Stockholders" below, other than directors, officers and
employees of Holdings or its subsidiaries have recognized a return upon their
entire initial investment in Holdings or the Company. The amount required to be
paid would be equal to 10% of their return over their investment in Holdings or
the Company adjusted upwards by 6.25% per quarter measured through the date of
any of the foregoing Liquidity Events.
Tidewater is also obligated, pursuant to the Transition Services Agreement,
to provide to the Company, for a term of 180 days from the closing date, certain
services, including, but not limited to, computer data processing services and
administrative services. The maximum payment that would be made if all of the
services are provided for the full 180-day term of the agreement is $105,000
plus out-of-pocket expenses.
CAPITALIZATION
The following table sets forth the cash and cash equivalents and
capitalization of the Company as of March 31, 1998 and June 30, 1998. See "Use
of Proceeds," "Selected Historical Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
financial statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998 AS OF JUNE 30, 1998
-------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.............................................. $ 2,382 $ 244
-------- ---------
-------- ---------
Total debt (including current portion):
Revolving Credit Facility............................................ $ 35,150 38,707
Term Loan Credit Facility............................................ 74,814 74,625
Senior Discount Notes due 2008....................................... 151,544 155,247
-------- ---------
Total debt................................................... 261,508 268,579
Stockholder's equity
Common Stock, $10 par value; 5,000 shares authorized; 4,910 shares
issued and outstanding............................................ $ 49 $ 49
Additional paid-in-capital........................................... 105,131 105,131
Retained earnings.................................................... 617 847
-------- ---------
Total stockholder's equity........................................ 105,797 106,027
-------- ---------
Total capitalization......................................... 367,305 374,606
-------- ---------
-------- ---------
</TABLE>
26
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS AND OTHER DATA
This Prospectus contains forward-looking statements. Discussions containing
such forward-looking statements may be found in the material set forth below and
under "Prospectus Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" and as
well as in the Prospectus generally. Actual events or results may differ
materially from those discussed in the forward-looking statements as a result of
various factors, including, without limitation, the factors set forth below and
the other matters set forth in the Prospectus generally.
The unaudited pro forma statements of operations were prepared as if the
Transactions had occurred on April 1, 1997.
The unaudited pro forma financial statements and other data have been
prepared under the purchase method of accounting. Under this method of
accounting, based on a preliminary allocation of the purchase price of the
Company, its identifiable assets and liabilities have been adjusted to their
estimated fair values.
The unaudited pro forma financial statements and other data have been
prepared based on the foregoing and on certain assumptions described in the
notes thereto. Such statements should be read in conjunction with the historical
financial statements of the Company including the notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," that are included elsewhere herein. The following unaudited pro
forma financial statements and other data do not purport to be indicative of
results of operations that would have been reported had the Transactions been
effected on the dates indicated, or that may be reported in the future.
27
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FISCAL YEAR ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TIDEWATER
COMPRESSION UNIVERSAL ACQUISITION
SERVICE, INC.(1) COMPRESSION, INC.(2) ADJUSTMENTS PRO FORMA
---------------- -------------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue
Rentals........................................ $ 71,644 $ 8,929 $ -- $ 80,573
Sales.......................................... 19,924 3,814 -- 23,738
Other.......................................... 3,024 363 -- 3,387
Gain on asset sales............................ 1,094 13 -- 1,107
-------- -------- ----------- ---------
Total revenue.................................... 95,686 13,119 -- 108,805
Costs and Expenses
Rentals........................................ 31,924 2,979 (3,800)(a) 31,103
Cost of sales.................................. 14,753 3,233 -- 17,986
Depreciation and amortization.................. 23,310 1,560 (5,563)(b) 19,307
General and administrative..................... 8,669 1,305 3,063 (c) 13,037
Interest expense............................... -- 2,896 26,186 (d) 29,082
-------- -------- ----------- ---------
78,656 11,973 19,886 110,515
Income (loss) before income taxes................ 17,030 1,146 (19,886) (1,710)
Income tax expense (benefit)..................... 6,271 529 (7,433)(e) (633)
-------- -------- ----------- ---------
Net income (loss).............................. $ 10,759 $ 617 $ (12,453) $ (1,077)
======== ======== =========== =========
</TABLE>
- ------------------
(1) Represents the historical financial statements of Tidewater Compression
Service, Inc. for the period from April 1, 1997 through February 20, 1998.
(2) Represents the historical consolidated financial statements of the Company
for the period from December 12, 1997 (inception) through March 31, 1998.
However, the Company had no operations until the Acquisition on
February 20, 1998.
See Notes to Unaudited Pro Forma Financial Statements
28
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(a) Reflects the effect of a change in accounting policy for capitalization
of major overhauls.
(b) Reflects an adjustment to depreciation expense resulting from the
allocation of purchase price and the change in accounting policy referred to in
note (a). Depreciation and amortization expense for rental equipment is
calculated using a 20% salvage value and an estimated useful life of 15 years.
All remaining depreciation for property and equipment is calculated on the
straight-line basis with estimated useful lives ranging from 2 to 25 years.
Depreciation for capitalized overhauls is calculated using a three year
estimated useful life. Goodwill amortization is calculated over an estimated
40-year life.
(c) Reflects the management fee paid to Castle Harlan, Inc. of $3 million
and estimated incremental costs associated with being a stand-alone public
company. Such stand-alone costs include legal, accounting and personnel costs.
(d) Interest expense adjustments are as follows based on the following
assumptions:
<TABLE>
<CAPTION>
FISCAL YEAR
1998
-----------
<S> <C>
Revolving Credit Facility, $35 million at 9.75%........................................ $ 3,427
Senior Discount Notes, $152 million at 9.875%, due 2008................................ 16,886
Term Loan Credit Facility, $75 million at 10%.......................................... 7,481
Commitment Fee, $48 million at .05%.................................................... 239
-------
28,034
Amortization of deferred financing costs............................................... 1,048
-------
Total Interest Expense................................................................. $29,082
=======
</TABLE>
Interest on the Revolving Credit Facility and the Term Loan Credit Facility
is based on LIBOR plus 2.25% and LIBOR plus 2.50%, respectively. The interest
rates on the Revolving Credit Facility and the Term Loan Credit Facility at
March 31, 1998 under an available Prime Rate option were 9.75% and 10.0%,
respectively. Interest on the Senior Discount Notes has been calculated based on
the fixed rate of 9.875% compounded semiannually on principal plus accumulated
interest. A fluctuation of .125% of actual rates related to the Revolving Credit
Facility and Term Loan Credit Facility would result in an approximate change of
$137,000 in interest expense.
(e) Reflects an adjustment to income tax expense to effect a statutory tax
rate of 37%.
29
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth summary financial data for Universal
Compression, Inc. and its predecessor, Tidewater Compression Service, Inc.
("Predecessor"). The summary historical financial data for the Predecessor as of
and for each of the years in the three-year period ended March 31, 1997 and for
the period from April 1, 1997 through February 20, 1998 and the summary
historical financial data for the Company as of and for the 39 day period ending
March 31, 1998 have been derived form the respective audited financial
statements. The summary financial data for the Predecessor for the year ended
March 31, 1994 has been derived from unaudited financial statements. The summary
financial data for the Predecessor for the three-months ending June 30, 1997 and
the summary financial data for the Company for the three-months ending June 30,
1998 have been derived from unaudited financial statements included elsewhere
herein, which in the opinion of management include all necessary and recurring
accounting adjustments to permit a fair presentation of the financial
statements. The following financial information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations", Tidewater Compression Service, Inc., financial statements and notes
thereto, the Company's financial statement and notes thereto, all appearing
elsewhere herein.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------------------------------------------------------------------------- -----------------
PERIOD FROM PERIOD FROM
YEARS ENDED MARCH 31 THREE MONTH APRIL 1, 1997 TO DECEMBER 12, 1997
------------------------------------------ PERIOD ENDED FEBRUARY 20, THROUGH
1994 1995 1996 1997 JUNE 30, 1997 1998 MARCH 31, 1998(8)
-------- -------- --------- -------- ------------- ---------------- -----------------
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue.......................... $ 56,978 $ 84,682 $ 110,464 $113,886 $ 26,381 $ 95,686 $ 13,119
Gross margin(1).................. 25,133 37,604 51,685 48,332 13,035 47,752 6,891
Depreciation and amortization.... 9,144 15,472 26,997 26,163 6,554 23,310 1,560
General and administrative
expenses........................ 10,602 8,888 10,508 11,004 2,509 8,669 1,305
Operating income(2).............. 5,387 13,244 14,180 11,165 3,972 15,773 4,026
Interest expense, net............ -- 3,469 3,706 -- 2 -- 2,896
Income tax expense............... 2,551 4,648 3,745 4,724 1,527 6,271 529
Net income....................... 4,343 6,319 5,972 7,842 2,623 10,759 617
OTHER DATA:
EBITDA(3)........................ $ 16,038 $ 29,908 $ 40,420 $ 38,729 $ 10,706 $ 40,340 $ 5,602
Acquisitions(4)(5)............... -- 240,000 -- -- -- -- 350,000
Cash flows from (used in):
Operating activities............ 11,279 35,880 50,810 41,923 9,032 33,491 (699)
Investing activities............ (18,192) (256,752) (1,270) (8,836) (3,291) (13,797) (353,145)
Financing activities............ 6,913 220,872 49,506 (33,121) (5,741) (17,870) 356,226
Ratio of earnings to fixed
charges(6)...................... 71.4x 4.1x 3.5x 88.9x 130.7x 132.1x 1.3x
<CAPTION>
COMPANY
-------------
THREE MONTH
PERIOD ENDED
JUNE 30, 1998
-------------
INCOME STATEMENT DATA:
<S> <C>
Revenue.......................... $ 29,637
Gross margin(1).................. 14,918
Depreciation and amortization.... 4,520
General and administrative
expenses........................ 3,808
Operating income(2).............. 6,590
Interest expense, net............ 6,249
Income tax expense............... 147
Net income....................... 230
OTHER DATA:
EBITDA(3)........................ $ 11,146
Acquisitions(4)(5)............... --
Cash flows from (used in):
Operating activities............ 6,216
Investing activities............ (11,723)
Financing activities............ 3,368
Ratio of earnings to fixed
charges(6)...................... 1.0x
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
----------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital(7)................... $ 8,949 $ 18,686 $ 16,192 $ 13,953 $ 13,882
Total assets......................... 68,285 308,339 274,312 257,090 379,108
Total debt (including
intercompany)....................... 27,428 249,430 229,657 194,371 261,508
Stockholders' equity................. 37,414 43,733 49,705 57,547 105,797
<CAPTION>
AS OF
JUNE 30, 1998
-------------------
<S> <C>
BALANCE SHEET DATA:
Working capital(7)................... $ 15,687
Total assets......................... 382,475
Total debt (including
intercompany)....................... 268,579
Stockholders' equity................. 106,025
</TABLE>
- ------------------
(1) Gross margin is defined as total revenue less (i) rental expense, (ii) cost
of sales (exclusive of depreciation and amortization), (iii) gain on asset
sales and (iv) interest income.
(2) Operating income is defined as income before income taxes less gain on asset
sales and interest income plus interest expense.
(3) EBITDA is defined as net income plus income taxes, interest expense,
depreciation and amortization. EBITDA represents a measure upon which
management assesses financial performance and certain covenants in the
Company's borrowing arrangements will be tied to similar measures. EBITDA is
not a measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to operating income
or net income as an indicator of the Company's operating performance or to
net cash provided by operating activities as a measure of its liquidity
Additionally, the EBITDA computation used herein may not be comparable to
other similarly titled measures of other companies.
(4) The Company acquired the assets of Brazos for $35 million in October 1994
and the natural gas compression assets of Halliburton for $205 million in
December 1994. The results of Brazos' and Halliburton's operations have been
included in the Company's results of operations from the respective dates of
acquisition.
(5) On February 20, 1998, the Company acquired 100% of the voting securities of
TCS for approximately $350 million. The results of TCS' operations have been
included in the Company's operations from the date of the acquisition.
(6) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as earnings before income taxes, plus fixed charges. Fixed
charges include interest expense on all indebtedness, amortization of
deferred financing fees, and one-third of rental expense on operating leases
representing that portion of rental expense deemed to be attributable to
interest.
(7) Working capital is defined as current assets minus current liabilities.
(8) The Company's financial information shown in this column is for the period
from December 12, 1997 (inception) through March 31, 1998. However, the
Company had no operations prior to the Acquisition on February 20, 1998.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and performance of the
Company should be read in conjunction with the financial statements and related
notes and other detailed information regarding the Company included elsewhere in
this Prospectus. Certain information contained below and elsewhere in this
Prospectus, including information with respect to the Company's plans and
strategy for its business, are forward-looking statements. See "Risk Factors"
for a discussion of important factors which could cause actual results to differ
materially from the forward-looking statements contained herein.
OVERVIEW
The Company is a leading provider of natural gas compressor rental,
maintenance and operations to the domestic oil and gas industry with a growing
presence in several key international markets. Management believes that the key
drivers in the natural gas compression rental industry are: (i) the demand for
natural gas compression, which is principally tied to the production of natural
gas as opposed to drilling activity which tends to be cyclical, (ii) the aging
of producing gas fields in the United States which require more compression to
continue producing at the ideal economic rate, (iii) the trend by natural gas
producers to outsource gas compression requirements to reduce their overall cost
of compression and (iv) the rapidly increasing production of natural gas in
international markets which is being driven by demand for energy and
environmental concerns curtailing the historical practice of flaring natural
gas. Since natural gas compression is tied to production of gas, the demand for
compression services has not historically been affected by short-term movements
in the pricing of natural gas.
The rental compression services industry has experienced significant
consolidation over the past several years but remains fragmented. In October
1994 the Company initiated the current phase of industry consolidation through
its acquisition of Brazos and Halliburton increasing its aggregate HP from
193,000 to 480,000. For the year prior to these acquisitions, the acquired
companies' fleet utilizations were approximately 60% and 70%, respectively, as
compared to the Company's fleet utilization of 86%.
Following these acquisitions, the Company's parent, Tidewater, increasingly
concentrated on its core marine support business limiting growth capital
available to the Company. Since 1995, the Company has focused its efforts on
optimizing the efficiency of its existing operations. In particular the Company
focused on integrating these acquisitions as well as (i) improving its
nationwide field service and marketing capabilities, (ii) centralizing
management at its Houston headquarters, (iii) instituting uniform quality
controls, (iv) standardizing maintenance and central overhaul procedures and
(v) implementing consistent Company-wide policies. Because of limited growth
capital, the Company has not fully participated in the growth in the higher HP
market. The Company intends to expend a majority of its capital budget on this
market.
Although, prior to the Acquisition, the Company was a wholly-owned
subsidiary of Tidewater, the Company historically operated as an autonomous
business with limited administrative and financial services provided by
Tidewater, including treasury, legal, information systems and employee benefits.
In fiscal 1997, the Company was charged approximately $200,000 for these
services. Management estimates that the costs of providing these services and
other services required of a stand-alone public company will be approximately
$700,000 per year. To assist the Company's transition following the Acquisition,
Tidewater has agreed to provide these services to the Company for a period of
six months for an aggregate fee not to exceed $105,000 plus out-of-pocket
expenses.
31
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the major components of the Company's
revenue with the contribution of such components to the Company's revenue
expressed as a percentage of revenue:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED MARCH 31, PERIOD FROM APRIL 1,
-------------------------------------- 1997 TO
1996 1997 FEBRUARY 20, 1998
------------------ ------------------ --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Rental................... $ 72,765 66% $ 72,695 64% $ 71,644 75%
Fabrication and Sales.... 32,319 29% 36,592 32% 19,924 21%
Other(1)................. 5,380 5% 4,599 4% 4,118 4%
-------- -------- -------- -------- ---------- --------
Total Revenue............ $110,464 100% $113,886 100% $ 95,686 100%
-------- -------- -------- -------- ---------- --------
-------- -------- -------- -------- ---------- --------
United States............ 91,824 83% 92,615 81% 80,158 84%
International............ 18,640 17% 21,271 19% 15,528 16%
-------- -------- -------- -------- ---------- --------
Total Revenue............ $110,464 100% $113,886 100% 95,686 100%
-------- -------- -------- -------- ---------- --------
-------- -------- -------- -------- ---------- --------
<CAPTION>
THREE MONTH PRO
PERIOD FROM PRO FORMA FISCAL FORMA
FEBRUARY 20, 1998 YEAR ENDED PERIOD ENDED JUNE
TO MARCH 31, 1998 MARCH 31, 1998 30, 1998
-------------------- ------------------ ------------------
(DOLLARS IN THOUSANDS) (DOLLARS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Rental................... $ 8,929 68% $ 80,573 74% $ 20,959 71%
Fabrication and Sales.... 3,814 29% 23,738 22% 7,798 26%
Other(1)................. 376 3% 4,494 4% 880 3%
---------- -------- -------- -------- -------- --------
Total Revenue............ $ 13,119 100% $108,805 100% $ 29,637 100%
---------- -------- -------- -------- -------- --------
---------- -------- -------- -------- -------- --------
United States............ 10,737 82% 90,895 83% 26,225 88%
International............ 2,382 13% 17,910 17% 3,412 12%
---------- -------- -------- -------- -------- --------
Total Revenue............ $ 13,119 100% $108,805 100% $ 29,637 100%
---------- -------- -------- -------- -------- --------
---------- -------- -------- -------- -------- --------
</TABLE>
- ------------------
(1) Other income includes primarily service fees, gains on asset sales, rental
revenue on air compressors and interest. The Company disposed of its air
compression rental business during the second quarter of fiscal 1997.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Revenue. Revenue for the quarter ended June 30, 1998 increased $3.3
million, or 12%, to $29.6 million compared to revenue of $26.4 million for the
quarter ended June 30, 1997 due to increases in both rental revenue and revenue
from fabrication and equipment sales. Rental revenue increased 8% to $19.4
million. The increase in rental revenue was principally due to a 3% increase in
utilized horsepower and a 1% increase in rental pricing. Additonally, the
Company increased the amount of HP rented in international markets by 35%
through additional service in Argentina. Revenue from fabrication and sales
increased to $7.8 million from $6.2 million, an increase of 25%, due to a
relatively higher level of fabrication activity in the most recent quarter.
Gross Margin. Gross margin before depreciation and amortization for the
quarter ended June 30, 1998 increased $1.3 million, or 10%, to $14.9 million
from gross margin of $13.3 million for the quarter ended June 30, 1997. The
increase was due to higher utilization and the resulting operating efficiencies
related to the rental fleet and to increased capitalization of overhaul expenses
of $1.3 million. The rental gross margin for the quarter ended June 30, 1998
increased $2.4 million, or 21%, to $13.8 million compared to gross margin of
$11.3 million for the quarter ended June 30, 1997 due to the aforementioned
factors regarding utilization of the rental fleet and the capitalization of
actual expenses.
General and Administrative Expenses. General and administrative expenses
for the quarter ended June 30, 1998 increased $1.3 million compared to general
and administrative expenses for the quarter ended June 30, 1997. The increase
was due to the management fee payable to CHI and increased sales and engineering
expense in the quarter ended June 30, 1998 as the Company added the additional
sales and engineering personnel necessary to manage and rent a larger rental
fleet.
Net Income (Loss). Primarily as a result of increased interest expense of
$7.0 million related to the indebtedness incurred in the Transactions, reduced
income taxes and the factors discussed above, net income for the quarter ended
June 30, 1998 decreased to $.2 million from $2.6 million for the quarter ended
June 30, 1997.
PRO FORMA FISCAL 1998 COMPARED TO FISCAL 1997
The acquisition of the Company occurred on February 20, 1998 at which time
the Company accounted for the acquisition under purchase accounting. To provide
for a comparison of the two twelve month periods pro forma results for the
twelve months ended March 31, 1998 are compared to actual results for the twelve
months ended March 31, 1997.
Revenue. Pro forma revenue for fiscal 1998 declined $5.1 million, or 4%,
to $108.8 million compared to $113.9 million for fiscal 1997 as an increase in
rental revenue partially offset a decline in revenue from fabrication and
equipment sales. Rental revenue increased 11% to $80.6 million principally due
to a 6% increase in utilized horsepower and a 1% increase in rental pricing.
Additionally, the Company increased the amount of
32
<PAGE>
HP rented in international markets by 54%, principally through additional
service in Argentina. Revenue from fabrication and sales declined to
$23.7 million from $36.6 million, a decline of 35%, due to a shift of the focus
of the Company's sales force away from low margin sales of third-party
fabricated Ajax gas compressor units.
Gross Margin. Pro forma gross margin before depreciation and amortization
for fiscal 1998 increased $11.4 million, or 23%, to $59.7 million from
$48.3 million for fiscal 1997. The increase was due to higher utilization and
resulting operating efficiencies related to the rental fleet and the
capitalization of $3.8 million of overhaul expenses in the pro forma statements
for fiscal 1998. The rental gross margin for fiscal 1998 increased
$10.3 million, or 26%, to $49.5 million compared to $39.1 million for fiscal
1997.
General and Administrative Expenses. Pro forma general and administrative
expenses for fiscal 1998 increased $2.0 million to $13.0 million compared to
$11.0 million for fiscal 1997. The increase was principally due to the inclusion
of $3.0 million of management fees to CHI and additional pro forma expenses
related to stand-alone operations of a public company. As a percent of revenue,
pro forma general and administrative expenses for the fiscal year 1998
represented 12% of revenue compared to 10% of revenue for fiscal 1997.
Net Income (Loss). Primarily as a result of increased pro forma interest
expense of $29.1 million related to the indebtedness incurred in the
Transactions, reduced income taxes and the factors discussed above, the
Company's pro forma results for fiscal 1998 reflected a net loss of
$1.0 million compared to net income of $7.8 million for fiscal 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
Revenue. Revenue for fiscal 1997 increased $3.4 million, or 3%, to
$113.9 million from $110.5 million in fiscal 1996 as increased revenue from
fabrication and sales and gains on sale of rental equipment offset a decline in
service and other revenue. Rental revenue was unchanged from the prior year at
$72.7 million. A decline in average rental rates per HP due to competitive
pricing pressure was offset by higher utilization rates. The Company's rental
fleet utilization rose to 77% from 74% in the prior year as the Company was
successful in increasing the utilization of units acquired in the Brazos and
Halliburton acquisitions. During fiscal 1997, the Company increased its presence
in the international rental market by deploying an additional 5,000 HP in
Argentina. Fabrication and sales revenue increased 13% from the prior year due
to increased sales of third-party fabricated Ajax compressors. Revenue from
international operations increased $2.7 million to $21.3 million from
$18.6 million with a $1.8 million increase in rental revenue and a $0.9 million
increase in fabrication and sales revenue.
Gross Margin. Gross margin before depreciation and amortization for fiscal
1997 declined $1.2 million, or 2%, to $49.7 million from $50.9 million due to
higher cost of sales related to low margin sales of third party fabricated Ajax
compressor units. The rental gross margin for fiscal 1997 declined
$0.7 million, or 2%, to $38.9 million as the efficiencies from increased
utilization of the rental fleet were offset by a 4% decline in average rental
rate per HP.
General and Administrative Expenses. General and administrative expenses
for fiscal 1997 increased $0.5 million to $11.0 million from $10.5 million for
fiscal 1996. The increase is principally due to increased selling expenses
related to the sale of the Ajax units. When expressed as a percentage of
revenue, general and administrative expenses were unchanged at approximately 9%
of revenue.
Net Income. Primarily as a result of the factors discussed above and the
elimination of $3.7 million of interest expense on allocated debt from the
parent company present in the prior year, net income for fiscal 1997 increased
$1.8 million, or 31%, to $7.8 million from $6.0 million for fiscal 1996.
EFFECTS OF INFLATION
In recent years, inflation has been modest and has not had a material
impact upon the results of the Company's operations.
LIQUIDITY AND CAPITAL RESOURCES
For the period from April 1, 1997 through February 20, 1998, the Company
generated cash flow from operations of $33.5 million and an additional
$3.8 million from the sale of assets. The Company utilized $17.6 million of this
cash flow primarily to add rental equipment to its fleet and $17.8 million to
repay intercompany debt. For the period from February 20, 1998 through
March 31, 1998, the Company used
33
<PAGE>
approximately $(.7) million in cash flow for operations, $(2.0) primarily for
the addition of rental equipment, and $(351.9) to acquire Tidewater Compression
Service, Inc. During this period, the Company also received approximately
$259.7 million in proceeds from issuance of long-term debt and approximately an
additional $105.2 million from the issuance of common stock. For the period from
April 11, 1998 through June 30, 1998, the Company generated $6.2 million in cash
flow from operations and used $11.7 million of cash flow primarily for additions
of rental equipment. The Company funded this investment by reducing its cash
balances by increasing long-term debt by $3.4 million.
The Company expects to expend $39 million on capital projects in fiscal
1999. Approximately $20 million is budgeted for expansion of the domestic fleet,
$6 million is for additional expansion into international markets, $10 million
is for maintaining and updating the existing fleet, with the balance of
$3 million being for expansion of the fabrication shop in Houston and for new
vehicles for the service technicians and other capital projects. The Company's
principal sources of cash to fund capital requirements will be net cash provided
by operating activities and borrowings under the Revolving Credit Facility.
The Company has elected to treat the Acquisition as a purchase of assets
for federal income tax purposes, substantially increasing the tax basis of its
property and equipment, which will be depreciated over their useful lives. This
will result in approximately $94 million of goodwill, which will be amortized
for federal income tax purposes over a fifteen year period. As a result of the
Transactions, management anticipates that, for federal income tax purposes, the
Company will generate net operating losses; however, the Company may be
obligated to pay federal income taxes as a result of the alternative minimum tax
and to pay foreign income taxes.
The Company's principal uses of liquidity will be to provide working
capital, to fund capital expenditures for both maintenance purposes as well as
to grow the Company's business, to meet required principal and interest payments
on debt obligations and to finance future acquisitions and investments. As a
result of the Transactions, the Company has incurred a substantial amount of
indebtedness. As of June 30, 1998, the Company had $269 million of debt, and had
approximately $45 million of available credit under the Revolving Credit
Facility. Based on this capital structure, anticipated interest rates and
capital spending, the Company's total interest expense for an entire year would
be expected to be $29.1 million of which only $11.1 million will be payable in
cash.
The Senior Secured Credit Facilities are comprised of the Term Loan Credit
Facility and the Revolving Credit Facility. At February 20, 1998 the Company had
approximately $35 million outstanding on the Revolving Credit Facility. See
"Description of Other Indebtedness." The required quarterly principal repayments
under the Term Loan Credit Facility are approximately $0.75 million per year for
the first five years, $26.25 million for year six and $45.0 million for year
seven. The Company will not be required to make any principal payments on the
Notes prior to maturity other than as described under "Description of the
Notes." Additionally, no cash interest payments are required on the Notes until
the sixth year.
The Company anticipates that internally generated cash flow coupled with
availability under the Revolving Credit Facility, will be sufficient to fund
domestic and international operations, capital investments and its obligations
to its creditors over the next five years. The Company's ability to borrow
additional funds is limited by the Senior Secured Credit Facilities, the
Indenture and the indenture governing the Holdings Notes. See "Description of
Other Indebtedness" and the "Description of the Exchange Notes--Certain
Covenants--Limitation on Incurrence of Additional Indebtedness."
The Indenture permits the Company to incur additional indebtedness based
upon the Consolidated Fixed Charge Coverage Ratio of the Company. For example,
on June 30, 1998, the Company's Consolidated Fixed Charge Coverage Ratio was
1.75:1, which would have permitted the Company to incur additional indebtedness
of up to $76.4 million. Moreover, the Indenture permits the Company to incur
certain indebtedness designated as Permitted Indebtedness which is treated
separately from indebtedness factored into determining the Consolidated Fixed
Charge Coverage Ratio. See "Description of the Exchange Notes--Certain
Covenants--Limitation on Incurrence of Additional Indebtedness." Under the
Revolving Credit Facility, the Company may, subject to availability, incur an
additional $45 million in Revolving Loans.
34
<PAGE>
IMPACT OF THE YEAR 2000
Many existing computer program use only two digits to identify a year (for
example "98" is used to represent "1998"). Such programs may read "00" as the
year 1900, thus incorrectly recognizing dates beginning with the Year 2000, or
may otherwise produce erroneous results or cease processing when dates after
1999 are encountered. Such failures could cause disruptions in normal business
operations.
The Company has assessed its internal information and operating systems in
order to develop a comprehensive strategy to address the computer software and
hardware changes and facility upgrades that are required to remedy Year 2000
related deficiencies inherent in those systems. Generally, the Company is in the
process of installing various modifications to existing computer systems to
accommodate the problems associated with the Year 2000, and anticipates
completing Year 2000 modifications, replacements and testing by mid-1999. The
aggregate cost of such modifications is estimated to be approximately $100,000.
The Company has evaluated its embedded technology systems in respect of the Year
2000 problem, and believes that a failure, if any, of such systems would not
significantly impact operations.
The Company has not conducted an assessment of Year 2000-related problems
originating with third parties outside the Company's control, including the
third parties with which the Company has a material relationship. However, the
Company has no significant supplier or customer that directly interfaces with
the Company's information technology systems. There is no assurance that the
computer systems of the suppliers and customers on which the Company relies will
be converted timely and will not have a material adverse effect on the Company.
The Company believes that its most reasonably likely worst case Year 2000
scenario would include these elements: (a) one or more of the Company's third
party providers will be unable to provide the supplies expected and (b) one or
more parts of the Company's internal systems will operate incorrectly. The
Company believes that the uncertainties associated with a failure of third party
providers are mitigated by the following factors: (a) significant supplies are
in inventory and (b) there is a long lead time in ordering supplies. See "Risk
Factors--Dependence on Suppliers."
The Company believes that the uncertainties associated with a failure of
its systems are being minimized by the testing and replacement of its critical
systems, which will reveal any significant Year 2000 problems. Such problems
will be capable of remediation so that the Company's systems will perform
substantially as planned when Year 2000 processing begins. In the event of a
systems failure, the Company believes it is equipped to switch to manual
processes until such failure is remedied, without significantly impacting
operations.
Because of the progress which has been made toward achieving Year 2000
compliance, the Company has not made specific contingency plans. However, the
Company has assembled a Year 2000 Steering Committee to continually review the
Year 2000 issues the Company faces, and, if adverse development of the Company's
plans or knowledge of third parties' non-compliance becomes evident, the Company
will develop and implement contingency plans as required.
RECENTLY ANNOUNCED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS 130"), which establishes standards for reporting and display of
comprehensive income and its components. The components of comprehensive income
refer to revenues, expenses, gains and losses that are excluded from net income
under current accounting standards, including foreign currency translation
items, minimum pension liability adjustments and unrealized gains and losses on
certain investments in debt and equity securities. SFAS 130 requires that all
items that are recognized under accounting standards as components of
comprehensive income be reported in a financial statement displayed in equal
prominence with other financial statements; the total of other comprehensive
income for a period is required to be transferred to a component of equity that
is separately displayed in a statement of financial position at the end of an
accounting period. SFAS 130 is effective for both interim and annual periods
begining after December 15, 1997.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures About Segments of an Enterprise and Related Information
("SFAS 131"). SFAS 131 establishes standards for the way public enterprises are
to report information about operating segments in annual financial statements
and requires
35
<PAGE>
the reporting of selected information about operating segments in interim
financial reports issued to stockholders. SFAS 131 also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. SFAS 131 is effective for periods beginning after December 15, 1997.
SEASONAL FLUCTUATIONS
The Company's results of operations have not historically reflected any
material seasonal tendencies.
BUSINESS
GENERAL
Universal Compression is a leading provider of natural gas compressor
rental, maintenance and operations services to the domestic oil and gas
industry, owning the second largest domestic gas compressor fleet, and has a
growing presence in key international markets, including Argentina, Venezuela,
the Pacific Rim, Europe and Canada. The Company has a broad base of over 500
customers and its 512,000 HP gas compression rental fleet is comprised of over
2,700 units. Founded in 1954, Universal Compression is the only compression
rental company with an operating presence in all active domestic gas compression
markets. As a complement to its rental operations, Universal Compression designs
and fabricates compression units for its own fleet as well as for its global
customer base. Universal Compression's involvement in natural gas and oil
production activities, rather than drilling, its geographic diversity and its
fleet standardization have contributed to the Company's high operating margins
and stable revenue and EBITDA. For the fiscal years ended March 31, 1997, the
Company generated revenue of $113.9 million, net income of $7.8 million and
EBITDA of $38.7 million. For the fiscal year ended March 31, 1998, on a pro
forma basis (giving effect to the Transactions), the Company generated revenue
of $108.8 million, net loss of $(1.1) million and EBITDA of $46.7 million.
Compression equipment is primarily utilized in the production, processing,
transportation and storage of natural gas and in certain applications
facilitating the production of oil. Rental units are primarily employed in the
field compression segment encompassing production and gas gathering. Renting
compression equipment affords customers: (i) the ability to efficiently meet
changing compression requirements while limiting capital investments in such
equipment, (ii) access to the compression rental companies' technical skills
which often leads to improved production rates and (iii) overall reduction in
compression costs through the elimination of expenditures associated with owning
and maintaining compressor units.
The total domestic natural gas field compression market is approximately
16.0 million HP in size, including both operator owned and rental company units.
The domestic field compression segment grew by a compound annual growth rate
("CAGR") of approximately 8% from 1992 through 1996, driven by the growth in
natural gas consumption and, more significantly, by the increase in compression
required to service the nation's aging gas fields and new gas discoveries.
Throughout the same period, the domestic field compression rental market grew at
a CAGR of 13% to approximately 4.0 million HP. The higher growth in the rental
market as compared to the overall market is primarily attributable to the trend
by energy producers towards outsourcing their compression requirements. From
1992 to 1996, rental companies' share of the domestic field compression market
grew from 20% to 25%. In addition, industry sources expect significant growth in
the international field compression market, driven by anticipated high growth
rates in natural gas consumption and by an increased emphasis on cost effective
operations resulting from the ongoing privatization of national energy
organizations and by environmental restrictions on the "flaring" of natural gas.
36
<PAGE>
BUSINESS STRATEGY
Management and CHP have developed a focused business strategy designed to
increase revenues and EBITDA which comprises the following key elements:
INCREASE SIZE AND AVERAGE HP OF RENTAL FLEET. The Company recently
accelerated its fabrication of upper mid-range (over 500 HP) units for its
rental fleet in an effort to increase the overall size and average HP of its
fleet. Larger HP units are typically used in centralized field gathering and gas
processing, a rapidly growing segment of the compression industry. Larger HP
units are (i) leased under long-term contracts and (ii) experience lower per HP
operating and maintenance costs. The Company believes that its increased
penetration of this market segment will broaden its product line resulting in
enhanced cross-selling opportunities and increased utilization of its existing
fleet. Management believes that the Acquisition and related financings positions
Universal Compression to achieve its goal of increasing the overall size and
average HP of its fleet.
EXPAND IN SELECT INTERNATIONAL MARKETS. Increased international demand for
field gas compression is driven by increasing natural gas demand and production
due to environmental concerns, growing local economies and the desire to develop
a stable local energy source permitting greater oil exports. International
demand for rental units is expected to grow as national oil entities
increasingly privatize and seek to eliminate capital expenditures, lower overall
costs and take advantage of greater technical skills afforded by gas compression
rental companies. With approximately 21,000 HP operating internationally,
Universal Compression has a strategic presence in the rapidly growing rental
compression markets of South America and the Pacific Rim. The Company plans to
leverage its existing presence and strong global reputation for the engineering
and fabrication of high specification gas and air compressors to expand its
offerings in these markets. Further, with increased capital directed toward
larger HP units, Universal Compression will aggressively pursue higher dollar
value, more lucrative international contracts.
EXPAND RENTAL FLEET AND CUSTOMER BASE THROUGH THE ACQUISITION AND LEASEBACK
OF COMPRESSORS. The Company estimates that domestic energy producers,
transporters and processors own and operate approximately 12.0 million HP of
field compression equipment, representing approximately 75% of the total
domestic field compression base. Producers and other industry participants are
increasingly outsourcing essential but non-core activities, including gas
compression services, to focus on core activities and reduce capital investment.
These outsourcing opportunities typically involve sizable fleets of operating
units that are purchased in place and leased back on a long-term basis. The
Company believes that with improved capital availability resulting from the
Acquisition and related financings, it is well positioned to capitalize on such
opportunities for significant fleet growth.
PURSUE INDUSTRY CONSOLIDATION OPPORTUNITIES. The rental compression
services industry has experienced significant consolidation over the past
several years but remains fragmented. In addition to opportunities to achieve
significant integration cost savings, consolidation is being driven by the
expanding needs of customers for the full range of compression services,
equipment and attendant technical skills. The Company initiated the current
phase of industry consolidation in 1994 with the acquisition of Halliburton and
Brazos. The Company believes that continuing industry consolidation will present
it with opportunities to acquire both smaller regional operators and larger
compression service companies and that, as a result of the Acquisition and
related financings, the Company is well positioned to pursue such opportunities.
COMPLEMENT CORE RENTAL BUSINESS WITH ANCILLARY SERVICES. The Company
offers a broad array of services to complement its core rental business. These
services include maintenance, turnkey installation, contract operations and unit
fabrication. These ancillary services enable Universal Compression to
(i) increase its customer base, (ii) increase rental revenue from its existing
fleet, (iii) improve customer loyalty and (iv) diversify its revenue base. In
addition, contract operations enable the Company to grow its business with
limited capital expenditures.
PROMOTE GROWTH THROUGH EMPLOYEE INCENTIVE PROGRAMS. The Company has begun
implementation of an employee incentive program that correlates annual and
long-term compensation with individual and Company performance. That program is
designed to result in the Company's management and employees having the
opportunity to beneficially own approximately 12% of the common stock of the
Company's parent on a fully-diluted basis through cash investment, stock grants
and stock option awards. The Company believes such incentives will promote
internal growth and facilitate the successful implementation of the Company's
goals.
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<PAGE>
NATURAL GAS COMPRESSION
OVERVIEW
Compression equipment is utilized in the production, transportation,
processing and storage of natural gas and in certain applications facilitating
the production of oil. Gas compression that is utilized prior to the "main line
transmission system," which transports gas from production to storage or the end
user is considered "field" compression. The Company has been active in both
segments of the field compression market: (i) production and
(ii) gas-gathering. During the production phase, compression is used to boost
the pressure of natural gas from the wellhead so that it can be moved from the
well to a pipeline for transmission to an end-user. Typically, these
applications require portable low to mid-range HP compression equipment located
at or near the wellhead. As wells age and domestic gas reservoir pressure
recedes, larger HP compression equipment is frequently introduced. The
continually dropping pressure levels in gas fields require constant modification
and variation of on-site compression equipment. In addition, gas compression is
utilized to enhance the production of mature oil wells through gas-lift and
gas-injection operations.
During the gas-gathering phase, compression is used to combine gas flowing
from several wells into a gathering line leading to a transmission line. Because
gathering lines are frequently undersized and are used to transmit the combined
production of several wells, higher HP compression applications become
necessary. As noted above, the Company's strategy is to increase the number of
larger HP compression units in its fleet thereby expanding its presence in this
segment of the compression market.
Gas producers, transporters and processors have historically owned most of
the compression equipment used in their operations. At present, owned field
compression equipment is estimated to comprise 75% of total domestic field
compression HP. Owned equipment is usually maintained and operated by these
entities. Gas production and transportation companies that rent compression
equipment (25% of the total domestic field compression HP) have the option of
maintaining and/or operating such equipment themselves or contracting with the
rental company to maintain and/or operate such equipment. Maintenance services
usually call for the rental company to be responsible for the repair and general
up-keep of the equipment while the customer usually remains responsible for
installing and handling the day-to-day operation of the equipment. Operations
services, on the other hand, require the rental company to maintain and operate
and, in many cases, to install the equipment. Often, a rental company providing
operations services will inspect the equipment daily, provide consumables such
as oil and antifreeze and, if necessary, be present at the site for several
hours each day.
By renting compression equipment and/or contracting for the maintenance of
such equipment, the producers, transporters and processors are able to avoid the
costs of (i) purchasing a full line of compression equipment necessary to
service their changing needs, (ii) maintaining a spare parts inventory and
(iii) retaining dedicated compression personnel, including engineers and field
service employees. Management believes that rental companies achieve run times
of over 97%, significantly higher than those achieved by owners operating their
own equipment.
NATURAL GAS INDUSTRY
The Company believes that a significant factor in the growth of the gas
compression equipment market is the increasing consumption of natural gas both
domestically and internationally.
In the United States, natural gas is the second leading fuel in terms of
total consumption and is the fuel of choice for power generation and industrial
use. In recent years, natural gas has increased its market share of total
domestic energy consumption. The closure of nuclear power plants and the current
economic expansion have further contributed to the increased consumption of
natural gas. Domestic consumption of natural gas grew from 20.24 trillion cubic
feet ("TCF") in 1991 to 23.32 TCF in 1996, representing a CAGR of 2.9%. Industry
sources forecast a CAGR of 2.3% in domestic natural gas consumption from 1997 to
2015.
Natural gas consumption is growing in the international markets as well,
and it is anticipated that natural gas will overtake coal as the second leading
fuel in terms of total consumption over the next 20 years. Increasing
international natural gas consumption is partially attributable to a growing
environmental awareness and to a desire by a number of oil exporting nations to
develop a local energy source that permits greater oil exports. Countries that
historically treated natural gas as a by-product of the more valuable oil
products and flared gas at the wellhead are now enacting no-flare requirements
and building in-country infrastructures to utilize natural gas
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<PAGE>
as a clean and viable fuel for local consumption. Furthermore, electrical power
generation requirements are escalating rapidly in developing countries, and the
fuel of choice appears to be natural gas.
Between 1991 and 1996, natural gas consumption in non-U.S. energy markets
grew from 53.50 TCF to 57.45 TCF, representing a CAGR of 1.4%. Industry sources
forecast natural gas consumption worldwide to grow at a CAGR of 3.8% from 1997
to 2015. It is estimated that natural gas consumption in South America, the
Middle East and the Pacific Rim is expected to grow at a CAGR of 5.9% from 1997
to 2015 with consumption in countries such as Argentina (where natural gas
constitutes 40% of total energy consumption) and Venezuela growing at a CAGR of
3.1% and 6.5%, respectively from 1997 to 2015.
FIELD COMPRESSION INDUSTRY
Increased utilization of natural gas compression equipment is directly
related to changing gas reservoir pressures. As gas is released from gas
formations, the natural reservoir pressure of those formations continually
declines. As the declining pressure approaches the line pressure of the
gas-gathering or pipeline system used to transport the gas, compression
equipment must be applied to boost the pressure in order to allow the gas to be
brought to market. Due in part to declining reservoir pressures, field
compression HP has grown more quickly than gas consumption in the U.S. from 1991
to 1996, with CAGR's (measured in HP) of approximately 8% and 2.9%,
respectively.
The international field gas compression market is substantially smaller
than the domestic market. However, international gas compression is expected to
grow at a faster pace than domestic compression due to accelerating gas
production internationally.
FIELD COMPRESSION RENTAL INDUSTRY
The Company primarily competes in the market for field natural gas
compression equipment. In the United States, this market constitutes compressors
aggregating approximately 16.0 million HP of which approximately 4.0 million HP
is rented. Total domestic rental and other contract field compression service
annual revenue for 1997 has been estimated at $530 million. From 1992 to 1996,
total domestic field compression HP has grown at CAGR of approximately 8% while
total domestic rental compression HP has grown at a 13% CAGR over the same
period. The rented share of total domestic field compression market grew from
20% to approximately 25% between 1992 and 1996.
The domestic rental market growth is driven by increasing natural gas
production, greater compression needs due to declining reservoir pressures and a
continuing trend towards outsourcing by energy producers and processors. Rental
of compression equipment improves the efficiency and financial performance of
their operations through greater availability of a wide variety of gas
compressors, higher rates of mechanical reliability and higher run-time rates.
As contrasted to the domestic market, the international rental compression
market is substantially comprised of large HP compressors which are maintained
and operated by compressor rental providers. A significant portion of the market
is comprised of turnkey installation projects, which includes the design,
delivery, installation, operation and maintenance of the compression and
ancillary gas treating equipment by the rental company. The only matter left to
the responsibility of the customer is to provide fuel gas. Turnkey installation
projects are generally anticipated to remain on-site for five years on average
and result in higher monthly payments due to higher installation costs.
International rental and contract compression revenue are minor in
comparison to total compression revenues. Historically, many international
energy producers have been state-owned entities that are less sensitive or
indifferent to traditional capital markets-influenced concerns about
profitability and cash flow. As state-owned entities privatize, the desire to
enhance cash flow and profitability is expected to motivate these entities to
rent rather than to purchase compression requirements. Energy producers are
replacing the outdated compressors currently being utilized in many
international areas. As a result of these factors, the market for rental
compression is expected by industry experts to grow as more companies realize
the benefits of rental compression.
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<PAGE>
COMPANY OPERATIONS
HISTORY
The Company was originally incorporated in 1954 under the name South Coast
Gas Company. Tidewater acquired South Coast Gas Company in 1968 and renamed it
Tidewater Compression Service, Inc. At the time of its acquisition by Tidewater,
the Company had five employees and a fleet of natural gas compressors consisting
of 35 units that generated approximately $500,000 of annual rental revenue.
Between 1968 and 1992, the Company increased its fleet of natural gas
compressors to 800 units, through both internal growth and the acquisition of
three gas compression rental companies. From 1993 to 1995, the Company grew
dramatically through the acquisition of four rental compression companies:
Allison Production Services and BJC Operating Company in 1993 and Halliburton
and Brazos in 1994.
Since 1995, the Company has focused on integrating these acquisitions as
well as (i) improving its nationwide field service and marketing capabilities,
(ii) centralizing management at its headquarters, (iii) instituting uniform
quality controls, (iv) standardizing maintenance and central overhaul procedures
and (v) implementing consistent Company-wide pricing. During this period,
management also focused its attention on creating a strong base of international
operations. At the same time, the former parent of the Company, Tidewater,
focused on its core marine support business thereby limiting growth capital
available to the Company.
OVERVIEW
The Company provides a full range of compressor rental, maintenance and
operations services to a broad base of over 500 customers. These operations are
complemented by its compressor design and fabrication operations, through which
the Company produces compressors for sale to third parties, as well as for its
own rental fleet.
RENTAL COMPRESSOR FLEET
At June 30, 1998, the Company owned over 2,700 natural gas compressors
ranging in size from 15 HP to 1,300 HP, with an average of 185 HP as reflected
in the following table.
FLEET BREAKDOWN
JUNE 30, 1998
<TABLE>
<CAPTION>
HP RANGE TOTAL HP % OF TOTAL
- ------------------------------------------------ --------- ------------
<S> <C> <C>
0 - 100........................................ 67,060 13.1%
101- 200........................................ 118,651 23.2%
201- 500........................................ 174,377 34.0%
501-1,300....................................... 152,298 29.7%
------- ------
Total......................................... 512,386 100.0%
------- ------
------- ------
</TABLE>
The Company has standardized its rental fleet around two equipment
platforms: Ajax for smaller HP applications and Ariel for larger HP
applications. Over 90% of the HP of the Company is of these two types. This high
level of fleet standardization and durability (i) enables the Company to
minimize its fleet maintenance capital requirements, (ii) enables the Company to
minimize inventory costs, (iii) facilitates low-cost compressor resizing, and
(iv) allows the Company to develop strong technical proficiency in its
maintenance and overhauling operations. The Company believes that this
standardization has allowed it to realize high run-time rates while maintaining
low operating costs, which benefits both the Company and its customers.
The Company's Ajax fleet is a significant factor in the Company's stable
customer base. Many customers have exhibited loyalty to Ajax compressors because
of their high reliability. Also, due to its design, the Ajax compressor burns
the broadest variety of fuel gas, including "sour" gas, which is produced in a
number of domestic and international regions.
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There has been substantial growth in customer demand in recent years in the
over 500 HP category, and management intends to focus future growth on this
segment of the market. In developing the Company's higher HP fleet of
compressors, the Company intends to fabricate units for its fleet primarily
utilizing Ariel compressors driven by Caterpillar engines. These compressors
operate at higher speeds and, although larger than the low HP compressors, are
transportable. The Company believes that the combination of these larger HP
units and the lower HP Ajax units position the Company to offer services to all
segments of field gas production and gathering.
RENTAL CUSTOMERS
The Company's customer base consists of over 500 U.S. and international
companies engaged in all aspects of the oil and gas industry, including major
integrated oil and gas companies, large and small independent producers, natural
gas processors, gatherers and pipelines. No single rental customer accounts for
as much as 10% of the Company's total revenues. The Company's top 20 customers
accounted in fiscal 1998 for approximately 50% of rental revenues. The Company
maintains no exclusive contractual relationships with any of its customers,
although three of its top 20 customers deal on a substantially exclusive basis
with the Company. All but one of the Company's top 20 customers have been
customers of the Company for more than three years, reflecting stability in the
Company's customer base.
DOMESTIC OPERATIONS
The Company's domestic operations account for over 95% of its deployed
rental fleet, which has been installed in a diverse geographic area. The Company
has compressor services operations in 23 of the 48 contiguous states. The
Company's marketing and client service functions are performed on a coordinated
basis by the Company's salesmen, field service personnel and engineers. Salesmen
regularly visit their customers to determine customer satisfaction and needs
with respect to current services being provided to that customer and to
ascertain potential future compressor requirements. Salesmen also communicate
regularly with field service employees who, in many cases, have day-to-day
relationships with key customer personnel and may have advance notice of
customer planning. When a salesman is advised of a new rental opportunity, that
salesman obtains relevant information concerning the project including gas flow,
pressure and composition. The salesman will then search a computerized data base
to determine the availability of an appropriate compressor unit in the Company's
fleet for that project. The salesman will also determine if the available unit
requires maintenance, reconfiguration or major overhaul. If providing the
appropriate unit would entail significant overhaul cost, the salesman will
communicate with the engineer and field service personnel for the customer as
well as contact a supervisor to determine the timing of the required maintenance
or overhaul, whether a competitive price can be offered and the ultimate pricing
of such bid. This ongoing communication between the sales, field service and
overhaul personnel allows the Company to quickly identify and respond to
customer requests.
For larger HP installation, including turnkey opportunities, the Company's
engineers are highly involved in the early stages of the bidding process. For
these projects, the proposal is reviewed at the Company's headquarters.
INTERNATIONAL OPERATIONS
In recent years, the Company has been expanding its presence in the
developing international compression rental markets including Argentina,
Venezuela, the Pacific Rim, Europe and Canada. As of June 30, 1998, the Company
had 37 units aggregating approximately 21,000 HP operating under contract in
these markets. The Company has three international sales offices with three
salespeople dedicated to the international business. The Company's presence in
the international compression markets, which dates back five years, has
generated higher margins for the Company and has produced longer-term contracts
than its domestic business. For the twelve months ended March 31, 1998,
approximately 17.0% of the Company's rental revenue was generated
internationally.
The Company's international operations are oriented to larger HP compressor
markets and frequently involve turnkey projects, as discussed above. These
projects require the Company to provide complete engineering and design in the
bidding process. Commercial negotiations proceed only after the acceptance of
the proposed engineering designs and concepts. The Company believes that, due to
this necessity for a high level of
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<PAGE>
technical capabilities, its experience and reputation provides it with a
competitive advantage in gaining future business internationally.
RENTAL CONTRACTS
The Company's rental contracts utilize variable formats of a standard
rental contract associated with a Master Service Agreement ("MSA"). The standard
rental contract documents the technical specifications, equipment selection and
performance, site location and pricing of the individual project and
incorporates the MSA by reference. When issued by sales personnel in the field,
the standard rental contract is called a "Quick Quote," which can be computer
generated when quoting equipment to a customer in his office. By referencing the
MSA, the Quick Quote becomes the contract as soon as it is signed by the
customer. Rental rates are generally determined by compressor category based on
the Company's standardized rental rates with variations as necessary to secure
the rental contract and assure profitability of that contract.
Over 98% of the Company's rental agreements provide for full maintenance.
Optional items such as oil, antifreeze, freight, insurance and other items may
be either itemized or included in the basic monthly rental rate. Initial rental
terms are usually six months with some projects committed for as long as five
years. After the initial term, rentals continue at the option of the lessee on a
month to month basis. The average length of time that a compressor is on a
single location with a single configuration is 24 months. After that time, the
compressor is either reconfigured for the current conditions or installed in a
different location. This constant need for varying the configuration of
compressor packages in the same location is a significant advantage for leased
compressors as compared to owned compression equipment.
The Company's international contracts are substantively similar to domestic
contracts subject to language and local law modifications. In the
Spanish-speaking countries of South America, the contracts differ significantly
from domestic contracts because individual contracts are negotiated for each
project.
MAINTENANCE AND OVERHAUL SERVICES
The Company maintains two major overhaul facilities, one in Houston, Texas
and the other in Mineral Wells, Texas. The Company maintains a third overhaul
facility located in Grand Junction, Colorado as well as 23 field service
facilities. The Company provides maintenance services on substantially all of
its rental fleet and operations services for most of its larger HP units.
Maintenance services include the repair and general up-keep of compressor
equipment. As an adjunct to its maintenance business, the Company offers (at
additional cost) supplies and services such as antifreeze, lubricants, property
damage insurance on the equipment, and prepaid freight to the job site. The
Company also may provide for installation, which for its typical lower,
mid-range and smaller HP units involves significantly less engineering and cost
than the turnkey concept prevalent in the international markets as discussed
above.
The Company's field gas compressors are maintained in accordance with
daily, weekly, monthly and annual maintenance schedules that have been developed
and refined over the Company's long history of maintaining and operating its
compressors. These procedures are constantly updated as technology changes and
operations develop new techniques and procedures. In addition, by providing
maintenance on substantially all of the Company's installed compression
equipment, its field technicians are able to know the status of that equipment
and identify potential problems.
At the termination of a unit's rental, the field service representative who
has been maintaining the equipment completes a comprehensive report detailing
the mechanical condition of the unit. Based on this report and depending upon
whether the unit is scheduled for immediate redeployment, the unit is then
either overhauled in the field, shipped to a field service location for a
maintenance overhaul or directed to one of the two major overhaul facilities.
When units are scheduled for immediate redeployment, the Company will typically
perform necessary overhauls in the field if the requirements are minor. On
average, each of the Company's units undergoes a major overhaul once every five
years. A major overhaul involves the rebuilding of the unit in order to
materially extend its useful life. Approximately one half of the units which are
being prepared for a new site are overhauled in the field or at a field service
facility, while the other half are sent in for major overhauls or
reconfigurations.
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<PAGE>
The Company has over 200 well trained and equipped field service
representatives located throughout the United States. These employees are
responsible for preventive maintenance, repair, preparation and installation of
rental units. In addition, over 50 trained mechanics perform major overhaul and
unit rework in the major shops. Each overhaul facility is capable of overhauling
approximately 200 compressor packages per year and is equipped with in-house
engine rebuild and test equipment, full machine shops, environmentally-approved
painting facilities and high capacity cranes. The Mineral Wells location also
operates a state-of-the-art unit test loop and functions as a full time training
center.
The Company also has a technical service group which is involved in the
Company's turnkey proposals and monitors the Company's larger HP units. This
group is assisted by equipment that permits field diagnostic analyses of engines
and compressors, as well as emission analyses ascertaining compliance with
regulatory requirements.
OPERATIONS SERVICES
The Company provides complete operations services on most of its larger HP
units, including its international units, and on customer-owned units. Operating
a compressor involves working closely with a customer's field service personnel
so that the compressor can be adjusted to efficiently match changing
characteristics of the gas produced. The Company generally operates large HP
compressors, the fee for which is included as part of the rental rate. Large HP
units are more complex and by operating the equipment the Company reduces its
maintenance and overhaul expenses. While the Company does not require its
customers to retain the Company to operate smaller HP units, the Company trains
its customers' personnel in fundamental compressor operations.
FABRICATION AND SALES
As a complement to its compressor services operations, the Company designs,
engineers, assembles and sells gas and air compressors for engineering and
construction firms, as well as for exploration and production companies both
domestically and internationally. Twenty-two percent of the Company's total
revenues for the twelve months ended March 31, 1998 were generated from its
fabrication and sales operations. In addition, the Company produces compressors
for its own fleet. When servicing third-party customers, the Company provides
its customers with compressors that are built in accordance with specific
criteria of the purchaser ("engineered products") as well as compressors that
are prepackaged ("standard products"). The Company utilizes both Caterpillar and
Waukesha gas engines for larger HP compressor units. Also, the Company acts as a
distributor for Ariel gas compressors. The Company's standard products
operations acts as a distributor in the Houston area for Atlas Copco, the
largest manufacturer of air compressors in the world. Certain of the compressors
manufactured by these entities are also used by the Company in its design and
fabrication operations. In addition to these services, the Company has developed
a significant position as a provider of complex fuel gas booster systems for the
co-generation industry both domestically and abroad.
EMPLOYEES
As of June 30, 1998, the Company had 490 employees. None of the Company's
employees are covered by a collective bargaining agreement. Management believes
that the Company's relationship with its employees is satisfactory.
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<PAGE>
PROPERTIES
The following table describes the Company's owned facilities:
OWNED FACILITIES
<TABLE>
<CAPTION>
LOCATION SQUARE FEET ACREAGE USES
- --------------------------------------------- ----------- ------- --------
<S> <C> <C> <C>
Houston, TX.................................. 94,000 30.0 Overhaul
Mineral Wells, TX............................ 83,000 37.0 Overhaul
Bridgeport, TX............................... 18,000 2.5 Field service
Grand Junction, CO........................... 11,000 2.8 Overhaul
Stinett, TX.................................. 4,000 4.0 Field service
</TABLE>
In addition to the Company's owned facilties, the Company leases 21 field
service offices and three international sales offices.
COMPETITION
The natural gas compression service and fabrication business is highly
competitive. The Company is the second largest natural gas compression company
in the United States on the basis of aggregate rental HP. As of December 31,
1997, the Company's main competitors were Hanover Compressor Company, Production
Operators, Weatherford Enterra, Global Compression, Compressor Systems, J-W
Operating, Dresser Rand and Equity Compression. The Company believes that it
competes effectively on the basis of customer service (including the
availability of personnel in remote locations), price flexibility in meeting
customer needs and quality and reliability of its compressors and related
services.
Compressor industry participants can achieve significant advantages through
increased size and geographic breadth. As the number of rental units increases
in a rental fleet, the number of sales, engineering, administrative and
maintenance personnel required does not increase proportionately. As a result,
companies with larger rental fleets have relatively lower operating costs and
higher margins due to economies of scale than smaller companies.
One of the significant cost items in the compressor rental business is the
amount of inventory required to service rental units. Each rental company must
maintain a minimum amount of inventory to stay competitive. As the size of the
rental fleet increases, the required amount of inventory does not increase in
the same proportion. The larger rental fleet companies can generate cost of
capital savings through reduced percentage of inventory. These cost savings are
particularly significant for a company which has a reduced inventory on account
of its standardized fleet.
The Company's compressor fabrication business competes with other
fabricators of compressor units. The compressor fabrication business is
dominated by a few major competitors, several of which also compete with the
Company in the compressor rental business.
GOVERNMENTAL REGULATION
The Company is subject to various federal and state laws and regulations
relating to environmental protection, including, but not limited to, regulations
regarding emission controls. These laws and regulations may affect the costs of
the Company's operations. As with any owner of property, the Company is also
subject to clean-up costs and liability for hazardous materials, asbestos, or
any other toxic or hazardous substance that may exist on or under any of its
properties.
The Company believes that it is in substantial compliance with
environmental laws and regulations and that the phasing in of emission controls
and other known regulatory requirements at the rate currently contemplated by
such laws and regulations will not have a material adverse effect on the
Company's financial condition or results of operations. Notwithstanding the
foregoing, the Company may not be in full compliance with certain
44
<PAGE>
environmental requirements, in part because of the Company's growth through
several acquisitions. For example, some of the Company's facilities may not
possess proper waste generation identification numbers, may not be in compliance
with underground storage tank ("UST") registration requirements, and may require
the installation of secondary containment around various material storage areas.
In addition, the Company is in the process of determining whether it needs
certain permits (such as stormwater and waste water discharge permits and air
emission permits) or certain plans (such as SPCC Plans) at several of its
facilities. If the Company determines it is not in full compliance with all
applicable environmental laws, it intends to take the necessary action to bring
itself into compliance.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the legality of the original conduct, on certain classes of persons
considered responsible for the release of "hazardous substances" into the
environment. These persons include the generator of hazardous substances, the
past or present owner or operator of the disposal site where the release
occurred and companies that transported the hazardous substances to the site.
Under CERCLA, such responsible persons may be subject to joint and several
liability for the costs of cleaning up the hazardous substances that have been
released into the environment, for damages to natural resources, for the costs
of certain health studies and other costs. Furthermore, it is not uncommon for
neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by hazardous substances or other
pollutants released into the environment. The Company could incur future
liability under Federal, state and common law, including CERCLA and its state
law counterparts, for any such damages that occur as a result of its past
operations.
The Resource Conservation and Recovery Act ("RCRA") and regulations
promulgated thereunder govern the generation, storage, transfer and disposal of
hazardous wastes. The Company must comply with RCRA regulations for any of its
operations that involve the generation, management, or disposal of hazardous
wastes (such as painting activities or the use of solvents).
Studies performed prior to the Acquisition indicated that conditions at
certain properties previously or currently owned or operated by the Company may
require remediation under environmental laws. Additional studies of Company
properties are ongoing, which may further define remedial obligations, the costs
of which may be material. The Company believes that former owners and operators
of many of these properties, including but not limited to Tidewater (see
"Description of the Company Acquisition"), are responsible under environmental
laws and contractual agreements to pay for or perform such remediations, or to
indemnify the Company for its remedial costs. There can be no assurance that
such other entities will fulfill their legal or contractual obligations, and
their failure to do so could result in material costs to the Company.
Stricter standards in environmental legislation or regulations that may
affect the Company may be imposed in the future, such as proposals to make
hazardous wastes subject to more stringent and costly handling, disposal and
clean-up requirements. Accordingly, new laws or regulations or amendments to
existing laws or regulations could require the Company to undertake significant
capital expenditures and could otherwise have a material adverse effect on the
Company's business, results of operations and financial condition. See "Risk
Factors--Environmental Regulation."
Since 1992, there have been various proposals to impose taxes with respect
to the energy industry, none of which have been enacted and all of which have
received significant scrutiny from various industry lobbyists. At the present
time, given the uncertainties regarding the proposed taxes, including the
uncertainties regarding the terms which the proposed taxes might ultimately
contain and the industries and persons who may ultimately be the subject of such
taxes, it is not possible to determine whether any such tax will have a material
adverse affect on the Company.
LEGAL PROCEEDINGS
The Company is not currently involved in any material litigation or
proceeding and is not aware of any such litigation or proceeding threatened
against it.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to each
person who is an executive officer or director of the Company.
DIRECTORS AND EXECUTIVE OFFICERS:
<TABLE>
<CAPTION>
NAME POSITION
- --------------------------------------------------- ---------------------------------------------------
<S> <C>
Ernie Danner................................. Chief Financial Officer, Executive Vice President
and Director
Thomas E. Hartford........................... Executive Vice President and Director
Stephen A. Snider............................ President, Chief Executive Officer and Director
Valerie L. Banner............................ Senior Vice President and General Counsel
Robert D. Ryan............................... Senior Vice President
Newton Schnoor............................... Senior Vice President and Controller
</TABLE>
The Company is party to employment agreements with respect to Messrs.
Danner, Snider, Schnoor, Ryan and Hartford. For a description of the employment
arrangements with respect to Messrs. Danner, Snider, Schnoor, Ryan and Hartford,
and Ms. Banner ("Named Officers"), see "--Executive Compensation; Employment
Agreements." No family relationship exists between any of the executive officers
or between any of them and any director of the Company.
The following individuals serve as Directors of the Company:
Ernie Danner (44) Mr. Danner joined the Company and Holdings as Chief
Financial Officer and Executive Vice President upon consummation of the
Acquisition. Most recently, Mr. Danner has served as Chief Financial Officer and
Senior Vice President of MidCon Corp., an interstate pipeline company, which was
a wholly-owned subsidiary of Occidental Petroleum Corporation. From 1988 until
May of 1997, Mr. Danner served as Vice President, Chief Financial Officer and
Treasurer of INDSPEC Chemical Company and he also served as a director of
INDSPEC. Prior to that time (from 1984 to December 1988), he was the Executive
Vice President-Finance, Administration and Planning of Adams and Porter, an
international agency specializing in marine and energy insurance.
Thomas E. Hartford (49) has been Executive Vice President and General
Manager of the Company since 1994. Mr. Hartford joined the Company in 1982 as a
District Manager, and transferred to Houston in 1986 where he became Regional
Sales Manager. In 1987, Mr. Hartford assumed responsibility for Western United
States operations of the Company's rental operations. From 1973 to 1982,
Mr. Hartford held sales and management positions in the agricultural industry.
He has 16 years of experience in senior management of operating companies.
Stephen A. Snider (50) has been President of the Company since 1991.
Mr. Snider joined Tidewater in 1975 as General Manager of the Company's
fabrication operations. In 1979, Mr. Snider established the Company's operation
in the Northeastern United States. In 1981, he assumed responsibility for the
Western United States operations of the Company. Mr. Snider left the Company in
1983 to own and operate businesses unrelated to the energy industry. He returned
to the Company in 1991 in his current position. Mr. Snider has 22 years of
experience in senior management of operating companies.
The following individuals serve as additional Executive Officers of the
Company:
Valerie L. Banner (43) has been Senior Vice President and General Counsel
of the Company since June 1998. Ms. Banner was in private practice as a solo
practitioner from March 1996 to May 1998. From 1990 to 1996, Ms. Banner was
employed as Vice President and General Counsel of Team, Inc., an American Stock
Exchange Company providing industrial services.
Robert D. Ryan (42) has been a Senior Vice President and General Manager of
the Company since 1994. Prior to this position, Mr. Ryan was the Branch Manager
of the Company's Houston office for one year, as well as for the Dallas office
for seven years. Mr. Ryan's first appointment to management was to Branch
Manager of the Odessa office where he served for two years. In 1980, he was
hired at the Dallas office in a sales position for the Company's fabrication
operations. Prior to his tenure at the Company, Mr. Ryan worked for Air
Compressor
46
<PAGE>
Sales and Service in Dallas, Texas and for Worthington Compressors in Midland,
Texas. Mr. Ryan has 22 years of experience in the compression industry.
Newton Schnoor (50) has been Vice President and Controller of the Company
since 1985. Mr. Schnoor joined Tidewater in 1979 as Controller of the Western
Division of the Company's rental operations. In 1985, Mr. Schnoor supervised the
national consolidation and reorganization of the accounting group in Houston.
These actions merged accounting groups from three different groups of the
Company. Mr. Schnoor was made an officer of the Company in 1987.
COMPENSATION OF DIRECTORS
Directors are not provided with any compensation for their services other
than the reimbursement of expenses associated with attending meetings of the
Board of Directors or any committee thereof.
LIMITATIONS ON OFFICER'S AND DIRECTOR'S LIABILITY
The Company and Holdings have entered into indemnification agreements with
its directors that, among other things, require the Company to indemnify the
directors to the fullest extent permitted by law, and to advance to the
directors all related expenses, subject to reimbursement if it is subsequently
determined that indemnification is not permitted. The Company and Holdings are
also required to indemnify and advance all expenses incurred by directors
seeking to enforce their rights under the indemnification agreements, and cover
directors under and Holdings' directors' and officers' liability insurance.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors pursuant to the foregoing provision, the Company
has been informed that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Agreement
Prior to the consummation of the Acquisition, the Company and Holdings
entered into a Management Agreement (the "Management Agreement") with CHI, as
Manager, pursuant to which the Manager agreed to provide business and
organizational strategy, financial and investment management and merchant and
investment banking services to the Company and Holdings upon the terms and
conditions set forth therein. As compensation for such services, the Company
will pay to the Manager $3.0 million per year, which amount was paid in advance
for the first year and will be payable quarterly in advance thereafter. The
agreement is for a term of five years, renewable automatically from year to year
thereafter unless CHP or its affiliates then beneficially owns less than 20% of
the then outstanding capital stock of Holdings. The Company and Holdings agreed
to indemnify the Manager against liabilities, costs, charges and expenses
relating to the Manager's performance of its duties, other than such of the
foregoing resulting from the Manager's gross negligence or willful misconduct.
In addition, the Company agreed to reimburse CHI for any reasonable
out-of-pocket expenses incurred by CHI in connection with the Transactions.
Registration Rights Agreement
Prior to the consummation of the Acquisition, Holdings entered into a
registration rights agreement (the "Holdings Registration Rights Agreement")
with CHP and certain other stockholders of Holdings (the "Stockholders"). Under
the Holdings Registration Rights Agreement, the Stockholders have the right,
subject to certain conditions, to require Holdings to register any or all of its
shares of common stock of Holdings under the Securities Act at Holdings'
expense. In addition, the Stockholders are entitled to inclusion (subject to
limitations) of any shares of common stock of Holdings subject to the Holdings
Registration Rights Agreement in any registration statement at Holdings' expense
whenever Holdings proposes to register any of its common stock under the
Securities Act. In connection with all such registrations, Holdings has agreed
to indemnify all of the Stockholders against certain liabilities, including
liabilities under the Securities Act.
47
<PAGE>
Stock Repurchase Agreement
Prior to the consummation of the Acquisition, Holdings entered into a Stock
Repurchase Agreement with certain of the Company's employees. This agreement,
among other things, gives Holdings the right and in certain limited
circumstances, the obligation, to repurchase the common stock of Holdings upon
certain triggering events at an appraised value or at cost.
Stockholders Agreement
Holdings, CHP and certain stockholders of Holdings entered into a
Stockholders Agreement providing for the following: (i) the right of such
holders to join in certain sales of capital stock of Holdings by CHP; (ii) the
right of CHP and each such holder to purchase capital stock of Holdings to
maintain its percentage ownership in the event of certain sales by Holdings of
such stock; (iii) the right of CHP to require such holders to sell their shares
of such stock upon a sale by CHP of substantially all of its interest in
Holdings; (iv) the obligation of each such holder to offer Holdings or CHP the
opportunity to purchase the capital stock of Holdings owned by such holder in
the event of a proposed sale by such holder of such stock; (v) the restrictions
on sales or transfers of such stock; and (vi) certain obligations of Holdings,
including reporting and Board of Directors observer rights in favor of such
holders.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company has no Compensation Committee. However, Holdings has such a
committee, of which John K. Castle and Jeffrey M. Siegal directors of Holdings,
are the sole members. No other employee of the Company or Holdings is a member
of the Compensation Committee. There are no compensation committee interlocks
(i.e., no executive officer of the Company serves as a member of the board of
directors or the compensation committee or another entity which has an executive
officer serving on the Board of Directors or the compensation committee of the
Company).
EXECUTIVE COMPENSATION; EMPLOYMENT AGREEMENTS
The following table sets forth the annual and long-term compensation for
the Chief Executive Officer of the Company and the five highest paid officers
(other than the Chief Executive Officer).
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL -------------
COMPENSATION(1) SECURITIES
-------------------- UNDERLYING ALL OTHER
SALARY BONUS OPTIONS(2) COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($)
- -------------------------------------------------- ---- ------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Stephen A. Snider................................. 1998 170,000 172,500 6,619 1,128,976(3)
President & Chief Executive Officer
Thomas E. Hartford................................ 1998 117,083 69,250 4,780 352,389(4)
Executive Vice President
Robert D. Ryan.................................... 1998 89,250 38,800 2,206 80,072(5)
Senior Vice President
Newton Schnoor.................................... 1998 78,354 48,600 2,206 106,245(6)
Senior Vice President & Controller
Ernie Danner...................................... 1998 13,836 -- 4,780 350,492(7)
Chief Financial Officer
Valerie L. Banner................................. 1998 -- -- 2,206 --
Senior Vice President & General Counsel
</TABLE>
(Footnotes on next page)
48
<PAGE>
(Footnotes from previous page)
- ------------------
(1) Salaries and bonuses paid to Messrs. Snider, Hartford, Ryan, Schnoor and
Danner reflect compensation paid during fiscal year 1998, including salaries
and bonuses payable pursuant to the employment agreements, which became
effective on February 20, 1998 (described below). Ms. Banner has been
employed with the Company since June 1, 1998. Her annual base salary is
$100,000, with a target bonus of 50% of her base salary (see below).
(2) Includes options to purchase shares of common stock of Holdings only.
(3) Includes (a) $2,069 of matching contributions made by the Tidewater and the
Company to Mr. Snider's 401K account, (b) $3,876 in health premiums paid by
the Company on behalf of Mr. Snider under Tidewater's and the Company's
Executive Medical Plans, (c) $3,031 paid by Tidewater on behalf of
Mr. Snider pursuant to Tidewater's Supplemental Savings Plan, and (d)
$1,120,000 paid to Mr. Snider as incentive compensation pursuant to the
consummation of the Transactions.
(4) Includes (a) $2,075 of matching contributions made by the Company to Mr.
Hartford's 401K account, (b) $3,876 in health care premiums paid by the
Company on behalf of Mr. Hartford under the Company's Executive Medical
Plan, (c) $1,438 paid by Tidewater on behalf of Mr. Hartford pursuant to
Tidewater's Supplemental Savings Plan, and (d) $345,000 paid to
Mr. Hartford as incentive compensation pursuant to the consummation of the
Transactions.
(5) Includes (a) $2,678 of matching contributions made by the Company to
Mr. Ryan's 401K account, (b) $394 in health care premiums paid by the
Company on behalf of Mr. Ryan under the Company's Executive Medical Plan,
(c) $77,000 paid to Mr. Ryan as incentive compensation pursuant to the
consummation of the Transactions.
(6) Includes (a) $2,350 of matching contributions made by the Company to
Mr. Schnoor's 401K account, (b) $394 in health care premiums paid by the
Company on behalf of Mr. Schnoor under the Company's Executive Medical Plan,
(c) $103,500 paid to Mr. Schnoor as incentive compensation pursuant to the
consummation of the Transactions.
(7) Includes (a) $169 of matching contributions made by the Company to
Mr. Danner's 401K account, (b) $323 in health care premiums paid by the
Company on behalf of Mr. Danner under the Company's Executive Medical Plan,
and (c) $100,000 in cash and $250,000 in Holdings' capital stock (valued at
the CHP purchase price) paid to Mr. Danner as incentive compensation
pursuant to the Transactions. Mr. Danner was compensated by the Company upon
consummation of the Transactions because of his contributions to the efforts
to structure and consummate the Transactions without receiving any
compensation at that time.
The following table sets forth grants of options to purchase shares of Common
Stock of Holdings during fiscal year 1998 to such persons.
OPTION GRANTS IN 1998(1)
OPTIONS GRANTED IN LAST FISCAL YEAR AND POTENTIAL REALIZABLE VALUES
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL
RATES
PERCENT OF OF STOCK PRICE
NUMBER OF TOTAL APPRECIATION FOR
SECURITIES OPTIONS OPTIONS
UNDERLYING GRANTED TO EXERCISE OR TERM(3)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION --------------------
NAME GRANTED(2) 1998 ($/SHARE) DATE 5% 10%
- ------------------------------------- ---------- ------------ ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Stephen A. Snider.................... 6,619 18.94 50 2/20/08 $208,133 $527,449
Thomas E. Hartford................... 4,780 13.68 50 2/20/08 150,306 380,904
Robert D. Ryan....................... 2,206 6.31 50 2/20/08 69,367 175,790
Newton Schnoor....................... 2,206 6.31 50 2/20/08 69,367 175,790
Ernie Danner......................... 4,780 13.68 50 2/20/08 150,306 380,904
Valerie L. Banner.................... 2,206 6.31 50 6/01/08 69,367 175,790
</TABLE>
(Footnotes on next page)
49
<PAGE>
(Footnotes from previous page)
- ------------------
(1) Includes only options granted by Holdings.
(2) For all options (other than options granted to Ernie Danner, which vested
immediately), one-third of each option vests on each of the first, second
and third anniversary of the option grant date.
(3) The hypothetical potential appreciation shown in these columns reflects the
required calculations at annual assumed appreciation rates of 5% and 10%,
as set by the Commission, and therefore is not intended to represent either
historical appreciation or anticipated future appreciation of the Holdings
common stock.
None of the Executive Officers exercised any options of Holdings during fiscal
year 1998.
The Company does not have a Defined Benefit Pension Plan or a Supplemental
Executive Retirement Plan. However, during the fiscal year 1998 period, Mr.
Snider and Mr. Hartford received $20,475.19 and $2,474.40, respectively, under
Tidewater's Supplemental Executive Retirement Plan, which plan has not been
continued by the Company.
The Company has entered into employment agreements with (i) Stephen A.
Snider pursuant to which Mr. Snider serves as President for an annual base
salary of $170,000, plus a target bonus up to 70% of such base salary; (ii)
Thomas E. Hartford pursuant to which Mr. Hartford serves as Executive Vice
President for an annual base salary of $135,000, plus a target bonus of up to
60% of such base salary; (iii) Robert D. Ryan pursuant to which Mr. Ryan serves
as Senior Vice President for an annual base salary of $100,000, plus a target
bonus of up to 50% of such base salary; (iv) Newton Schnoor pursuant to which
Mr. Schnoor serves as Senior Vice President for an annual base salary of
$90,000, plus a target bonus of up to 50% of such base salary; and (v) Ernie
Danner pursuant to which Mr. Danner serves as Chief Financial Officer and
Executive Vice President for an annual base salary of $135,000 plus a target
bonus up to 60% of such base salary (collectively, the "Employment Agreements").
The Company has an employment arrangement with Valerie L. Banner pursuant to
which Ms. Banner serves as General Counsel and Senior Vice President for an
annual base salary of $100,000 plus a target bonus up to 50% of such base
salary. All bonuses described in this paragraph are discretionary. Upon
consummation of the Transactions, Mr. Danner also received $250,000 in Holdings
capital stock (valued at the CHP purchase price) and $100,000 in cash. Each of
the Employment Agreements has a stated duration of three years. If during such
stated duration (or during any extension of such duration), a "change of
control" (as such term is defined in the Employment Agreements) occurs, each
agreement shall automatically extend to a date that is the second anniversary of
the occurrence of such event.
Messrs. Snider, Hartford, Danner, Ryan and Schnoor and Ms. Banner each
received certain stock options--see "Management Options" and "Principal
Stockholders"--and have registration rights with respect to such stock. The
Employment Agreements also provide that if the Company terminates any of the
foregoing individual's employment without cause, such individual will be
entitled to receive severance payments for up to the remaining term of the
relevant employment agreement. The foregoing agreements also place certain
restrictions on the ability of these individuals to disclose certain
confidential information, to compete against the Company and to hire or solicit
certain employees of the Company should such individual's employment with the
Company be terminated.
BENEFIT PLANS
Pursuant to the Stock Purchase Agreement, the Company is obligated to cause
its employees to be eligible to participate in an employee welfare benefit plan
and an employee pension benefit plan (within the meaning of Section 3(1) and
3(3) of ERISA, respectively), which plans shall credit, for purposes of any
length of service requirements, waiting periods, vesting periods or differential
benefits based on length of service in such plans, service by such employees
with the Company prior to the Acquisition. Furthermore, pursuant to the Stock
Purchase Agreement, the Company is obligated to waive any waiting period for
participation or coverage in any welfare benefit plans or policies of the
Company and, to the extent an employee was a participant in Tidewater's medical
benefits plan and such condition was covered under such plan, to waive any
pre-existing medical condition provision of such plan or policy.
Additionally, pursuant to the Stock Purchase Agreement, the Company is
obligated to honor the terms of a severance policy covering the Company's
employees.
50
<PAGE>
On August 1, 1998, the Company entered into a Grant Agreement (the "Grant
Agreement") with each employee of the Company whereby each such employee party
thereto received a certain number of shares of Non-Voting Common Stock. Such
shares may be converted into shares of voting Common Stock in the event that
shares of voting Common Stock are listed on a national securities exchange or
quoted on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"). See "Description of Capital Stock of Holdings." Additionally,
the Grant Agreement provides for certain transfer restrictions and buy back
rights upon the occurrence of certain events.
MANAGEMENT OPTIONS
In order to motivate and retain key executive employees of the Company, the
Company has established a stock option plan and an incentive bonus plan or
policy. Under the stock option plan, the Company has the ability to award to
such key employees as it may notify in writing either incentive stock options of
Holdings common stock, meeting the requirements of Section 422 of the Code, or
non-qualified stock options of Holdings common stock, which will not be subject
to Section 422 of the Code. The decision whether to grant options, the key
executive employees to whom to grant such options, the type of options to be
granted (whether incentive stock options or non-qualified stock options), the
number of shares of common stock of Holdings to be the subject of each option,
as well as other matters concerning the administration of the plan and the
interpretation of its provisions shall be solely within the power of the Board
of Directors of the Company or of a committee of such Board of Directors acting
as administrator of the plan. Under an incentive bonus plan or policy, the
Company has the ability to award to such key employees as it may notify in
writing a bonus, in an amount of up to 20% of such employee's compensation, in
cash or, with respect to amounts exceeding 10% of such employee's compensation,
Holdings stock or either incentive stock options of Holdings stock or
non-qualified stock options under the terms of the Company's stock option plan,
as the Company may determine in its discretion.
Options to purchase an aggregate number of shares of Common Stock equal to
approximately 10% of the outstanding Common Stock were granted to the employees
and directors of the Company upon the closing of the Transactions. Such options
have a ten year term, may be subject to vesting and will have an exercise price
per share equal to the purchase price per share of Common Stock paid by CHP to
acquire its Common Stock of Holdings upon such closing.
51
<PAGE>
PRINCIPAL STOCKHOLDERS
As a wholly owned subsidiary of Holdings, all of the issued and outstanding
capital stock of the Company is held by Holdings. Upon the closing of the
Transactions, Holdings had outstanding approximately 325,000 shares of Common
Stock ("Common Stock"), $.01 par value per share, and approximately 1,300,000
shares of Series A Preferred Stock ("Series A Preferred Stock"), $.01 par value
per share. Each share of Common Stock and Series A Preferred Stock carries one
vote and holders of both classes generally vote on all matters as a single
class. See "Description of Capital Stock of Holdings." The following table sets
forth certain information regarding beneficial ownership of the Common Stock and
Series A Preferred Stock with respect to (i) each person known by the Company to
beneficially own five percent or more of any class of Holdings' capital stock,
(ii) each director of the Company, (iii) each executive officer of the Company
and (iv) all directors and executive officers of the Company as a group. All
information with respect to beneficial ownership has been furnished to the
Company by the respective stockholders of Holdings.
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE TOTAL
NUMBER OF OF NUMBER OF SHARES SERIES A
SHARES OF TOTAL COMMON OF SERIES A PREFERRED
NAME AND ADDRESS OF BENEFICIAL OWNER(1) COMMON STOCK STOCK(2) PREFERRED STOCK STOCK
- ------------------------------------------------ ------------ ------------ ---------------- --------------
<S> <C> <C> <C> <C>
CHP (3)......................................... 184,840 56.9% 739,360 56.9%
John K. Castle(4)............................... 351,548 100.0 1,300,000 100.0
BT Capital Partners, Inc........................ 32,000 9.8 128,000 9.8
First Union Capital Partners, Inc............... 32,000 9.8 128,000 9.8
Mellon Bank N.A., as Trustee for the
Bell Atlantic Master Trust.................... 32,000 9.8 128,000 9.8
Wilmington Trust, as Trustee of Du Pont Pension
Trust......................................... 32,000 9.8 128,000 9.8
Brown University Third Century Fund............. 2,000 * 8,000 *
Samuel Urcis(5)................................. 12,757 3.1 27,200 2.1
Stephen Snider(6)............................... 8,619 2.6 8,000 *
Ernie Danner(7)................................. 6,780 2.1 12,000 *
Thomas Hartford(8).............................. 5,940 1.7 4,640 *
Newton Schnoor(9)............................... 2,606 * 1,600 *
Robert Ryan(10)................................. 2,606 * 1,600 *
Valerie Banner(11).............................. 2,206 * -- --
All directors and executive officers as group
(11 persons).................................. 351,548 100 1,300,000 100
</TABLE>
* Indicates less than 1% of the outstanding stock.
- ------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Except as indicated in the footnotes to
this table, each stockholder named in the table has sole voting and
investment power with respect to the shares set forth opposite such
stockholder's name. The address for each such stockholder or director
identified above is c/o Universal Compression Holdings, Inc., 150 East 58th
Street, New York, New York 10155.
(2) Based upon 325,000 shares of Common Stock outstanding. Except as otherwise
set forth below, shares of Common Stock not outstanding but deemed
benefically owned by virtue of a person or group to acquire them within
60 days are treated as outstanding only for purposes of determining the
percent owned by such person or group. Except as otherwise set forth below,
each named owner has the sole voting power and investment power of the
shares set forth.
(3) CHP holds approximately 175,566 and 702,262 shares of Common Stock and
Series A Preferred Stock, respectively, for its own account and the
remaining shares for the account of related entities and persons, all of
which may be deemed to be beneficially owned by CHP. CHP disclaims
beneficial ownership of such shares.
(Footnotes continued on next page)
52
<PAGE>
(Footnotes continued from previous page)
(4) Includes 184,840 shares of Common Stock and 739,360 shares of Series A
Preferred Stock beneficially owned by CHP and its affiliates. John K.
Castle is a director of the Company and Holdings and, along with
Leonard M. Harlan, is the controlling stockholder of Castle Harlan Partners
III G.P., Inc., the general partner of the general partner of CHP, and as
such may be deemed to be a beneficial owner of the shares owned by CHP.
Also includes 128,000 shares of Common Stock and 512,000 shares of
Series A Preferred Stock the voting of which Mr. Castle may direct pursuant
to the Voting Agreement entered into among Holdings, CHP and the five
entities listed immediately below Mr. Castle's name. Each of the other
persons who acquired Common Stock and Series A Preferred Stock upon the
consummation of the Acquisition entered into a Voting Trust Agreement with
Mr. Castle pursuant to which Mr. Castle acts as voting trustee and all
shares of Common Stock issuable upon the exercise of option held by such
persons will become subject to such Voting Trust Agreement upon exercise of
such options. Mr. Castle and Mr. Harlan disclaim beneficial ownership of
such shares in excess of their respective pro rata partnership interests
and Mr. Castle disclaims beneficial ownership of such shares subject to the
Voting Agreement and the Voting Trust Agreement.
(5) Includes 4,400 shares of Common Stock and 17,600 Series A Preferred Stock
purchased by Mr. Urcis with $1,100,000 of his finders fee as well as such
shares subject to the option granted to him upon consummation of the
Transactions. Also includes 2,400 shares of Common Stock and 9,600 shares
of Series A Preferred Stock owned by CHP, which shares CHP has agreed to
sell to Mr. Urcis at a purchase price of $50 per share.
(6) Includes 6,619 shares of Common Stock subject to an option granted by
Holdings to Mr. Snider upon the closing of the Acquisition. Such option
will vest over three years and will be exercisable for $50 per share.
(7) Includes 4,780 shares of Common Stock subject to an option granted by
Holdings to Mr. Danner upon the closing of the Acquisition. Such option
will be exercisable for $50 per share.
(8) Includes 4,780 shares of Common Stock subject to an option granted by
Holdings to Mr. Hartford upon the closing of the Acquisition. Such option
will vest over three years and will be exercisable for $50 per share.
(9) Includes 2,206 shares of Common Stock subject to an option granted by
Holdings to Mr. Schnoor upon the closing of the Acquisition. Such option
will vest over three years and will be exercisable for $50 per share.
(10) Includes 2,206 shares of Common Stock subject to an option granted by
Holdings to Mr. Ryan upon the closing of the Acquisition. Such option will
vest over three years and will be exercisable for $50 per share.
(11) Consists of 2,206 shares of Common Stock subject to an option granted by
Holdings to Ms. Banner on June 1, 1998. Such option will vest over three
years and be exercisable for $50 per share.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF HOLDINGS
Holdings' Certificate of Incorporation, as amended, provides that Holdings
is authorized to issue 5,000,000 shares of preferred stock, par value $.01 per
share and 1,000,000 shares of Common Stock, of which 994,000 shares are
designated as voting Common Stock, par value $.01 per share, and 6,000 shares
are designated as non-voting Common Stock, par value $.01 per share (the
"Non-Voting Common Stock").
SERIES A PREFERRED STOCK
Dividends. No dividends shall accrue on the Series A Preferred Stock.
Redemption and Liquidation. The Series A Preferred Stock is redeemable at
any time as a whole or in part at the option of Holdings for cash in the amount
of $50 per share (the "Stated Value"). If within ninety (90) days of a
liquidation, dissolution or winding up of Holdings or a merger or consolidation
of Holdings or a sale of substantially all of the assets of Holdings, in each
case as would constitute a "Change of Control" under the Holdings Indenture,
Holdings has not redeemed the Series A Preferred Stock, each share of Series A
Preferred Stock shall bear dividends at the rate of 12.0% per annum of the
Stated Value thereof effective from the date of such Change in Control. Such
dividends on the Series A Preferred Stock shall accrue from day-to-day whether
or not earned or declared, and shall be cumulative from the date on which such
shares have been redeemed as provided therein, and shall be due and payable
quarterly, in arrears.
</R?
Restriction on Payment of Other Dividends. So long as any share of
Series A Preferred Stock shall be issued and outstanding, Holdings shall not
declare, pay or set aside for payment, any dividends on, or make any other
distributions with respect to, any shares of Common Stock or other shares of
capital stock of Holdings ranking junior to the Series A Preferred Stock as to
dividend rights or rights upon liquidation, dissolution or winding up.
Voting. In addition to any voting rights required by law, each share of
the Series A Preferred Stock shall entitle each holder to one vote on all
matters presented to the holders of the Common Stock generally, with the votes
of the holders of the Common Stock and the Series A Preferred Stock to be
treated together as a single class. Notwithstanding the foregoing, unless the
consent or approval of a greater number of shares shall then be required by law,
the affirmative vote of the holders of at least a majority of the outstanding
shares of Series A Preferred Stock, separately as a single class, shall be
necessary to (i) amend, alter or repeal any provision of the Certificate of
Incorporation or Bylaws of Holdings, and (ii) effect the consolidation or merger
of Holdings or sale of all or substantially all of its assets, in each case so
as to affect adversely any of the preferences, rights, powers or privileges of
the Series A Preferred Stock or the holders thereof.
COMMON STOCK
The holders of the Common Stock (other than the Non-Voting Common Stock)
are entitled to one vote for each share held of record on all matters submitted
to a vote of stockholders, including the election of directors, and shall vote
together as a class with the holders of the Series A Preferred.
Dividends may be paid on the Common Stock, when and as declared by the
Board of Directors out of funds legally available therefor. The Company does not
expect to pay dividends on the Common Stock in the foreseeable future.
Each holder of shares of Non-Voting Common Stock has the right to convert
such shares into voting Common Stock in the event that shares of voting Common
Stock are listed on a national securities exchange or quoted on NASDAQ.
54
<PAGE>
DESCRIPTION OF OTHER INDEBTEDNESS
In connection with the Acquisition, the Company entered into a Credit
Agreement (the "Credit Agreement") with Bankers Trust Company, as agent (the
"Agent") and other lending institutions party thereto (the "Banks"), which
agreement provides for senior secured credit facilities (the "Senior Secured
Credit Facilities") in the aggregate amount of up to $160,000,000. The following
is a summary of the material terms and conditions of the Senior Secured Credit
Facilities and is subject to the detailed provisions of the Credit Agreement and
various related documents entered into in connection with the Senior Secured
Credit Facilities. Terms not otherwise defined herein shall have the meanings
set forth in the Credit Agreement.
General. The Senior Secured Credit Facilities consist of (i) a $75,000,000
senior term loan facility (the "Term Loan Credit Facility") and (ii) a revolving
credit facility (the "Revolving Credit Facility") in the amount of $85,000,000
which includes a sublimit for letters of credit.
Loans under the Term Loan Credit Facility ("Term Loans") and $35,000,000 of
loans under the Revolving Credit Facility ("Revolving Credit Loans", and
together with the Term Loans, the "Loans") were borrowed to finance in part the
Acquisition. Additional Revolving Loans will be made available for the Company's
and its subsidiaries' working capital and general corporate purposes, including
to make certain permitted acquisitions.
Interest Rates and Fees. Loans under the Senior Secured Credit Facilities
may be maintained from time to time, at the Company's option, as (i) Base Rate
Loans which bear interest at the Base Rate plus the Applicable Margin or
(ii) Eurodollar Loans which bear interest at the Eurodollar Rate (adjusted for
maximum reserves) as determined by the Agent for the applicable interest period
plus the Applicable Margin.
Eurodollar Loans may have one, two, three or six month interest periods.
Interest in Eurodollar Loans will be payable in arrears at the end of the
applicable interest period and every three months where the applicable period
exceeds three months. Interest on Base Rate Loans will be payable in arrears on
the last business day of each quarter. Overdue amounts shall bear interest at a
rate per annum equal to the rate which is 2% in excess of the rate otherwise
applicable to Base Rate Loans.
The Company will pay a commitment fee calculated at a rate of 0.5% per
annum of the unutilized commitments of each lender under the Revolving Credit
Facility. This fee will accrue from the date of the closing of the Acquisition
to and including the date of termination of the Revolving Credit Facility, and
will be payable in arrears.
The Company will pay a letter of credit fee equal to the Applicable Margin
for Revolving Loans maintained as Eurodollar Loans, and a facing fee of 1/4% of
1% per annum, in each case calculated on the aggregate stated amount of each
letter of credit for its stated duration. Such fees will be payable in arrears
at the end of each quarter. In addition, the Company will pay customary
administration charges in connection with the issuance and amendment of, and
draws under, Letters of Credit.
Amortizations; Prepayments. The Revolving Credit Facility is scheduled to
mature on the fifth anniversary of the date of closing of the Acquisition. The
Term Loans are scheduled to mature seven years after the date of the closing of
the Acquisition and will be subject to quarterly amortizations as follows:
<TABLE>
<CAPTION>
QUARTER ANNUAL
YEAR AMOUNT AMOUNT
- --------------------------------------------------------- ----------- -----------
<S> <C> <C>
1........................................................ $ 187,500 $ 750,000
2........................................................ $ 187,500 $ 750,000
3........................................................ $ 187,500 $ 750,000
4........................................................ $ 187,500 $ 750,000
5........................................................ $ 187,500 $ 750,000
6........................................................ $ 6,562,500 $26,250,000
7........................................................ $11,250,000 $45,000,000
</TABLE>
55
<PAGE>
Voluntary prepayments may be made in whole or in part without premium or
penalty (other than the payment of breakage costs for Eurodollar Loans prepaid
on a day other than the last day of an interest period). The Company will be
required to make a mandatory repayment of Loans from (i) 100% of the net
proceeds from asset dispositions, (ii) 100% of the net proceeds of issuances of
indebtedness, (iii) 100% of the net proceeds from insurance recovery and
condemnation events, (iv) 50% of the net proceeds from equity issuances and
capital contributions and (v) 50% of annual excess cash flow (to be calculated
net of capital expenditures), in each case with customary exceptions to be
agreed upon. Upon a change of control of Holdings or the Company, the Company
would be required to repay in full all outstanding Loans and all commitments
under the Revolving Credit Facility would terminate. In addition, outstanding
Revolving Loans under the Revolving Credit Facility shall be required to be
prepaid if at any time the aggregate principal amount thereof exceeds the total
Revolving Credit Facility commitments, with such prepayment to be in an amount
equal to such excess.
Guaranties. Holdings ("Guarantor") has unconditionally guaranteed all
amounts owing under the Senior Secured Credit Facilities (the "Guaranties").
Security. The Senior Secured Credit Facilities (and all obligations under
the Guaranties) are secured by (i) a first priority perfected pledge of (x) all
notes owned by the Company and the Guarantor and (y) all capital stock owned by
the Company and the Guarantor and two-thirds of the outstanding capital stock of
the foreign subsidiaries of the Company and (ii) a first priority perfected
security interest in all other assets (including receivables, contracts,
contract rights, securities, inventory, equipment, real estate, copyrights,
patents and trademarks but excluding assets located outside the United States)
owned by the Company and the Guarantor with such exceptions as Agent has
approved (it being understood that, after the final maturity of the Revolving
Credit Facility, the Company and the Guarantor shall be allowed to grant a first
priority perfected lien on all inventory and receivables owned by them to any
lender providing a replacement working capital facility).
Events of Default. The Senior Secured Credit Facilities contain customary
events of default, including the non-payment of principal or interest when due
under the notes issued in connection with the Senior Secured Credit Facilities
or, subject to applicable grace periods in certain circumstances, upon the
non-fulfillment of customary covenants applicable to this type of transaction,
certain changes in control of the ownership of Holdings or the Company,
cross-defaults to certain other indebtedness, certain events of bankruptcy or
insolvency, ERISA, judgment defaults and failure of any security agreement or
guarantee supporting the Senior Secured Credit Facilities to be in full force
and effect. If any such event of default occurs, the Agent will be entitled, on
behalf of the Banks, to take all actions permitted to be taken by a secured
creditor under the Uniform Commercial Code and to accelerate the amounts due
under the Senior Secured Credit Facilities and may require all such amounts
outstanding thereunder to be immediately paid in full.
Definitions.
"Applicable Margin" means a percentage per annum equal to (i) in the case
of Term Loans that are maintained (x) as Base Rate Loans, 1.50%, and (y) as
Eurodollar Loans, 2.50% and (ii) in the case of Revolving Loans that are
maintained (x) as Base Rate Loans, 1.25%, and (y) as Eurodollar Loans, 2.25%. So
long as no default or event of default exists under the Senior Secured Credit
Facilities, the Applicable Margin for Term Loans and Revolving Loans shall be
subject to quarterly reductions based on one or more financial tests to be
determined; provided however, that the Applicable Margin for Term Loans and
Revolving Loans shall not be subject to any such adjustment during the six
months immediately after the date of the Closing of the Senior Secured Credit
Facilities.
"Base Rate" means the higher of (i) the rate that Bankers Trust Company
announces from time to time as its prime lending rate, as in effect from time to
time, and (ii) one-half ( 1/2) of 1% in excess of the overnight federal funds
rate.
In addition, the Company also has outstanding indebtedness comprised of the
Company Notes, and Holdings, its parent, has outstanding indebtedness comprised
of the Holdings Notes. See "Description of the Exchange Notes" and "Description
of the Holdings Notes."
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<PAGE>
DESCRIPTION OF THE EXCHANGE NOTES
The Exchange Notes will be issued pursuant to the indenture (the
"Indenture"), dated as of February 20, 1998 by and between the Company and
United States Trust Company of New York, as Trustee. The following summary of
certain provisions of the Indenture does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the Trust
Indenture Act of 1939, as amended (the "TIA"), and to all of the provisions of
the Indenture, including the definitions of certain terms therein and those
terms made a part of the Indenture by reference to the TIA as in effect on the
date of the Indenture. A copy of the Indenture may be obtained from the Company
or the Initial Purchasers. The definitions of certain capitalized terms used in
the following summary are set forth below under "-- Certain Definitions." For
purposes of this section, references to the "Company" include only the Company
and not its subsidiaries.
The Notes are unsecured obligations of the Company, ranking pari passu in
right of payment to all existing and future senior indebtedness of the Company.
The Notes are effectively senior to the Holdings Notes. Holdings is a holding
company with no material operations of its own. Accordingly, Holdings is
dependent upon the distribution of the earnings of its subsidiaries, including
the Company, whether in the form of dividends, advances or payments on account
of intercompany obligations to service its debt obligations.
The Notes have been issued in fully registered form only, without coupons,
in denominations of $1,000 and integral multiples thereof. Initially, the
Trustee is acting as Paying Agent and Registrar for the Notes. The Notes may be
presented for registration of transfer and exchange at the offices of the
Registrar, which initially is the Trustee's corporate trust office. No service
charge will be made for any registration of transfer or exchange or redemption
of Notes, but the Company may require payment in certain circumstances of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection therewith. The Company may change any Paying Agent and Registrar
without notice to holders of the Notes (the "Holders"). The Company will pay
principal of (and premium, if any on) the Notes at the Trustee's corporate
office in New York, New York. At the Company's option, interest may be paid at
the Trustee's corporate trust office or by check mailed to the registered
addresses of Holders. Any Original Notes that remain outstanding after the
completion of the Exchange Offer, together with the Exchange Notes issued in
connection with the Exchange Offer, will be treated as a single class of
securities under the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount at maturity to
$242,500,000 million and will mature on February 15, 2008. The Notes have been
issued at a substantial discount from the aggregate stated principal amount
thereof at maturity. For federal income tax purposes, significant amounts of
original issue discount, taxable as ordinary income, will be recognized by
Holders annually as long as they hold the Notes, including in advance of receipt
of cash interest payments thereon. See "Certain Federal Income Tax
Considerations". Cash interest on the Notes will not accrue or be payable prior
to February 15, 2003. Thereafter, interest on the Notes will accrue at the rate
of 9 7/8% per annum and will be payable semiannually in cash on each August 15
and February 15 commencing on August 15, 2003, to the persons who are registered
Holders at the close of business on the day immediately preceding the applicable
interest payment date. Interest on the Notes will accrue from the most recent
date to which interest has been paid or, if no interest has been paid, from and
including the date of issuance.
The Notes are not entitled to the benefit of any mandatory sinking fund.
REDEMPTION
Optional Redemption. The Notes are redeemable, at the Company's option, in
whole at any time or in part from time to time, on and after February 15, 2003,
upon not less than 30 nor more than 60 days' notice, at the following redemption
prices (expressed as percentages of the principal amount at maturity thereof) if
redeemed
57
<PAGE>
during the twelve-month period commencing on February 15 of the year set forth
below, plus, in each case, accrued and unpaid interest thereon, if any, to the
date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- -------------------------------------------------------------------------------------------- ----------
<S> <C>
2003........................................................................................ 104.938%
2004........................................................................................ 103.292%
2005........................................................................................ 101.646%
2006 and thereafter......................................................................... 100.000%
</TABLE>
Optional Redemption Upon Public Equity Offerings. At any time, or from
time to time, on or prior to February 15, 2001, the Company may, at its option,
use the net cash proceeds of one or more Public Equity Offerings (as defined
below) to redeem the Notes at a redemption price equal to 109.875% of the
Accreted Value of the Notes to be redeemed on the date of redemption plus
accrued and unpaid interest, if any; provided that at least 65% of the aggregate
principal amount at maturity of Notes originally issued remains outstanding
immediately after any such redemption. In order to effect the foregoing
redemption with the proceeds of any Public Equity Offering, the Company shall
make such redemption not more than 120 days after the consummation of any such
Public Equity Offering.
As used in the preceding paragraph, "Public Equity Offering" means an
underwritten public offering of Qualified Capital Stock of Holdings or the
Company pursuant to a registration statement filed with the Commission in
accordance with the Securities Act; provided that, in the event of a Public
Equity Offering by Holdings, Holdings contributes to the capital of the Company
the portion of the net cash proceeds of such Public Equity Offering necessary to
pay the aggregate redemption price of the Notes to be redeemed pursuant to the
preceding paragraph.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any
time, selection of such Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which such Notes are listed or, if such Notes are not then listed on
a national securities exchange, on a pro rata basis, by lot or by such method as
the Trustee shall deem fair and appropriate; provided, however, that no Notes of
a principal amount at maturity of $1,000 or less shall be redeemed in part;
provided, further, that if a partial redemption is made with the proceeds of a
Public Equity Offering, selection of the Notes or portions thereof for
redemption shall be made by the Trustee only on a pro rata basis or on as nearly
a pro rata basis as is practicable (subject to DTC procedures), unless such
method is otherwise prohibited. Notice of redemption shall be mailed by
first-class mail at least 30 but not more than 60 days before the redemption
date to each Holder of Notes to be redeemed at its registered address. If any
Note is to be redeemed in part only, the notice of redemption that relates to
such Note shall state the portion of the principal amount at maturity thereof to
be redeemed. A new Note in a principal amount at maturity equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the redemption date, Accreted
Value will cease to accrete or interest will cease to accrue on Notes or
portions thereof called for redemption as long as the Company has deposited with
the Paying Agent funds in satisfaction of the applicable redemption price
pursuant to the Indenture.
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control,
each Holder will have the right to require that the Company purchase all or a
portion of such Holder's Notes pursuant to the offer described below (a "Change
of Control Offer"), at a purchase price equal to 101% of the Accreted Value
thereof plus accrued and unpaid interest to the date of purchase.
Within 30 days following the date upon which a Change of Control occurs,
the Company must send, by first class mail, a notice to each Holder, with a copy
to the Trustee, which notice shall govern the terms of the Change of Control
Offer. Such notice shall state, among other things, the purchase date, which
must be no earlier than 30 days nor later than 45 days from the date such notice
is mailed, other than as may be required by law (the "Change of Control Payment
Date"). Holders electing to have a Note purchased pursuant to a Change of
Control Offer will be required to surrender the Note, with the form entitled
"Option of Holder to Elect Purchase" on the
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<PAGE>
reverse of the Note completed, to the Paying Agent at the address specified in
the notice prior to the close of business on the third business day prior to the
Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. The Credit Agreement prohibits the purchase
of Notes by the Company, under certain circumstances, prior to full repayment of
indebtedness under the Credit Agreement and, upon a Change of Control, all
amounts outstanding under the Credit Agreement become due and payable. There can
be no assurance that in the event of a Change of Control the Company will have
sufficient funds to repay such indebtedness as well as to consummate the Change
of Control Offer. The failure of the Company to make or consummate the Change of
Control Offer or pay the applicable Change of Control purchase price when due
would result in an Event of Default and would give the Trustee and the Holders
of the Notes the rights described under "Events of Default". In addition to the
obligations of the Company under the Indenture with respect to the Notes in the
event of a Change of Control, the Senior Secured Credit Facilities contain a
provision designating a change of control as described therein as an event of
default, which would obligate the Company to repay amounts outstanding under the
Credit Agreement upon an acceleration of the indebtedness outstanding
thereunder.
The existence of a Holder's right to require the Company to purchase such
Holder's Notes upon a Change of Control may deter a third party from acquiring
the Company in a transaction that constitutes a Change of Control.
The definition of "Change of Control" in the Indenture is limited in scope.
The provisions of the Indenture may afford Holders the right to require the
Company to repurchase such Notes in the event of a highly leveraged transaction
or certain transactions with the Company's management or its affiliates,
including a reorganization, restructuring, merger or similar transaction
involving the Company (including, in certain circumstances, an acquisition of
the Company by management or its affiliates) that may adversely affect Holders,
if such transaction is not a transaction defined as a Change of Control. See
"Certain Definitions" below for the definition of "Change of Control". A
transaction involving a recapitalization of the Company's management or its
affiliates, or a transaction involving a recapitalization of the Company, would
result in a Change of Control if it is the type of transaction specified in such
definition.
One of the events that constitutes a Change of Control under the Indenture
is the disposition of "all or substantially all" of the Company's assets under
certain circumstances. This term has not been interpreted under New York law
(which is the governing law of the Indenture) to represent a specific
quantitative test. As a consequence, in the event Holders elect to require the
Company to purchase the Notes and the Company elects to contest such election,
there can be no assurance as to how a court interpreting New York law would
interpret the phrase in many circumstances.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. The Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, become liable, contingently or
otherwise, with respect to, or otherwise become responsible for payment of
(collectively, "incur") any Indebtedness (other than Permitted Indebtedness);
provided, however, that if no Event of Default shall have occurred and be
continuing at the time of or as a consequence of the incurrence of any such
Indebtedness, the Company and its Restricted Subsidiaries may incur Indebtedness
(including, without limitation, Acquired Indebtedness) if on the date of the
incurrence of such Indebtedness, after giving effect to the incurrence thereof,
the Consolidated Fixed Charge Coverage Ratio of the Company is greater than 1.75
to 1.0 on or before
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<PAGE>
February 15, 2000, greater than 2.0 to 1.0 after February 15, 2000 and greater
than 2.25 to 1.0 after February 15, 2002.
For purposes of determining compliance with this covenant, (i) in the event
that an item of Indebtedness meets the criteria of more than one of the types of
Indebtedness permitted by this covenant, the Company in its sole discretion will
classify such item of Indebtedness and will only be required to include the
amount and type of each class of Indebtedness in the test specified in the first
paragraph of this covenant or in one of the clauses of the definition of the
term "Permitted Indebtedness", (ii) the amount of Indebtedness issued at a price
which is less than the principal amount thereof shall be equal to the amount of
liability in respect thereof determined in accordance with GAAP,
(iii) Indebtedness incurred in connection with, or in contemplation of, any
transaction described in the definition of the term "Acquired Indebtedness"
shall be deemed to have been incurred by the Company or one of its Restricted
Subsidiaries, as the case may be, at the time an acquired Person becomes such a
Restricted Subsidiary (or is merged into the Company or such a Restricted
Subsidiary) or at the time of the acquisition of assets, as the case may be,
(iv) the maximum amount of Indebtedness that the Company and its Restricted
Subsidiaries may incur pursuant to this covenant shall not be deemed to be
exceeded, with respect to any outstanding Indebtedness, due solely to the result
of fluctuations in the exchange rates of currencies, and (v) guarantees or Liens
supporting Indebtedness permitted to be incurred under this covenant may be
issued or granted if otherwise issued or granted in accordance with the terms of
the Indenture.
Limitation on Restricted Payments. The Company will not, and will not
cause or permit any of its Restricted Subsidiaries to, directly or indirectly,
(a) declare or pay any dividend or make any distribution (other than dividends
or distributions payable in Qualified Capital Stock of the Company or in
options, warrants, or other rights to purchase such Qualified Capital Stock (but
excluding any debt security or Disqualified Capital Stock convertible into, or
exchangeable for, such Qualified Capital Stock)) on or in respect of shares of
the Company's Capital Stock to holders of such Capital Stock, (b) purchase,
redeem or otherwise acquire or retire for value any Capital Stock of the Company
or any warrants, rights or options to purchase or acquire shares of any class of
such Capital Stock (in each case, other than in exchange for Qualified Capital
Stock of the Company or options, warrants or other rights to purchase such
Qualified Capital Stock (but excluding any debt security, or Disqualified
Capital Stock convertible into, or exchangeable for, such Qualified Capital
Stock)), (c) make any principal payment on, purchase, defease, redeem, prepay,
decrease or otherwise acquire or retire for value, prior to any scheduled final
maturity, scheduled repayment or scheduled sinking fund payment, any
Indebtedness of the Company that is subordinate or junior in right of payment to
the Notes or (d) make any Investment (other than Permitted Investments) (each of
the foregoing actions set forth in clauses (a), (b), (c) and (d) being referred
to as a "Restricted Payment"), if at the time of such Restricted Payment or
immediately after giving effect thereto, (i) a Default or an Event of Default
shall have occurred and be continuing or (ii) the Company is not able to incur
at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in
compliance with the "Limitation on Incurrence of Additional Indebtedness"
covenant or (iii) the aggregate amount of Restricted Payments (including such
proposed Restricted Payment) made subsequent to the Issue Date (the amount
expended for such purposes, if other than in cash, being the fair market value
of such property as determined reasonably and in good faith by the Board of
Directors of the Company) shall exceed the sum of: (v) 50% of the cumulative
Consolidated Net Income (or if cumulative Consolidated Net Income shall be a
loss, minus 100% of such loss) of the Company earned subsequent to the Issue
Date and on or prior to the date the Restricted Payment occurs (the "Reference
Date") (treating such period as a single accounting period); plus (w) 100% of
the aggregate net cash proceeds received by the Company from any Person (other
than a Subsidiary of the Company) from the issuance and sale subsequent to the
Issue Date and on or prior to the Reference Date of Qualified Capital Stock of
the Company or options, warrants or other rights to purchase such Qualified
Capital Stock (but excluding any debt security or Disqualified Capital Stock
convertible into, or exchangeable for, such Qualified Capital Stock); plus (x)
without duplication of any amounts included in clause (iii)(w) above, 100% of
the aggregate net cash proceeds of any equity contribution received by the
Company from a holder of the Company's Capital Stock (excluding, in the case of
clauses (iii)(x) and (y), any net cash proceeds from a Public Equity Offering to
the extent used to redeem the Notes in compliance with the provisions set forth
under "Redemption--Optional Redemption Upon Public Equity Offerings"); plus
(y) 100% of the aggregate net cash proceeds received by the Company from any
Person (other than a Subsidiary of the Company) from the issuance and sale
(subsequent to the Issue Date) of debt securities or shares of Disqualified
Capital Stock that have been converted into or exchanged for Qualified Capital
Stock of the Company, together with the aggregate cash
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<PAGE>
received by the Company at the time of such conversion or exchange; plus
(z) without duplication, the sum of (1) the aggregate amount returned in cash to
the Company or a Restricted Subsidiary of the Company on or with respect to
Investments (other than Permitted Investments) made subsequent to the Issue Date
whether through interest payments, principal payments, dividends or other
distributions or payments, (2) the net cash proceeds received by the Company or
any of its Restricted Subsidiaries from the disposition of all or any portion of
such Investments (other than to a Subsidiary of the Company) and (3) upon
redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary, the fair
market value of such Subsidiary; provided, however, that the sum of clauses (1),
(2) and (3) above shall not exceed the aggregate amount of all such Investments
made subsequent to the Issue Date.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend within
60 days after the date of declaration of such dividend if the dividend would
have been permitted on the date of declaration; (2) the acquisition of any
shares of Capital Stock of the Company, either (i) solely in exchange for shares
of Qualified Capital Stock of the Company or options, warrants, or other rights
to purchase such Qualified Capital Stock (other than any debt security or
Disqualified Capital Stock convertible into, or exchangeable for, such Qualified
Capital Stock) or (ii) through the application of net proceeds of a
substantially concurrent sale for cash (other than to a Subsidiary of the
Company) of shares of Qualified Capital Stock of the Company or options,
warrants, or other rights to purchase such Qualified Capital Stock (other than
any debt security or Disqualified Capital Stock convertible into, or
exchangeable for, such Qualified Capital Stock); (3) the acquisition of any
Indebtedness of the Company that is subordinate or junior in right of payment to
the Notes either (i) solely in exchange for shares of Qualified Capital Stock of
the Company, or options, warrants, or other rights to purchase such qualified
Capital Stock or (ii) through the application of net proceeds of a substantially
concurrent sale for cash (other than to a Subsidiary of the Company) of (A)
shares of Qualified Capital Stock of the Company or (B) Refinancing
Indebtedness; (4) dividends or payments to Holdings of cash to be immediately
applied to repurchases by Holdings of Qualified Capital Stock of Holdings or
options to purchase such Qualified Capital Stock from directors or employees or
former directors or former employees of Holdings or any of its Subsidiaries or
their authorized representatives upon the death, disability or termination of
employment of such persons or pursuant to the terms of any customary agreement
under which such Qualified Capital Stock or options were issued, in an aggregate
amount not to exceed $1,000,000 plus any life insurance proceeds in any calendar
year; (5) make payments to Holdings in an amount equal to the cash interest then
due and payable on the Holdings PIK Notes; (6) the repurchase of any
Indebtedness which is subordinated to the Notes at a purchase price not greater
than 101% of the principal amount of such Indebtedness in the event of a change
of control in accordance with provisions similar to the "Change of Control"
covenant; provided that, prior to or simultaneously with such repurchase, the
Company has made the Change of Control Offer as provided in such covenant with
respect to the Notes and has repurchased all Notes validly tendered for payment
in connection with such Change of Control Offer; (7) the declaration or payment
of dividends on the Common Stock of the Company (or the payment to Holdings to
fund the payment by Holdings of dividends on Common Stock of Holdings) following
a Public Equity Offering of the Company or Holdings, as the case may be, in an
amount per annum not to exceed 6% of the net cash proceeds received by the
Company, or contributed to Holdings, in all Public Equity Offerings;
(8) payments or distributions to dissenting stockholders pursuant to applicable
law, pursuant to or in connection with a consolidation, merger or transfer of
assets that complies with the provisions of the Indenture applicable to mergers,
consolidating and transfers of all or substantially all of the property and
assets of the Company and (9) any dividends or payments to Holdings in respect
of overhead expenses, legal, accounting, commissions reporting and other
professional fees and expenses of Holdings that are directly attributable to the
operations of the Company and its restricted subsidiaries; provided that, except
in the case of clauses (l) and (2), no Default or Event of Default shall have
occurred and be continuing or occur as a consequence of the actions or payments
set forth therein. In determining the aggregate amount of Restricted Payments
made subsequent to the Issue Date in accordance with clause (iii) of the
immediately preceding paragraph, amounts expended, without duplication, pursuant
to clauses (1), (2)(ii) and (4) through (8) shall be included in such
calculation.
Not later than 10 days after the date of making any Restricted Payment (but
not including any transaction described in the preceding paragraph), the Company
shall deliver to the Trustee an officers' certificate stating that such
Restricted Payment complies with the Indenture and setting forth in reasonable
detail the basis upon
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which the required calculations were computed, which calculations may be based
upon the Company's latest available internal quarterly financial statements.
Limitation on Asset Sales. The Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors), and (ii) at least 75% of the consideration
received by the Company or the Restricted Subsidiary, as the case may be, from
such Asset Sale shall be in the form of cash or Cash Equivalents; provided that
(A) the amount of any liabilities of the Company or any such Restricted
Subsidiary (other than liabilities that are by their terms subordinated to the
Notes) that are assumed by the transferee of any such assets and (B) the fair
market value of any marketable securities received by the Company or any such
Restricted Subsidiary in exchange for any such assets that are promptly
converted into cash shall be deemed to be cash for purposes of this provision;
and provided, further, that in no event shall the aggregate fair market value at
the time of receipt of consideration received by the Company in a form other
than cash or Cash Equivalents exceed 5% of the Company's Consolidated Total
Assets. In the event of an Asset Sale, the Company shall apply, or cause such
Restricted Subsidiary to apply, the Net Cash Proceeds relating to such Asset
Sale within 360 days of receipt thereof either (A) to repay or prepay any
indebtedness under the Credit Agreement, and effect a permanent reduction
thereof, (B) to make an investment in either (x) properties and assets that
replace the properties and assets that were the subject of such Asset Sale or
(y) any properties or assets that will be used in the business of the Company
and its Restricted Subsidiaries as existing on the Issue Date or in businesses
similar or reasonably related thereto or in the capital stock of any entity a
majority of whose assets consists of the properties or assets described under
(x) or (y) ("Replacement Assets"), or (C) a combination of prepayment and
investment permitted by the foregoing clauses (iii)(A) and (iii)(B). After
360 days from the day on which the aggregate amount of Net Cash Proceeds which
have not been applied as permitted in clauses (iii)(A), (iii)(B) and
(iii)(C) of the next preceding sentence (a "Net Proceeds Offer Amount") exceeds
$7,500,000 (the "Net Proceeds Offer Trigger Date"), the Company shall make an
offer to purchase (the "Net Proceeds Offer") from all Holders on a pro rata
basis, that amount of Notes equal to the Net Proceeds Offer Amount at a price
equal to 100% of the Accreted Value of the Notes to be purchased, plus accrued
and unpaid interest thereon, if any, to the date of purchase. If at any time any
non-cash consideration received by the Company or any Restricted Subsidiary of
the Company, as the case may be, in connection with any Asset Sale is converted
into or sold or otherwise disposed of for cash (other than interest received
with respect to any such non-cash consideration), then such conversion or
disposition shall be deemed to constitute an Asset Sale hereunder and the Net
Cash Proceeds thereof shall be applied in accordance with this covenant. To the
extent that the aggregate Accreted Value of Notes tendered pursuant to such Net
Proceeds Offer is less than the Net Proceeds Offer Amount the Company and its
Restricted Subsidiaries may use such deficiency for general corporate purposes.
If the aggregate Accreted Value of Notes validly tendered and not withdrawn by
Holders thereof exceeds the Net Proceeds Offer Amount, the Notes to be purchased
will be selected on a pro rata basis. Upon completion of such Net Proceeds
Offer, the amount of Net Proceeds Offer Amount will be reset to zero.
Notwithstanding the immediately preceding paragraph, the Company and its
Restricted Subsidiaries will be permitted to consummate an Asset Sale without
complying with such paragraphs to the extent (i) at least 80% of the
consideration for such Asset Sale constitutes Replacement Assets and (ii) such
Asset Sale is for fair market value; provided that any consideration not
constituting Replacement Assets received by the Company or any of its Restricted
Subsidiaries in connection with any Asset Sale permitted to be consummated under
this paragraph shall constitute Net Cash Proceeds subject to the provisions of
the preceding paragraph.
Each Net Proceeds Offer will be mailed to the record Holders as shown on
the register of Holders not less than 30 days nor more than 45 days following
the Net Proceeds Offer Trigger Date, with a copy to the Trustee, and shall
comply with the procedures set forth in the Indenture. Upon receiving notice of
the Net Proceeds Offer, Holders may elect to tender their Notes in whole or in
part in integral multiples of $1,000 principal amount at maturity in exchange
for cash. To the extent Holders properly tender Notes in an amount exceeding the
Net Proceeds Offer Amount, Notes of tendering Holders will be purchased on a pro
rata basis (based on amounts tendered). A Net Proceeds Offer shall remain open
for a period of 20 business days or such longer period as may be required by
law, and the purchase of such Note shall be consummated within 60 days following
the mailing of the Net Proceeds Offer.
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The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset Sale"
provisions of the Indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the "Asset Sale" provisions of the Indenture by virtue
thereof.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary of the Company to (a) pay dividends or make
any other distributions on or in respect of its Capital Stock; (b) make loans or
advances or to pay any Indebtedness or other obligation owed to the Company or
any other Restricted Subsidiary of the Company; or (c) transfer any of its
property or assets to the Company or any other Restricted Subsidiary of the
Company, except for such encumbrances or restrictions existing under or by
reason of: (1) applicable law; (2) the Indenture; (3) the Credit Agreement; (4)
any agreement or instrument governing Acquired Indebtedness, which encumbrance
or restriction is not applicable to any Person, or the properties or assets of
any Person, other than the Person or the properties or assets of the Person so
acquired; (5) agreements existing on the Issue Date to the extent and in the
manner such encumbrances and restrictions went into effect on the Issue Date;
(6) in the case of clause (c) above: (A) agreements or instruments arising or
agreed to in the ordinary course of business that restrict in a customary manner
the subletting, assignment or transfer of any property or asset subject to a
lease, license, conveyance or other contract and (B) any transfer of, agreement
to transfer, option or right with respect to, or Lien on, any property or assets
of the Company or any Restricted Subsidiary entered into in compliance with the
Indenture; (7) an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock of, or property and
assets of, any Restricted Subsidiary of the Company; (8) provisions in
agreements or instruments which prohibit the payment of dividends or the making
of other distributions with respect to any Capital Stock of a Person other than
on a pro rata basis; or (9) an agreement governing Indebtedness incurred to
Refinance the Indebtedness issued, assumed or incurred pursuant to an agreement
referred to in clause (2), (3), (4) or (5) above; provided, however, that the
provisions relating to such encumbrance or restriction contained in any such
Indebtedness are no less favorable to the Company or the relevant Restricted
Subsidiary of the Company in any material respect as determined by the Board of
Directors of the Company in its reasonable and good faith judgment than the
provisions relating to such encumbrance or restriction contained in agreements
referred to in such clause (2), (3), (4) or (5). Nothing contained in clause
(c) of this "Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries" covenant shall prevent the Company or any of its
Restricted Subsidiaries from creating, incurring, assuming or suffering to exist
any Lien created, incurred, assumed or suffered to exist in accordance with the
other terms of the Indenture.
Limitation on Preferred Stock of Restricted Subsidiaries. The Company will
not permit any of its Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Wholly Owned Restricted Subsidiary of the
Company) or permit any Person (other than the Company or a Wholly Owned
Restricted Subsidiary of the Company) to own any Preferred Stock of any
Restricted Subsidiary of the Company; provided that the foregoing shall not
prohibit the creation of a Lien in any such Preferred Stock under the Credit
Agreement and otherwise created in accordance with the Indenture.
Limitation on Liens. The Company will not, and will not cause or permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or permit or suffer to exist any Liens of any kind against or upon any
property or assets of the Company or any of its Restricted Subsidiaries whether
owned on the Issue Date or acquired after the Issue Date, or any proceeds
therefrom, or assign or otherwise convey any right to receive income or profits
therefrom unless (i) in the case of Liens securing Indebtedness that is
expressly subordinate or junior in right of payment to the Notes, the Notes are
secured by a Lien on such property, assets or proceeds that is senior in
priority to such Liens and (ii) in all other cases, the Notes are equally and
ratably secured, except for (A) Liens existing as of the Issue Date (other than
Liens securing Indebtedness under the Credit Agreement) to the extent and in the
manner such Liens were in effect on the Issue Date; (B) Liens securing
Indebtedness under the Credit Agreement; (C) Liens securing the Notes and the
Guarantees, if any; (D) Liens of the Company or a Wholly Owned Restricted
Subsidiary of the Company on assets of any Restricted Subsidiary of the Company;
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(E) Liens securing Refinancing Indebtedness which is incurred to Refinance any
Indebtedness which has been secured by a Lien permitted under the Indenture and
which has been incurred in accordance with the provisions of the Indenture;
provided, however, that such Liens (a) are no less favorable to the Holders and
are not more favorable to the lienholders with respect to such Liens than the
Liens in respect of the Indebtedness being Refinanced and (b) do not extend to
or cover any property or assets of the Company or any of its Restricted
Subsidiaries not securing the Indebtedness so Refinanced; and (F) Permitted
Liens. In the event that the Lien the existence of which gives rise to a Lien
securing the Notes pursuant to the provisions of this covenant ceases to exist,
the Lien securing the Notes required by this covenant shall automatically be
released and the Trustee shall execute appropriate documentation.
Merger, Consolidation and Sale of Assets. The Company will not, in a
single transaction or series of related transactions, consolidate or merge with
or into any Person, or sell, assign, transfer, lease, convey or otherwise
dispose of (or cause or permit any Restricted Subsidiary of the Company to sell,
assign, transfer, lease, convey or otherwise dispose of) all or substantially
all of the Company's assets (determined on a consolidated basis for the Company
and the Company's Restricted Subsidiaries) whether as an entirety or
substantially as an entirety to any Person unless: (i) either (1) the Company
shall be the surviving or continuing corporation or (2) the Person (if other
than the Company) formed by such consolidation or into which the Company is
merged or the Person which acquires by sale, assignment, transfer, lease,
conveyance or other disposition the properties and assets of the Company and of
the Company's Restricted Subsidiaries substantially as an entirety (the
"Surviving Entity") (x) shall be a corporation organized and validly existing
under the laws of the United States or any State thereof or the District of
Columbia and (y) shall expressly assume, by supplemental indenture (in form
satisfactory in all respects to the Trustee), executed and delivered to the
Trustee, the due and punctual payment of the principal of, and premium, if any,
and interest on all of the Notes and the performance of every covenant of the
Notes, the Indenture and the Registration Rights Agreement on the part of the
Company to be performed or observed; (ii) immediately after giving effect to
such transaction and the assumption contemplated by clause (i)(2)(y) above
(including giving effect to any Indebtedness and Acquired Indebtedness incurred
in connection with or in respect of such transaction), the Company or such
Surviving Entity, as the case may be, (1) shall have a Consolidated Net Worth
equal to or greater than the Consolidated Net Worth of the Company immediately
prior to such transaction, and (2) shall be able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the "--
Limitation on Incurrence of Additional Indebtedness" covenant;
(iii) immediately after giving effect to such transaction and the assumption
contemplated by clause (i)(2)(y) above (including, without limitation, giving
effect to any Indebtedness and Acquired Indebtedness incurred or anticipated to
be incurred and any Lien granted in connection with or in respect of the
transaction), no Default or Event of Default shall have occurred or be
continuing; and (iv) the Company or the Surviving Entity shall have delivered to
the Trustee an officers' certificate and an opinion of counsel, each stating
that such consolidation, merger, sale, assignment, transfer, lease, conveyance
or other disposition and, if a supplemental indenture is required in connection
with such transaction, such supplemental indenture shall comply with the
applicable provisions of the Indenture and that all conditions precedent in the
Indenture relating to such transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company and the Company, if surviving, will be automatically discharged from
all of its obligations under the Indenture and the Notes.
The Indenture provides that upon any consolidation, combination or merger
or any transfer of all or substantially all of the assets of the Company in
accordance with the foregoing, in which the Company is not the continuing
corporation, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture and the Notes with the same effect as if such
surviving entity had been named as such.
Limitations on Transactions with Affiliates. (a) The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related
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transactions (including, without limitation, the purchase, sale, lease or
exchange of any property or the rendering of any service) with, or for the
benefit of, any of its Affiliates (each an "Affiliate Transaction"), other than
(x) Affiliate Transactions permitted under paragraph (b) below and
(y) Affiliate Transactions on terms that are no less favorable than those that
might reasonably have been obtained in a comparable transaction at such time on
an arm's-length basis from a Person that is not an Affiliate of the Company or
such Restricted Subsidiary. All Affiliate Transactions (and each series of
related Affiliate Transactions which are similar or part of a common plan)
involving aggregate payments or other property with a fair market value in
excess of $1,000,000 shall be approved by the Board of Directors of the Company
or such Restricted Subsidiary, as the case may be, such approval to be evidenced
by a Board Resolution stating that such Board of Directors has determined that
such transaction complies with the foregoing provisions. If the Company or any
Restricted Subsidiary of the Company enters into an Affiliate Transaction (or a
series of related Affiliate Transactions related to a common plan) that involves
an aggregate fair market value of more than $5,000,000, the Company or such
Restricted Subsidiary, as the case may be, shall, prior to the consummation
thereof, obtain a favorable opinion as to the fairness of such transaction or
series of related transactions to the Company or the relevant Restricted
Subsidiary, as the case may be, from a financial point of view, from a
nationally recognized firm qualified to do the business for which it is engaged
and file the same with the Trustee.
(b) The restrictions set forth in clause (a) above shall not apply to
(i) reasonable fees and compensation paid to and indemnity provided on behalf
of, officers, directors, employees or consultants of the Company or any
Restricted Subsidiary of the Company as determined in good faith by the
Company's Board of Directors or senior management; (ii) transactions exclusively
between or among the Company and any of its Wholly Owned Restricted Subsidiaries
or exclusively between or among such Wholly Owned Restricted Subsidiaries,
provided such transactions are not otherwise prohibited by the Indenture; (iii)
any agreement as in effect as of the Issue Date or any amendment thereto or any
transaction contemplated thereby (including pursuant to any amendment thereto)
in any replacement agreement thereto so long as any such amendment or
replacement agreement is not more disadvantageous to the Holders in any material
respect than the original agreement as in effect on the Issue Date; (iv)
Restricted Payments permitted by the Indenture; (v) the Tax Sharing Agreement;
(vi) employment agreements with officers and employees of the Company and its
Restricted Subsidiaries, in the ordinary course of business; (vii) loans and
advances to employees not to exceed $500,000 outstanding at any one time, in the
ordinary course of business; (viii) provided that there is no existing Event of
Default, payments pursuant to the terms of the Management Agreement and
(ix) arrangements with directors of the Company existing on the Issue Date as
disclosed in the Prospectus.
Limitation of Guarantees by Restricted Subsidiaries. The Company will not
permit any of its Restricted Subsidiaries, directly or indirectly, by way of the
pledge of any intercompany note, or any Preferred Stock or otherwise, to assume,
guarantee or in any other manner become liable with respect to any Indebtedness
of the Company or any other Restricted Subsidiary of the Company that is a
Guarantor (other than guarantees, pledges or other assumptions of or liability
for or in favor of a Foreign Credit Facility by Foreign Restricted
Subsidiaries), unless, in any such case (a) such Restricted Subsidiary executes
and delivers a supplemental indenture to the Indenture, providing a senior
guarantee of payment of the Notes by such Restricted Subsidiary (the
"Guarantee") and (b) if such assumption, guarantee or other liability of such
Restricted Subsidiary is provided in respect of Indebtedness that is expressly
subordinated to the Notes, the guarantee or other instrument provided by such
Restricted Subsidiary in respect of such subordinated Indebtedness shall be
subordinated to the Guarantee pursuant to subordination provisions no less
favorable to the Holders of the Notes than the provisions subordinating such
Indebtedness to the Notes; provided that the foregoing shall not be applicable
to a guarantee of Acquired Indebtedness by another Restricted Subsidiary whose
guarantee also constitutes Acquired Indebtedness incurred by the Company or one
of its Restricted Subsidiaries in the same transaction.
Notwithstanding the foregoing, any such Guarantee by a Restricted
Subsidiary of the Notes shall provide by its terms that it shall be
automatically and unconditionally released and discharged, without any further
action required on the part of the Trustee or any Holder, upon: (i) the
unconditional release of such Restricted Subsidiary from its liability in
respect of the Indebtedness in connection with which such Guarantee was executed
and delivered pursuant to the preceding paragraph; or (ii) any sale or other
disposition (by merger or otherwise) to any Person which is not a Restricted
Subsidiary of the Company of all of the Company's direct or indirect Capital
Stock in, or all or substantially all of the assets of, such Restricted
Subsidiary; provided that
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(a) such sale or disposition of such Capital Stock or assets is otherwise in
compliance with the terms of the Indenture and (b) such assumption, guarantee or
other liability of such Restricted Subsidiary has been released by the holders
of the other Indebtedness so guaranteed.
Conduct of Business. The Company and its Restricted Subsidiaries will not
engage in any businesses which are not the same, similar or reasonably related
to the businesses in which the Company and its Restricted Subsidiaries were
engaged on the Issue Date.
Reports to Holders. The Indenture provides that the Company will deliver
to the Trustee within 15 days after the filing of the same with the Commission,
copies of the quarterly and annual reports and of the information, documents and
other reports, if any, which the Company is required to file with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act. The Indenture further
provides that, notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
will provide the Trustee and Holders with such annual reports and such
information, documents and other reports specified in Sections 13 and 15(d) of
the Exchange Act. The Company will also comply with the other provisions of TIA
Section 314(a).
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on any Note when the same becomes due
and payable and the default continues for a period of 30 days;
(ii) the failure to pay the principal of any Notes, when the same
becomes due and payable, at maturity, upon redemption or otherwise
(including the failure to make a payment to purchase Notes tendered
pursuant to a Change of Control Offer or a Net Proceeds Offer);
(iii) a default in the observance or performance of any other covenant
or agreement contained in the Indenture which default continues for a
period of 30 days after the Company receives written notice specifying the
default (and demanding that such default be remedied and stating that such
notice is a "Notice of Default") from the Trustee or the Holders of at
least 25% of the outstanding principal amount of the Notes (except in the
case of a default with respect to the "Merger, Consolidation and Sale of
Assets" covenant, which will constitute an Event of Default with such
notice requirement but without such passage of time requirement);
(iv) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount
of any Indebtedness of the Company or any Restricted Subsidiary (other than
a Foreign Restricted Subsidiary that is not a Significant Subsidiary) of
the Company, or the acceleration of the final stated maturity of any such
Indebtedness if the aggregate principal amount of such Indebtedness,
together with the principal amount of any other such Indebtedness in
default for failure to pay principal at final maturity or which has been
accelerated, aggregates $5,000,000 or more;
(v) one or more judgments (not covered by insurance as to which the
carrier has assumed the defense or acknowledged coverage) in an aggregate
amount in excess of $5,000,000 shall have been rendered against the Company
or any of its Restricted Subsidiaries (other than a Foreign Restricted
Subsidiary that is not a Significant Subsidiary) and such judgments shall
remain undischarged, unpaid or unstayed in such aggregate amount for a
period of 60 consecutive days after such judgment or judgments become final
and non-appealable;
(vi) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries; or
(vii) any of the Guarantees, if any, ceases to be in full force and
effect or any of the Guarantees is declared to be null and void and
unenforceable or any of the Guarantees is found to be invalid or any of the
Guarantors denies its liability under its Guarantee (other than by reason
of release of a Guarantor in accordance with the terms of the Indenture).
If an Event of Default (other than an Event of Default specified in clause
(vi) above with respect to the Company) shall occur and be continuing, the
Trustee or the Holders of at least 25% in principal amount of outstanding Notes
may declare the Accreted Value of and accrued and unpaid interest on all the
Notes to be due
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and payable by notice in writing to the Company and the Trustee specifying the
respective Event of Default and that it is a "notice of acceleration" (the
"Acceleration Notice"), and the same (i) shall become immediately due and
payable or (ii) if there are any amounts outstanding under the Senior Secured
Credit Facilities, shall become immediately due and payable upon the first to
occur of an acceleration under the Senior Secured Credit Facilities or 5
business days after receipt by the Company and the representative under the
Senior Secured Credit Facilities of such Acceleration Notice. In the event of an
acceleration because an Event of Default set forth in clause (iv) above has
occurred and is continuing, such acceleration shall be automatically rescinded
and annulled if the event of default triggering such Event of Default pursuant
to clause (iv) shall be remedied or cured by the Company or the relevant
Restricted Subsidiary or waived by the holders of the relevant Indebtedness
within 20 days after the date of the Acceleration Notice with respect thereto.
If an Event of Default specified in clause (vi) above with respect to the
Company occurs and is continuing, then all unpaid principal of, and premium, if
any, and accrued and unpaid interest on all of the outstanding Notes shall ipso
facto become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any Holder.
The Indenture provides that, at any time after a declaration of
acceleration with respect to the Notes as described in the preceding paragraph,
the Holders of a majority in principal amount of the Notes may rescind and
cancel such declaration and its consequences (i) if the rescission would not
conflict with any judgment or decree, (ii) if all existing Events of Default
have been cured or waived except nonpayment of Accreted Value or interest that
has become due solely because of the acceleration, (iii) to the extent the
payment of such interest is lawful, if interest on overdue installments of
interest and overdue principal, which has become due otherwise than by such
declaration of acceleration, has been paid, (iv) if the Company has paid the
Trustee its reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (v) in the event of the cure or waiver of an
Event of Default of the type described in clause (vi) of the description above
of Events of Default, the Trustee shall have received an officers' certificate
and an opinion of counsel that such Event of Default has been cured or waived.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
The Holders of a majority in principal amount of the Notes may waive any
existing or past Default or Event of Default under the Indenture, and its
consequences, except a default in the payment of the Accreted Value of or
interest on any Notes.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon obtaining knowledge of any Default or
Event of Default (provided that the Company shall provide such certification at
least annually whether or not it knows of any Default or Event of Default) that
has occurred and, if applicable, describe such Default or Event of Default and
the status thereof.
NOTICE OF DEFAULT
If a Default or an Event of Default occurs and is continuing and if it is
known to an officer of the Trustee, the Trustee shall mail to each Holder notice
of the uncured Default or Event of Default within 90 days after obtaining
knowledge thereof. Except in the case of a Default or an Event of Default in
payment of Accreted Value or principal of, or interest on, any Note, including
an accelerated payment, a Default in payment on the Change of Control Payment
Date pursuant to an offer to purchase the Notes upon a Change of Control or on
the date of payment of an accepted Net Proceeds Offer and a Default in
compliance with Article Five of the Indenture, the Trustee may withhold the
notice if and so long as its Board of Directors, the executive committee of its
Board of Directors or a committee of its directors and/or officers of the
Trustee in good faith determines that withholding the notice is in the interest
of the Holders.
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LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations and the obligations of the Guarantors discharged with respect to the
outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the outstanding Notes, except for (i) the rights of Holders to
receive payments in respect of the principal of, premium, if any, and interest
on the Notes when such payments are due from the trust referred to below, (ii)
the Company's obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payments, (iii) the rights, powers,
trust, duties and immunities of the Trustee and the Company's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
reorganization and insolvency events) described under "Events of Default" will
no longer constitute Events of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance,
(i) the Company must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders cash in U.S. dollars, non-callable U.S. government
obligations, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on the Notes on the
stated date for payment thereof or on the applicable redemption date, as the
case may be; (ii) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or (B) since
the date of the Indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the Holders will not recognize income,
gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that the Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred; (iv) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit (other than a
Default or Event of Default arising in connection with the substantially
contemporaneous borrowing of funds to fund the deposit referenced in clause (i)
above) or insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date of
deposit; (v) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under the Indenture or any other
material agreement or instrument to which the Company or any of its Subsidiaries
is a party or by which the Company or any of its Subsidiaries is bound;
(vi) the Company shall have delivered to the Trustee an officers' certificate
stating that the deposit was not made by the Company with the intent of
preferring the Holders over any other creditors of the Company or with the
intent of defeating, hindering, delaying or defrauding any other creditors of
the Company or others; (vii) the Company shall have delivered to the Trustee an
officers' certificate and an opinion of counsel, each stating that all
conditions precedent provided for or relating to the Legal Defeasance or the
Covenant Defeasance have been complied with; (viii) the Company shall have
delivered to the Trustee an opinion of counsel to the effect that after the 91st
day following the deposit, the trust funds will not be subject to the effect of
any applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; and (ix) certain other customary conditions
precedent are satisfied. Notwithstanding the foregoing, the opinion of counsel
required by clause (ii) above with respect to a Legal Defeasance need not be
delivered if all Notes not theretofore delivered to the Trustee for cancellation
(x) have become due and payable or (y) will become due and payable on the
maturity date within one year under arrangements satisfactory to the Trustee for
the giving of notice of redemption by the Trustee in the name, and at the
expense, of the Company.
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SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable or, by their terms, are to become due
and payable, or are to be called for redemption upon delivery of notice, within
one year and the Company has irrevocably deposited or caused to be deposited
with the Trustee funds in an amount sufficient to pay all principal of, premium,
if any, and interest on the Notes to the date of maturity or redemption, as the
case may be, together with irrevocable instructions from the Company directing
the Trustee to apply such funds to the payment thereof at maturity or
redemption, as the case may be; (ii) the Company has paid all other sums payable
under the Indenture by the Company; and (iii) the Company has delivered to the
Trustee an officers' certificate and an opinion of counsel stating that all
conditions precedent under the Indenture relating to the satisfaction and
discharge of the Indenture have been complied with.
MODIFICATION OF THE INDENTURE
From time to time, the Company, the Guarantors and the Trustee, without the
consent of the Holders, may amend, waive or otherwise modify provisions of the
Indenture for certain specified purposes, including curing ambiguities, defects
or inconsistencies, so long as such change does not, in the opinion of the
Trustee, adversely affect the rights of any of the Holders in any material
respect. In formulating its opinion on such matters, the Trustee will be
entitled to rely on such evidence as it deems appropriate, including, without
limitation, solely on an opinion of counsel. Other amendments, waivers and other
modifications of provisions of the Indenture may be made with the consent of the
Holders of a majority in principal amount of the then outstanding Notes issued
under the Indenture, except that, without the consent of each Holder affected
thereby, no such amendment, waiver or other modification may: (i) reduce the
principal amount at maturity of Notes whose Holders must consent to an
amendment; (ii) reduce the rate of or change or have the effect of changing the
time for payment of interest, including defaulted interest, on any Notes; or
change or have the effect of changing the definition of Accreted Value;
(iii) reduce the principal of or change or have the effect of changing the fixed
maturity of any Notes, or change the date on which any Notes may be subject to
redemption or repurchase, or reduce the redemption or repurchase price therefor;
(iv) make any Notes payable in money other than that stated in the Notes;
(v) make any change in provisions of the Indenture protecting the right of each
Holder to receive payment of principal of and interest on such Holder's Note or
Notes on or after the due date thereof or to bring suit to enforce such payment,
or permitting Holders of a majority in principal amount of Notes to waive
Defaults or Events of Default; (vi) amend, change or modify in any material
respect the obligation of the Company (or any of the provisions or definitions
with respect thereto) to (A) make and consummate a Change of Control Offer in
the event of a Change of Control or (B) make and consummate a Net Proceeds Offer
with respect to any Asset Sale that has been consummated; or (vii) release any
Guarantor from any of its obligations under its Guarantee or the Indenture
otherwise than in accordance with the terms of the Indenture.
GOVERNING LAW
The Indenture provides that it, the Notes and the Guarantees, if any, are
governed by, and construed in accordance with, the laws of the State of New York
but without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
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THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it by the Indenture, and use the same
degree of care and skill in its exercise as a prudent person would exercise or
use under the circumstances in the conduct of such person's own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions; provided that if the
Trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Accreted Value" means (i) as of any date on or prior to February 15, 2003,
an amount per $1,000 principal amount at maturity of the Notes that is equal to
the sum of (a) the original issue price of each Note and (b) the portion of the
excess of the principal amount at maturity of each Note over such original issue
price which shall have been amortized through such date, such amount to be so
amortized on a daily basis and compounded semi-annually on each August 15 and
February 15 at the rate of 9 7/8% per annum from the Issue Date through the date
of determination computed on the basis of a 360-day year of twelve 30-day months
and (ii) after February 15, 2003, the principal amount of the Notes.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of
the Company or at the time it merges or consolidates with the Company or any of
the Company's Subsidiaries or assumed in connection with the acquisition of
assets from such Person and in each case not incurred by such Person in
connection with, or in anticipation or contemplation of, such Person becoming a
Restricted Subsidiary of the Company or such acquisition, merger or
consolidation.
"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
"Asset Acquisition" means (a) an Investment by the Company or any
Restricted Subsidiary of the Company in any other Person pursuant to which such
Person shall become a Restricted Subsidiary of the Company or any Restricted
Subsidiary of the Company, or shall be merged with or into the Company or any
Restricted Subsidiary of the Company, or (b) the acquisition by the Company or
any Restricted Subsidiary of the Company of the assets of any Person (other than
a Restricted Subsidiary of the Company) which constitute all or substantially
all of the assets of such Person or comprise any division or line of business of
such Person or any other properties or assets of such Person other than in the
ordinary course of business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business or sales of equipment pursuant to purchase options entered into by
the Company or a Restricted Subsidiary of the Company in the ordinary course of
business), assignment or other transfer for value by the Company or any of its
Restricted Subsidiaries (excluding any Lien granted in accordance with the
"Limitation on Liens" covenant, but including any Sale and Leaseback
Transaction) to any Person other than the Company or a Wholly Owned Restricted
Subsidiary of the Company of (a) any Capital Stock of any Restricted Subsidiary
of the Company; or (b) any other property or assets of the Company or any
Restricted Subsidiary of the Company other than in the ordinary course of
business; provided, however, that Asset Sales shall not include (i) a
transaction or series of related transactions for which the Company or its
Restricted Subsidiaries receive aggregate consideration of less than $750,000,
(ii) the sale, lease, conveyance,
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disposition or other transfer of all or substantially all of the assets of the
Company as permitted under "Merger, Consolidation and Sale of Assets" and (iii)
a Restricted Payment permitted under the "Limitation on Restricted Payments"
covenant.
"Board of Directors" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person and (ii) with respect to any
Person that is not a corporation, any and all partnership or other equity
interests of such Person.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof;
(ii) marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Ratings Services, a division of McGraw
Hill, Inc. ("S&P") or Moody's Investors Service, Inc. ("Moody's");
(iii) commercial paper maturing no more than one year from the date of creation
thereof and, at the time of acquisition, having a rating of at least A-1 from
S&P or at least P-1 from Moody's; (iv) certificates of deposit or bankers'
acceptances maturing within one year from the date of acquisition thereof issued
by any bank organized under the laws of the United States of America or any
state thereof or the District of Columbia or any U.S. branch of a foreign bank
having at the date of acquisition thereof combined capital and surplus of not
less than $250,000,000; (v) repurchase obligations with a term of not more than
seven days for underlying securities of the types described in clause (i) above
entered into with any bank meeting the qualifications specified in clause
(iv) above; (vi) investments in money market funds which invest substantially
all their assets in securities of the types described in clauses (i) through
(v) above; and (vii) investments made by Foreign Restricted Subsidiaries in
local currencies in instruments issued by or with entities of such jurisdiction
having correlative attributes to the foregoing.
"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions, but other than by the granting of a Lien in
accordance with the Indenture or by way of consolidation or merger in accordance
with the Indenture) of all or substantially all of the assets of the Company and
its Subsidiaries, taken as a whole, to any Person or "group" (as defined in
Section 13(d)(3) of the Exchange Act) (whether or not otherwise in compliance
with the provisions of the Indenture) other than to the Permitted Holders;
(ii) the approval by the holders of Capital Stock of the Company of any plan or
proposal for the liquidation or dissolution of the Company (whether or not
otherwise in compliance with the provisions of the Indenture); (iii) (A) prior
to the initial public offering of Common Stock of the Company or Holdings, the
Permitted Holders shall own, directly or indirectly, less than 50% of the
aggregate voting power of the Capital Stock of the Company or (B) after the
initial public offering of Common Stock of the Company or Holdings, (1) the
Permitted Holders shall own, directly or indirectly, less than 20% of the
aggregate voting power of the Capital Stock of the Company or (2) any Person or
"group" within the meaning of Section 13(d) of the Exchange Act (other than the
Permitted Holders) shall become the "beneficial owner" as defined in Rule 13d-3
under the Exchange Act, of shares representing more than the aggregate voting
power represented by the Capital Stock of the Company owned directly or
indirectly, by the Permitted Holders; or (iv) the replacement of a majority of
the Board of Directors of the Company or Holdings over a two-year period from
the directors who constituted the Board of Directors of the Company or Holdings,
as the case may
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be, at the beginning of such period, and such replacement shall not have been
approved by a vote of at least a majority of the Board of Directors of the
Company or Holdings, as the case may be, then still in office who either were
members of such Board of Directors at the beginning of such period or whose
election as a member of such Board of Directors was previously so approved.
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Consolidated EBITDA" means, with respect to any Person, for any period,
the sum (without duplication) of (i) Consolidated Net Income and (ii) to the
extent Consolidated Net Income has been reduced thereby, (A) all income taxes of
such Person and its Restricted Subsidiaries paid or accrued in accordance with
GAAP for such period (other than income taxes attributable to extraordinary or
nonrecurring gains or losses or taxes attributable to sales or dispositions
outside the ordinary course of business), (B) Consolidated Interest Expense,
(C) Consolidated Non-cash Charges less any non-cash items increasing
Consolidated Net Income for such period, all as determined on a consolidated
basis for such Person and its Restricted Subsidiaries in accordance with GAAP,
(D) any fee to CHP under the Management Agreement paid or accrued, (E) any
expense of the Company or its Restricted Subsidiaries incurred in connection
with the overhaul of equipment that can be reclassified as a capital expenditure
in accordance with GAAP and (F) any write-off or amortization of fees and
expenses incurred in connection with the financing for the Acquisition.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of
such Person for the Four Quarter Period. In addition to and without limitation
of the foregoing, for purposes of this definition, "Consolidated EBITDA" and
"Consolidated Fixed Charges" shall be calculated after giving effect on a pro
forma basis for the period of such calculation to (i) the incurrence or
repayment of any Indebtedness of such Person or any of its Restricted
Subsidiaries (and the application of the proceeds thereof) giving rise to the
need to make such calculation and any incurrence or repayment of other
Indebtedness (and the application of the proceeds thereof), other than the
incurrence or repayment of Indebtedness in the ordinary course of business for
working capital purposes pursuant to working capital facilities, occurring
during the Four Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment, as the case may be (and the application of the proceeds
thereof), occurred on the first day of the Four Quarter Period and (ii) any
Asset Sales or Asset Acquisitions (including, without limitation, any Asset
Acquisition giving rise to the need to make such calculation as a result of such
Person or one of its Restricted Subsidiaries (including any Person who becomes a
Restricted Subsidiary as a result of the Asset Acquisition) incurring, assuming
or otherwise being liable for Acquired Indebtedness and also including any
Consolidated EBITDA (including any pro forma expense and cost reductions
calculated on a basis consistent with Regulation S-X under the Securities Act)
attributable to the assets which are the subject of the Asset Acquisition or
Asset Sale during the Four Quarter Period) occurring during the Four Quarter
Period or at any time subsequent to the last day of the Four Quarter Period and
on or prior to the Transaction Date, as if such Asset Sale or Asset Acquisition
(including the incurrence, assumption or liability for any such Acquired
Indebtedness) occurred on the first day of the Four Quarter Period. Furthermore,
in calculating "Consolidated Fixed Charges" for purposes of determining the
denominator (but not the numerator) of this "Consolidated Fixed Charge Coverage
Ratio," (1) interest on outstanding Indebtedness determined on a fluctuating
basis as of the Transaction Date and which will continue to be so determined
thereafter shall be deemed to have accrued at a fixed rate per annum equal to
the rate of interest on such Indebtedness in effect on the Transaction Date; and
(2) notwithstanding clause (1) above, interest on Indebtedness determined on a
fluctuating basis, to the extent such interest is covered by agreements relating
to Interest Swap Obligations, shall be deemed to accrue at the rate per annum
resulting after giving effect to the operation of such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense, plus
(ii) the product of (x) the amount of all dividend payments on any series of
Preferred Stock of such Person (other than dividends paid in Qualified Capital
Stock) paid, accrued or scheduled to be paid or accrued during such period times
(y) a fraction, the numerator of which is one
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and the denominator of which is one minus the then current effective
consolidated federal, state and local tax rate of such Person, expressed as a
decimal.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication: (i) the aggregate of the interest
expense of such Person and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, including without
limitation, (a) any amortization of debt discount and amortization or write-off
of deferred financing costs, (b) the net costs under Interest Swap Obligations,
(c) all capitalized interest and (d) the interest portion of any deferred
payment obligation; (ii) the interest component of Capitalized Lease Obligations
paid, accrued and/or scheduled to be paid or accrued by such Person and its
Restricted Subsidiaries during such period as determined on a consolidated basis
in accordance with GAAP; and (iii) with respect to the Company, cash interest on
the Holdings PIK Notes; excluding, however, (1) any amount of such interest
expense of any Restricted Subsidiary if the net income of such Restricted
Subsidiary is excluded in the calculation of Consolidated Net Income pursuant to
clause (d) of the definition thereof (but only in the same proportion as the net
income of such Restricted Subsidiary is excluded from the calculation of
Consolidated Net Income pursuant to clause (d) of the definition thereof) and
(2) any non-cash amortization or write-off of fees and expenses incurred in
connection with financing arrangements for the Acquisition.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided that there shall be excluded therefrom (without duplication)
(a) after-tax gains or losses from Asset Sales, (b) after-tax items classified
as extraordinary or nonrecurring gains or losses, (c) the net income or loss of
any Person acquired in a "pooling of interests" transaction accrued prior to the
date it becomes a Restricted Subsidiary of the referent Person or is merged or
consolidated with the referent Person or any Restricted Subsidiary of the
referent Person, (d) the net income (but not loss) of any Restricted Subsidiary
of the referent Person to the extent that the declaration of dividends or
similar distributions by that Restricted Subsidiary of that income is restricted
by a contract, operation of law or otherwise, except for any dividends or
distributions actually paid by such Restricted Subsidiary to the referent
Person, (e) the net income but not loss of any Person, other than a Restricted
Subsidiary of the referent Person, except to the extent of cash dividends or
distributions paid to the referent Person or to a Wholly Owned Restricted
Subsidiary of the referent Person by such Person and (f) income or loss
attributable to discontinued operations (including, without limitation,
operations disposed of during such period whether or not such operations were
classified as discontinued).
"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
GAAP, less (without duplication) amounts attributable to Disqualified Capital
Stock of such Person.
"Consolidated Non-cash Charges" means, with respect to any Person, for any
period, the aggregate depreciation, amortization and other non-cash expenses of
such Person and its Restricted Subsidiaries reducing Consolidated Net Income of
such Person and its Restricted Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP (excluding any such charges which
require an accrual of or a reserve for cash charges for any future period).
"Consolidated Total Assets" of any Person means such Person's total
consolidated assets calculated in accordance with GAAP.
"Credit Agreement" means the Credit Agreement dated as of February 20,
1998, among the Company, the lenders party thereto in their capacities as
lenders thereunder and Bankers Trust Company, as agent, and any Foreign Credit
Facility together with the documents related thereto (including, without
limitation, any guarantee agreements and security documents), in each case as
such agreements may be amended (including any amendment and restatement
thereof), supplemented or otherwise modified from time to time, including any
agreement extending the maturity of, refinancing, replacing or otherwise
restructuring (including increasing the amount of available borrowings
thereunder or adding Restricted Subsidiaries of the Company as additional
borrowers or guarantors thereunder) all or any portion of the Indebtedness under
such agreement or any successor or replacement agreement and whether by the same
or any other agent, lender or group of lenders.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
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"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof on or prior to the final
maturity date of the Notes, provided that any Capital Stock that would not
constitute Disqualified Capital Stock but for provisions thereof giving holders
thereof the right to require such Person to repurchase or redeem such Capital
Stock upon the occurrence of an "asset sale" or "change of control" occurring
prior to the stated maturity of the Notes shall not constitute Disqualified
Capital Stock if the "asset sale" or "change of control" provisions applicable
to such Capital Stock are no more favorable to the holders of such Capital Stock
than the provisions contained in "Limitation on Asset Sales" and "Change of
Control" covenants and such Capital Stock specifically provides that such Person
will not repurchase or redeem any such stock pursuant to such provision prior to
the Company's repurchase of such Notes as are required to be repurchased
pursuant to such covenants.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting in good
faith and shall be evidenced by a Board Resolution of the Board of Directors of
the Company delivered to the Trustee.
"Foreign Credit Facility" means any credit facility of a Foreign Restricted
Subsidiary.
"Foreign Restricted Subsidiary" means any Restricted Subsidiary of the
Company (i) whose jurisdiction of incorporation is other than the United States
of America, any state thereof, the District of Columbia or any possession
thereof and (ii) which derives substantially all of its income from
jurisdictions other than the United States of America.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which were in effect as of the Issue Date,
provided, however, that all reports and other financial information provided by
the Company to the Holders or the Trustee shall be prepared in accordance with
GAAP as in effect on the date of such report or other financial information.
"Guarantor" means each of the Company's Restricted Subsidiaries that in the
future executes a supplemental indenture in which such Restricted Subsidiary
agrees to be bound by the terms of the Indenture as a Guarantor; provided that
any Person constituting a Guarantor as described above shall cease to constitute
a Guarantor when its respective Guarantee is released in accordance with the
terms of the Indenture.
"Indebtedness" means with respect to any Person, without duplication,
(i) all Obligations of such Person for borrowed money, (ii) all Obligations of
such Person evidenced by bonds, debentures, notes or other similar instruments,
(iii) all Capitalized Lease Obligations of such Person, (iv) all Obligations of
such Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business that are not overdue by 120 days or
more or are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted), (v) all Obligations of such Person for the
reimbursement of any obligor on any letter of credit, banker's acceptance or
similar credit transaction, (vi) guarantees and other contingent obligations in
respect of Indebtedness of other Persons of the type referred to in clauses
(i) through (v) above and clause (viii) below to the extent such Indebtedness is
so guaranteed, (vii) all Obligations of any other Person of the type referred to
in clauses (i) through (vi) above which are secured by any lien on any property
or asset of such Person, the amount of such Obligation being deemed to be the
lesser of the fair market value of such property or asset and the amount of the
Obligation so secured, (viii) all Obligations of
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such Person under currency agreements and interest swap agreements of such
Person and (ix) all Disqualified Capital Stock issued by such Person with the
amount of Indebtedness represented by such Disqualified Capital Stock being
equal to the greater of its voluntary or involuntary liquidation preference and
its maximum fixed repurchase price, but excluding accrued dividends, if any. For
purposes hereof, the "maximum fixed repurchase price" of any Disqualified
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Disqualified Capital Stock as if such
Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value shall be determined in good faith by the
Board of Directors of the issuer of such Disqualified Capital Stock. The amount
of Indebtedness of any Person at any date shall be the outstanding balance at
such date of all unconditional obligations as described above and, with respect
to contingent obligations, the maximum liability upon the occurrence of the
contingency giving rise to the obligation, provided that (A) the amount
outstanding at any time of any Indebtedness issued with original issue discount
is the original issue price of such indebtedness and (B) "Indebtedness" shall
not include any money borrowed and set aside, at the time of the incurrence of
related Indebtedness, to fund cash interest payments on such related
Indebtedness.
"Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude (i) extensions of trade credit by the
Company and its Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be, and (ii) the acquisition of Capital Stock,
securities or other properties or assets by the Company or any of its Restricted
Subsidiaries for, and to the extent, consideration consisting of Capital Stock
of the Company. For the purposes of the "Limitation on Restricted Payments"
covenant, (i) "Investment" shall (A) include and be valued at the fair market
value of the net assets of any Restricted Subsidiary at the time that such
Restricted Subsidiary is designated an Unrestricted Subsidiary and (B) exclude
the fair market value of the net assets of any Unrestricted Subsidiary at the
time that such Unrestricted Subsidiary is designated a Restricted Subsidiary and
(ii) the amount of any Investment shall be the original cost of such Investment
plus the cost of all additional Investments by the Company or any of its
Restricted Subsidiaries, without any adjustments for increases or decreases in
value, or write-ups, write-downs or write-offs with respect to such Investment,
reduced by the payment of dividends or distributions in connection with such
Investment or any other amounts received in respect of such Investment; provided
that no such payment of dividends or distributions or receipt of any such other
amounts shall reduce the amount of any Investment if such payment of dividends
or distributions or receipt of any such amounts would be included in
Consolidated Net Income. If the Company or any Restricted Subsidiary of the
Company sells or otherwise disposes of any Common Stock of any direct or
indirect Restricted Subsidiary of the Company such that, after giving effect to
any such sale or disposition, the Company no longer owns, directly or
indirectly, greater than 50% of the Common Stock of such Restricted Subsidiary,
the Company shall be deemed to have made an investment on the date of such sale
equal to the fair market value of the Common Stock of such Restricted Subsidiary
not sold or disposed of.
"Issue Date" means the date of original issuance of the Notes.
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"Management Agreement" means the Management Agreement by and among CHP, the
Company and their respective affiliates, as in effect on the Issue Date.
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"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest) received by
the Company or any of its Restricted Subsidiaries from such Asset Sale net of
(a) reasonable out-of-pocket expenses and fees relating to such Asset Sale
(including, without limitation, legal, accounting and investment banking fees
and sales or brokerage commissions), (b) net taxes paid or payable as a result
of such Asset Sale, (c) repayment of Indebtedness that is required to be repaid
in connection with such Asset Sale, (d) amounts required to be paid to any
Person (other than the Company or any of its Restricted Subsidiaries) owning a
beneficial interest in the assets which are subject to such Asset Sale and
(e) appropriate amounts to be provided by the Company or any Restricted
Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against
any liabilities associated with such Asset Sale and retained by the Company or
any Restricted Subsidiary, as the case may be, after such Asset Sale, including,
without limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Permitted Holder(s)" means (i) CHP, Castle Harlan, Inc. and employees,
management and directors of, and Persons owning accounts managed by, any of the
foregoing and their respective Affiliates, including, without limitation,
Holdings and its Subsidiaries and (ii) institutional investors who acquired
Common Stock of Holdings on or within 30 days of the Issue Date.
"Permitted Indebtedness" means, without duplication, each of the following:
(i) Indebtedness under the Notes, the Indenture and the Guarantees, if
any;
(ii) Indebtedness incurred pursuant to the Credit Agreement in an
aggregate principal amount at any time outstanding not to exceed
(A) $75 million with respect to the Indebtedness under the Term Loan Credit
Facility, less the amount of all mandatory principal payments actually made
by the Company in respect of the Term Loan Credit Facility (excluding any
such payments to the extent refinanced at the time of payment under a
replacement Credit Agreement) and (B) $85 million in the aggregate with
respect to Indebtedness under (1) the Revolving Credit Loans, reduced by
any required permanent repayments (which are accompanied by a corresponding
permanent commitment reduction) thereunder and (2) any Foreign Credit
Facility, reduced by any required permanent repayments thereof as a result
of any asset sales, but not to exceed $25 million outstanding at any one
time;
(iii) other Indebtedness of the Company and its Restricted
Subsidiaries outstanding on the Issue Date reduced by the amount of any
scheduled amortization payments or mandatory prepayments when actually paid
or permanent reductions thereon (including the Purchase Price Adjustment
Agreement pursuant to the Stock Purchase Agreement);
(iv) Interest Swap Obligations of the Company covering Indebtedness of
the Company or any of its Restricted Subsidiaries and Interest Swap
Obligations of any Restricted Subsidiary of the Company covering
Indebtedness of such Restricted Subsidiary and its Restricted Subsidiaries;
provided, however, that such Interest Swap Obligations are entered into to
protect the Company and its Restricted Subsidiaries from fluctuations in
interest rates on Indebtedness incurred in accordance with the Indenture to
the extent the notional principal amount of such Interest Swap Obligation
does not exceed the principal amount of the Indebtedness to which such
Interest Swap Obligation relates;
(v) Indebtedness under Currency Agreements; provided that in the case
of Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the Indebtedness of the Company and its
Restricted Subsidiaries outstanding other than as a result of fluctuations
in foreign currency exchange rates or by reason of fees, indemnities and
compensation payable thereunder;
(vi) Indebtedness of a Restricted Subsidiary of the Company to the
Company or to a Restricted Subsidiary of the Company for so long as such
Indebtedness is held by the Company or a Restricted Subsidiary of the
Company, in each case subject to no Lien held by a Person other than the
Company or a
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Restricted Subsidiary of the Company; provided that if as of any date any
Person other than the Company or a Restricted Subsidiary of the Company
owns or holds any such Indebtedness or holds a Lien, other than pursuant to
the Credit Agreement, in respect of such Indebtedness, such date shall be
deemed the incurrence of Indebtedness not constituting Permitted
Indebtedness by the issuer of such Indebtedness;
(vii) Indebtedness of the Company to a Restricted Subsidiary of the
Company for so long as such Indebtedness is held by a Restricted Subsidiary
of the Company, in each case subject to no Lien, other than pursuant to the
Credit Agreement; provided that (a) any Indebtedness of the Company to any
Restricted Subsidiary of the Company is unsecured and subordinated,
pursuant to a written agreement, to the Company's obligations under the
Indenture and the Notes and (b) if as of any date any Person other than a
Restricted Subsidiary of the Company owns or holds any such Indebtedness or
any Person, other than pursuant to the Credit Agreement, holds a Lien in
respect of such Indebtedness, such date shall be deemed the incurrence of
Indebtedness not constituting Permitted Indebtedness by the Company;
(viii) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; provided, however, that such
Indebtedness is extinguished within three business days of incurrence;
(ix) Indebtedness of the Company or any of its Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with
self-insurance or similar requirements in the ordinary course of business;
(x) Indebtedness represented by Capitalized Lease Obligations and
Purchase Money Indebtedness of the Company and its Restricted Subsidiaries
incurred in the ordinary course of business not to exceed $10 million at
any one time outstanding;
(xi) Indebtedness (A) in respect of performance, surety or appeal
bonds or letters of credit provided in the ordinary course of business, or
(B) arising from agreements providing for indemnification, adjustment of
purchase price or similar obligations, or from guarantees or letters of
credit, surety bonds or performance bonds securing any such obligations of
the Company or any of its Restricted Subsidiaries, in any case incurred in
connection with the disposition of any business, assets or Restricted
Subsidiary of the Company (excluding herefrom any guarantees of
Indebtedness incurred by any Person acquiring all or any portion of such
business, assets or Restricted Subsidiary of the Company for the purpose of
financing such acquisition), in a principal amount not to exceed the gross
proceeds actually received by the Company or any of its Restricted
Subsidiaries in connection with such disposition;
(xii) Indebtedness of the Company or any of its Restricted
Subsidiaries, to the extent the net proceeds thereof are substantially
contemporaneously (A) used to purchase Notes tendered in a Change of
Control Offer or (B) deposited to defease the Notes as described above
under "Legal Defeasance and Covenant Defeasance";
(xiii) guarantees of Indebtedness of the Company or any of its
Restricted Subsidiaries by any Restricted Subsidiary provided the guarantee
of such Indebtedness is permitted by and made in accordance with the
"Limitation on Guarantees by Restricted Subsidiaries" covenant; and
guarantees of Indebtedness of any Restricted Subsidiary of the Company by
the Company provided that such Indebtedness is permitted by the "Limitation
of Indebtedness" covenant;
(xiv) Refinancing Indebtedness; and
(xv) additional Indebtedness of the Company and its Restricted
Subsidiaries in an aggregate principal amount not to exceed $10 million at
any one time outstanding.
"Permitted Investments" means (i) Investments by the Company or any
Restricted Subsidiary of the Company in any Person that is or will become
immediately after such Investment a Restricted Subsidiary of the Company or that
will merge or consolidate into the Company or a Restricted Subsidiary of the
Company; (ii) Investments in the Company by any Restricted Subsidiary of the
Company; provided that any Indebtedness evidencing such Investment in the
Company is unsecured and subordinated, pursuant to a written agreement, to
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the Company's obligations under the Notes and the Indenture; (iii) investments
in cash and Cash Equivalents; (iv) loans and advances to employees and officers
of the Company and its Restricted Subsidiaries in the ordinary course of
business for bona fide business purposes not in excess of $500,000 at any one
time outstanding; (v) Currency Agreements and Interest Swap Obligations entered
into in the ordinary course of the Company's or its Restricted Subsidiaries'
businesses and otherwise in compliance with the Indenture; (vi) Investments in
Unrestricted Subsidiaries and joint ventures not to exceed $5.0 million at any
one time outstanding; (vii) Investments in securities of trade creditors or
customers received pursuant to any plan of reorganization or similar arrangement
upon the bankruptcy or insolvency of such trade creditors or customers;
(viii) Investments made by the Company or its Restricted Subsidiaries as a
result of consideration received in connection with an Asset Sale made in
compliance with the "Limitation on Asset Sales" covenant; (ix) other Investments
not to exceed $5.0 million at any one time outstanding and (x) Investments
existing on the Issue Date.
"Permitted Liens" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) being contested in good faith by
appropriate proceedings and as to which the Company or its Restricted
Subsidiaries shall have set aside on its books such reserves as may be
required pursuant to GAAP;
(ii) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security, including any Lien securing letters of
credit issued in the ordinary course of business consistent with past
practice in connection therewith, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(iv) Liens arising by reason of any judgment, decree or order of any
court but not giving rise to an Event of Default so long as such Lien is
adequately bonded and any appropriate legal proceedings which may have been
duly initiated for the review of such judgment, decree or order shall not
have been finally terminated or the period within which such proceedings
may be initiated shall not have expired;
(v) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company
or any of its Restricted Subsidiaries;
(vi) Liens representing the interest or title of a lessor under any
Capitalized Lease Obligation; provided that such Liens do not extend to any
property or assets which is not leased property subject to such Capitalized
Lease Obligation;
(vii) Liens upon specific items of inventory or other goods and
proceeds of the Company or any of its Restricted Subsidiaries securing such
Person's obligations in respect of bankers' acceptances issued or created
for the account of such Person to facilitate the purchase, shipment or
storage of such inventory or other goods;
(viii) Liens securing reimbursement obligations with respect to
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(ix) Liens encumbering deposits made to secure obligations arising
from statutory, regulatory, contractual, or warranty requirements of the
Company or any of its Restricted Subsidiaries, including rights of offset
and set-off;
(x) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(xi) Liens securing Capitalized Lease Obligations and Purchase Money
Indebtedness permitted pursuant to the "Limitation on Indebtedness"
covenant; provided, however, that in the case of Purchase
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Money Indebtedness (A) the Indebtedness shall not exceed the cost of such
property or assets and shall not be secured by any property or assets of
the Company or any Restricted Subsidiary of the Company other than the
property and assets so acquired or constructed and (B) the Lien securing
such Indebtedness shall be created within 180 days of such acquisition or
construction or, in the case of a refinancing of any Purchase Money
Indebtedness, within 180 days of such refinancing;
(xii) Liens securing Indebtedness under Currency Agreements; and
(xiii) Liens securing Acquired Indebtedness incurred in accordance
with the "Limitation on Incurrence of Additional Indebtedness" covenant;
provided that (A) such Liens secured such Acquired Indebtedness at the time
of and prior to the incurrence of such Acquired Indebtedness by the Company
or a Restricted Subsidiary of the Company and were not granted in
connection with, or in anticipation of, the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary of the Company and
(B) such Liens do not extend to or cover any property or assets of the
Company or of any of its Restricted Subsidiaries other than the property or
assets that secured the Acquired Indebtedness prior to the time such
Indebtedness became Acquired Indebtedness of the Company or a Restricted
Subsidiary of the Company.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Purchase Money Indebtedness" means Indebtedness of the Company and its
Restricted Subsidiaries incurred in the normal course of business for the
purpose of financing all or any part of the purchase price, or the cost of
installation, construction or improvement, of property or equipment.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Refinance" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant (other than
pursuant to clause (ii), (iv), (v), (vi), (vii), (viii), (ix), (x), (xi), (xii),
(xiii) or (xv) of the definition of Permitted Indebtedness), in each case (other
than Refinancing Indebtedness incurred to Refinance all of the Notes) that does
not (1) result in an increase in the aggregate principal amount of Indebtedness
of such Person as of the date of such proposed Refinancing (plus accrued
interest and plus the amount of any premium required to be paid under the terms
of the instrument governing such Indebtedness and plus the amount of reasonable
fees, expenses and other amounts payable by the Company or any of its Restricted
Subsidiaries in connection with such Refinancing) or (2) create Indebtedness
with (A) a Weighted Average Life to Maturity that is less than the Weighted
Average Life to Maturity of the Indebtedness being Refinanced or (B) a final
maturity earlier than the final maturity of the Indebtedness being Refinanced;
provided that (x) if such Indebtedness being Refinanced is Indebtedness solely
of the Company (other than Refinancing Indebtedness incurred to Refinance all of
the Notes), then such Refinancing Indebtedness shall be Indebtedness solely of
the Company and (y) if such Indebtedness being Refinanced is subordinate or
junior to the Notes, then such Refinancing Indebtedness shall be subordinate to
the Notes at least to the same extent and in the same manner as the Indebtedness
being Refinanced.
"Restricted Subsidiary" of any Person means any Subsidiary of such Person
which at the time of determination is not an Unrestricted Subsidiary.
"Revolving Credit Loans" means one or more revolving credit facilities
under the Credit Agreement.
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of the Company of any
property, whether owned by the Company or any Restricted Subsidiary of the
Company at the Issue Date or later acquired, which has been or is to be sold or
transferred by the Company or such Restricted Subsidiary to
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such Person or to any other Person from whom funds have been or are to be
advanced by such Person on the security of such Property.
"Significant Subsidiary", with respect to any Person, means any Restricted
Subsidiary of such Person that satisfies the criteria for a "significant
subsidiary" set forth in Rule 1.02(w) of Regulation S-X under the Securities
Act.
"Subsidiary", with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (ii) any
other Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Tax Sharing Agreement" means the tax sharing agreement between the Company
and Holdings as in effect on the date hereof, and as thereafter modified in any
way not adverse to the Company or the Holders.
"Term Loan Credit Facility" means one or more term loan facilities under
the Credit Agreement.
"Unrestricted Subsidiary" of any Person means (i) any Subsidiary of such
Person that at the time of determination shall be or continue to be designated
an Unrestricted Subsidiary by the Board of Directors of such Person in the
manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The
Board of Directors of such Person may designate any Subsidiary (including any
newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary
unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on
any property of, the Company or any other Subsidiary of the Company that is not
a Subsidiary of the Subsidiary to be so designated; provided that (x) the
Company certifies to the Trustee that such designation complies with the
"Limitation on Restricted Payments" covenant and (y) each Subsidiary to be so
designated and each of its Subsidiaries has not at the time of designation, and
does not thereafter, create, incur, issue, assume, guarantee or otherwise become
directly or indirectly liable with respect to any Indebtedness pursuant to which
the lender has recourse to any of the assets of the Company or any of its
Restricted Subsidiaries. The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary only if (x) immediately after giving
effect to such designation, the Company is able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) in compliance with
the "Limitation on Incurrence of Additional Indebtedness" covenant and (y)
immediately before and immediately after giving effect to such designation, no
Default or Event of Default shall have occurred and be continuing. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the Board Resolution giving effect to
such designation and an officers' certificate certifying that such designation
complied with the foregoing provisions.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" of any Person means any Restricted
Subsidiary of such Person of which all the outstanding voting securities (other
than directors' qualifying shares or an immaterial amount of shares required to
be owned by other Persons, in each case pursuant to applicable law) are owned by
such Person or any Wholly Owned Restricted Subsidiary of such Person.
DESCRIPTION OF THE HOLDINGS NOTES
Universal Compression Holdings, Inc. issued $43,500,000 of 11 3/8% Senior
Discount Notes due February 15, 2009 yielding gross proceeds of $25,056,435
("Holdings Notes") in a private placement. The proceeds from the Holdings Notes
were contributed to the Company as equity and were used by the Company to
finance a portion of the Purchase Price. See "Use of Proceeds."
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The Holdings Notes were offered by Holdings at a substantial discount from
their principal amount. Commencing February 15, 2003, interest will accrue until
maturity on the Holdings Notes at the rate of 11 3/8% per annum and will be
payable semi-annually on August 15 and February 15, commencing August 15, 2003.
The Holdings Notes will be redeemable, in whole or in part, at the option of
Holdings on or at any time prior to February 15, 2003. Holdings may, at its
option, redeem up to 100% of the aggregate principal amount of the Holdings
Notes originally issued with the net cash proceeds of one or more Public Equity
Offerings at a redemption price equal to 111.375% of the Accreted Value of the
Holdings Notes to be redeemed plus accrued and unpaid interest, if any, to the
date of redemption.
In the event of a Change of Control each holder of the Holdings Notes will
have the right to require Holdings to repurchase such holder's Holdings Notes at
a price equal to 101% of the Accreted Value thereof, plus accrued and unpaid
interest, if any, to the date of purchase. In addition, the Holdings will be
obligated to offer to repurchase the Holdings Notes at 100% of the Accreted
Value thereof, plus accrued and unpaid interest, if any, to the date of purchase
in the event of certain Asset Sales.
The Holdings Notes are general unsecured obligations of Holdings and rank
pari passu in right of payment to existing and future senior indebtedness of
Holdings.
The indenture governing the Holdings Notes contains certain covenants,
substantially similar to those in the Notes, that limit the ability of the
Holdings and its subsidiaries to, among other things, incur additional
indebtedness, pay dividends or make investments and certain other restricted
payments, consummate certain asset sales, enter into certain transactions with
affiliates, incur liens, impose restrictions on the ability of a subsidiary to
pay dividends or make certain payments to Holdings and its subsidiaries, merge
or consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of Holdings. In
addition, under certain circumstances, Holdings will be required to offer to
purchase the Holdings Notes, in whole or in part, at a purchase price equal to
100% of the Accreted Value thereof plus accrued and unpaid interest, if any, to
the date of repurchase, with the proceeds of certain Asset Sales (as defined).
All of such covenants are subject to significant qualifications and exceptions.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
THE SUMMARY OF MATERIAL FEDERAL INCOME TAX CONSEQUENCES SET FORTH BELOW IS
FOR GENERAL INFORMATION ONLY. PROSPECTIVE PURCHASERS OF THE EXCHANGE NOTES ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE FEDERAL, STATE, LOCAL AND
OTHER TAX CONSEQUENCES OF ACQUIRING, OWNING AND DISPOSING OF THE EXCHANGE NOTES.
The following discussion summarizes all material United States federal
income tax consequences to beneficial owners arising from the purchase,
ownership and disposition of the Exchange Notes which constitutes the opinion of
Schulte Roth & Zabel LLP, special counsel to the Company. The discussion is
based on the United States Internal Revenue Code of 1986, as amended (the
"Code"), currently applicable Treasury regulations promulgated thereunder, and
judicial and administrative interpretations thereof, all as in effect on the
date hereof. Such authorities may be repealed, revoked or modified so as to
result in federal income tax consequences different from those discussed below,
possibly with retroactive effect. There can be no assurance that the Internal
Revenue Service ("IRS") will not take a contrary view, and no ruling from the
IRS has been or will be sought. The following discussion is intended as a
descriptive summary only and is not intended as tax advice for any particular
investor. It is not a complete analysis and does not address tax consequences of
holding the Exchange Notes which may be relevant to investors in special tax
situations, such as insurance companies, banks, investors subject to the
alternative minimum tax, tax-exempt organizations, dealers in securities or
other investors holding the Exchange Notes as other than capital assets,
investors holding the Exchange Notes as a hedge or as part of a hedging,
straddle or conversion transaction, Non-U.S. Holders (as defined below) that own
(directly, indirectly or by attribution) 10% or more of the outstanding stock of
the Company or holders whose "functional currency" (as defined in Code Section
985) is not the U.S. dollar. Finally, the discussion does not address the effect
of any United States state or local tax law or foreign tax law on the Exchange
Notes.
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U.S. HOLDERS
For purposes of this summary, the term "U.S. Holder" means a beneficial
owner of an Exchange Note that is (a) an individual who is a United States
citizen or resident, (b) a corporation, partnership or other entity created or
organized under the laws of the United States or any political subdivision
thereof, (c) an estate the income of which is subject to federal income tax
regardless of source, or (d) a trust if a court within the United States is able
to exercise primary supervision over the administration of the trust and one or
more U.S. persons that have the authority to control all substantial decisions
of the trust. The term "Non-U.S. Holder" means a beneficial owner of an Exchange
Note that is not a U.S. Holder.
Exchange Notes. The exchange of Original Notes for Exchange Notes will not
be a taxable event to holders of the Notes. Accordingly, holders will not
recognize any taxable gain or loss or any income as a result of such an
exchange. Because the Exchange Notes will be treated as a continuation of the
Original Notes for tax purposes, the remainder of this description refers
generally to "Notes."
Original Issue Discount
General. A debt obligation that has an issue price that is less than its
stated redemption price at maturity ("SRPM") by more than a de minimis amount
will be treated as issued with original issue document ("OID") for federal
income tax purposes. As explained below, the issue price of the Notes was
substantially less than their SRPM, so the Notes were issued with OID.
Generally, the issue price of a Note was the first price at which a
substantial amount of the Notes were sold to the public (ignoring sales to bond
houses, brokers, or similar persons or organizations acting in the capacity of
underwriters, placement agents, or wholesalers). The SRPM of a Note is the sum
of all payments provided by the Note that are not payments of "qualified stated
interest". "Qualified stated interest" generally means stated interest that is
unconditionally payable in cash or property other than debt instruments of the
Company at least annually at a single fixed rate (or at certain qualifying
variable rates) applied to the outstanding principal amount of the Note. The
Notes were issued at a discount from their stated principal amount. In addition,
stated interest on the Notes is not payable until August 15, 2003. As a result,
the stated interest on the Notes is not "qualified stated interest" and all
payments of stated interest will be included in the SRPM of the Notes.
Accordingly, the Notes were issued with OID.
U.S. Holders must generally include OID in gross income for federal income
tax purposes on an annual basis under a constant yield method without regard to
the holder's method of accounting for tax purposes. As a result, U.S. Holders
generally will be required to include OID in income in advance of the receipt of
cash attributable to the stated interest. OID accrues based on a compounded,
constant yield to maturity; accordingly U.S. Holders of Notes issued with OID
are required to include in income increasingly greater amounts of OID in
successive accrual periods. However, U.S. Holders generally are not required to
include separately in income cash payments received on the Notes, even if
denominated as interest. The aggregate amount of OID on each Note equals the
excess of such Note's SRPM over such Note's issue price.
The amount of OID includible in income by a U.S. Holder of a Note is the
sum of the "daily portions" of OID with respect to the Note for each day during
the taxable year (or portion of the taxable year) in which such U.S. Holder held
such Note. The daily portion is determined by allocating to each day in any
"accrual period" a pro rata portion of the OID allocable to that accrual period.
The "accrual period" for a Note may be of any length and may vary in length over
the term of the Note, provided that each accrual period is no longer than one
year and each scheduled payment of principal or interest occurs on the first day
or the final day of an accrual period.
In general, the amount of OID allocable to an accrual period is an amount
equal to the product of the Note's adjusted issue price at the beginning of such
accrual period and its yield to maturity (determined on the basis of compounding
at the close of each accrual period and properly adjusted for the length of the
accrual period). The Notes' yield to maturity is determined by performing
present value calculations of all principal and interest payments due under the
Note. The rate that produces an amount equal to the issue price of the Note is
the Note's yield to maturity. The yield must be constant over the term of the
Note and must be calculated to at least two decimal places (e.g., 10.50%). OID
allocable to a final accrual period is the difference between the amount
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payable at maturity and the adjusted issue price at the beginning of the final
accrual period. The "adjusted issue price" of a Note at the beginning of any
accrual period is equal to its issue price increased by the accrued OID for each
prior accrual period (determined without regard to the amortization of any
acquisition premium, as described below) and reduced by any payments made on
such Note on or before the first day of the accrual period.
The Treasury regulations contain special rules that allow any reasonable
method to be used in determining the amount of OID allocable to a short initial
accrual period, provided all other accrual periods are of equal length, and
require that the amount of OID allocable to the final accrual period equals the
excess of the amount payable at the maturity of the Note (other than any payment
of qualified stated interest) over the Note's adjusted issue price as of the
beginning of such final accrual period. In addition, if an interval between
payments of qualified stated interest contains more than one accrual period,
then the amount of qualified stated interest payable at the end of such interval
is allocated pro rata (on the basis of their relative lengths) between the
accrual periods contained in the interval.
Contingent Payments. In the event of a Change of Control, the Company will
be required to offer to repurchase all the Notes at a purchase price of 101% of
the principal amount thereof, plus accrued and unpaid interest, if any, to the
date of purchase. The right of U.S. Holders to require repurchase upon a Change
of Control will not affect the yield or maturity date of the Notes provided
that, based on all the facts and circumstances as of the issue date, the payment
schedule on such Notes that does not reflect a Change of Control is
significantly more likely than not to occur. The Company does not intend to
treat the Change of Control provisions of the Notes as affecting the computation
of the amount of OID on the Notes.
Optional Redemption. The Notes are redeemable at the option of the Company
in whole or in part and subject to certain conditions (see "Description of the
Notes--Optional Redemption"). For purposes of computing the Notes' yield to
maturity, the Company will be deemed to exercise its option to redeem the Notes
if such deemed exercise could produce (utilizing the redemption price on any
date on which the option could be exercised as the SRPM) a lower yield on the
Notes than the yield to stated maturity. The Company's option to redeem the
Notes prior to their stated maturity date at a premium should not affect the
computation of the amount of OID on the Notes.
Market Discount. A U.S. Holder that purchases a Note at a market discount
(as described below) generally will be required to treat any principal payments
on, or any gain on the disposition or maturity of, such Note as ordinary income
to the extent of the accrued market discount (not previously included in income)
at the time of such payment or disposition. In general, market discount is the
amount by which a Note's adjusted issue price exceeds the U.S. Holder's basis in
the Note immediately after the Note is acquired. If such difference is less than
a specified de minimis amount, the market discount will be disregarded. Market
discount on a Note will accrue ratably during the period from the date of
acquisition to the maturity of a Note, unless the U.S. Holder elects to accrue
such market discount on the constant yield method. This election is irrevocable
and applies only to the Note for which it is made.
The U.S. Holder may also elect to include market discount in income
currently as it accrues. This election, once made, applies to all market
discount obligations acquired on or after the first day of the first taxable
year to which the election applies and may not be revoked without the consent of
the IRS. Generally, if a Note with market discount is transferred in certain
non-taxable transactions, the market discount will be transferred to the
property received in exchange for the Note; however, under certain limited
circumstances, the market discount will be includible as ordinary income as if
such Note had been sold at its fair market value. A U.S. Holder that does not
elect to include market discount in income currently may be required to defer
deductions for interest on borrowings incurred or continued to purchase or carry
such Note in an amount not exceeding the accrued market discount on such Note,
until the maturity of the Note or, in certain circumstances, the earlier
disposition of such Note.
Acquisition Premium. A U.S. Holder that purchases a Note for an amount
that is greater than the adjusted issue price of such Note, but that is less
than or equal to the sum of the amounts payable on the Note after the purchase
date, will be considered to have purchased such Note at an "acquisition
premium". Under the acquisition premium rules of the Code and the Treasury
regulations thereunder, the amount of OID that such U.S.
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Holder must include in its gross income with respect to such Note will be
reduced (but not below zero) for each accrual period by the portion of
acquisition premium properly allocable to the period.
Purchase, Sale, Retirement and Other Disposition of the Notes. In general,
a U.S. Holder's adjusted tax basis in a Note will equal the cost of such Note to
the U.S. Holder, increased by the amount of any OID or market discount
previously included in the U.S. Holder's income with respect to the Note, and
reduced by the amount of (i) any payments made on the Note and (ii) any
amortizable bond premium applied to reduce interest on the Note.
A U.S. Holder will generally recognize gain or loss on the sale, retirement
or other disposition (including redemption) of a Note in an amount equal to the
difference between (i) the amount of cash and the fair market value of property
received by such U.S. Holder on such disposition (less any amounts attributable
to, and taxable as, accrued but unpaid interest) and (ii) the U.S. Holder's
adjusted tax basis in the Note (as described above). Gain or loss upon the sale,
retirement or other disposition (including redemption) of a Note will be capital
gain or loss (except that any portion of such gain attributable to market
discount will be ordinary income). Under recently enacted legislation, the
maximum individual U.S. federal income tax rate on net capital gains is 20% for
capital assets held for more than 18 months and 28% for capital assets held for
more than 12 months but not more than 18 months. Gains on the sale of capital
assets held for one year or less are subject to U.S. federal income tax at
ordinary income tax rates. Certain limitations exist on the deductibility of
capital losses by both corporations and individual taxpayers.
NON-U.S. HOLDERS
Interest (including OID). Subject to the discussion of backup withholding
below, a Non-U.S. Holder will generally not be subject to U.S. federal income or
withholding tax on payments of principal, premium, if any, and interest
(including OID) on the Notes under the portfolio interest exemption of the Code,
provided that (in the case of interest, including OID): (i) the Non-U.S. Holder
does not actually or constructively own 10% or more of the total combined voting
power of all classes of stock of the Company entitled to vote; (ii) the Non-U.S.
Holder is not a controlled foreign corporation that is related to the Company
through stock ownership; (iii) such interest or OID is not effectively connected
with a United States trade or business of the Non-U.S. Holder; (iv) generally
either (a) the beneficial owner of the Notes certifies to the Company or its
agent, under penalties of perjury, that it is a Non-U.S. Holder and provides a
completed IRS Form W-8 ("Certificate of Foreign Status") or (b) a securities
clearing organization, bank or other financial institution which holds
customers' securities in the ordinary course of its trade or business (a
"financial institution") and which holds the Notes, certifies to the Company or
its agent, under penalties of perjury, that it has received Form W-8 from the
beneficial owner or that it has received from another financial institution a
Form W-8 and furnishes the payor with a copy thereof; and (v) for payments made
on or after January 1, 1999, the payment can be reliably associated (within the
meaning of applicable Treasury Regulations) with IRS Form W-8. If any of the
situations described in proviso (i), (ii) or (iv) of the preceding sentence do
not exist, interest on the Notes when received is subject to United States
withholding tax at the rate of 30% unless an income tax treaty between the
United States and the country of which the Non-U.S. Holder is a tax resident
provides for the elimination or reduction in the rate of U.S. federal
withholding tax.
If a Non-U.S. Holder of a Note is engaged in a trade or business in the
United States and interest (including OID) on the Note is effectively connected
with the conduct of such trade or business, such Non-U.S. Holder, although
exempt from U.S. federal withholding tax by reason of the delivery of a properly
completed Form 4224, will be subject to U.S. federal income tax on such interest
(including OID) and on any gain realized on the sale, exchange or other
disposition of a Note in the same manner as if it were a U.S. Holder. In
addition, if such Non-U.S. Holder is a foreign corporation, it may be subject to
a branch profits tax equal to 30% of its effectively connected earnings and
profits for that taxable year, unless it qualifies for a lower rate under an
applicable income tax treaty.
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Sale, Retirement and Other Disposition of Notes. A Non-U.S. Holder
generally will not be subject to U.S. federal income tax on any gain realized in
connection with the sale, exchange, retirement or other disposition of Notes
(other than gain attributable to accrued interest or OID, which is addressed in
the preceding paragraph), unless: (i) the gain is effectively connected with a
trade or business carried on by the Non-U.S. Holder within the United States;
(ii) if a tax treaty applies, the gain is attributable to an office or other
fixed place of business maintained in the United Stated by the Non-U.S. Holder;
or (iii) in the case of an individual holder, (a) such holder is present in the
United States for 183 days or more in the taxable year of disposition and
certain other conditions are satisfied, or (b) the Non-U.S. Holder is subject to
tax pursuant to provisions of the Code applicable to United States expatriates.
UNITED STATES INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, under current U.S. federal tax law, payments to a U.S. Holder
of (a) principal, premium (if any) and interest (including OID) on a Note, and
(b) the proceeds of sale or other disposition of a Note before maturity will be
subject to U.S. information reporting requirements. Subject to certain
exceptions, such payments will also generally be subject to "backup" withholding
tax at a rate of 31% if such U.S. Holder fails to supply a correct taxpayer
identification number and certain other information in the required manner. U.S.
Holders should consult their own tax advisors regarding their qualification for
exemption from backup withholding and the procedure for obtaining such an
exemption if applicable.
In general, there is no U.S. information reporting requirement or backup
withholding tax on payments to Non-U.S. Holders who provide the appropriate
certification described above regarding qualification for the portfolio interest
exemption from U.S. federal income tax for payments of principal or interest
(including OID) on the Notes.
Payment by the Company of principal on the Notes or payment by a United
States office of a broker of the proceeds of a sale of Notes is subject to both
backup withholding and information reporting unless the beneficial owner
provides a completed IRS Form W-8 which certifies under penalties of perjury
that such owner is a Non-U.S. Holder who meets all the requirements for
exemption from U.S. federal income tax on any gain from the sale, exchange or
retirement of the Notes.
In general, backup withholding and information reporting will not apply to
a payment of the gross proceeds of a sale of Notes effected at a foreign office
of a broker. If, however, such broker is, for U.S. federal income tax purposes,
a U.S. person, a controlled foreign corporation or a foreign person 50% or more
of whose gross income for certain periods is derived from activities that are
effectively connected with the conduct of a trade or business in the United
States, such payments will not be subject to backup withholding, but will be
subject to information reporting unless (i) such broker has documentary evidence
in its records that the beneficial owner is a Non-U.S. Holder and certain other
conditions are met, or (ii) the beneficial owner otherwise establishes an
exemption, provided such broker does not have actual knowledge that the payee is
a United States person. Non-U.S. Holders should consult their tax advisors
regarding the application of these rules to their particular situations, the
availability of an exemption therefrom and the procedure for obtaining such an
exemption, if available.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be allowed as a refund or a credit against such
holder's U.S. federal income tax liability, provided the required information is
furnished to the IRS.
BOOK-ENTRY; DELIVERY AND FORM
Ownership of beneficial interests in the Global Notes is limited to persons
who have accounts with DTC ("participants") or persons who hold interests
through participants. Ownership of beneficial interests in the Global Notes is
shown on, and the transfer of such ownership is effected only through, records
maintained by DTC or its nominee (with respect to interest of participants) and
the records of participants (with respect to interests of persons other than
participants). Holders may hold their interests in the Global Notes directly
through DTC if they are participants in such system, or indirectly through
organizations which are participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by such Global Notes for all
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purposes under the Indenture. No beneficial owner of an interest in the Global
Notes will be able to transfer that interest except in accordance with DTC's
procedures, in addition to those provided for under the Indenture with respect
to the Notes.
Payments of the principal of, premium (if any), interest (including
Additional Interest) on, the Global Notes will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of the Company, the
Trustee or any Paying Agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Notes or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, interest (including Additional Interest) on the
Global Notes, will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of the Global Notes as shown on the records of DTC or its nominee. The Company
also expects that payments by participants to owners of beneficial interests in
the Global Notes held through such participants will be governed by standing
instructions and customary practice, as is now the case with securities held for
the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical delivery of a
Certificated Security for any reason, including to sell Notes to persons in
states which require physical delivery of the Notes, or to pledge such
securities, such holder must transfer its interest in a Global Note, in
accordance with the normal procedures of DTC and with the procedures set forth
in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more participants to whose
account the DTC interests in the Global Notes are credited and only in respect
of such portion of the aggregate principal amount of Notes as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default under the Indenture, DTC will exchange the Global Notes
for Certificated Securities, which it will distribute to its participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and certain other organizations. Indirect
access to the DTC system is available to others such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a participant, either directly or indirectly ("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Note and a successor depositary is not
appointed by the Company within 90 days, Certificated Securities will be issued
in exchange for the Global Notes.
PLAN OF DISTRIBUTION
Reference is made to "The Exchange Offer" above for a description of the
Exchange Offer, including the purpose of the Exchange Offer, the basis upon
which the Exchange Notes are offered and expenses incurred in connection with
the Exchange Offer.
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus with any resale of such Exchange Notes. To date, the Commission has
taken the position that a broker-dealer may fulfill its prospectus delivery
requirements with respect to transactions involving an exchange of securities
such as the exchange contemplated by the Exchange Offer with a
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Prospectus meeting the requirements of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in exchange
for Original Notes where such Original Notes were acquired as a result of market
making activities or other trading activities. The Company will, during the
period ending 180 days after the consummation of the Exchange Offer, make this
Prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale.
Neither the Company nor any of its affiliates has entered into any
arrangement or understanding with any broker-dealer to distribute the Exchange
Notes and will not receive any proceeds from any sale of Exchange Notes by any
broker-dealers or any other persons. Exchange Notes received by broker-dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of the resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker or dealer and/or the purchaser of any such
Exchange Notes. Any broker or dealer that resells Exchange Notes that were
received by it for its own account pursuant to the Exchange Offer and any broker
or dealer that participates in a distribution of such Exchange Notes may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of Exchange Notes and any commissions or concessions
received by any such person may be deemed to be underwriting compensation under
the Securities Act. The Letter of Transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
The Company has agreed in the Registration Rights Agreement to pay all
expenses incident to the Exchange Offer.
In connection with the Offering, certain persons participating in the
Offering may engage in transactions that stabilize, maintain or otherwise affect
the price of the Notes, specifically, the Initial Purchasers may bid for and
purchase Notes in the open markets to stabilize the price of the Notes. The
Initial Purchasers may also overallot the Offering, creating a syndicate short
position, and may bid for and purchase Notes in the open market to cover the
syndicate short position. In addition, the Initial Purchasers may bid for and
purchase the Notes in market making transactions and impose penalty bids. These
activities may stabilize or maintain the market price of the Notes above market
levels that may otherwise prevail. The Initial Purchasers are not required to
engage in these activities, and may end these activities at any time.
LEGAL MATTERS
Certain legal matters in connection with the Notes offered hereby will be
passed upon for the Company by Schulte Roth & Zabel LLP. Certain legal matters
in connection with this Offering will be passed upon for the Initial Purchasers
by Cahill Gordon & Reindel.
EXPERTS
The financial statements of Tidewater Compression Service, Inc. and
subsidiaries as of March 31, 1997, and for each of the years in the two-year
period ended March 31, 1997 have been included herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
The financial statements of Universal Compression, Inc. as of March 31,
1998 and for the period from December 12, 1997 (inception) through March 31,
1998 and the financial statements of Tidewater Compression Service, Inc. as of
February 20, 1998 and for the period from April 1, 1997 through February 20,
1998 included in this Prospectus and the related financial statement schedules
for Tidewater Compression Service, Inc. for the period ending February 20, 1998
and for Universal Compression, Inc. for the period ending March 31, 1998
included elsewhere in the registration statement have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein
and elsewhere in the registration statement, and are included in reliance upon
the reports of such firm given upon their authority as experts in accounting and
auditing.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
UNIVERSAL COMPRESSION, INC.
Independent Auditors' Report of Deloitte & Touche LLP...................................................... F-1
Financial Statements:
Balance Sheets........................................................................................... F-2
Statement of Income...................................................................................... F-3
Statement of Stockholder's Equity........................................................................ F-4
Statement of Cash Flows.................................................................................. F-5
Notes to Financial Statements............................................................................ F-6
TIDEWATER COMPRESSION SERVICE, INC.
Independent Auditors' Report of Deloitte & Touche LLP...................................................... F-13
Independent Auditors' Report of KPMG Peat Marwick LLP...................................................... F-14
Financial Statements:
Balance Sheets........................................................................................... F-15
Statements of Income..................................................................................... F-16
Statements of Stockholder's Equity....................................................................... F-17
Statements of Cash Flows................................................................................. F-18
Notes to Financial Statements............................................................................ F-19
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Universal Compression, Inc.
We have audited the accompanying balance sheet of Universal Compression, Inc.
(the "Company") as of March 31, 1998, and the related statements of income,
stockholder's equity and cash flows for the period from December 12, 1997
(inception) through March 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Universal Compression, Inc., as of
March 31, 1998, and the results of its operations and its cash flows for the
period from December 12, 1997 (inception) through March 31, 1998, in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Houston, Texas
June 1, 1998
F-1
<PAGE>
UNIVERSAL COMPRESSION, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT FOR PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1998
--------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................................. $ 2,382 $ 244
Receivables, net of allowance for bad debts of $213 and $147 as of March 31 and June
30, 1998, respectively.............................................................. 11,662 12,853
Inventories............................................................................ 8,678 8,240
Current deferred tax asset............................................................. 67 63
Other.................................................................................. 3,121 2,406
--------- ---------
Total current assets................................................................ 25,910 23,806
--------- ---------
Property and equipment:
Rental equipment....................................................................... 237,795 247,735
Other.................................................................................. 14,611 15,201
Accumulated depreciation............................................................... (1,366) (5,300)
--------- ---------
Total............................................................................... 251,040 257,636
--------- ---------
Goodwill, net of accumulated amortization of $194 and $580 as of March 31 and June 30,
1998, respectively..................................................................... 93,300 92,722
Other assets, net........................................................................ 8,858 8,313
--------- ---------
Total............................................................................... $ 379,108 $ 382,477
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt...................................................... $ 750 $ 750
Accounts payable....................................................................... 6,054 4,262
Accrued expenses....................................................................... 5,224 3,084
--------- ---------
Total current liabilities........................................................... 12,028 8,096
Deferred income taxes.................................................................... 525 525
Long-term debt........................................................................... 260,758 267,829
--------- ---------
Total liabilities................................................................... 273,311 276,450
--------- ---------
Commitments and contingencies
Stockholder's equity:
Common stock, $10 par value; 5,000 shares authorized and 4,910 shares
issued and outstanding.............................................................. $ 49 $ 49
Additional paid-in capital............................................................. 105,131 105,131
Retained earnings...................................................................... 617 847
--------- ---------
Total stockholder's equity.......................................................... 105,797 106,027
--------- ---------
Total............................................................................... $ 379,108 $ 382,477
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
UNIVERSAL COMPRESSION, INC.
STATEMENT OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE PERIOD FROM THREE MONTHS
DECEMBER 12, 1997 ENDED
(INCEPTION) THROUGH JUNE 30,
MARCH 31, 1998 1998
---------------------- ------------
(UNAUDITED)
<S> <C> <C>
Revenues:
Rentals.................................................................. $ 8,929 $ 20,958
Sales.................................................................... 3,814 7,798
Other.................................................................... 363 880
Gain on asset sales...................................................... 13 --
-------- --------
Total revenues........................................................ 13,119 29,636
-------- --------
Costs and expenses:
Rentals.................................................................. 2,979 7,997
Cost of sales............................................................ 3,233 6,686
Depreciation and amortization............................................ 1,560 4,520
General and administrative............................................... 1,305 3,808
Interest expense......................................................... 2,896 6,249
-------- --------
Total costs and expenses.............................................. 11,973 29,260
-------- --------
Income before income taxes................................................. 1,146 376
Income taxes............................................................... 529 148
-------- --------
Net income............................................................ $ 617 $ 230
-------- --------
-------- --------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
UNIVERSAL COMPRESSION, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE PERIOD FROM DECEMBER 12, 1997 (INCEPTION) THROUGH JUNE 30, 1998
(IN THOUSANDS, EXCEPT FOR PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ---------- -------- --------
<S> <C> <C> <C> <C>
Balance, December 12, 1997 (Inception)
Common stock issuance (4,910 shares at $10 par value)............. $ 49 $105,131 -- $105,180
Net income for period from December 12, 1997 (inception) through
March 31, 1998................................................. -- -- $617 617
---- -------- ---- --------
Balance, March 31, 1998............................................. $ 49 $105,131 $617 $105,797
Net income for the three-month period ended June 30, 1998
(unaudited).................................................... -- -- 230 230
---- -------- ---- --------
Balance, June 30, 1998 (unaudited).................................. $ 49 $105,131 $847 $106,027
---- -------- ---- --------
---- -------- ---- --------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
UNIVERSAL COMPRESSION, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM FOR THE
DECEMBER 12, 1997 THREE MONTH
(INCEPTION) THROUGH PERIOD ENDED
MARCH 31, 1998 JUNE 30, 1998
------------------- -------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................................... $ 617 $ 230
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................................. 1,560 4,520
Gain on asset sales....................................................... (13) (35)
Deferred income taxes..................................................... 458 (179)
Amortization of debt issuance costs....................................... 121 --
Increase in receivables................................................... (1,263) (1,192)
(Increase) Decrease in inventories........................................ (223) 439
(Increase) Decrease in other current assets............................... (2,951) 1,006
Decrease in accounts payable.............................................. (1,472) (1,121)
Increase (Decrease) in accrued expenses................................... 587 (1,601)
Deferred interest on notes payable........................................ 1,880 3,873
Decrease in non-current assets............................................ -- 276
--------- ---------
Net cash used in operating activities................................... (699) 6,216
--------- ---------
Cash flows from investing activities:
Proceeds from asset sales.................................................... 765 142
Additions to property and equipment.......................................... (2,038) (10,646)
Acquisition of Tidewater Compression Service, Inc............................ (351,872) (1,219)
--------- ---------
Net cash used in investing activities................................... (353,145) (11,723)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt..................................... 259,664 3,556
Repayments of long-term debt................................................. (36) (188)
Debt issuance costs.......................................................... (8,582) --
Issuance of common stock..................................................... 105,180 --
--------- ---------
Net cash provided by financing activities............................... 356,226 3,368
--------- ---------
Net increase in cash and cash equivalents...................................... 2,382 (2,139)
--------- ---------
Cash and cash equivalents at beginning of period............................... -- 2,383
--------- ---------
Cash and cash equivalents at end of period..................................... $ 2,382 $ 244
--------- ---------
--------- ---------
Supplemental cash flow information--cash paid for interest..................... $ 1,202 $ 1,871
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
UNIVERSAL COMPRESSION, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM DECEMBER 12, 1997 (INCEPTION) THROUGH MARCH 31, 1998 AND
FOR THE THREE-MONTH PERIOD ENDED JUNE 30, 1998 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Universal Compression, Inc., formerly the TW Acquisition Corporation
("Acquisition Corp."), was formed on December 12, 1997. On February 20, 1998,
Acquisition Corp. acquired 100% of the voting securities of Tidewater
Compression Service, Inc. ("TCS") (the "Acquisition"). See Note 2. Immediately
following the Acquisition, Acquisition Corp. was merged with and into TCS, which
changed its name to Universal Compression, Inc. (the "Company"). The Company is
a wholly owned subsidiary of Universal Compression Holdings, Inc. ("Holdings").
Nature of Operations
The Company operates one of the largest rental fleets of natural gas
compressors in the United States. The compressors are rented to oil and gas
producers and processors and are used primarily to boost the pressure of natural
gas from the wellhead into gas-gathering systems, into nearby gas-processing
plants or into high-pressure pipelines. The Company also designs and fabricates
compressor packages for its own fleet as well as for sale to customers.
Use of Estimates
In preparing the Company's financial statements, management makes estimates
and assumptions that affect the amounts reported in the financial statements and
related disclosures. Actual results may differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Revenue Recognition
Revenue from equipment rentals and parts sales is recognized when earned.
Compressor fabrication revenue is recognized using the completed-contract
method. This method is used because the typical contract is completed within two
months and financial position and results of operations do not vary
significantly from those which would result from use of the
percentage-of-completion method.
Concentration of Credit Risk
Trade accounts receivable are due from companies of varying size engaged
principally in oil and gas activities in the United States and in certain
international locations such as Argentina, Venezuela, Southeast Asia, Europe and
Canada. The Company reviews the financial condition of customers prior to
extending credit and periodically updates customer credit information. Payment
terms are on a short-term basis and in accordance with industry standards. No
single customer accounts for 10% or more of the Company's revenues.
Inventories
Inventories are stated at the lower of cost (first in first out [FIFO]
method) or market (net realizable value). Some items of compression equipment
are acquired and placed in inventories for subsequent sale or rental to others.
Acquisitions of these assets are considered operating activities in the
statement of cash flows, although they later may be transferred to the
compression rental fleet.
F-6
<PAGE>
UNIVERSAL COMPRESSION, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM DECEMBER 12, 1997 (INCEPTION) THROUGH MARCH 31, 1998 AND
FOR THE THREE-MONTH PERIOD ENDED JUNE 30, 1998 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Properties and Equipment
Properties and equipment are carried at cost. Depreciation for financial
reporting purposes is computed on the straight-line basis beginning with the
first rental, with salvage values of 20% for compression equipment, using
estimated useful lives of:
<TABLE>
<S> <C>
Compression equipment....................................................... 15 years
Other properties and equipment.............................................. 2-25 years
</TABLE>
Maintenance and repairs are charged to expenses as incurred. Overhauls and
major improvements that benefit future periods are capitalized and depreciated
over the estimated period of benefits, generally three years.
Goodwill and Other Assets
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over 40 years. At the
balance sheet date, the Company evaluated the recoverability of goodwill based
on expectations of undiscounted cash flows from operations and determined that
no impairment had occurred. Included in other assets are debt issuance costs,
net of accumulated amortization, totaling approximately $8,582,000 at March 31,
1998. Such costs are amortized over the period of the respective debt
agreements.
Income Taxes
The Company's operations are included in the consolidated U.S. federal
income tax returns of Holdings. The tax provisions presented in these financial
statements have been determined as if the Company were filing a separate income
tax return on a stand-alone business. The deferred asset and liabilities are
determined based on the differences between the financial statements and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to be recovered or settled.
Foreign Currency Transactions
Activities outside the United States, except those located in highly
inflationary economies, are measured using the local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated at the
rates of exchange at the balance sheet date. Income and expense items are
translated at average monthly rates of exchange. The resultant translation
adjustments for the period from December 12, 1997 (inception) through March 31,
1998 and for the three-months ended June 30, 1998 were not significant.
Fair Value of Financial Instruments
The Company's financial instruments consist of trade receivables and
payables (which have carrying values that approximate fair value) and long-term
debt. At March 31, 1998 and June 30, 1998, the Company estimated that the fair
value of its long-term debt approximated fair value because of the short period
of time since its issuance.
Environmental Liabilities
The costs to remediate and monitor environmental matters are accrued when
such liabilities are considered probable and a reasonable estimate of such costs
is determinable.
New Accounting Pronouncements
Effective April 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This statement
requires the presentation of total nonowner changes in
F-7
<PAGE>
UNIVERSAL COMPRESSION, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM DECEMBER 12, 1997 (INCEPTION) THROUGH MARCH 31, 1998 AND
FOR THE THREE-MONTH PERIOD ENDED JUNE 30, 1998 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
equity, including items not currently reflected in net income. The Company is
currently evaluating the effect, if any, this statement will have on the
Company's financial position.
Interim Financial Information
The financial statements of the Company as of and for the three-month
period ended June 30, 1998 presented herein are unaudited. However, in the
opinion of management, these interim financial statements include all
adjustments, which are necessary for the fair presentation of the Company's
financial position and results of operations. The adjustments, which have been
made, are of a normal and recurring nature. Such results are not necessarily
indicative of results to be expected for the year due to seasonal variations and
market conditions affecting sales of natural gas and petroleum products.
2. TCS ACQUISITION
On February 20, 1998, Acquisition Corp. acquired 100% of the voting
securities of TCS for approximately $350 million. The Acquisition was recorded
using the purchase method of accounting and the purchase price was allocated to
the assets and liabilities acquired based on their fair values. The excess cost
of the Acquisition was recorded as goodwill which is being amortized on a
straight-line basis over its 40 year useful life. The operations of TCS are
included in the financial statements presented herein from February 20, 1998
through March 31, 1998.
The following table presents the (unaudited) pro forma revenue and net
income amounts as if the Acquisition occurred on December 12, 1997 (inception)
(in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 12, 1997
(INCEPTION) THROUGH
MARCH 31, 1998
-------------------
(UNAUDITED)
<S> <C>
Revenues.............................................. $32,630
-------
Net loss.............................................. $ (476)
-------
</TABLE>
3. INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1998 JUNE 30, 1998
-------------- -------------
(UNAUDITED)
<S> <C> <C>
Finished goods................................................. $5,479 $ 5,837
Work-in-progress............................................... 3,199 2,403
------ -------
Total..................................................... $8,678 $ 8,240
------ -------
------ -------
</TABLE>
F-8
<PAGE>
UNIVERSAL COMPRESSION, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM DECEMBER 12, 1997 (INCEPTION) THROUGH MARCH 31, 1998 AND
FOR THE THREE-MONTH PERIOD ENDED JUNE 30, 1998 (UNAUDITED)
4. LONG-TERM DEBT
The Company's debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1998 JUNE 30, 1998
-------------- -------------
(UNAUDITED)
<S> <C> <C>
Term loan, bearing interest of LIBOR + 2.5%, due February 2005
and collateralized by property of the Company................
$ 74,814 $ 74,625
Revolving credit facility, bearing interest of LIBOR + 2.25%,
due February 2003 and collateralized by property of the
Company...................................................... 35,150 38,707
Senior discount notes, bearing interest of 9 7/8% per annum,
due 2008, net of discount of $90,956, unsecured.............. 151,544 155,247
-------- ---------
Total debt................................................ 261,508 268,579
Less current maturities........................................ 750 750
-------- ---------
Total long-term debt...................................... $260,758 $ 267,829
-------- ---------
-------- ---------
</TABLE>
The Company's senior secured credit agreement ("Credit Agreement") provides
for $75 million under the term loan and $85 million under the revolving credit
facility, which includes a sublimit for letters of credit. The available
capacity on the revolving credit facility at March 31, 1998 and June 30, 1998
was approximately $47,819,000 and $44,692,000, respectively. The interest rates
on the term loan and the revolving credit facility at March 31, 1998 were 10.0%
and 9.75%, respectively. The interest rates on the term loan and the revolving
credit facility at June 30, 1998 were 8.125% and 7.875%, respectively. Under the
revolving credit facility, a commitment fee of 0.50% per annum on the average
available commitment is payable quarterly.
The Credit Agreement contains certain financial covenants and limitations
on, among other things, acquisitions, sales, indebtedness and liens. The Credit
Agreement also limits the payment of cash dividends related to the Company
paying up to $1 million to Holdings in any given fiscal year. In addition, the
Company has substantial dividend payment restrictions under the indenture
related to the senior discount notes. The Company was in compliance with all
such covenants and limitations at March 31, 1998 and June 30, 1998. Holdings has
unconditionally and irrevocably guaranteed the Credit Agreement. As defined by
the Credit Agreement, any "change of control" would result in an "Event of
Default" and all amounts outstanding under the Credit Agreement will become due
and payable.
Interest related to both the 9 7/8% senior discount notes and the 11 3/8%
senior discount notes is payable semi-annually on August 15 and February 15,
commencing August 15, 2003.
Maturities of long-term debt as of March 31, 1998, in thousands, are
1999--$750; 2000--$750; 2001--$750; 2002--$750; 2003--$61,400; and $197,108
thereafter.
The Company's sole stockholder, Holdings, in conjunction with the
Acquisition, issued senior discount notes for which it received proceeds of
approximately $25 million. These Holdings notes bear interest at 11 3/8% per
annum and mature in 2009. Holdings is a holding company with no material
operations of its own. Accordingly, Holdings is dependent upon the distribution
of earnings from the Company whether in the form of dividends, advances or
payments on account of intercompany obligations, to service its debt
obligations.
5. INCOME TAXES
For the period from December 12, 1997 (inception) through March 31, 1998,
substantially all of the Company's income before income taxes was derived from
its U.S. operations.
F-9
<PAGE>
UNIVERSAL COMPRESSION, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM DECEMBER 12, 1997 (INCEPTION) THROUGH MARCH 31, 1998 AND
FOR THE THREE-MONTH PERIOD ENDED JUNE 30, 1998 (UNAUDITED)
5. INCOME TAXES--(CONTINUED)
Income tax expense for the period from December 12, 1997 (inception)
through March 31, 1998 consisted of the following (in thousands):
<TABLE>
<S> <C>
Current:
Foreign............................................................................. $ 71
Deferred:
Federal............................................................................. 411
State............................................................................... 47
----
Total............................................................................ $529
----
----
</TABLE>
A reconciliation of the provision for income taxes and the amount computed
by applying the federal statutory income tax rate to income before taxes is as
follows (in thousands):
<TABLE>
<S> <C>
Provision for income taxes at statutory rate.......................................... $401
State taxes........................................................................... 47
Foreign taxes......................................................................... 71
Other................................................................................. 10
----
Total............................................................................ $529
----
----
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at March 31, 1998 are (in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards.................................................. $ 1,399
Other............................................................................. 165
-------
1,564
Valuation allowance................................................................. (71)
-------
Total.......................................................................... 1,493
-------
Deferred tax liabilities:
Depreciation differences on property and equipment................................ (1,924)
Other............................................................................. (27)
-------
Total.......................................................................... (1,951)
-------
Net deferred tax liability..................................................... $ (458)
-------
-------
</TABLE>
A valuation allowance has been established against the Company's deferred
tax assets related to foreign tax credits. The Company believes that it is
probable that all other deferred tax assets will be realized on future tax
returns, primarily from the generation of future taxable income through both
profitable operations and future reversals of existing taxable temporary
differences.
As a result of the activity for the period from December 12, 1997
(inception) through March 31, 1998, the Company has net operating loss ("NOL")
carryforwards available to offset future taxable income. The Company has NOL
carryforwards of approximately $3,586,000 which will expire in 2018.
6. EMPLOYEE BENEFITS
The Company has a defined contribution 401(k) plan covering substantially
all employees. The Company makes matching contributions under this plan equal to
50% of each participant's contribution of up to 6% of the
F-10
<PAGE>
UNIVERSAL COMPRESSION, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM DECEMBER 12, 1997 (INCEPTION) THROUGH MARCH 31, 1998 AND
FOR THE THREE-MONTH PERIOD ENDED JUNE 30, 1998 (UNAUDITED)
6. EMPLOYEE BENEFITS--(CONTINUED)
participant's compensation. Company contributions to the plan were approximately
$159,000 for the period from December 12, 1997 (inception) through March 31,
1998.
7. RELATED-PARTY TRANSACTIONS
Management Agreement
Castle Harlan Inc., an affiliate of a major shareholder of Holdings,
entered into an agreement whereby, in exchange for investment banking and
financial advisory services rendered, the Company agreed to pay a fee to Castle
Harlan Inc. totaling $3 million per year. The amount was paid in advance for the
first year and quarterly in advance thereafter. The agreement is for a term of
five years, renewable automatically from year to year thereafter unless Castle
Harlan Inc. or its affiliates beneficially own at this time less than 20% of the
then outstanding stock of Holdings. The Company paid Castle Harlan Inc. $3
million for the period from December 12, 1997 (inception) through March 31, 1998
for services to be provided by Castle Harlan Inc. for the year ending
February 20, 1999.
Finder's Fee/Consulting Arrangement
The Company paid a member of Holdings Board of Directors (the "Director")
$1,750,000 (a "finders fee") related to services provided by the Director for
the Acquisition. Upon consummation of the Acquisition, $1,100,000 of the finders
fee was used to purchase capital stock of Holdings at $50 per share. In
addition, the Company will pay the Director an annual consulting fee of $150,000
for consulting services for a stated term of five years. The agreement will
automatically extend for one-year periods unless the parties elect to terminate
the agreement. The Company paid the Director $12,500 for the period from
December 12, 1997 (inception) through March 31, 1998.
As of June 30, 1998, 5,760 shares of common stock and 23,040 shares of
preferred stock held by certain officers of the Company and Holdings are subject
to certain repurchase requirements by Holdings in the event of disability,
death, or termination of the officer by the Company and Holdings without
"cause," as specified in the Stock Repurchase Agreement. Holdings maintains an
insurance policy to fund its obligation in the event of disability or death.
8. COMMITMENTS AND CONTINGENCIES
Rent and expense for the period from December 12, 1997 (inception) through
March 31, 1998 was approximately $43,000. Commitments for future lease payments
were not significant at March 31, 1998.
In the ordinary course of business, the Company is involved in various
pending or threatened legal actions. In the opinion of management, the amount of
ultimate liability, if any, with respect to these actions will not have a
materially adverse effect on the Company's financial position or operating
results.
An environmental assessment (the "Assessment") of the operations, physical
premises and assets of the Company was completed in connection with the
Acquisition. The Assessment indicated that the ultimate cost of remediation
could range up to $18.8 million. In the event that remediation is undertaken by
the Company, then pursuant to the stock purchase agreement, costs of such
remediation shall be paid as follows: Tidewater, Inc. shall pay 75% of the first
$4 million, 83.33% of the next $6 million, and 100% of the costs in excess of
$10 million, although not to exceed the upper limit of the range in the
Assessment. Tidewater, Inc. has disputed certain aspects of the Assessment, but
has not disputed its obligation to reimburse the Company for actual costs
incurred in remediating environmental conditions identified in the Assessment.
The Company has not recorded a provision at March 31, 1998 environmental
remediation costs. The Company's environmental consulting firm
F-11
<PAGE>
UNIVERSAL COMPRESSION, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM DECEMBER 12, 1997 (INCEPTION) THROUGH MARCH 31, 1998 AND
FOR THE THREE-MONTH PERIOD ENDED JUNE 30, 1998 (UNAUDITED)
8. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
continues to review the Assessment and to further evaluate the Company's
remediation requirements, if any, under existing laws, rules and regulations.
The Company does not currently believe that all such remediation is necessary
and cannot estimate the amount, if any, of remediation, which will ultimately be
necessary. Pending the outcome of this review and considering Tidewater's
obligations pursuant to the stock purchase agreement, the Company continues to
believe that any remediation obligations will not have a material impact in its
financial condition, results of operations and cash flows.
Should the Company determine that a remediation liability needs to be
recorded, such liability will be recorded along with a receivable from
Tidewater, Inc. for the expected reimbursement based on the terms of the stock
purchase agreement. The unreimbursed portion of any such remediation liability
will be recorded as a purchase price adjustment and result in an increase to
goodwill.
The Company has no other commitments or contingent liabilities which, in
the judgment of management, would result in losses that would materially affect
the Company's consolidated financial position or operating results.
9. INDUSTRY SEGMENTS AND GEOGRAPHIC INFORMATION
The Company has two principal industry segments: Rentals and Maintenance
and Engineered Products. The Rentals and Maintenance Segment provides natural
gas compression rental and maintenance services to meet specific customer
requirements. The Engineered Products Segment involves the design, fabrication
and sale of natural gas and air compression packages to meet unique customer
specifications.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on profit or loss from operations before interest expense and
income taxes.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different marketing strategies because of customer
specifications. The business was acquired as a unit (see Note 1--Organization),
and the management at the time of the Acquisition was retained.
The following table presents sales and other financial information by
industry segment for the period from December 12, 1997 (inception) through
March 31, 1998 (in thousands):
<TABLE>
<CAPTION>
RENTAL AND ENGINEERED ALL
MAINTENANCE PRODUCTS OTHER (A) TOTAL
----------- ---------- --------- --------
<S> <C> <C> <C> <C>
Revenues.............................................. $ 9,059 $3,165 $ 895 $ 13,119
Gross profit.......................................... $ 6,255 $ 340 $ 312 $ 6,907
Operating income...................................... $ 3,671 $ 189 $ 182 $ 4,042
Depreciation and amortization......................... $ 1,544 $ 10 $ 6 $ 1,560
Identifiable assets................................... $ 369,648 $7,865 $ 1,595 $379,108
</TABLE>
- ------------------
(a) All Other segment represents part sales and services and all other items
that could not be allocated to an identifiable segment. The segment serves
the oil and gas market as well as the industry market. A portion of the
amount represents sales of parts and equipment utilized in the extraction of
natural gas and the service that the Company provides to customer's natural
gas compression units.
Foreign operations were not deemed significant for the period from
December 12, 1997 (inception) through March 31, 1998. Export sales for the
period from December 12, 1997 (inception) through March 31, 1998 were
approximately $1,711,000.
Revenues include sales to unaffiliated customers. Gross profit represents
total revenue less rental expenses and cost of sales. Operating income
represents revenues less total costs and expenses, not including the effect of
interest expense and income taxes. Identifiable assets are those tangible and
intangible assets that are identified with the operations of a particular
industry segment.
F-12
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Universal Compression, Inc.
We have audited the accompanying balance sheet of Tidewater Compression Service,
Inc. (the "Company") as of February 20, 1998, and the related statements of
income, stockholder's equity and cash flows for the period from April 1, 1997
through February 20, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Tidewater Compression Service, Inc., as of
February 20, 1998, and the results of its operations and its cash flows for the
period from April 1, 1997 through February 20, 1998, in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche
Deloitte & Touche LLP
Houston, Texas
June 1, 1998
F-13
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Tidewater Compression Service, Inc.
We have audited the accompanying balance sheet of Tidewater Compression Service,
Inc. as of March 31, 1997, and the related income statements, and statements of
stockholder's equity and cash flows for each of the years in the two-year period
ended March 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of Tidewater Compression Service, Inc. as of
March 31, 1997, and the results of its operations and its cash flows for each of
the years in the two-year period ended March 31, 1997, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
New Orleans, Louisiana
November 21, 1997
F-14
<PAGE>
TIDEWATER COMPRESSION SERVICE, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, FEBRUARY 20,
1997 1998
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................................................. $ -- $ 1,824
Receivables, net of allowance for bad debts of $318 at March 31, 1997 and $283 at
February 20, 1998................................................................. 11,099 10,399
Inventories.......................................................................... 7,845 8,455
Other................................................................................ 181 170
--------- ----------
Total current assets.............................................................. 19,125 20,848
--------- ----------
Property and equipment:
Rental equipment..................................................................... 322,512 333,507
Other................................................................................ 13,391 14,844
Accumulated depreciation............................................................. (118,925) (138,315)
--------- ----------
Total............................................................................. 216,978 210,036
--------- ----------
Goodwill, net of accumulated amortization of $3,872 at March 31, 1997 and $5,349 at
February 20, 1998.................................................................... 20,952 19,475
Other.................................................................................. 35 35
--------- ----------
Total............................................................................. $ 257,090 $ 250,394
--------- ----------
--------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable..................................................................... $ 4,208 $ 6,924
Accrued expenses..................................................................... 964 488
--------- ----------
Total current liabilities......................................................... 5,172 7,412
Due to Tidewater Inc................................................................... 194,371 174,676
--------- ----------
Total liabilities................................................................. 199,543 182,088
--------- ----------
Commitments and contingencies
Stockholder's equity:
Common stock, $10 par value; 5,000 shares authorized and 4,910 shares issued and
outstanding....................................................................... $ 49 $ 49
Additional paid-in capital........................................................... 25,627 25,627
Retained earnings.................................................................... 31,871 42,630
--------- ----------
Total stockholder's equity........................................................ 57,547 68,306
--------- ----------
Total............................................................................. $ 257,090 $ 250,394
--------- ----------
--------- ----------
</TABLE>
See accompanying notes to financial statements.
F-15
<PAGE>
TIDEWATER COMPRESSION SERVICE, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTH PERIOD FROM
MARCH 31, PERIOD ENDED APRIL 1, 1997
-------------------- JUNE 30, 1997 THROUGH
1996 1997 (UNAUDITED) FEBRUARY 20, 1998
-------- -------- ------------- -----------------
<S> <C> <C> <C> <C>
Revenues:
Rentals............................................... $ 72,765 $ 72,695 $19,354 $71,644
Sales................................................. 32,319 36,592 6,219 19,924
Other................................................. 6,236 3,477 808 3,024
Gain (loss) on asset sales............................ (856) 1,122 -- 1,094
-------- -------- ------- -------
Total revenues..................................... 110,464 113,886 26,381 95,686
-------- -------- ------- -------
Costs and expenses:
Rentals............................................... 33,191 33,814 8,611 31,924
Cost of sales......................................... 26,345 30,339 4,555 14,753
Depreciation and amortization......................... 26,997 26,163 6,554 23,310
General and administrative............................ 10,508 11,004 2,509 8,669
Interest expense...................................... 3,706 -- 2 --
-------- -------- ------- -------
Total costs and expenses........................... 100,747 101,320 22,221 78,656
-------- -------- ------- -------
Income before income taxes.............................. 9,717 12,566 4,150 17,030
Income taxes............................................ 3,745 4,724 1,527 6,271
-------- -------- ------- -------
Net income......................................... $ 5,972 $ 7,842 $ 2,623 $10,759
-------- -------- ------- -------
-------- -------- ------- -------
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE>
TIDEWATER COMPRESSION SERVICE, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE PERIOD FROM APRIL 1, 1997 THROUGH FEBRUARY 20, 1998 AND
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT FOR PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ---------- -------- -------
<S> <C> <C> <C> <C>
Balance, March 31, 1995.............................................. $ 49 $ 25,627 $ 18,057 $43,733
Net income........................................................... -- -- 5,972 5,972
---- -------- -------- -------
Balance, March 31, 1996.............................................. 49 25,627 24,029 49,705
Net income........................................................... -- -- 7,842 7,842
---- -------- -------- -------
Balance, March 31, 1997 49 25,627 31,871 57,547
Net income........................................................... -- -- 10,759 10,759
---- -------- -------- -------
Balance, February 20, 1998........................................... $ 49 $ 25,627 $ 42,630 $68,306
---- -------- -------- -------
---- -------- -------- -------
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE>
TIDEWATER COMPRESSION SERVICE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED PERIOD FROM
MARCH 31, JUNE 30, APRIL 1, 1997
------------------------ 1997 THROUGH
1996 1997 (UNAUDITED) FEBRUARY 20, 1998
---------- ---------- ------------ -----------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 5,972 $ 7,842 $ 2,623 $ 10,759
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 26,997 26,163 6,554 23,310
(Gain) loss on asset sales........................ 856 (1,122) (177) (1,094)
Deferred income tax (benefit) expense............. 12,630 6,835 -- (1,825)
(Increase) decrease in receivables................ 5,733 308 (868) 700
(Increase) decrease in inventories................ 2,630 72 (767) (610)
(Increase) decrease in other current assets....... 1,159 603 (21) 11
Increase (decrease) in accounts payable........... (4,898) 1,458 (561) 2,716
(Decrease) increase in accrued expenses........... (269) (236) 758 (476)
---------- -------- -------- ---------
Net cash provided by operating activities....... 50,810 41,923 7,541 33,491
---------- -------- -------- ---------
Cash flows from investing activities:
Proceeds from asset sales............................ 5,124 7,684 743 3,803
Additions to properties and equipment................ (6,394) (16,520) (4,034) (17,600)
---------- -------- -------- ---------
Net cash used in investing activities........... (1,270) (8,836) (3,291) (13,797)
---------- -------- -------- ---------
Cash flows from financing activities:
Net change in amount due to Tidewater Inc............ 62,494 (33,121) (4,506) (17,870)
Repayments of long-term debt......................... (112,000) -- -- --
---------- -------- -------- ---------
Net cash used in financing activities........... (49,506) (33,121) (4,506) (17,870)
---------- -------- -------- ---------
Net increase (decrease) in cash........................ 34 (34) (256) 1,824
Cash at beginning of period............................ -- 34 -- --
---------- -------- -------- ---------
Cash at end of period.................................. $ 34 $ -- $ (256) $ 1,824
---------- -------- -------- ---------
---------- -------- -------- ---------
Supplemental cash flow information--cash paid for
interest............................................. $ 4,310 -- -- --
----------
----------
</TABLE>
See accompanying notes to financial statements.
F-18
<PAGE>
TIDEWATER COMPRESSION SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996,
FOR THE PERIOD FROM APRIL 1, 1997 THROUGH FEBRUARY 20, 1998 AND
FOR THE THREE MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Tidewater Compression Service, Inc. ("TCS" or the "Company") is, and has
been for all periods presented, a wholly owned subsidiary of Tidewater Inc.
("Tidewater"). The accompanying financial statements are presented as if TCS had
been an entity separate from its parent during the periods presented and include
the assets, liabilities, revenues and expenses that are directly related to TCS'
operations. As a subsidiary of Tidewater, TCS was a participating employer in
certain employee benefit plans and also received certain administrative services
such as data processing, legal, insurance placement and claims handling from its
parent. The costs associated with providing TCS with such employee benefit
programs and administrative services, where significant, have been allocated to
TCS based on management's estimate of the time involved in providing such
services and are included in the accounts of TCS. Management believes the method
used to allocate the cost of these services is reasonable.
Nature of Operations
TCS operates one of the largest rental fleets of natural gas compressors in
the United States. The compressors are rented to oil and gas producers and
processors and are used primarily to boost the pressure of natural gas from the
wellhead into gas-gathering systems, into nearby gas-processing plants or into
high-pressure pipelines. TCS also designs and fabricates compression packages
for its own fleet as well as for sale to customers.
Use of Estimates
In preparing TCS' financial statements, management makes estimates and
assumptions that affect the amounts reported in the financial statements and
related disclosures. Actual results may differ from these estimates.
Revenue Recognition
Revenue from equipment rentals and parts sales is recognized when earned.
Compressor fabrication revenue is recognized using the completed-contract
method. This method is used because the typical contract is completed within two
months and financial position and results of operations do not vary
significantly from those which would result from use of the
percentage-of-completion method.
Concentration of Credit Risk
Trade accounts receivable are due from companies of varying size engaged
principally in oil and gas activities in the United States and in certain
international locations such as, Argentina, Venezuela, Southeast Asia, Europe
and Canada. The Company reviews the financial condition of customers prior to
extending credit and periodically updates customer credit information. Payment
terms are on a short-term basis and in accordance with industry standards. No
single customer accounts for 10% or more of TCS' revenues.
Inventories
Inventories are stated at the lower of cost (first in first out [FIFO]
method) or market (net realizable value). Some items of compression equipment
are acquired and placed in inventories for subsequent sale or rental to others.
Acquisitions of these assets are considered operating activities in the
statements of cash flows, although they later may be transferred to the
compression rental fleet.
F-19
<PAGE>
TIDEWATER COMPRESSION SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996,
FOR THE PERIOD FROM APRIL 1, 1997 THROUGH FEBRUARY 20, 1998 AND
FOR THE THREE MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Properties and Equipment
Properties and equipment are carried at cost. Depreciation for financial
reporting purposes is computed on the straight-line basis beginning with the
first rental, with salvage values of 30% for compression equipment, using
estimated useful lives of:
<TABLE>
<S> <C>
Compression equipment:
New........................................................................... 12 years
Used.......................................................................... 8 years
Other properties and equipment................................................ 3-30 years
</TABLE>
Major overhauls that benefit future periods are capitalized and depreciated
over the estimated period of benefit, generally three years. Maintenance and
repairs are charged to expense as incurred during the asset's original estimated
useful life.
On April 1, 1996, TCS adopted the provisions of Statement of Financial
Accounting Standards No. 121, "Accounting for an Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." The adoption of this accounting
standard had no impact on TCS' results of operations or financial position.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over 15 years. At the
balance sheet dates, the Company evaluated the recoverability of goodwill based
on expectations of undiscounted cash flows from operations and determined that
no impairment had occurred.
Income Taxes
TCS' operations are included in the consolidated U.S. federal income tax
returns of Tidewater Inc. The tax provisions presented in these financial
statements have been determined as if TCS' operations were a stand-alone
business filing a separate income tax return with the amount of current tax owed
(refundable) charged or credited to the amounts due to Tidewater Inc. Deferred
tax assets and liabilities which are also included in the amounts due to
Tidewater Inc. are determined based on the differences between the financial
statements and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to be recovered or
settled.
Environmental Liabilities
The costs to remediate and monitor environmental matters are accrued when
such liabilities are considered probable and a reasonable estimate of such costs
is determinable.
Pension, Postretirement and Other Benefit Plans
TCS employees participate in Tidewater pension and other postretirement
plans. TCS has accounted for its participation in the Tidewater plans as a
participation in multiemployer plans. Accordingly, the statement of income
includes an allocation from Tidewater for the costs associated with the TCS
employees who participate in these plans that is comparable to TCS' required
contribution to the plans for the periods presented. Additionally, no assets and
liabilities have been reflected in the balance sheets related to the overall
Tidewater pension and other postretirement benefit plans since it is not
practicable to segregate the amounts applicable to TCS. TCS employees also
participate in the medical, dental, life and workers' compensation insurance
plans sponsored by
F-20
<PAGE>
TIDEWATER COMPRESSION SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996,
FOR THE PERIOD FROM APRIL 1, 1997 THROUGH FEBRUARY 20, 1998 AND
FOR THE THREE MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Tidewater. The costs of these plans are allocated to TCS based on the number of
TCS employees participating in the plans.
Foreign Currency Transactions
Activities outside the United States, except those located in highly
inflationary economies, are measured using the local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated at the
rates of exchange at the balance sheet date. Income and expense items are
translated at average monthly rates of exchange. The resultant translation
adjustments for the period from April 1, 1997 through February 20, 1998 and the
years ended March 31, 1997 and March 31, 1996 were not significant.
Foreign Operations and Export Sales
Foreign operations were not deemed significant for the period from April 1,
1997 through February 20, 1998 and the fiscal years ended March 31, 1997 and
1996. Export sales for the period from April 1, 1997 through February 20, 1998
and the fiscal years ended March 31, 1997 and 1996 were $15,528,000, $21,271,000
and $18,640,000, respectively.
Fair Value of Financial Instruments
The Company's financial instruments consist of trade receivables and
payables which have carrying values that approximate fair value.
Interim Financial Information
The financial statements of the Company for the three-month period ended
June 30, 1997 presented herein are unaudited. However, in the opinion of
management, these interim financial statements include all adjustments, which
are necessary for the fair presentation of the Company's results of operations.
The adjustments, which have been made, are of a normal and recurring nature.
Such results are not necessarily indicative of results to be expected for the
year due to seasonal variations and market conditions affecting sales of natural
gas and petroleum products.
2. INVENTORIES
Inventories consisted of the following at February 20, 1998 and March 31,
1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Parts and supplies......................................................... $5,493 $5,684
Work-in progress........................................................... 2,962 2,161
------ ------
Total................................................................. $8,455 $7,845
------ ------
------ ------
</TABLE>
3. INCOME TAXES
For the period from April 1, 1997 through February 20, 1998 and for each of
the years in the two-year period ended March 31, 1997, substantially all of TCS'
income before income taxes was derived from its U.S. operations.
F-21
<PAGE>
TIDEWATER COMPRESSION SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996,
FOR THE PERIOD FROM APRIL 1, 1997 THROUGH FEBRUARY 20, 1998 AND
FOR THE THREE MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
3. INCOME TAXES--(CONTINUED)
Income tax expense (benefit) consisted of the following (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED
APRIL 1, 1997 MARCH 31
THROUGH -------------------
FEBRUARY 20, 1998 1997 1996
----------------- ------- --------
<S> <C> <C> <C>
Current:
U.S. Federal................................................. $ 7,220 $(2,162) $ (8,646)
State and foreign............................................ 876 51 (239)
Deferred....................................................... (1,825) 6,835 12,630
------- ------- --------
Total..................................................... $ 6,271 $ 4,724 $ 3,745
------- ------- --------
------- ------- --------
</TABLE>
The actual income tax expense for each of the periods shown above differs
from the amount computed by applying the U.S. federal tax rate of 35% to income
before income taxes principally because of state income taxes.
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities, which are included in the intercompany
accounts, at February 20, 1998 and March 31, 1997 were as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets--financial provisions not deducted for income tax
purposes............................................................. $ 1,181 $ 1,096
Deferred tax liabilities--depreciation differences on property and
equipment............................................................ (34,207) (35,947)
-------- --------
Total............................................................. $(33,026) $(34,851)
-------- --------
-------- --------
</TABLE>
4. DUE TO TIDEWATER INC.
Amounts due to Tidewater Inc. include net charges from Tidewater for
various services and cost allocations. These amounts also include liabilities
relating to current and deferred federal, state and foreign income taxes.
Amounts due to Tidewater Inc. do not bear interest. The net changes in amounts
due to Tidewater Inc. are included in cash flows from financing activities. The
weighted average balance of amounts due to Tidewater Inc. for the period from
April 1, 1997 through February 20, 1998 and the fiscal years ended March 31,
1997 and 1996 was $184,866,000, $206,329,000 and $191,058,000, respectively.
5. EMPLOYEE BENEFITS
Defined Benefit Pension Plans and Defined Contribution Retirement Plan
Until January 1, 1996, substantially all of the TCS personnel participated
in a defined benefit pension plan sponsored by Tidewater. Tidewater's pension
benefits are based principally on years of service and employee compensation.
Beginning April 1996, TCS field service personnel, along with all new employees
of TCS eligible for pension plan membership, were enrolled in a new, defined
contribution retirement plan. Tidewater allocated pension expense to TCS of
approximately $598,000 in fiscal year 1996. The cost of the defined contribution
plan allocated to TCS for the period from April 1, 1997 through February 20,
1998 and for fiscal year 1997 was approximately $282,000 and $298,000,
respectively.
F-22
<PAGE>
TIDEWATER COMPRESSION SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996,
FOR THE PERIOD FROM APRIL 1, 1997 THROUGH FEBRUARY 20, 1998 AND
FOR THE THREE MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
5. EMPLOYEE BENEFITS--(CONTINUED)
Postretirement Benefits Other Than Pension
Tidewater sponsors a program which provides limited health care and life
insurance benefits to qualified retired employees. Costs of the program are
based on actuarially determined amounts and are accrued over the period from the
date of hire to the full eligibility date of employees who are expected to
qualify for these benefits. Tidewater has allocated postretirement health care
and life insurance expense to TCS of approximately $274,000, $384,000 and
$178,000 for the period from April 1, 1997 through February 20, 1998 and for the
years ended March 31, 1997 and 1996, respectively.
6. COMMITMENTS AND CONTINGENCIES
Rent expense for the period from April 1, 1997 through February 20, 1998
and for the years ended March 31, 1997 and 1996 was approximately $390,000,
$435,000 and $483,000, respectively. Commitments for future minimum lease
payments were not significant at February 20, 1998.
In the ordinary course of business, the Company is involved in various
pending or threatened legal actions. In the opinion of management, the amount of
ultimate liability, if any, with respect to these actions will not have a
materially adverse effect on the Company's financial position or operating
results.
An environmental assessment (the "Assessment") of the operations, physical
premises and assets of the Company was completed in connection with the
Acquisition. The Assessment indicated that the ultimate cost of remediation
could range up to $18.8 million. In the event that remediation is undertaken by
the Company, then pursuant to the stock purchase agreement, costs of such
remediation shall be paid as follows: Tidewater, Inc. shall pay 75% of the first
$4 million, 83.33% of the next $6 million, and 100% of the costs in excess of
$10 million, although not to exceed the upper limit of the range in the
Assessment. Tidewater, Inc. has disputed certain aspects of the Assessment, but
has not disputed its obligation to reimburse the Company for actual costs
incurred in remediating environmental conditions identified in the Assessment.
The Company has not recorded a provision at March 31, 1998 for environmental
remediation costs. The Company's environmental consulting firm continues to
review the Assessment and to further evaluate the Company's remediation
requirements, if any, under existing laws, rules and regulations. The Company
does not currently believe that all such remediation is necessary and cannot
estimate the amount, if any, of remediation, which will ultimately be necessary.
Pending the outcome of this review and considering Tidewater's obligations
pursuant to the stock purchase agreement, the Company continues to believe that
any remediation obligations will not have a material impact in its financial
condition, results of operations and cash flows.
The Company has no other commitments or contingent liabilities which, in
the judgment of management, would result in losses that would materially affect
the Company's financial position or operating results.
7. SUBSEQUENT EVENTS
On February 20, 1998, pursuant to the Stock Purchase Agreement, dated
December 18, 1997, between Tidewater and TW Acquisition Corporation
("Acquisition Corp."), the Acquisition Corp. acquired 100% of the voting
securities of TCS for a purchase price of approximately $350 million (the
"Acquisition"). Immediately following the Acquisition, Acquisition Corp. was
merged with and into TCS, which changed its name to Universal Compression, Inc.
F-23
<PAGE>
---------------------------------------------------------
---------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE INITIAL PURCHASERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THOSE TO WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL,
OR THE SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF NOR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................ 1
Summary of the Exchange Offer..................... 5
The Original Notes................................ 8
Summary Historical and Pro Forma Financial and
Other Data...................................... 10
Risk Factors...................................... 11
Use of Proceeds................................... 17
The Exchange Offer................................ 18
Description of the Company Acquisition............ 25
Capitalization.................................... 26
Unaudited Pro Forma Financial Statements and Other
Data............................................ 27
Selected Historical Financial Data................ 30
Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 31
Business.......................................... 36
Business Strategy................................. 37
Management........................................ 46
Principal Stockholders............................ 52
Description of Capital Stock of Holdings.......... 54
Description of Other Indebtedness................. 55
Description of the Exchange Notes................. 57
Description of the Holdings Notes................. 80
Material United States Federal Income Tax
Considerations.................................. 81
Book-Entry; Delivery and Form..................... 85
Plan of Distribution.............................. 86
Legal Matters..................................... 87
Experts........................................... 87
</TABLE>
------------------------------
UNTIL , 199 , ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
-------------------
PROSPECTUS
-------------------
LOGO
------------------------------
UNIVERSAL
COMPRESSION, INC.
Offer to Exchange up to
$242,500,000 of new 9 7/8 Senior Discount
Notes due 2008 for up to
$242,500,000
of any and all outstanding
9 7/8% Senior Discount
Notes due 2008
THE UNITED STATES
TRUST COMPANY
OF NEW YORK,
AS EXCHANGE AGENT
, 1998
---------------------------------------------------------
---------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is empowered by Art. 2.02-1 of the Texas Business Corporation
Act, subject to the procedures and limitations stated therein, to indemnify any
person who was, is or is threatened to be made a named defendant or respondent
in a proceeding because the person is or was a director or officer against
judgments, penalties (including excise and similar taxes), fines, settlements
and reasonable expenses (including court costs and attorneys' fees) actually
incurred by the person in connection with the proceeding. The Company is
required by Art. 2.02-1 to indemnify a director or officer against reasonable
expenses (including court costs and attorneys' fees) incurred by him in
connection with a proceeding in which he is a named defendant or respondent
because he is or was a director or officer if he has been wholly succesful, on
the merits or otherwise, in the defense of the proceeding. The statute provides
that indemnification pursuant to its provisions is not exclusive of other rights
of indemnification to which a person may be entitled under any bylaw, agreement,
vote of shareholders or disinterested directors, or otherwise. The articles and
bylaws of the Company do not provide for indemnification by the Company of its
directors and officers.
See Item 22 for a statement of the Company's undertaking as to the
Securities and Exchange Commission's position respecting indemnification arising
under the Securities Act of 1933.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<S> <C>
3.1 -- Certificate of Incorporation of Universal Compression, Inc., as amended.
3.2 -- Bylaws of Universal Compression, Inc.
4.1 -- Purchase Agreement, dated as of February 13, 1998, between Universal Compression, Inc. and each of BT
Alex. Brown and Salomon Smith Barney.
4.2 -- Specimen of Universal Compression, Inc.'s 9 7/8% Senior Discount Note due 2008.
4.3 -- Indenture, dated as of February 20, 1998, between Universal Compression, Inc. and The United States
Trust Company of New York, as Trustee.
4.4 -- Registration Rights Agreement, dated July 1, 1997, between Universal Compression Holdings, Inc. and
each of BT Alex. Brown Incorporated and Salomon Smith Barney.
4.5 -- Credit Agreement, dated as of February 20, 1998, among Universal Compression, Inc., Universal
Compression Holdings, Inc., Bankers Trust Company, as agent and the lenders party thereto.
4.6 -- Form of Notes under Credit Agreement.
4.7 -- Security Agreement, dated as of February 20, 1998, among Universal Compression, Inc., Universal
Compression Holdings, Inc., Bankers Trust Company, and the Banks party thereto.
4.8 -- Pledge Agreement, dated as of February 20, 1998, among Universal Compression, Inc., Universal
Compression Holdings, Inc., Bankers Trust Company and the Banks party thereto.
4.9 -- Acknowledgment and Joinder Agreement, dated February 20, 1998, between Universal Compression, Inc.
and Bankers Trust Company.
5.1* -- Opinion of Schulte Roth & Zabel LLP regarding legality.
8.1* -- Opinion of Schulte Roth & Zabel LLP regarding tax matters (contained in Exhibit 5.1).
9.1* -- Voting Trust Agreement, dated February 20, 1998, among Universal Compression Holdings, Inc., John K.
Castle, as voting trustee and certain stockholders party thereto.
10.1 -- Stock Purchase Agreement, dated December 18, 1997, between TW Acquisition Corporation and Tidewater
Inc.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<S> <C>
10.2 -- Purchase Price Adjustment Agreement, dated February 20, 1998, among TW Acquisition Corporation,
Universal Compression Holdings, Inc., and Tidewater Inc.
10.3 -- Transition Services Agreement, dated February 20, 1998, between TW Acquisition Corporation and
Tidewater Inc.
10.4 -- Employment Agreement, dated February 20, 1998, with Stephen Snider.
10.5 -- Employment Agreement, dated February 20, 1998, with Ernie Danner.
10.6 -- Employment Agreement, dated February 20, 1998, with Thomas Hartford.
10.7 -- Employment Agreement, dated February 20, 1998, with Newton Schnoor.
10.8 -- Employment Agreement, dated February 20, 1998, with Robert Ryan.
10.9 -- Management Agreement, dated February 20, 1998, among Universal Compression, Inc., Universal
Compression Holdings, Inc., and Castle Harlan, Inc.
10.10 -- Finders and Consulting Agreement, dated February 20, 1998.
10.11 -- Assignment and Assumption Agreement, dated February 20, 1998, among Universal Compression, Inc., BT
Alex. Brown and Salomon Smith Barney.
10.12 -- Co-Investor Subscription Agreement, dated February 20, 1998, between Universal Compression Holdings,
Inc. and certain co-investors.
10.13 -- Voting Agreement, dated February 20, 1998, among Castle Harlan Partners III, L.P., Universal
Compression Holdings, Inc. and certain other parties.
10.14 -- Registration Rights Agreement, dated February 20, 1998, among Universal Compression Holdings, Inc.
and certain of its stockholders.
10.15 -- Stockholders Agreement, dated February 20, 1998, between Universal Compression Holdings, Inc. and
certain of its stockholders.
10.16 -- Management Subscription Agreement, dated February 20, 1998, between Universal Compression Holdings,
Inc. and certain key members of Universal Compression, Inc.'s management.
10.17 -- Management Stock Buyback Agreement between Universal Compression Holdings, Inc. and certain key
members of Universal Compression, Inc.'s management.
10.18 -- Stock Option Agreements between Universal Compression Holdings, Inc. and each of Ernie Danner,
Stephen Snider, Thomas Hartford, Samuel Urcis, Newton Schnoor, Robert Ryan, and Valerie Banner.
12.1* -- Statement of Computation of the Ratios of Earnings to Fixed Charges.
21.1 -- Subsidiaries of Universal Compression, Inc.
23.1* -- Consent of KMPG Peat Marwick LLP.
23.2* -- Consent of Schulte Roth & Zabel LLP (contained in Exhibit 5.1).
23.3* -- Consent of Deloitte & Touche LLP.
25.1 -- Statement of Eligibility and Qualification (Form T-1) under the Trust Indenture Act of 1939 of The
United States Trust Company of New York.
27.1* -- Financial Data Schedule.
99.1 -- Form of Letter of Transmittal.
99.2 -- Notice of Guaranteed Delivery.
</TABLE>
- ------------------
* Filed herewith.
(b) Financial Statement Schedules.
II-2
<PAGE>
ITEM 22. UNDERTAKINGS
A. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1993;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(5) That every prospectus: (i) that is filed pursuant to paragraph (4)
immediately proceeding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(6) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of form
S-4, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(7) To supply by means of post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
B. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW
YORK ON THE 17th DAY OF SEPTEMBER, 1998.
UNIVERSAL COMPRESSION, INC.
By: /s/ ERNIE DANNER
----------------------------------
Ernie Danner
Chief Financial Officer
and Executive Vice President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
/s/ STEPHEN SNIDER President, Chief Executive Officer and September 17, 1998
- ------------------------------------------ Director
Stephen Snider
/s/ ERNIE DANNER Chief Financial Officer, Executive Vice September 17, 1998
- ------------------------------------------ President and Director (Principal Financial
Ernie Danner and Accounting Officer)
/s/ THOMAS HARTFORD Executive Vice President September 17, 1998
- ------------------------------------------ and Director
Thomas Hartford
</TABLE>
II-4
<PAGE>
SCHEDULE II
TIDEWATER COMPRESSION SERVICE, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE PERIOD FROM APRIL 1, 1997 TO FEBRUARY 20, 1998
AND YEARS ENDED MARCH 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------------- ---------- -------- -------- --------
BALANCE
BALANCE AT AT
BEGINNING ADDITIONS END OF
DESCRIPTION OF PERIOD AT COST DEDUCTIONS PERIOD
- ----------------------------------------------- ---------- --------- ---------- --------
<S> <C> <C> <C> <C>
FOR THE PERIOD FROM APRIL 1, 1997
TO FEBRUARY 20, 1998
Deducted in balance sheet from trade accounts
receivable:
Allowance for doubtful accounts.............. $ 318 (50) (157) 283
Deducted in balance sheet from other assets:
Amortization of goodwill, prepaid rent and
debt issuance costs....................... $4,654 1,477 -- 6,131
1997
Deducted in balance sheet from trade accounts
receivable:
Allowance for doubtful accounts.............. $ 510 120 (312) 318
Deducted in balance sheet from other assets:
Amortization of goodwill, prepaid rent and
debt issuance costs....................... $3,000 1,654 -- 4,654
1996
Deducted in balance sheet from trade accounts
receivables:
Allowance for doubtful accounts.............. $ 702 120 (312) 510
Deducted in balance sheet from other assets:
Amortization of goodwill and debt issuance
costs..................................... $ 675 2,325 -- 3,000
</TABLE>
- ------------------
(A) Accounts receivable amounts considered uncollectible are removed from
accounts receivable by reducing allowance for doubtful accounts.
<PAGE>
SCHEDULE II
UNIVERSAL COMPRESSION, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE PERIOD FROM FEBRUARY 20, 1998 TO MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------------- ---------- -------- -------- --------
BALANCE
BALANCE AT AT
BEGINNING ADDITIONS END OF
DESCRIPTION OF PERIOD AT COST DEDUCTIONS PERIOD
- ----------------------------------------------- ---------- --------- ---------- --------
<S> <C> <C> <C> <C>
Deducted in balance sheet from trade accounts
receivable:
Allowance for doubtful accounts.............. $ 283 10 (80) 213
Deducted in balance sheet from other assets:
Amortization of goodwill, prepaid rent and
debt issuance costs....................... -- $ 310 -- 310
</TABLE>
- ------------------
(A) Accounts receivable amounts considered uncollectible are removed from
accounts receivable by reducing allowance for doubtful accounts.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------ ----------------------------------------------------------------------------------------------- ----------
<S> <C> <C>
3.1 -- Certificate of Incorporation of Universal Compression, Inc., as amended.
3.2 -- Bylaws of Universal Compression, Inc.
4.1 -- Purchase Agreement, dated as of February 13, 1998, between Universal Compression, Inc.
and each of BT Alex. Brown and Salomon Smith Barney.
4.2 -- Specimen of Universal Compression, Inc.'s 9 7/8% Senior Discount Note due 2008.
4.3 -- Indenture, dated as of February 20, 1998, between Universal Compression, Inc. and The
United States Trust Company of New York, as Trustee.
4.4 -- Registration Rights Agreement, dated July 1, 1997, between Universal Compression
Holdings, Inc. and each of BT Alex. Brown Incorporated and Salomon Smith Barney.
4.5 -- Credit Agreement, dated as of February 20, 1998, among Universal Compression, Inc.,
Universal Compression Holdings, Inc., Bankers Trust Company, as agent and the lenders
party thereto.
4.6 -- Form of Notes under Credit Agreement.
4.7 -- Security Agreement, dated as of February 20, 1998, among Universal Compression, Inc.,
Universal Compression Holdings, Inc., Bankers Trust Company, and the Banks party thereto.
4.8 -- Pledge Agreement, dated as of February 20, 1998, among Universal Compression, Inc.,
Universal Compression Holdings, Inc., Bankers Trust Company and the Banks party thereto.
4.9 -- Acknowledgement and Joinder Agreement, dated February 20, 1998, between Universal
Compression, Inc. and Bankers Trust Company.
5.1* -- Opinion of Schulte Roth & Zabel LLP regarding legality.
8.1* -- Opinion of Schulte Roth & Zabel LLP regarding tax matters (contained in Exhibit 5.1).
9.1* -- Voting Trust Agreement, dated February 20, 1998, among Universal Compression Holdings,
Inc., John K. Castle, as voting trustee and certain stockholders party thereto.
10.1 -- Stock Purchase Agreement, dated December 18, 1997, between TW Acquisition Corporation and
Tidewater Inc.
10.2 -- Purchase Price Adjustment Agreement, dated February 20, 1998, among TW Acquisition
Corporation, Universal Compression Holdings, Inc., and Tidewater Inc.
10.3 -- Transition Services Agreement, dated February 20, 1998, between TW Acquisition
Corporation and Tidewater Inc.
10.4 -- Employment Agreement, dated February 20, 1998, with Stephen Snider.
10.5 -- Employment Agreement, dated February 20, 1998, with Ernie Danner.
10.6 -- Employment Agreement, dated February 20, 1998, with Thomas Hartford.
10.7 -- Employment Agreement, dated February 20, 1998, with Newton Schnoor.
10.8 -- Employment Agreement, dated February 20, 1998, with Robert Ryan.
10.9 -- Management Agreement, dated February 20, 1998, among Universal Compression, Inc.,
Universal Compression Holdings, Inc., and Castle Harlan, Inc.
10.10 -- Finders and Consulting Agreement, dated February 20, 1998.
10.11 -- Assignment and Assumption Agreement, dated February 20, 1998, among Universal
Compression, Inc., BT Alex. Brown and Salomon Smith Barney.
10.12 -- Co-Investor Subscription Agreement, dated February 20, 1998, between Universal
Compression Holdings, Inc. and certain co-investors.
10.13 -- Voting Agreement, dated February 20, 1998, among Castle Harlan Partners III, L.P.,
Universal Compression Holdings, Inc. and certain other parties.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------ ----------------------------------------------------------------------------------------------- ----------
<S> <C> <C>
10.14 -- Registration Rights Agreement, dated February 20, 1998, among Universal Compression
Holdings, Inc. and certain of its stockholders.
10.15 -- Stockholders Agreement, dated February 20, 1998, between Universal Compression Holdings,
Inc. and certain of its stockholders.
10.16 -- Management Subscription Agreement, dated February 20, 1998, between Universal Compression
Holdings, Inc. and certain key members of Universal Compression, Inc.'s management.
10.17 -- Management Stock Buyback Agreement between Universal Compression Holdings, Inc. and
certain key members of Universal Compression, Inc.'s management.
10.18 -- Stock Option Agreements between Universal Compression Holdings, Inc. and each of Ernie
Danner, Stephen Snider, Thomas Hartford, Samuel Urcis, Newton Schnoor, Robert Ryan, and
Valerie Banner.
12.1* -- Statement of Computation of the Ratios of Earnings to Fixed Charges.
21.1 -- Subsidiaries of Universal Compression, Inc.
23.1* -- Consent of KMPG Peat Marwick LLP.
23.2* -- Consent of Schulte Roth & Zabel LLP (contained in Exhibit 5.1).
23.3* -- Consent of Deloitte & Touche LLP.
25.1 -- Statement of Eligibility and Qualification (Form T-1) under the Trust Indenture Act of
1939 of The United States Trust Company of New York.
27.1* -- Financial Data Schedule.
99.1 -- Form of Letter of Transmittal.
99.2 -- Notice of Guaranteed Delivery.
</TABLE>
- ------------------
* Filed herewith.
<PAGE>
EXHIBIT 5.1
SCHULTE ROTH & ZABEL LLP
900 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 756-2000
September 17, 1998
Universal Compression Holdings, Inc.
4430 Brittmoore Road
Houston, Texas 77041
Attention: Ernie Danner
Ladies and Gentlemen:
Reference is made to the Registration Statement on Form S-4, File
No. 333-48283 (the "Registration Statement"), filed with the Securities and
Exchange Commission in connection with the offer (the "Exchange Offer") by
Universal Compression Holdings, Inc. (the "Company") of 11 3/8% Senior Discount
Notes due 2009 (the "Exchange Notes") of the Company in exchange for all
outstanding 11 3/8% Senior Discount Notes due 2009 (the "Original Notes") of the
Company. We have acted as special counsel to the Company in connection with the
Exchange Offer.
In connection with the opinion set forth below, we have examined originals,
telecopies or copies, certified or otherwise identified to our satisfaction, of
such records of the Company and all such agreements, certificates of public
officials and certificates of officers of the Company and others, and such
documents, certificates and corporate and other records, as we have deemed
necessary or appropriate as a basis for the opinion set forth below.
In our examination, we have assumed the genuineness of all signatures, the
legal capacity of natural persons signing or delivering any instrument, the
authenticity of all documents submitted to us as originals, the conformity to
original documents of all documents submitted to us as certified or photostatic
copies and the authenticity of the originals of such copies. We have also
assumed, in our examination of documents executed by the Company, that each of
the other parties thereto is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization, has the power,
corporate or other, to execute and deliver such documents and to perform such
party's obligations thereunder, that each such document has been duly
authorized, executed and delivered by such party, and that each such document
constitutes the legal, valid and binding obligation of each such party,
enforceable against such party in accordance with its terms.
We are attorneys admitted to practice in the State of New York, and the
opinion set forth below is limited to the laws the State of New York.
Based on the foregoing, and having such regard for such legal
considerations as we deem relevant, we are of the opinion that, upon the
issuance of the Exchange Notes in the manner referred to in the Registration
Statement, and when the Exchange Notes are duly executed, authenticated and
delivered in exchange for the Original Notes in accordance with the Exchange
Offer, the Exchange Notes will be legally issued and will be valid and binding
obligations of the Company enforceable against the Company in accordance with
their terms, subject to applicable bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance and similar laws now or hereafter in effect
affecting creditors' rights generally and general principles of equity,
regardless of whether such enforceability is considered in a proceeding in
equity or at law.
We have prepared the discussion contained under the heading "Material
United States Federal Income Tax Considerations" in the Prospectus (the
"Prospectus") forming a part of the Registration Statement. We confirm that
such discussion represents our opinion regarding the material U.S. federal
income tax considerations applicable generally to the holders of the Original
Notes that exchange Original Notes for Exchange Notes and to such holders'
acquisition, ownership and disposition of the Exchange Notes.
<PAGE>
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to this firm under the headings
"Material United States Federal Income Tax Considerations" and "Legal Matters"
in the Prospectus. In giving such consent, we do not thereby admit that we are
in the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations promulgated
thereunder. We have no obligation to modify, amend or update the opinion set
forth herein for any reason.
Very truly yours,
/s/ SCHULTE ROTH & ZABEL LLP
<PAGE>
VOTING TRUST AGREEMENT
----------------------
Voting Trust Agreement, dated as of February 20, 1998 (the
"Agreement"), among Universal Compression Holdings, Inc. ("Holdings"), each of
the stockholders listed on the signature pages hereto (the "Stockholders") and
John K. Castle and any successor appointed as provided in this Agreement, as
Voting Trustee (the "Voting Trustee").
Recitals
--------
Holdings is duly organized and validly existing under the
laws of the State of Delaware, and, as of the date hereof, the Stockholders
are the owners the number of shares of the issued and outstanding Common
Stock, par value $0.01 per share, of Holdings (the "Common Stock"), and the
number of shares of the issued and outstanding Series A Preferred Stock, par
value $.01 per share, of Holdings (the "Preferred Stock") as set forth
opposite such Stockholder's name on Exhibit B hereto (the shares of Common
Stock and Preferred Stock now owned of record or beneficially or that may be
so owned in the future hereafter from time to time by the Stockholders being
referred to herein collectively as "Shares").
In consideration of the premises and of the mutual
undertakings of the parties hereinafter set forth, a voting trust (the
"Trust") in respect of the Shares of Holdings owned by the Stockholders is
hereby created and established, subject to the following terms and conditions,
to all and every one of which the parties hereto expressly assent and agree.
1. DEPOSIT OF SHARES.
-----------------
(a) Transfer of Shares. Each Stockholder agrees that,
concurrently with the execution and delivery of this Agreement, he, she or it
will transfer and assign, or cause to be transferred and assigned, to the
Voting Trustee all of the Shares of Holdings now owned by him, her or it and
will deposit or cause to be deposited hereunder, with the Voting Trustee, the
certificates for such Shares, all of which certificates, if not registered in
the name of the Voting Trustee, shall be duly endorsed in blank or accompanied
by proper instruments of assignment and transfer thereof duly executed in
blank.
(b) All Capital Stock. The provisions of this Agreement
shall apply to any and all Shares of Holdings that (i) may be issued in
respect of, in exchange for, or in substitution of any Shares transferred to
the Voting Trustee pursuant to paragraph (a) hereof, or (ii) are hereafter
acquired by any Stockholder at any time, and each Stockholder agrees that
until the termination of this Agreement no Shares of Holdings shall be held by
such Stockholder, but all such Shares shall be deposited with the Voting
Trustee in accordance with the terms and conditions of this Agreement.
<PAGE>
2. VOTING TRUST CERTIFICATES.
-------------------------
(a) Issue of Certificates. Subject to the provisions of
Section 4 hereof, the Voting Trustee shall from time to time issue to each
Stockholder, with respect to the Shares of Holdings owned by such Stockholder
and so deposited hereunder, a Voting Trust Certificate or Voting Trust
Certificates, each in the form of Exhibit A, for the number of Shares equal to
that deposited by such Stockholder, which Certificate or Certificates shall
refer to the provisions of this Agreement and be registered on the books of
the Trust in such Stockholder's name.
(b) Transfer of Certificates. Voting Trust Certificates
shall, to the extent permitted by law and the terms of this Agreement, be
transferable (subject to the limitations on transfer otherwise applicable) in
the same manner as negotiable instruments; provided, however, that ownership
of such Voting Trust Certificates shall be transferable on the books of the
Trust by the holders of record thereof only upon (i) the surrender of such
Certificates, properly endorsed by the registered holders, and (ii) delivery
to the Voting Trustee (A) by the proposed transferee, of a valid undertaking,
in form and substance satisfactory to the Voting Trustee, to become, and such
transferee becoming, bound by the terms of this Agreement, and (B) by the
proposed transferor, of an opinion of counsel or no-action letter as provided
in Section 4 hereof.
3. STOCKHOLDERS AGREEMENT.
-----------------------
(a) Limitations on Transfer. All Voting Trust Certificates
issued hereunder shall be subject to (i) the limitations on transfer and all
other terms provided, with respect to the Shares now or hereafter transferred
to the Voting Trustee hereunder, in the Stockholders Agreement dated as of the
date hereof, among Holdings and certain of its stockholders (the "Stockholders
Agreement"), a copy of which is on file with Holdings.
(b) Notices. Any notice required to be given by any
Stockholder to Holdings or others under the Stockholders Agreement with
respect to the purchase or sale of any Shares transferred hereunder shall be
given to the Voting Trustee who shall promptly transmit such notice to
Holdings, and Holdings shall thereafter give all notices required under such
Stockholders Agreement to be given to others, including the other stockholders
of Holdings.
4. REGISTRATION OF CERTIFICATES.
----------------------------
Certificates Not Registered. The Voting Trustee will not
register the Voting Trust Certificates under the Securities Act of 1933, as
amended (the "Securities Act"), or under the securities laws of any state in
reliance upon each Stockholder's representation hereby made that he, she or it
will hold the Voting Trust Certificates subject to all applicable provisions
of the Securities Act and such state laws and all applicable rules and
regulations promulgated thereunder, and will not offer, sell, transfer or
otherwise dispose of said Voting Trust Certificates or any part thereof unless
(in addition to compliance with any other applicable restrictions on transfer)
he, she or it shall have first obtained (i) an opinion of counsel, in form and
substance satisfactory to the Voting Trustee, to the effect that such
disposition will not result in a violation of any federal or state law
applicable to the offer and sale of securities, or (ii) written advice from
the Securities and Exchange
-2-
<PAGE>
Commission that it will take no action with respect to any such proposed
disposition of said Voting Trust Certificates.
5. REPLACEMENT OF CERTIFICATES.
----------------------------
Issue of Replacement Certificates. In case any Voting Trust
Certificate shall be mutilated, lost, destroyed or stolen, the Voting Trustee
may issue and deliver in exchange therefor and upon cancellation of the
mutilated Voting Trust Certificate, or in lieu of the lost, destroyed or
stolen Voting Trust Certificate, a new Voting Trust Certificate or Voting
Trust Certificates representing a like number of Shares, upon the production
of evidence of such loss, destruction or theft, satisfactory to the Voting
Trustee, and upon receipt of an indemnity satisfactory to the Voting Trustee,
and upon compliance also with such other reasonable conditions as the Voting
Trustee may prescribe.
6. STOCK CERTIFICATES HELD BY VOTING TRUSTEES.
------------------------------------------
(a) Surrender of Certificates. The certificates for Shares
of Holdings deposited with the Voting Trustee shall, if not registered in the
name of the Voting Trustee, be surrendered to Holdings and canceled and new
certificates therefor issued to and in the name of the Voting Trustee.
Notation shall be made on the face of all certificates issued in the name of
the Voting Trustee that they are issued pursuant to this Agreement, and such
fact shall also be noted in the records of stock ownership of Holdings.
(b) Shares Held in Trust. All Shares deposited with the
Voting Trustee hereunder shall be held in trust for the Stockholders and their
respective heirs, executors, administrators and assigns, and used and applied
by the Voting Trustee and his successors in office for the purposes of and in
accordance with this Agreement and shall remain subject to the Stockholders
Agreement.
(c) Transfer of Shares. The Voting Trustee may cause any
Shares at any time held by him under this Agreement to be transferred to any
name or names other than the name of the Voting Trustee herein named, if such
transfer becomes necessary by reason of any change in the person holding the
office of Voting Trustee as hereinafter provided.
7. DIVIDENDS; STOCKHOLDERS RIGHTS.
-------------------------------
(a) Dividends. Holdings is hereby authorized and directed,
and Holdings hereby agrees, to pay all distributions, payments in respect of
redemption of the Preferred Stock and dividends that are payable (and to which
the holders of the capital stock shall be entitled) in cash, stock (other than
stock entitled to vote in the selection of directors generally (the "Voting
Stock")) or other property directly to the registered holder of the Voting
Trust Certificate evidencing the Shares on which such distributions,
redemption payments or dividends are declared. All Voting Stock issued as
dividends or otherwise in respect of the Shares shall also be subject to this
Agreement. The stock certificates for such shares shall be issued in the name
of and delivered to the Voting Trustee to be held hereunder, subject to all of
the provisions hereof, and the Voting
-3-
<PAGE>
Trustee shall issue additional Voting Trust Certificates in respect of such
shares to the Stockholders entitled thereto.
(b) Distributions of Capital Stock. In case Holdings shall
at any time issue any stock or other securities to which the holders of Common
Stock or Preferred Stock shall be entitled to subscribe by way of preemptive
right or otherwise, or any Stockholder shall be otherwise entitled (including,
without limitation, pursuant to the Stockholders Agreement) to purchase any
shares of capital stock of Holdings, the Voting Trustee shall promptly give
notice of such right so to subscribe or purchase and of the terms thereof to
such Stockholder at his, her or its address registered with the Voting
Trustee; and such Stockholder upon providing the Voting Trustee with funds in
the requisite amount, shall have the right, subject to such reasonable
regulations as may be prescribed by the Voting Trustee, to instruct the Voting
Trustee to subscribe for or purchase such stock or other securities, or any
part thereof; and to the extent that such Stockholder shall fail to exercise
such rights the Voting Trustee shall be entitled, in its absolute discretion,
to permit such rights so to subscribe or purchase to lapse. Upon receiving
proper instructions in writing, the Voting Trustee shall subscribe for or
purchase such stock or other securities (but only out of funds provided by
such Stockholder for the purpose) and shall distribute the same to such
Stockholder, except that any shares of Voting Stock of Holdings, when so
subscribed for or purchased and received by the Voting Trustee, shall not be
distributed but shall be held hereunder, subject to all the provisions hereof,
and the Voting Trustee shall issue new or additional Voting Trust Certificates
in appropriate form in respect of such shares to such Stockholder.
8. ACTIONS BY VOTING TRUSTEE.
-------------------------
(a) Proxy. A proxy may be given to any person other than the
Voting Trustee; provided, that such proxy may be voted only in accordance with
specific instructions given by the Voting Trustee.
(b) Agents. The Voting Trustee may at any time or from time
to time appoint an agent or agents and may delegate to such agent or agents
the performance of any administrative duty of the Voting Trustee, including,
without limitation, the appointment of a domestic bank or other institution to
act as custodian of the Shares of Holdings held by it hereunder. The fees of
such agent or agents shall constitute an expense of the Voting Trustee.
9. LIABILITY OF VOTING TRUSTEE; INDEMNIFICATION.
---------------------------------------------
(a) No Liability. The Voting Trustee assumes no liability as
a stockholder, his interest hereunder being that of trustee only. In voting
the stock represented by the stock certificates held by it hereunder (which he
may do either in person or by proxy as aforesaid), the Voting Trustee will
vote and act in all matters in accordance with his best good faith judgment
and the terms of this Agreement, without taking into consideration the
preferences of the Stockholders; but he assumes no responsibility or liability
in respect of any action taken by him or taken in pursuance of his vote so
cast, and the Voting Trustee shall not incur any responsibility as trustee or
otherwise by reason of any error of fact or law, mistake of judgment, or of
any matter or thing done or suffered or omitted to be done under this
Agreement, except for his own individual gross negligence or willful
misconduct.
<PAGE>
(b) Agents. The Voting Trustee shall not be answerable for
the default or misconduct of any agent or attorney appointed by him in
pursuance hereof if such agent or attorney shall have been selected with
reasonable care.
(c) Expenses. The Voting Trustee shall not be entitled to
any compensation for his services but shall be reimbursed by the Stockholders
for any reasonable expenses (other than counsel, advisors' and agents' fees)
paid or incurred in the administration of the trust hereunder.
(d) Indemnity. The Stockholders hereby jointly and severally
agree that they will at all times protect, indemnify and save harmless the
Voting Trustee from any loss, cost or expense of any kind or character
whatsoever incurred in connection with this Trust except those, if any,
arising from the gross negligence or willful misconduct of the Voting Trustee,
and will at all times themselves undertake, assume full responsibility for,
and pay all costs and expenses of any suit or litigation of any character,
including any proceedings before any governmental agency, with respect to the
Shares or this Agreement and, if the Voting Trustee shall be made a party
thereto, the Stockholders will pay all costs and expenses, including counsel
fees, to which the Voting Trustee may be subject by reason thereof. The Voting
Trustee may consult with counsel and other advisors, and the opinions of such
counsel and advisors shall be full and complete authorization and protection
in respect of any action taken or omitted or suffered by the Voting Trustee
hereunder in good faith and in accordance with such opinions.
(e) Survival. Notwithstanding any other provision hereof,
the provisions of this Section 9 shall survive the termination of this
Agreement.
10. VOTING DISCRETION.
-----------------
(a) Voting Discretion. Except as otherwise provided herein,
until the termination of this Agreement and the actual delivery of stock
certificates in exchange for Voting Trust Certificates hereunder, the Voting
Trustee shall possess and shall be entitled in his discretion, not subject to
any review, to exercise in person or by proxy, in respect of any and all
Shares at any time deposited under this Agreement, all rights and powers of
every name and nature, including the right to vote thereon or to consent to
any and every act of Holdings, in the same manner and to the same extent as if
he were the absolute owner of such stock in his own right.
(b) Permitted Actions. Without limiting the generality of
the foregoing paragraph (a), the Voting Trustee is specifically authorized to
vote for or consent to any of the following:
(a) (i) an increase or decrease in the
authorized capital of Holdings, (ii) the creation or authorization of any
class of capital stock of Holdings, (iii) the issuance or sale of any shares
of capital stock or rights to acquire capital stock of Holdings or any
subsidiary of Holdings (by conversion, exercise of a warrant or option or
otherwise);
(b) any amendment of the certificate of
incorporation or by-laws of Holdings;
(c) the incurrence of any indebtedness for
borrowed money;
-5-
<PAGE>
(d) the appointment, election, termination or
removal of any officer or director of Holdings;
(e) the declaration or payment of any dividend
or other distribution to the stockholders of Holdings;
(f) (i) entering into any transaction of
merger, consolidation or amalgamation, or liquidation, winding up or
dissolution, (ii) the conveyance, sale, lease, transfer or other disposition
of, in a transaction or related series of transactions, substantially all of
Holdings' or any of its subsidiaries' property, business or assets, (iii)
acquisition by purchase or otherwise of all of the capital stock or other
evidences of beneficial ownership of Holdings or any of its subsidiaries, or
(iv) any recapitalization or similar restructuring transaction;
(g) the acquisition, directly or indirectly, of
a significant amount of assets other than in the ordinary course of business;
(h) the sale or disposition of, directly or
indirectly, a significant amount of assets other than in the ordinary course
of business;
(i) adoption of any stock option plan for
employees or any material changes in any such stock option plan or any other
executive compensation plan of Holdings or any of its subsidiaries;
(j) any change in the annual compensation of any
officer of Holdings;
(k) any other extraordinary transaction,
including any transaction that changes or would change the nature of the
business of Holdings or its subsidiaries; and
(l) any other proposal to be voted on or
consented to by stockholders of Holdings;
11. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS.
--------------------------------------------------
Each Stockholder hereby represents and warrants to the Voting Trustee
as follows:
(a) Authority Relative to This Agreement. Such Stockholder
has all requisite power and authority to enter into this Agreement and to
perform its obligations hereunder. This Agreement has been duly authorized,
executed and delivered by such Stockholder and, assuming this Agreement
constitutes a valid and binding obligation of the other parties hereto,
constitutes a legal, valid and binding obligation of such Stockholder,
enforceable against such Stockholder in accordance with its terms, except to
the extent that the enforceability thereof may be limited by: (i) applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or
similar laws from time to time in effect affecting generally the enforcement
of creditors' rights and remedies; and (ii) general principles of equity,
including, without limitation, principles of reasonableness, good faith and
fair dealing (regardless of whether enforcement is sought in equity or at
law).
-6-
<PAGE>
(b) No Conflict. (i) The execution and delivery of this
Agreement by such Stockholder and performance of its obligations hereunder do
not (A) conflict with or violate any laws applicable to such Stockholder or by
which the Shares held by such Stockholder are bound or affected or (B) result
in any breach of or constitute a default (or an event that with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, or result
in the creation of a lien or encumbrance on any of the Shares held by such
Stockholder pursuant to, any note, bond, mortgage, indenture, contract, lease,
license, permit, franchise or other instrument or obligation to which such
Stockholder is a party or by which such Stockholder or the Shares held by such
Stockholder are bound or affected.
(ii) The execution and delivery of this Agreement by such
Stockholder do not, and the performance of this Agreement by such Stockholder
will not, require any consent, authorization or approval or other action by,
or notice to or filing with, any governmental authority or other person.
(c) Title to the Shares. As of the date hereof, each
Stockholder is the record and beneficial owner of the number of shares of
Common Stock and the number of shares of Preferred Stock as set forth opposite
such Stockholder's name on Exhibit B hereto free and clear of all security
interests, liens, claims, pledges, options, rights of first refusal,
contracts, limitations on such Stockholder's voting rights, charges and other
encumbrances of any nature whatsoever. Except as provided in this Agreement,
such Stockholder has not appointed or granted (and will not, after the date
hereof, appoint or grant) any proxy, which appointment or grant is still
effective, with respect to the shares set forth opposite such Stockholder's
name on Exhibit B hereto.
12. TERMINATION OF THIS AGREEMENT.
-----------------------------
(a) Term. Unless terminated sooner pursuant to Section 12(b)
hereof, this Agreement shall continue in effect for the maximum period
permitted by applicable law as in effect on the date hereof.
(b) Termination. This Agreement shall terminate with respect
to any Shares of Holdings sold, transferred or disposed of by any Stockholder
as provided in and subject to compliance with the terms and conditions of the
Stockholders Agreement.
(c) Irrevocable. Subject to the foregoing Section 12 (b),
during the term of this Agreement the Trust hereby created shall be
irrevocable and no Shares of Holdings held by the Voting Trustee pursuant to
the terms of this Agreement shall be transferred to or upon the order of the
holder of a Voting Trust Certificate evidencing the beneficial ownership
thereof prior to the termination of this Agreement.
13. DELIVERY OF STOCK CERTIFICATES UPON TERMINATION OF THIS AGREEMENT.
------------------------------------------------------------------
-7-
<PAGE>
(a) Stock Certificates. Upon termination of this Agreement,
the Voting Trustee, in exchange for and upon surrender of any Voting Trust
Certificates then outstanding, shall, in accordance with the terms hereof,
deliver certificates for capital stock of Holdings of the series or class and
in the amount called for by such Voting Trust Certificate and either
registered in the name of the holder thereof or duly endorsed in blank or
accompanied by proper instruments of assignment and transfer thereof duly
executed in blank to the holder thereof, and the Voting Trustee may require
the holder of such Voting Trust Certificate to surrender the same for such
exchange.
(b) Obligations of Trustee. After any termination of this
Agreement as above provided with respect to all Shares, and delivery by the
Voting Trustee of any stock or other property then held hereunder in exchange
for outstanding Voting Trust Certificates as provided in this Section 13, all
further obligations or duties of the Voting Trustee under this Agreement or
any provision hereof shall cease.
14. RESIGNATION; SUCCESSOR TRUSTEE.
-------------------------------
The Voting Trustee may resign at any time by providing
Holdings and each Stockholder with written notice to such effect 30 days prior
to the effective date of such resignation. If for any reason John K. Castle
shall cease to serve as Voting Trustee hereunder, his immediate successor in
such capacity shall be Leonard M. Harlan; provided that (i) the person serving
as Voting Trustee may at any time, and from time to time, replace or designate
the successor to such Voting Trustee and (ii) each such successor shall be an
officer of Castle Harlan, Inc. or an officer of Castle Harlan Partners III GP,
Inc. Each such successive designated person shall, upon assuming the duties
hereunder upon a vacancy occurring in the office of Voting Trustee, be the
Voting Trustee.
15. INTERESTS ALLOWED AS VOTING TRUSTEE.
-----------------------------------
The Voting Trustee may be a creditor or stockholder of
Holdings and may act as a director, officer or employee of, or consultant or
advisor to, Holdings and receive compensation therefor. In addition, the
Voting Trustee and any firm of which he may be a member, and any of his
affiliates, may contract with Holdings or have a pecuniary interest in any
matter or transaction to which Holdings may be a party, or in which Holdings
may be in any way concerned.
16. EFFECT OF AGREEMENT UPON REPRESENTATIVES, SUCCESSORS AND ASSIGNS.
-----------------------------------------------------------------
This Agreement shall inure to the benefit of and be binding
upon the Voting Trustee and each Stockholder and their respective legal
representatives, successors and assigns.
-8-
<PAGE>
17. MISCELLANEOUS.
-------------
(a) Deliver to Stockholders. The Voting Trustee shall
deliver to each Stockholder all information received by the Voting Trustee
from Holdings or from other stockholders of Holdings.
(b) Assignment; Binding Effect. Except as otherwise provided
in this Agreement, no right under this Agreement shall be assignable and any
attempted assignment in violation of this provision shall be void. This
Agreement, and the rights and obligations of the parties hereunder, shall be
binding upon and inure to the benefit of any and all successors, permitted
assigns, personal representatives and all other legal representatives, in
whatsoever capacity, by operation of law or otherwise, of the parties hereto,
in each case with the same force and effect as if the foregoing persons were
named herein as parties hereto..
(c) Notices. All notices to be given to the owners of Voting
Trust Certificates shall be given by mailing the same in a sealed postpaid
envelope to the registered owners of Voting Trust Certificates addressed to
their respective addresses as shown on the books of the Trust, and any notice
whatsoever when mailed by or on behalf of the Voting Trustee to such
registered owners of Voting Trust Certificates as herein provided shall have
the same effect as though personally served on all holders of Voting Trust
Certificates. All notices to be given to the Voting Trustee shall be given by
serving a copy thereof upon him personally or by mailing the same in a sealed
postpaid envelope addressed to him at his address set forth below or to such
other address as he shall from time to time in writing designate.
(c) Filing of Agreement. Until the termination of this
Agreement, one original counterpart hereof shall be filed at each of (i) the
principal office of Holdings and (ii) the registered office of Holdings in the
State of Delaware, and each such counterpart shall be open to the inspection
of any holder of any Voting Trust Certificate or any stockholder of Holdings
daily during business hours.
(d) Amendment. If at any time it is deemed advisable for the
parties hereto to amend or revoke this Agreement, it may be amended or revoked
by an agreement executed by the Voting Trustee, Holdings and the holder or
holders of all of the Voting Trust Certificates.
(e) Acknowledgment of Obligations. The Voting Trustee
accepts the trust created hereby subject to all the terms and conditions
herein contained and agrees that he will exercise the powers and perform the
duties of Voting Trustee as set forth herein according to his best judgment.
(f) Applicable Law; Consent to Jurisdiction. This Agreement
and the validity and performance of the terms hereof shall be governed by and
construed in accordance with the laws of the State of New York without regard
to principles of conflicts of law or choice of law. The parties hereto hereby
agree that all actions or proceedings arising directly or indirectly from or
in connection with this Agreement shall be litigated only in the Supreme Court
of the State of New York or the United States District Court for the Southern
District of New York located in New York County, New York. To the extent
permitted by applicable law, the parties hereto consent to
-9-
<PAGE>
the jurisdiction and venue of the foregoing courts and consent that any
process or notice of motion or other application to either of said courts or a
judge thereof may be served inside or outside the State of New York or the
Southern District of New York by registered mail, return receipt requested,
directed to such party at its address set forth in this Agreement (and service
so made shall be deemed complete five days after the same has been posted as
aforesaid) or by personal service or in such other manner as may be
permissible under the rules of said courts.
(g) Entire Agreement; Amendments and Waivers. This Agreement
sets forth the entire understanding of the parties with respect to the subject
matter hereof. The failure of any party to seek redress for the violation of
or to insist upon the strict performance of any term of this Agreement shall
not constitute a waiver of such term and such party shall be entitled to
enforce such term without regard to such forbearance. This Agreement may be
amended only by the written consent of each party hereto, and each party
hereto may take any action herein prohibited or omit to take action herein
required to be performed by it, and any breach of or compliance with any
covenant, agreement, warranty or representation may be waived only by the
written waiver of the party against whom such action or inaction may
negatively affect, but, in any case, such consent or waiver shall only be
effective in the specific instance and for the specific purpose for which
given.
(h) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning of terms contained herein.
(i) Severability. If any term, provision, covenant or
restriction of this Agreement, or any part thereof, is held by a court of
competent jurisdiction or any foreign federal, state, county or local
government or any other governmental, regulatory or administrative agency or
authority to be invalid, void, unenforceable or against public policy for any
reason, the remainder of the terms, provisions, covenants and restrictions of
this Agreement shall remain in full force and effect and shall in no way be
affected, impaired or invalidated.
(j) Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
shall constitute one and the same instrument, and it shall not be necessary in
making proof of this Agreement to produce or account for more than one such
counterpart.
(k) Specific Performance. Each of the parties hereto
acknowledges and agrees that in the event of any breach of this Agreement, the
non-breaching party would be irreparably harmed and could not be made whole by
monetary damages. It is accordingly agreed that the parties hereto shall and
do hereby waive the defense in any action for specific performance that a
remedy at law would be adequate and that the parties hereto, in addition to
any other remedy to which they may be entitled at law or in equity, shall be
entitled to compel specific performance of this Agreement in any action
instituted in the Supreme Court of the State of New York or the United States
District Court for the Southern District of New York, or, in the event such
courts shall not have jurisdiction of such action, in any court of the United
States or any state thereof having subject matter jurisdiction of such action.
-10-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed
this Agreement as of the day and year first above written.
VOTING TRUSTEE: UNIVERSAL COMPRESSION HOLDINGS, INC.
/s/ John K. Castle By: /s/ Ernie Danner
- ------------------------------- ----------------------
John K. Castle Ernie Danner
c/o Castle Harlan, Inc. Chief Financial Officer
37th Floor
150 East 58th Street
New York, New York 10155
<PAGE>
EXHIBIT A
THIS VOTING TRUST CERTIFICATE HAS BEEN ISSUED WITHOUT
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND NO INTEREST
THEREIN MAY BE TRANSFERRED EXCEPT IN COMPLIANCE, ESTABLISHED TO SATISFACTION
OF THE ISSUER, WITH SAID ACT AND THE RULES AND REGULATIONS PROMULGATED
THEREUNDER BY THE SECURITIES AND EXCHANGE COMMISSION.
THIS VOTING TRUST CERTIFICATE AND THE SECURITIES REPRESENTED
HEREBY ARE SUBJECT TO RESTRICTIONS ON TRANSFER PURSUANT TO A STOCKHOLDERS
AGREEMENT ON FILE WITH HOLDINGS.
VOTING TRUST CERTIFICATE
UNIVERSAL COMPRESSION HOLDINGS, INC.
No. V-______________________________
Class: Common Stock
Shares:____________________
Class: Preferred Stock
Shares:_____________________
This certificate is evidence that _________________ has
deposited (i) ________ shares of Common Stock, $0.01 par value per share, of
Universal Compression Holdings, Inc., a Delaware corporation (the "Company"),
and (ii) ____ shares of Preferred Stock, no par value per share, of Holdings,
with the Voting Trustee hereinafter named in accordance with the terms of the
Voting Trust Agreement (the "Agreement") dated as of ____ __, 1998 among
Holdings, each of the Stockholders listed on the signature pages thereof and
the person whose name appears below as Voting Trustee (the "Trustee").
This certificate and the interest represented hereby is
transferable on the books of the Trust only in accordance with the terms of
the Agreement and any holder of this Certificate takes the same subject to all
of the terms and conditions of such Agreement.
IN WITNESS WHEREOF, the Trustee has signed this certificate
as of the ___ day of ____ __, 1998.
VOTING TRUSTEE
__________________________
John K. Castle
<PAGE>
EXHIBIT 12.1
UNIVERSAL COMPRESSION, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE THREE-
FROM DECEMBER 12, 1997 (INCEPTION) MONTH PERIOD ENDED
THROUGH MARCH 31, 1998 JUNE 30, 1998
---------------------------------- ------------------
<S> <C> <C>
Fixed Charges as Defined:
Interest expense, including amortization of deferred
financing charges.................................... $2,896 $6,249
Interest component of rental expense on operating
leases............................................... 14 36
------ ------
Total Fixed Charges................................ $2,910 $6,285
------ ------
------ ------
Earnings as Defined:
Net Income.............................................. $ 617 $ 230
Income Tax.............................................. 529 148
Total Fixed Charges..................................... 2,910 6,285
------ ------
Total Earnings as Defined.......................... 4,056 6,663
------ ------
------ ------
Ratio of Earnings to Fixed Charges........................ 1.4 1.1
</TABLE>
<PAGE>
EXHIBIT 12.1
TIDEWATER COMPRESSION SERVICE, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED MARCH 31, FOR THE PERIOD
---------------------------------------- FROM APRIL 1, 1997
1994 1995 1996 1997 THROUGH FEBRUARY 20, 1998
------- ------- ------- ------- -------------------------
<S> <C> <C> <C> <C> <C>
Fixed Charges as Defined:
Interest expense, including amortization
of deferred financing charges......... $ -- $ 3,469 $ 3,706 $ -- $ --
Interest component of rental expense on
operating leases...................... 98 126 159 143 130
------- ------- ------- ------- -------
Total Fixed Charges................. $ 98 $ 3,595 $ 3,865 $ 143 $ 130
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Earnings as Defined:
Net income............................... $ 4,343 $ 6,319 $ 5,972 $ 7,842 $10,759
Income Tax............................... 2,551 4,648 3,745 4,724 6,271
Total Fixed Charges...................... 98 3,595 3,865 143 130
------- ------- ------- ------- -------
Total Earnings as Defined........... $ 6,992 $14,562 $13,582 $12,709 $17,160
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Ratio of Earnings to Fixed Charges......... 71.4 4.1 3.5 88.9 132.1
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE AND CONSENT
The Board of Directors
Universal Compression, Inc.:
The audits referred to in our report dated November 21, 1997, included the
related financial statement schedule for each of the years in the two-year
period ended March 31, 1997, included in the registration statement. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
New Orleans, Louisiana
September 14, 1998
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT AND REPORT ON FINANCIAL STATEMENT SCHEDULES
We consent to the use in this Amendment No. 2 to Registration Statement
No. 333-48279 of Universal Compression, Inc. of our report dated June 1, 1998 on
the consolidated financial statements of Universal Compression, Inc. and our
report dated June 1, 1998 on the financial statements of Tidewater Compression
Service, Inc. appearing in the Prospectus, which is a part of such Registration
Statement, and to the reference to us under the heading "Experts" in such
Prospectus.
Our audits of the financial statements referred to in our aforementioned reports
also included the financial statement schedules of Universal Compression, Inc.
for the period from December 12, 1997 (inception) through March 31, 1998 and
Tidewater Compression Service, Inc. for the period from April 1, 1997 through
February 20, 1998. These financial statement schedules are the responsibility of
management of Universal Compression, Inc. and Tidewater Compression Service,
Inc. (for the period from April 1, 1997 through February 20, 1998),
respectively. Our responsibility is to express an opinion based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Houston, Texas
September 16, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 244
<SECURITIES> 0
<RECEIVABLES> 12,853
<ALLOWANCES> (147)
<INVENTORY> 8,240
<CURRENT-ASSETS> 23,806
<PP&E> 262,936
<DEPRECIATION> (5,300)
<TOTAL-ASSETS> 382,477
<CURRENT-LIABILITIES> 8,096
<BONDS> 267,829
0
0
<COMMON> 49
<OTHER-SE> 105,978
<TOTAL-LIABILITY-AND-EQUITY> 382,477
<SALES> 7,798
<TOTAL-REVENUES> 29,636
<CGS> 6,686
<TOTAL-COSTS> 14,683
<OTHER-EXPENSES> 14,577
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> 6,249
<INCOME-PRETAX> 376
<INCOME-TAX> 148
<INCOME-CONTINUING> 230
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 230
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
