<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Numbers: 001-15843
333-48279
UNIVERSAL COMPRESSION HOLDINGS, INC.
UNIVERSAL COMPRESSION, INC.
(Exact name of registrants as specified in their charters)
DELAWARE 13-3989167
TEXAS 74-1282680
(States or other jurisdictions of (I.R.S. Employer
incorporation of organization) Identification Nos.)
4440 BRITTMOORE ROAD
HOUSTON, TEXAS 77041-8004
(Address of principal executive offices) (Zip Code)
(713) 335-7000
(Registrants' telephone number, including area code)
Indicate by check mark whether the registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
UNIVERSAL COMPRESSION, INC. MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q
WITH THE REDUCED DISCLOSURE FORMAT.
As of November 10, 2000, there were 14,664,038 shares of Universal Compression
Holdings, Inc.'s common stock, $0.01 par value, outstanding and 4,910 shares of
Universal Compression, Inc.'s common stock, $10.00 par value, outstanding.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIVERSAL COMPRESSION HOLDINGS, INC.
(IN THOUSANDS, EXCEPT SHARE DATA)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
2000 2000
------------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,535 $ 1,403
Accounts receivable, net 23,760 14,615
Current portion of notes receivable 3,087 1,535
Inventories 14,722 8,727
Current deferred tax asset 227 227
Other 1,396 1,571
--------- ---------
Total current assets 44,727 28,078
Property, plant and equipment
Rental equipment 359,993 349,198
Other 26,525 19,617
Accumulated depreciation (44,391) (38,466)
--------- ---------
Net property, plant and equipment 342,127 330,349
Goodwill, net of accumulated amortization 131,557 99,250
Notes receivable 4,929 1,117
Other non-current assets, net 8,611 7,570
Non-current deferred tax asset 7,509 3,578
--------- ---------
Total assets $ 539,460 $ 469,942
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 15,694 $ 10,911
Accrued liabilities 15,718 6,869
Current portion of long-term debt and capital lease obligation 1,991 4,206
--------- ---------
Total current liabilities 33,403 21,986
Capital lease obligation 5,952 10,243
Long-term debt 196,429 363,036
Non-current deferred tax liability 2,806 --
Other liabilities 39,192 --
--------- ---------
Total liabilities 277,782 395,265
Commitments and Contingencies
Stockholders' equity:
Series A preferred stock, $.01 par value, 50,000,000
and 5,000,000 shares authorized, 0 and 1,320,128
shares issued, 0 and 1,318,896 shares outstanding
at September 30, 2000 and March 31, 2000, respectively -- 13
Common stock, $.01 par value, 200,000,000 and 994,000 shares
authorized, 14,674,741 and 330,032 shares issued, 14,661,579
and 329,724 shares outstanding at September 30, 2000 and March 31,
2000, respectively 147 3
Class A non-voting common stock, $.01 par value,
0 and 6,000 shares authorized, 0 and 4,120 shares
issued, 0 and 3,210 shares outstanding at September 30,
2000 and March 31, 2000, respectively -- --
Treasury stock, 13,162 and 2,450 shares at cost at
September 30, 2000 and March 31, 2000, respectively (132) (123)
Additional paid-in capital 278,751 82,697
Retained deficit (17,088) (7,913)
--------- ---------
Total stockholders' equity 261,678 74,677
--------- ---------
Total liabilities and stockholders' equity $ 539,460 $ 469,942
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE> 3
UNIVERSAL COMPRESSION HOLDINGS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Rentals $ 28,681 $ 23,675 $ 54,955 $ 46,863
Sales 10,131 11,255 18,401 21,874
Other 41 58 257 59
-------- -------- -------- --------
Total revenues 38,853 34,988 73,613 68,796
Costs and expenses:
Rentals, exclusive of depreciation
and amortization 9,903 8,502 18,873 17,104
Cost of sales, exclusive of depreciation and amortization 8,480 9,648 15,028 18,750
Depreciation and amortization 6,679 6,061 14,177 11,678
Selling, general and administrative 3,769 4,116 7,224 8,654
Operating lease 1,995 -- 2,684 --
Interest expense 5,221 8,500 13,225 16,446
Non-recurring charges -- -- 7,059 --
-------- -------- -------- --------
Total costs and expenses 36,047 36,827 78,270 72,632
-------- -------- -------- --------
Income (loss) before income taxes and extraordinary items 2,806 (1,839) (4,657) (3,836)
Income taxes (benefit) 1,053 (261) (1,746) (1,020)
-------- -------- -------- --------
Income (loss) before extraordinary items $ 1,753 $ (1,578) $ (2,911) $ (2,816)
======== ======== ======== ========
Extraordinary loss, net of $3,759
income tax benefit -- -- (6,264) --
-------- -------- -------- --------
Net income (loss) $ 1,753 $ (1,578) $ (9,175) $ (2,816)
======== ======== ======== ========
Weighted average common and common equivalent shares outstanding:
Basic 13,504 -- 11,173 --
-------- -------- -------- --------
Diluted 13,881 -- 11,173 --
-------- -------- -------- --------
Earnings per share - basic:
Income (loss) before extraordinary items $ 0.13 $ -- $ (0.26) $ --
Extraordinary loss -- -- (0.56) --
-------- -------- -------- --------
Net income (loss) $ 0.13 $ -- $ (0.82) $ --
======== ======== ======== ========
Earnings per share - diluted:
Income (loss) before extraordinary items $ 0.13 $ -- $ (0.26) $ --
Extraordinary loss -- -- (0.56) --
-------- -------- -------- --------
Net income (loss) $ 0.13 $ -- $ (0.82) $ --
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
UNIVERSAL COMPRESSION HOLDINGS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (9,175) $ (2,816)
Adjustments to reconcile net loss to cash
provided from operating activities:
Depreciation and amortization 14,177 11,678
Gain on asset sales (102) (6)
Amortization of debt issuance costs 732 581
Accretion of discount notes 9,697 9,882
Deferred income taxes (1,125) --
(Increase) decrease in receivables (14,509) 3,912
(Increase) decrease in inventories (5,995) 1,774
Increase (decrease) in accounts payable 4,783 (1,032)
Increase in accrued expenses 6,578 3,631
Other 3,722 (1,599)
--------- ---------
Net cash provided by operating activities 8,783 26,005
Cash flows from investing activities:
Additions to property, plant and equipment, net (30,779) (33,125)
Capital leaseback of vehicles (713) (4,062)
Acquisitions (124,852) --
Proceeds from sale of fixed assets 139,647 --
--------- ---------
Net cash used in investing activities (16,697) (37,187)
Cash flows from financing activities:
Principal repayments of long-term debt (107,091) (376)
Net repayment under revolving line of credit (75,000) (1,100)
Net proceeds (repayment) on sale-leaseback of vehicles (79) 3,689
Net proceeds (repayment) of financing lease (10,580) 7,406
Common stock issuance 196,185 --
Debt issuance costs (5,320) --
Treasury stock (9) (17)
Debt assumed in acquisitions 9,940 --
--------- ---------
Net cash provided by financing activities 8,046 9,602
Net increase (decrease) in cash and cash equivalents 132 (1,580)
Cash and cash equivalents at beginning of period 1,403 2,927
--------- ---------
Cash and cash equivalents at end of period $ 1,535 $ 1,347
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
UNIVERSAL COMPRESSION HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. BASIS OF PRESENTATION
Universal Compression Holdings, Inc. (the "Company") was formed on December 12,
1997 for the purpose of acquiring Tidewater Compression Service, Inc. ("TCS")
from Tidewater Inc. ("Tidewater"). Upon completion of the acquisition on
February 20, 1998 (the "Tidewater Acquisition"), TCS became the Company's
wholly-owned subsidiary and changed its name to Universal Compression, Inc.
("Universal"). Through this subsidiary, the Company's gas compression service
operations date back to 1954. The Company is a holding company which conducts
its operations through its wholly-owned subsidiary, Universal. Accordingly, the
Company is dependent upon the distribution of earnings from Universal, whether
in the form of dividends, advances or payments on account of intercompany
obligations, to service its debt obligations. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements presented in the Company's Annual Report on Form 10-K for the year
ended March 31, 2000. That report contains a more comprehensive summary of the
Company's major accounting policies. In the opinion of management, the
accompanying unaudited consolidated financial statements contain all appropriate
adjustments, all of which are normally recurring adjustments unless otherwise
noted, considered necessary to present fairly the financial position of the
Company and its consolidated subsidiaries and the results of operations and cash
flows for the respective periods. Operating results for the three and six-month
periods ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the fiscal year ending March 31, 2001.
The Company is a leading provider of natural gas compressor rental, sales,
operations, maintenance and fabrication services to the natural gas industry,
with one of the largest gas compressor fleets in the United States, and has a
growing presence in key international markets. As of September 30, 2000, the
Company had a broad base of over 750 customers and maintained a fleet of over
3,400 compression rental units. In addition, the Company owns or services
under contract a total of approximately 977,000 horsepower. The Company operates
in every significant natural gas producing region in the United States through
its 38 compression sales and service locations. As a complement to its rental
operations, the Company designs and fabricates compression units for its own
fleet as well as for its global customer base.
During the quarter ended June 30, 2000, the Company completed an initial public
offering of 7,275,000 shares of its common stock (which includes 275,000 shares
of common stock issued pursuant to an over-allotment option granted to the
underwriters), which provided the Company with net proceeds (after deducting
underwriting discounts and commissions) of approximately $149.2 million.
Concurrently with the initial public offering, the Company implemented a
recapitalization pursuant to which all existing classes of the Company's stock
were converted into common stock. Also concurrently with the initial public
offering, the Company entered into a new $50 million revolving credit facility
and $200 million operating lease facility. The proceeds of the offering and the
$62.6 million in initial proceeds from the new operating lease facility were
used to repay $192.7 million of indebtedness, and the remaining proceeds were
used for working capital and to pay expenses associated with the offering and
concurrent financing transactions.
The Company completed the merger of Gas Compression Services, Inc. ("GCSI") into
Universal on September 15, 2000. In the merger, the GCSI shareholders received
cash and 1,400,726 shares of the Company's common stock and the Company assumed
certain debt.
EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number of shares
outstanding for the period. Diluted earnings per share is computed using the
weighted average number of shares outstanding adjusted for the incremental
shares attributed to outstanding options to purchase common stock. Included in
diluted shares for the three-month period ended September 30, 2000 are common
stock equivalents relating to options of 377,000. Common stock equivalents are
calculated using the treasury stock method. Diluted earnings per share for the
six-month period ended September 30, 2000 is not adjusted for the incremental
shares attributed to outstanding options to purchase common stock due to the
anti-dilutive effect of such options. The Company completed its initial public
offering of 7,000,000 shares of common stock on May 30, 2000, with an additional
275,000 shares issued on June 7, 2000 pursuant to the underwriters'
over-allotment option. The Company completed the merger of GCSI into Universal
on September 15, 2000 in exchange for the Company's issuance of 1,400,726 shares
of its common stock to GCSI shareholders. Earnings per share information is not
presented for the three and six-month periods ended September 30, 1999 as such
information would not be meaningful because the Company was beneficially owned
by a single stockholder under the terms of voting agreements during such period.
5
<PAGE> 6
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year amounts to conform to
the current year classification.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." This statement addresses
a limited number of issues causing implementation difficulties for entities
applying SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 requires that an entity recognize all derivative
instruments as either assets or liabilities in the balance sheet and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as (i) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment,
(ii) a hedge of the exposure to variable cash flows of a forecasted transaction,
or (iii) a hedge of the foreign currency exposure of a net investment in a
foreign operation, an unrecognized firm commitment, an available-for-sale
security, or a foreign-currency-denominated forecasted transaction. The
accounting for changes in the fair value of a derivative depends on the intended
use of the derivative and the resulting designation. This statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. The
Company is currently evaluating the effects of this statement.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
On June 26, 2000, the SEC issued an amendment to SAB 101, effectively delaying
its implementation until the fourth quarter of fiscal years beginning after
December 15, 1999. After careful study of SAB 101 and its amendment, management
believes that its revenue recognition policy is appropriate and that any
possible effects of SAB 101 and its amendment will be immaterial to the
Company's results of operations.
3. BUSINESS COMBINATION
On September 15, 2000, the Company completed the merger of Gas Compression
Services, Inc. ("GCSI"), a supplier of natural gas compression equipment and
services with fabrication and overhaul facilities in Michigan and Texas, into
Universal for a combination of approximately $12 million in cash, 1,400,726
shares of the Company's common stock valued at approximately $39 million, the
assumption of approximately $57 million in debt and operating leases of GCSI,
and $6 million of debt related to GCSI customer equipment financing and
associated customer notes receivable. All of the assumed debt and operating
leases, except for approximately $10 million, were paid off concurrent with the
merger using proceeds received under the operating lease facility. The
acquisition was accounted for under the purchase method of accounting and
resulted in the recognition of approximately $33 million in goodwill. Results of
operations for GCSI are included in the accompanying consolidated financial
statements for the 15 days from the date of the merger.
4. INVENTORIES
Inventories consisted of (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
2000 2000
------------- ---------
<S> <C> <C>
Finished goods $ 7,930 $ 5,551
Work-in-progress 6,792 3,176
------- -------
Total $14,722 $ 8,727
======= =======
</TABLE>
5. OPERATING LEASE FACILITY
In May 2000, the Company and Universal entered into a $200 million operating
lease facility pursuant to which the Company may sell and lease back certain
compression equipment from a Delaware business trust for a five-year term. The
rental payments under the lease facility include an amount based on LIBOR plus a
variable amount depending on the Company's operating results, applied to the
funded amount of the lease. Under the lease facility, the Company has received
an aggregate of approximately $140 million in proceeds from the sale of
compression equipment in May 2000 and, in connection with the GCSI acquisition,
in September 2000, and may sell up to an additional $60 million of compression
equipment through November 2001. The equipment was sold and leased back by the
Company for a five-year period and will continue to be deployed by the Company
under its normal operating procedures. At any time, the Company has the option
to repurchase the equipment. The equipment sold had a book value of
approximately $97 million and the equipment sale resulted in a gain of
approximately $43 million that is being deferred until the end of the lease.
6
<PAGE> 7
The Company has residual value guarantees on the equipment under the operating
lease facility of approximately 85% of the funded amount that are due upon
termination of the lease and which may be satisfied by a cash payment or the
exercise of the purchase option. Pursuant to the facility, the Company is
restricted by certain covenants relating to its operations, including its
ability to enter into acquisition and sales transactions, incur additional
indebtedness, permit additional liens on its assets and pay dividends. The
Company's obligations under this facility are secured by liens on its
compression equipment that is subject to the lease and certain related rights.
Under the operating lease facility, Universal is the lessee and the Company
guarantees certain of Universal's obligations thereunder.
6. EXTRAORDINARY LOSSES
During the quarter ended June 30, 2000, the Company incurred extraordinary
losses of $6.3 million, net of income taxes of $3.7 million, related to its debt
restructuring that occurred concurrently with the Company's initial public
offering of its common stock.
7. NON-RECURRING CHARGES
During the quarter ended June 30, 2000, the Company incurred non-recurring
charges of $4.4 million, net of income taxes of $2.7 million, related to the
early termination of a management agreement and a consulting agreement and other
related fees in connection with the Company's initial public offering and
concurrent financing transactions.
8. RELATED PARTY TRANSACTIONS
In connection with the initial public offering in the quarter ended June 30,
2000, the Company terminated its Management Agreement with Castle Harlan, Inc.
and its Finders and Consulting Agreement with Samuel Urcis, a director of the
Company. In exchange for such terminations, the Company paid $3 million in cash
and issued 136,364 shares of its common stock to Castle Harlan, and paid
$150,000 in cash and issued 6,818 shares of common stock to Mr. Urcis.
9. INDUSTRY SEGMENTS
The Company has three principal industry segments: Domestic Rental and
Maintenance, International Rental and Maintenance and Engineered Products. The
two Rental and Maintenance segments provide 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 customer and the Company's own specifications.
The International Rental and Maintenance segment represents substantially all of
the Company's foreign based operations.
The Company evaluates performance based on profit or loss from operations, which
is defined as income before income taxes less gain on asset sales and interest
income plus interest expense and operating lease expense. Revenues include sales
to unaffiliated customers. Gross margin is defined as total revenue less rental
expenses, cost of sales (exclusive of depreciation and amortization), gain on
asset sales and interest income. The Corporate and Other segment, which
represents primarily corporate activities, part sales and services and all other
items that could not be allocated to an identifiable segment, principally serves
the oil and gas market, including sales of parts and equipment utilized in the
extraction of natural gas and the services that the Company provides to
customers' natural gas compression units.
The following table presents sales and other financial information by industry
segment for the three months ended September 30, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
DOMESTIC INTERNATIONAL CORPORATE
RENTAL AND RENTAL AND ENGINEERED AND
MAINTENANCE MAINTENANCE PRODUCTS OTHER TOTAL
----------- ------------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
September 30, 2000:
Revenues ............ $24,396 $ 4,286 $ 8,318 $ 1,853 $38,853
Gross margin ........ $15,525 $ 3,254 $ 1,363 $ 253 $20,395
Operating income .... $ 7,678 $ 1,290 $ 796 $ 183 $ 9,947
September 30, 1999:
Revenues ............ $20,351 $ 3,324 $ 8,909 $ 2,404 $34,988
Gross margin ........ $12,816 $ 2,358 $ 1,157 $ 479 $16,810
Operating income .... $ 5,080 $ 805 $ 563 $ 185 $ 6,633
</TABLE>
7
<PAGE> 8
The following table presents sales and other financial information by industry
segment for the six months ended September 30, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
DOMESTIC INTERNATIONAL CORPORATE
RENTAL AND RENTAL AND ENGINEERED AND
MAINTENANCE MAINTENANCE PRODUCTS OTHER TOTAL
----------- ------------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
September 30, 2000:
Revenues ............ $46,571 $ 8,385 $15,979 $ 2,678 $73,613
Gross margin ........ $29,770 $ 6,313 $ 2,885 $ 513 $39,481
Operating income .... $13,381 $ 2,598 $ 1,717 $ 384 $18,080
September 30, 1999:
Revenues ............ $40,112 $ 6,751 $14,897 $ 7,036 $68,796
Gross margin ........ $24,834 $ 4,926 $ 1,733 $ 1,437 $32,930
Operating income .... $ 9,326 $ 2,004 $ 464 $ 804 $12,598
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
In February 1998, in connection with the Tidewater Acquisition, the Company
entered into a Purchase Price Adjustment Agreement with Tidewater. The agreement
provides for potential additional amounts to be paid to Tidewater upon a
liquidity event, as defined in the agreement. If a liquidity event occurs and
Castle Harlan Partners III and its affiliates receive an amount greater than its
accreted investment (defined as its initial investment increased at a compounded
rate of 6.25% each quarter, which equates to approximately 27.4% annually), the
Company must make a payment to Tidewater equal to 10% of the amount, if any,
that Castle Harlan receives in excess of its accreted investment. Any payment
pursuant to this agreement would result in an increase in goodwill in the year
of payment and a corresponding increase in goodwill and amortization expense in
subsequent years. As of September 30, 2000, Castle Harlan's accreted investment
was approximately $27.09 per share, which will continue to grow at a compounded
rate of 6.25% per quarter. As of September 30, 2000, no liquidity event, as
defined in the agreement, that required a payment had occurred.
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, operating results
or cash flows.
11. SUBSEQUENT EVENTS
On October 24, 2000, the Company and Universal announced the signing of a
definitive merger agreement to acquire Weatherford Global Compression Services
("WGC"), a supplier of natural gas compression equipment and services and a
division of Weatherford International, Inc. Under the terms of the agreement, a
subsidiary of Weatherford International will merge into Universal in exchange
for 13.75 million shares of the Company's common stock, which will represent
approximately 48% of the outstanding shares of the combined company, and the
assumption of approximately $300 million in debt and operating leases of WGC.
The transaction will be accounted for as a purchase. Weatherford International
will acquire the interest of its minority partner in WGC as a condition to the
closing of the transaction. Also, Weatherford International will retain
approximately $40 million of WGC's assets, including its Singapore-based
operations. The transaction is subject to various conditions, including approval
of the Company's stockholders, the refinancing of the Company's and WGC's debt
and leasing obligations, regulatory approvals and other customary conditions.
Concurrent with the execution and delivery of the merger agreement, Weatherford,
the Company and Castle Harlan and certain of its affiliates entered into a
stockholders agreement that obligates the Castle Harlan parties to, among other
things, vote in favor of the merger, which through their ownership and various
voting agreements and voting trusts with several stockholders currently gives
the Castle Harlan parties voting control of up to approximately 38% of the
Company's voting stock. Although there can be no assurance the transaction will
close, it is expected to be consummated by the end of December 2000 or in the
first quarter of 2001.
8
<PAGE> 9
UNIVERSAL COMPRESSION, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
2000 2000
------------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,535 $ 1,403
Accounts receivable, net 23,760 14,615
Current portion of notes receivable 3,087 1,535
Inventories 14,722 8,727
Current deferred tax asset 227 227
Other 1,325 1,519
--------- ---------
Total current assets 44,656 28,026
Property, plant and equipment:
Rental equipment 359,993 349,198
Other 26,525 19,617
Accumulated depreciation (44,391) (38,466)
--------- ---------
Net property, plant and equipment 342,127 330,349
Goodwill, net of accumulated amortization 131,323 99,013
Notes receivable 4,929 1,117
Other assets, net 8,611 6,878
Non-current deferred tax asset 3,171 962
--------- ---------
Total assets $ 534,817 $ 466,345
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable, trade $ 15,694 $ 10,911
Accrued liabilities 15,945 6,869
Current portion of long-term debt and capital
lease obligation 1,991 4,206
--------- ---------
Total current liabilities 33,630 21,986
Capital lease obligation 5,952 10,243
Long-term debt 196,429 331,383
Payable to parent 155,106 1,288
Non-current deferred tax liability 2,806 --
Other liabilities 39,192 --
--------- ---------
Total liabilities 433,115 364,900
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 111,316 105,131
Retained deficit (9,663) (3,735)
--------- ---------
Total stockholder's equity 101,702 101,445
--------- ---------
Total liabilities and stockholder's equity $ 534,817 $ 466,345
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
9
<PAGE> 10
UNIVERSAL COMPRESSION, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Rentals $ 28,681 $ 23,675 $ 54,955 $ 46,863
Sales 10,131 11,255 18,401 21,874
Other 41 58 257 59
-------- -------- -------- --------
Total revenues 38,853 34,988 73,613 68,796
Costs and expenses:
Rentals, exclusive of depreciation
and amortization 9,903 8,502 18,873 17,104
Cost of sales, exclusive of
depreciation and amortization 8,480 9,648 15,028 18,750
Depreciation and amortization 6,677 6,060 14,173 11,675
Selling, general and administrative 3,769 4,116 7,224 8,654
Operating lease 1,995 -- 2,684 --
Interest expense 5,221 7,653 12,627 14,785
Non-recurring charges -- -- 7,059 --
-------- -------- -------- --------
Total costs and expenses 36,045 35,979 77,668 70,968
-------- -------- -------- --------
Income (loss) before income taxes and 2,808 (991) (4,055) (2,172)
extraordinary items
Income taxes (benefit) 1,054 61 (1,520) (388)
-------- -------- -------- --------
Income (loss) before extraordinary items $ 1,754 $ (1,052) $ (2,535) $ (1,784)
======== ======== ======== ========
Extraordinary loss, net of $2,037 income tax
benefit -- -- (3,393) --
-------- -------- -------- --------
Net income (loss) $ 1,754 $ (1,052) $ (5,928) $ (1,784)
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
10
<PAGE> 11
UNIVERSAL COMPRESSION, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,928) $ (1,784)
Adjustments to reconcile net loss to cash
provided from operating activities:
Depreciation and amortization 14,173 11,675
Gain on asset sales (102) (6)
Amortization of debt issuance costs 717 537
Accretion of discount notes 9,114 8,266
Increase (decrease) in payable to parent 153,818 (34)
Deferred income taxes 597 --
(Increase) decrease in receivables (14,509) 3,912
(Increase) decrease in inventories (5,995) 1,774
Increase (decrease) in accounts payable 4,783 (1,032)
Increase in accrued expenses 6,805 3,631
Other 3,065 (1,584)
--------- ---------
Net cash provided by operating activities 166,538 25,988
Cash flows from investing activities:
Additions to property, plant and equipment, net (30,779) (33,125)
Capital leaseback of vehicles (713) (4,062)
Acquisitions (124,852) --
Proceeds from sale of fixed assets 139,647 --
--------- ---------
Net cash used in investing activities (16,697) (37,187)
Cash flows from financing activities:
Principal repayments of long-term debt (74,855) (376)
Net repayment under revolving line of credit (75,000) (1,100)
Net proceeds (repayment) on sale-leaseback of vehicles (79) 3,689
Net proceeds (repayment) of financing lease (10,580) 7,406
Acquisition 6,185 --
Debt issuance costs (5,320) --
Debt assumed in acquisitions 9,940 --
--------- ---------
Net cash provided by (used in) financing activities (149,709) 9,619
Net increase (decrease) in cash and cash equivalents 132 (1,580)
Cash and cash equivalents at beginning of period 1,403 2,927
--------- ---------
Cash and cash equivalents at end of period $ 1,535 $ 1,347
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
11
<PAGE> 12
UNIVERSAL COMPRESSION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. BASIS OF PRESENTATION
Universal Compression Holdings, Inc. (the "Company") was formed on December 12,
1997 for the purpose of acquiring TCS, which was formed in 1954, from Tidewater.
Upon completion of the Tidewater Acquisition on February 20, 1998, TCS became
the Company's wholly-owned subsidiary and changed its name to Universal
Compression, Inc. ("Universal"). Universal is a wholly-owned subsidiary of the
Company. These consolidated financial statements should be read in conjunction
with the consolidated financial statements presented in Universal's Annual
Report on Form 10-K for the year ended March 31, 2000. That report contains a
more comprehensive summary of Universal's major accounting policies. In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all appropriate adjustments, all of which are normally
recurring adjustments unless otherwise noted, considered necessary to present
fairly the financial position of Universal and its consolidated subsidiaries and
the results of operations and cash flows for the respective periods. Operating
results for the three and six-month periods ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the fiscal year
ending March 31, 2001.
Universal is a leading provider of natural gas compressor rental, sales,
operations, maintenance and fabrication services to the natural gas industry,
with one of the largest compressor fleets in the United States, and has a
growing presence in key international markets. As of September 30, 2000,
Universal had a broad base of over 750 customers and maintained a fleet of over
3,400 compression rental units. In addition, Universal owns or services under
contract a total of approximately 977,000 horsepower. Universal operates in
every significant natural gas producing region in the United States through its
38 compression sales and service locations. As a complement to its rental
operations, Universal designs and fabricates compression units for its own fleet
as well as for its global customer base.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
This statement addresses a limited number of issues causing implementation
difficulties for entities applying SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that an entity
recognize all derivative instruments as either assets or liabilities in the
balance sheet and measure those instruments at fair value. If certain conditions
are met, a derivative may be specifically designated as (i) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (ii) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (iii) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign-currency-denominated
forecasted transaction. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Universal is currently evaluating the effects of
this statement.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
On June 26, 2000, the SEC issued an amendment to SAB 101, effectively delaying
its implementation until the fourth quarter of fiscal years beginning after
December 15, 1999. After careful study of SAB 101 and its amendment, management
believes that its revenue recognition policy is appropriate and that any
possible effects of SAB 101 and its amendment will be immaterial to Universal's
results of operations.
3. BUSINESS COMBINATION
On September 15, 2000, the Company completed the merger of Gas Compression
Services, Inc. ("GCSI"), a supplier of natural gas compression equipment and
services with fabrication and overhaul facilities in Michigan and Texas, into
Universal for a combination of approximately $12 million in cash, 1,400,726
shares of the Company's common stock valued at approximately $39 million, the
assumption of approximately $57 million in debt and operating leases of GCSI,
and $6 million of debt related to GCSI customer equipment financing and
associated customer notes receivable. All of the assumed debt and operating
leases, except for approximately $10 million, were paid off concurrent with the
merger using proceeds received under the operating lease facility. The
acquisition was accounted for under the purchase method of accounting and
resulted in the recognition of approximately $33 million in goodwill. Results of
operations for GCSI are included in the accompanying consolidated financial
statements for the 15 days from the date of the merger.
12
<PAGE> 13
4. INVENTORIES
Inventories consisted of (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
2000 2000
------------- ---------
<S> <C> <C>
Finished goods $ 7,930 $ 5,551
Work-in-progress 6,792 3,176
------- -------
Total $14,722 $ 8,727
======= =======
</TABLE>
5. OPERATING LEASE FACILITY
In May 2000 the Company and Universal entered into a $200 million operating
lease facility pursuant to which Universal may sell and lease back certain
compression equipment from a Delaware business trust for a five-year term. The
rental payments under the lease facility include an amount based on LIBOR plus a
variable amount depending on Universal's operating results, applied to the
funded amount of the lease. Under the lease facility, Universal has received an
aggregate of approximately $140 million in proceeds from the sale of compression
equipment in May 2000 and, in connection with the GCSI acquisition, in September
2000, and may sell up to an additional $60 million of compression equipment
through November 2001. The equipment was sold and leased back by Universal for a
five-year period and will continue to be deployed by Universal under its normal
operating procedures. At any time, Universal has the option to repurchase the
equipment. The equipment sold had a book value of approximately $97 million and
the equipment sale resulted in a gain of approximately $43 million that is being
deferred until the end of the lease. Universal has residual value guarantees on
the equipment under the operating lease facility of approximately 85% of the
funded amount that are due upon termination of the lease and which may be
satisfied by a cash payment or the exercise of the purchase option. Pursuant to
the facility, Universal is restricted by certain covenants relating to its
operations, including its ability to enter into acquisition and sales
transactions, incur additional indebtedness, permit additional liens on its
assets and pay dividends. Universal's obligations under this facility are
secured by liens on its compression equipment that is subject to the lease and
certain related rights. Under the operating lease facility, Universal is the
lessee and the Company guarantees certain of Universal's obligations thereunder.
6. EXTRAORDINARY LOSSES
During the quarter ended June 30, 2000, Universal incurred extraordinary losses
of $3.4 million, net of income taxes of $2.0 million, related to its debt
restructuring that occurred concurrently with the Company's initial public
offering of its common stock.
7. NON-RECURRING CHARGES
During the quarter ended June 30, 2000, Universal incurred non-recurring charges
of $4.4 million, net of income taxes of $2.7 million, related to the early
termination of a management agreement and a consulting agreement and other
related fees in connection with the Company's initial public offering and the
concurrent financing transactions.
8. RELATED PARTY TRANSACTIONS
In connection with the initial public offering in the quarter ended June 30,
2000, Universal terminated its Management Agreement with Castle Harlan, Inc. and
the Finders and Consulting Agreement with Samuel Urcis, a director of the
Company. In exchange for such terminations, the Company paid $3 million in cash
and issued 136,364 shares of the Company's common stock to Castle Harlan, and
paid $150,000 in cash and issued 6,818 shares of common stock to Mr. Urcis.
9. INDUSTRY SEGMENTS
Universal has three principal industry segments: Domestic Rental and
Maintenance, International Rental and Maintenance and Engineered Products. The
two Rental and Maintenance segments provide 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 customer and Universal's own specifications.
The International Rental and Maintenance segment represents substantially all of
Universal's foreign based operations.
Universal evaluates performance based on profit or loss from operations, which
is defined as income before income taxes less gain on
13
<PAGE> 14
asset sales and interest income plus interest expense and operating lease
expense. Revenues include sales to unaffiliated customers. Gross margin is
defined as total revenue less rental expenses, cost of sales (exclusive of
depreciation and amortization), gain on asset sales and interest income. The
Corporate and Other segment, which represents primarily corporate activities,
part sales and services and all other items that could not be allocated to an
identifiable segment, principally serves the oil and gas market, including sales
of parts and equipment utilized in the extraction of natural gas and the service
that Universal provides to customers' natural gas compression units.
The following table presents sales and other financial information by industry
segment for the three months ended September 30, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
DOMESTIC INTERNATIONAL CORPORATE
RENTAL AND RENTAL AND ENGINEERED AND
MAINTENANCE MAINTENANCE PRODUCTS OTHER TOTAL
----------- ----------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
September 30, 2000:
Revenues ........... $24,396 $ 4,286 $ 8,318 $ 1,853 $38,853
Gross margin ....... $15,525 $ 3,254 $ 1,363 $ 253 $20,395
Operating income ... $ 7,678 $ 1,290 $ 796 $ 185 $ 9,949
September 30, 1999:
Revenues ........... $20,351 $ 3,324 $ 8,909 $ 2,404 $34,988
Gross margin ....... $12,816 $ 2,358 $ 1,157 $ 479 $16,810
Operating income ... $ 5,080 $ 805 $ 563 $ 186 $ 6,634
</TABLE>
The following table presents sales and other financial information by industry
segment for the six months ended September 30, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
DOMESTIC INTERNATIONAL CORPORATE
RENTAL AND RENTAL AND ENGINEERED AND
MAINTENANCE MAINTENANCE PRODUCTS OTHER TOTAL
----------- ----------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
September 30, 2000:
Revenues ........... $46,571 $ 8,385 $15,979 $ 2,678 $73,613
Gross margin ....... $29,770 $ 6,313 $ 2,885 $ 513 $39,481
Operating income ... $13,381 $ 2,598 $ 1,717 $ 388 $18,084
September 30, 1999:
Revenues ........... $40,112 $ 6,751 $14,897 $ 7,036 $68,796
Gross margin ....... $24,834 $ 4,926 $ 1,733 $ 1,437 $32,930
Operating income ... $ 9,326 $ 2,004 $ 464 $ 807 $12,601
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, Universal 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 Universal's financial position, operating results or cash
flows.
11. SUBSEQUENT EVENTS
On October 24, 2000, the Company and Universal announced the signing of a
definitive merger agreement to acquire Weatherford Global Compression Services
("WGC"), a supplier of natural gas compression equipment and services and a
division of Weatherford International, Inc. Under the terms of the agreement, a
subsidiary of Weatherford International will merge into Universal in exchange
for 13.75 million shares of the Company's common stock, which will represent
approximately 48% of the outstanding shares of the combined company, and the
assumption of approximately $300 million in debt and operating leases of WGC.
The transaction will be accounted for as a purchase. Weatherford International
will acquire the interest of its minority partner in WGC as a condition to the
closing of the transaction. Also, Weatherford International will retain
approximately $40 million of WGC's assets, including its Singapore-based
operations. The transaction is subject to various conditions, including approval
of the Company's stockholders, the refinancing of the Company's and WGC's debt
and leasing obligations, regulatory approvals and other customary conditions.
Concurrent with the execution and delivery of the merger agreement, Weatherford,
the Company and Castle Harlan and certain of its affiliates entered into a
stockholders agreement that obligates the Castle Harlan parties to, among other
things, vote in favor of the merger, which through their ownership and various
voting agreements and voting trusts with several stockholders currently gives
the Castle Harlan parties voting control of up to approximately 38% of the
Company's voting stock. Although there can be no assurance the transaction will
close, it is expected to be consummated by the end of December 2000 or in the
first quarter of 2001.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this report are "forward-looking statements"
intended to qualify for the safe harbors from liability established by the
Private Securities Litigation Reform Act of 1995. All statements other than
statements of historical facts included in this report are forward-looking
statements. Such forward-looking statements include, without limitation,
statements regarding the sufficiency of available cash flows to fund continuing
operations, capital improvements, the expected amount of capital expenditures
for the fiscal year, successful consummation of the Company's pending
Weatherford merger transaction, tax and accounting treatment of any acquisition,
the Company's future financial position, growth strategy and projected costs,
and plans and objectives of management for future operations. Such
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those anticipated as of the
date of this report. Although management believes the expectations reflected in
these forward-looking statements are based on reasonable assumptions, no
assurance can be given that these expectations will prove to have been correct.
Important factors that could cause actual result to differ materially from the
expectations reflected in the forward-looking statements include, among other
things: (1) competition among the various providers of contract compression
services, (2) conditions in the oil and gas industry, including the demand for
natural gas as well as impacts from the price of natural gas and oil, (3)
failure to consummate acquisitions and integrate acquired businesses, (4)
changes in safety and environmental regulations pertaining to the production and
transportation of natural gas, (5) changes in economic or political conditions
in the markets in which the Company operates, and (6) introduction of competing
technologies by other companies. Our future results will depend upon various
other risks and uncertainties, including but not limited to, those detailed in
our filings with the Securities and Exchange Commission. For additional
information regarding risks and uncertainties, see our filings, copies of which
are available to the public. The forward-looking statements included herein are
only made as of the date of this report and the Company undertakes no obligation
to publicly revise or update such forward-looking statements whether as a result
of new information, future events or otherwise.
The terms "Company," "our" and "we" when used in this report, refer to Universal
Compression Holdings, Inc. and its subsidiaries including Universal Compression,
Inc., as a combined entity, except where it is made clear that such term means
only the parent company, and includes its predecessors, including Tidewater
Compression Service, Inc.
GENERAL
Universal Compression Holdings, Inc. was formed in December 1997 to acquire all
of the outstanding stock of Tidewater Compression. Upon completion of the
acquisition in February 1998, Tidewater Compression became the Company's
wholly-owned operating subsidiary and changed its name to Universal Compression,
Inc. ("Universal"). Through this subsidiary, the Company's gas compression
service operations date back to 1954.
During the quarter ended June 30, 2000, the Company completed an initial public
offering of 7,275,000 shares of its common stock (which includes 275,000 shares
of common stock issued pursuant to an over-allotment option granted to the
underwriters), which provided the Company with net proceeds (after deducting
underwriting discounts and commissions) of approximately $149.2 million.
Concurrently with the initial public offering, the Company implemented a
recapitalization pursuant to which all then existing classes of the Company's
stock were converted into common stock. Also concurrently with the initial
public offering, the Company entered into a $50 million revolving credit
facility and $200 million operating lease facility. The proceeds of the offering
and the $62.6 million in initial proceeds from the operating lease facility were
used to repay $192.7 million of indebtedness, and the remaining proceeds were
used for working capital and to pay expenses associated with the offering and
concurrent financing transactions.
The Company is a leading provider of natural gas compressor rental, sales,
operations, maintenance and fabrication services to the natural gas industry,
with one of the largest gas compressor fleets in the United States, and has a
growing presence in key international markets. As of September 30, 2000, the
Company had a broad base of over 750 customers and maintained a fleet of over
3,400 compression rental units. In addition, the Company owns or services
under contract a total of approximately 977,000 horsepower. The Company operates
in every significant natural gas producing region in the United States through
its 38 compression sales and service locations. As a complement to its rental
operations, the Company designs and fabricates compression units for its own
fleet as well as for its global customer base.
15
<PAGE> 16
UNIVERSAL COMPRESSION HOLDINGS, INC.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Revenues. The Company's total revenues for the three months ended September 30,
2000 increased $3.9 million, or 11%, to $38.9 million compared to $35.0 million
for the three months ended September 30, 1999. Rental revenue increased by $5.0
million, or 21%, to $28.7 million during the three months ended September 30,
2000 from $23.7 million during the three months ended September 30, 1999.
Domestic rental revenue increased by $4.0 million, or 20%, to $24.4 million
during the three months ended September 30, 2000 from $20.4 million during the
three months ended September 30, 1999. International rental revenue increased by
$1.0 million, or 30%, to $4.3 million during the three months ended September
30, 2000 from $3.3 million during the three months ended September 30, 1999. The
increase in both domestic and international rental revenue primarily resulted
from expansion of the Company's rental fleet.
Domestic average rented horsepower for the three months ended September 30, 2000
increased by 24% to approximately 535,000 horsepower from approximately 433,000
horsepower for the three months ended September 30, 1999. In addition,
international average rented horsepower for the three months ended September 30,
2000 increased by 31% to approximately 55,000 horsepower from approximately
42,000 horsepower for the three months ended September 30, 1999, primarily
through additional service in South America. The Company's average horsepower
utilization rate for the quarter ended September 30, 2000, was approximately
86.2%, up from 79.3% in the same quarter a year ago. At the end of the quarter,
the Company had approximately 810,000 available horsepower with another 167,000
horsepower operated and maintained for customers. The horsepower utilization
rate at September 30, 2000 was approximately 87.5%. The preceding horsepower and
utilization amounts include GCSI for the 15 days from the date of the merger.
Revenue from fabrication and sales decreased to $10.1 million from $11.3
million, a decrease of 11%. The decline in sales revenue, consisting mostly of
equipment fabrication and parts sales, for the second fiscal quarter was due
primarily to a slightly lower level of fabrication activity and the sale of a
small air compression distributorship. The backlog of fabrication projects at
the end of the second fiscal quarter was approximately $26.8 million, compared
with a backlog of $5.2 million at the same time a year earlier. From June 30,
2000 to September 30, 2000, backlog has increased $8.4 million.
Gross Margin. Gross margin (defined as total revenue less rental expense, cost
of sales (exclusive of depreciation and amortization), gain on asset sales and
interest income) for the three months ended September 30, 2000 increased $3.6
million, or 21%, to $20.4 million from gross margin of $16.8 million for the
three months ended September 30, 1999. The rental gross margin for the three
months ended September 30, 2000 increased $3.6 million, or 24%, to $18.8 million
compared to gross margin of $15.2 million for the three months ended September
30, 1999. Gross margin increased primarily as the result of the rental revenue
growth discussed above and operating cost improvements realized by rental
operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended September 30, 2000 decreased
$0.3 million compared to the three months ended September 30, 1999. As a
percentage of revenue, selling, general and administrative expenses represented
10% of revenues for the three months ended September 30, 2000 compared to 12% of
revenues for the three months ended September 30, 1999. The decrease is
primarily due to the elimination of management fees paid as a result of
termination of such fees in connection with the Company's initial public
offering consummated May 30, 2000. In addition, the Company has been able to
reduce other costs as compared to the same period in the prior year. These
reductions have been offset partially by increases in certain expenses related
to the Company operating as a publicly traded company.
EBITDA for the three months ended September 30, 2000 increased 24% to $16.7
million from $13.5 million for the three months ended September 30, 1999,
primarily due to increases in horsepower and utilization of the compression
rental fleet in addition to operating cost improvements realized by rental
operations and decreased selling, general and administrative expenses, as
discussed above. EBITDA is defined as net income plus income taxes, interest
expense, leasing expense, management fees, depreciation and amortization. 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. 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. The Company
believes that EBITDA is a standard measure of financial performance used for
valuing companies in the compression industry. EBITDA is a useful common
yardstick as it measures the capacity of companies to generate cash without
reference to how they are capitalized, how they account for significant non-cash
charges for depreciation and amortization associated with assets used in the
business (the bulk of which are long-lived assets in the compression industry),
or what their tax attributes may be.
16
<PAGE> 17
Depreciation and Amortization. Depreciation and amortization increased by $0.6
million to $6.7 million during the three months ended September 30, 2000,
compared to $6.1 million during the three months ended September 30, 1999. The
increase resulted primarily from the expansion of the Company's rental fleet
offset partially by the compressor equipment sold and leased back under the new
operating lease facility.
Operating Lease. The Company incurred leasing expense of $2.0 million during the
three months ended September 30, 2000 resulting from the new operating lease
facility entered into in May 2000. The outstanding balance under the operating
lease facility at September 30, 2000 was $139.6 million.
Interest Expense. Interest expense decreased $3.3 million to $5.2 million for
the three months ended September 30, 2000 from $8.5 million for the three months
ended September 30, 1999, primarily as a result of the reduction of debt
resulting from the Company's initial public offering and related debt
restructuring. The decrease in interest expense was offset partially by
increased accretion of discount notes and the assumption of debt related to the
GCSI acquisition.
Net Income. The Company had net income of $1.8 million for the three months
ended September 30, 2000 compared to a net loss of $1.6 million for the three
months ended September 30, 1999, primarily as a result of an increase in gross
margins and interest expense decreasing from $8.5 million to $5.2 million,
offset partially by increased depreciation and amortization related to the
continued expansion of the Company's assets and leasing expense of $2.0 million
resulting from the new operating lease facility.
SIX MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1999
Revenues. The Company's total revenues for the six months ended September 30,
2000 increased $4.8 million, or 7%, to $73.6 million compared to $68.8 million
for the six months ended September 30, 1999. Rental revenue increased by $8.1
million, or 17%, to $55.0 million during the six months ended September 30, 2000
from $46.9 million during the six months ended September 30, 1999. Domestic
rental revenue increased by $6.5 million, or 16%, to $46.6 million during the
six months ended September 30, 2000 from $40.1 million during the six months
ended September 30, 1999. International rental revenue increased by $1.6
million, or 24%, to $8.4 million during the six months ended September 30, 2000
from $6.8 million during the six months ended September 30, 1999. The increase
in both domestic and international rental revenue primarily resulted from
expansion of the Company's rental fleet.
Domestic average rented horsepower for the six months ended September 30, 2000
increased by 22% to approximately 514,000 horsepower from approximately 420,000
horsepower for the six months ended September 30, 1999. In addition,
international average rented horsepower for the six months ended September 30,
2000 increased by 32% to approximately 54,000 horsepower from approximately
41,000 horsepower for the six months ended September 30, 1999, primarily through
additional service in South America. The Company's average horsepower
utilization rate for the six months ended September 30, 2000, was approximately
85.3%, up from 78.9% in the same period a year ago. At the end of the quarter,
the Company had approximately 810,000 available horsepower with another 167,000
horsepower operated and maintained for customers. The horsepower utilization
rate at September 30, 2000 was approximately 87.5%. The preceding horsepower and
utilization amounts include GCSI for the 15 days from the date of the merger.
Revenue from fabrication and sales decreased to $18.4 million for the six months
ended September 30, 2000 from $21.9 million for the same period a year ago, a
decrease of 16%. The decline in sales revenue, consisting mostly of equipment
fabrication and parts sales was due primarily to the impact in the prior-year
period of an equipment purchase option exercised by a rental customer and the
sale of a small air compression distributorship. The backlog of fabrication
projects at the end of the second fiscal quarter was approximately $26.8
million, compared with a backlog of $5.2 million at the same time a year
earlier. From June 30, 2000 to September 30, 2000, backlog has increased $8.4
million.
Gross Margin. Gross margin (defined as total revenue less rental expense, cost
of sales (exclusive of depreciation and amortization), gain on asset sales and
interest income) for the six months ended September 30, 2000 increased $6.6
million, or 20%, to $39.5 million from gross margin of $32.9 million for the six
months ended September 30, 1999. The rental gross margin for the six months
ended September 30, 2000 increased $6.3 million, or 21%, to $36.1 million
compared to gross margin of $29.8 million for the six months ended September 30,
1999. Gross margin increased primarily as the result of the rental revenue
growth discussed above and operating cost improvements realized by rental
operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six months ended September 30, 2000 decreased
$1.4 million compared to the six months ended September 30, 1999. As a
percentage of revenue, selling, general and
17
<PAGE> 18
administrative expenses represented 10% of revenues for the six months ended
September 30, 2000 compared to 13% of revenues for the six months ended
September 30, 1999. The decrease is primarily due to the elimination of
management fees as a result of termination of such fees in connection with the
Company's initial public offering consummated May 30, 2000. In addition, the
Company has been able to reduce other costs as compared to the same period in
the prior year. These reductions have been offset partially by increases in
certain expenses related to the Company operating as a publicly traded company.
EBITDA for the six months ended September 30, 2000 increased 25% to $32.4
million from $25.9 million for the six months ended September 30, 1999,
primarily due to increases in horsepower and utilization of the compression
rental fleet in addition to operating cost improvements realized by rental
operations and decreased selling, general and administrative expenses, as
discussed above. EBITDA is defined as net income plus income taxes, interest
expense, leasing expense, management fees, depreciation and amortization. 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. 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. The Company
believes that EBITDA is a standard measure of financial performance used for
valuing companies in the compression industry. EBITDA is a useful common
yardstick as it measures the capacity of companies to generate cash without
reference to how they are capitalized, how they account for significant non-cash
charges for depreciation and amortization associated with assets used in the
business (the bulk of which are long-lived assets in the compression industry),
or what their tax attributes may be.
Non-recurring Charges. During the quarter ended June 30, 2000, the Company
incurred non-recurring charges of $4.4 million, net of income taxes of $2.7
million, related to the early termination of a management agreement and a
consulting agreement and other related fees in connection with the Company's
initial public offering and concurrent financing transactions.
Depreciation and Amortization. Depreciation and amortization increased by $2.5
million to $14.2 million during the six months ended September 30, 2000,
compared to $11.7 million during the six months ended September 30, 1999. The
increase resulted primarily from the expansion of the Company's rental fleet
offset partially by the compressor equipment sold and leased back under the new
operating lease facility.
Operating Lease. The Company incurred leasing expense of $2.7 million during the
six months ended September 30, 2000 resulting from the new operating lease
facility entered into in May 2000. The outstanding balance under the operating
lease facility at September 30, 2000 was $139.6 million.
Interest Expense. Interest expense decreased $3.2 million to $13.2 million for
the six months ended September 30, 2000 from $16.4 million for the six months
ended September 30, 1999, primarily as a result of the reduction of debt
resulting from the Company's initial public offering and related debt
restructuring. The decrease in interest expense was offset partially by
increased accretion of discount notes and the assumption of debt related to the
GCSI acquisition.
Extraordinary Losses. During the quarter ended June 30, 2000, the Company
incurred extraordinary losses of $6.3 million, net of income taxes of $3.7
million, related to its debt restructuring.
Net Loss. The Company had a net loss of $9.2 million for the six months ended
September 30, 2000 compared to a net loss of $2.8 million for the six months
ended September 30, 1999, primarily as a result of extraordinary losses of $6.3
million, net of income taxes, non-recurring charges of $4.4 million, net of
income taxes, increased depreciation and amortization related to the continued
expansion of the Company's assets and the factors discussed above. The increase
in the net loss was partially offset by increased gross margins, decreased
selling, general and administrative expenses and decreased interest expense.
Excluding the effect of the non-recurring and extraordinary after-tax charges,
the Company had net income of $1.5 million for the six months ended September
30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
In May 2000, concurrently with the Company's initial public offering, the
Company and Universal entered into a $200 million, five-year operating lease
facility (the "Operating Lease Facility") arranged by Deutsche Bank Securities
Inc. The transaction involves a sale and leaseback of compression equipment to a
trust formed by Deutsche Bank AG (the "Trust"). Under the Operating Lease
Facility, certain of the Company's compression equipment was sold to the Trust
for approximately $140 million and leased back by the Company for a five-year
period. The Company may sell an additional $60 million of equipment to the Trust
through November 2001. The compression equipment sold under the Operating Lease
Facility will continue to be deployed by the Company under its
18
<PAGE> 19
normal operating procedures. Additionally, the Company has the option to
repurchase the equipment from the Trust at any time. The equipment sold had a
book value of approximately $97 million and the equipment sale resulted in a
gain of approximately $43 million, which is being deferred until the end of the
lease. As of September 30, 2000, the rate for the rental payments under the
Operating Lease Facility was approximately 9.5%. Under the Operating Lease
Facility, Universal is the lessee and the Company guarantees certain of
Universal's obligations thereunder.
In May 2000, the Company repaid and terminated its term loan and revolving
credit facility and entered into a new $50.0 million secured revolving credit
facility which has a five-year term. The revolver bears interest at the
Company's option at a base rate or LIBOR plus, in each case, a variable amount
depending on the Company's operating results. The revolver is secured by a lien
on all of the Company's personal property that is not subject to the Operating
Lease Facility. The revolver contains limitations on the Company's ability to
enter into acquisition and sales transactions, incur additional indebtedness and
place additional liens on the Company's assets. Although the Company is able to
borrow the full amount of the commitment under the revolver, as of September 30,
2000, no amounts were outstanding. Universal is the borrower, and four of its
subsidiaries, together with the Company, are guarantors under the revolver.
The Company's cash and cash equivalents balance at September 30, 2000 was $1.5
million compared to $1.4 million at March 31, 2000. For the six months ended
September 30, 2000, the Company generated cash flow from operations of $8.8
million, received $139.6 million from the sale of compression equipment under
the Operating Lease Facility and received $149.2 million from the initial public
offering of its common stock. The Company primarily used this cash flow to
purchase $32.9 million of equipment and inventory for its rental operations and
make net principal payments of $192.7 million on its outstanding debt balances,
which included termination of the Company's term loan and credit facility,
redemption of all of its 11 3/8% Senior Discount Notes and retirement of a
finance lease arrangement.
The Company expects to expend approximately $89 million on capital projects
during fiscal 2001, excluding acquisitions. The Company has spent approximately
$33 million during the six months ended September 30, 2000. The Company
continues to emphasize its investment in larger horsepower compression rental
units and the acquisition leaseback of customer owned equipment. The Company's
other principal uses of cash will be to meet interest and lease payments as well
as support changes in its working capital.
In April 2000, the Company acquired all of the outstanding stock of Spectrum
Rotary Compression Inc. from Energy Spectrum Partners LP in exchange for 287,723
shares of the Company's common stock. Spectrum added approximately 10,700
horsepower to the Company's fleet and provided an increased presence in the
screw compressor market.
On September 15, 2000, the Company completed the merger of Gas Compression
Services, Inc. ("GCSI"), a supplier of natural gas compression equipment and
services with fabrication and overhaul facilities in Michigan and Texas, into
Universal for a combination of approximately $12 million in cash, 1,400,726
shares of the Company's common stock valued at approximately $39 million, the
assumption of approximately $57 million in debt and operating leases of GCSI,
and $6 million of debt related to GCSI customer equipment financing and
associated customer notes receivable. The acquisition was accounted for under
the purchase method of accounting and resulted in the recognition of
approximately $33 million in goodwill.
On October 24, 2000, the Company and Universal announced the signing of a
definitive merger agreement to acquire Weatherford Global Compression Services
("WGC"), a supplier of natural gas compression equipment and services and a
division of Weatherford International, Inc. The consolidated entity will have a
total of 1.8 million horsepower available and will be the second largest natural
gas compression services provider. Under the terms of the agreement, a
subsidiary of Weatherford International will merge into Universal in exchange
for 13.75 million restricted shares of the Company's common stock, which will
represent approximately 48% of the outstanding shares of the combined company,
and the assumption of approximately $300 million in debt and operating leases of
WGC. In addition, WGC's net working capital, estimated at $90 million, will be
transferred to Universal. As part of the agreement, Weatherford will limit its
voting rights to 33 1/3% of the voting power of the Company for a period of up
to two years. Also, the Company will enter into a registration rights agreement
with Weatherford, which will provide certain demand and piggyback registration
rights at the effective time of the merger. Weatherford International will
acquire the interest of its minority partner in WGC as a condition to the
closing of the transaction and will retain approximately $40 million of WGC's
assets, including its Singapore-based operations. The transaction is subject to
various conditions, including approval of the Company's stockholders, the
refinancing of the Company's current revolver and Operating Lease Facility as
well as WGC's current financing arrangements, regulatory approvals and other
customary conditions. In addition, pursuant to the indenture governing
Universal's 9 7/8% senior discount notes, the merger with WGC gives the holders
of such notes the right to require that the Company redeem those notes at a
price equal to 101% of the accreted value, plus accrued and unpaid interest to
date. Concurrent with the execution and delivery of the
19
<PAGE> 20
merger agreement, Weatherford, the Company and Castle Harlan and certain of its
affiliates entered into a stockholders agreement that obligates the Castle
Harlan parties to, among other things, vote in favor of the merger, which
through their ownership and various voting agreements and voting trusts with
several stockholders currently gives the Castle Harlan parties voting control of
up to approximately 38% of the Company's voting stock. Although there can be no
assurance the transaction will close, it is expected to be consummated by the
end of December 2000 or in the first quarter of 2001.
The Company expects to add approximately 40,000 horsepower to its fleet in the
current fiscal 2001 third quarter. Such increase includes the 10,000 horsepower
to be added for its first compression service project in Mexico, which project
will contribute an approximately $4.7 million one time turn key installation
payment to the Company at a modest margin. The Company also expects to invoice
in the current quarter approximately $12 million of its $26.8 million backlog at
September 30, 2000.
The successful completion of the Company's initial public offering of its common
stock and financing and operating lease arrangements during the first fiscal
quarter improved the Company's financial resources. The Company anticipates that
internally generated cash flow, including improvement in its working capital
position and availability under its revolving credit facility, Operating Lease
Facility and permitted international borrowings will be sufficient to fund
domestic and international operations, capital projects, and its obligations for
fiscal year 2001, excluding acquisitions and the pending Weatherford merger.
UNIVERSAL COMPRESSION, INC.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Revenues. Universal Compression Inc.'s ("Universal") total revenues for the
three months ended September 30, 2000 increased $3.9 million, or 11%, to $38.9
million compared to $35.0 million for the three months ended September 30, 1999.
Rental revenue increased by $5.0 million, or 21%, to $28.7 million during the
three months ended September 30, 2000 from $23.7 million during the three months
ended September 30, 1999. Domestic rental revenue increased by $4.0 million, or
20%, to $24.4 million during the three months ended September 30, 2000 from
$20.4 million during the three months ended September 30, 1999. International
rental revenue increased by $1.0 million, or 30%, to $4.3 million during the
three months ended September 30, 2000 from $3.3 million during the three months
ended September 30, 1999. The increase in both domestic and international rental
revenue primarily resulted from expansion of Universal's rental fleet.
Domestic average rented horsepower for the three months ended September 30, 2000
increased by 24% to approximately 535,000 horsepower from approximately 433,000
horsepower for the three months ended September 30, 1999. In addition,
international average rented horsepower for the three months ended September 30,
2000 increased by 31% to approximately 55,000 horsepower from approximately
42,000 horsepower for the three months ended September 30, 1999, primarily
through additional service in South America. Universal's average horsepower
utilization rate for the quarter ended September 30, 2000, was approximately
86.2%, up from 79.3% in the same quarter a year ago. At the end of the quarter,
Universal had approximately 810,000 available horsepower with another 167,000
horsepower operated and maintained for customers. The horsepower utilization
rate at September 30, 2000 was approximately 87.5%. The preceding horsepower and
utilization amounts include GCSI for the 15 days from the date of the merger.
Revenue from fabrication and sales decreased to $10.1 million from $11.3
million, a decrease of 11%. The decline in sales revenue, consisting mostly of
equipment fabrication and parts sales, for the second fiscal quarter was due
primarily to a slightly lower level of fabrication activity and the sale of a
small air compression distributorship. The backlog of fabrication projects at
the end of the second fiscal quarter was approximately $26.8 million, compared
with a backlog of $5.2 million at the same time a year earlier. From June 30,
2000 to September 30, 2000, backlog has increased $8.4 million.
Gross Margin. Gross margin (defined as total revenue less rental expense, cost
of sales (exclusive of depreciation and amortization), gain on asset sales and
interest income) for the three months ended September 30, 2000 increased $3.6
million, or 21%, to $20.4 million from gross margin of $16.8 million for the
three months ended September 30, 1999. The rental gross margin for the three
months ended September 30, 2000 increased $3.6 million, or 24%, to $18.8 million
compared to gross margin of $15.2 million for the three months ended September
30, 1999. Gross margin increased primarily as the result of the rental revenue
growth discussed above and operating cost improvements realized by rental
operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended September 30, 2000 decreased
$0.3 million compared to the three months ended September 30, 1999. As a
percentage of revenue, selling, general and administrative expenses represented
10% of revenues for the three months ended September 30, 2000 compared to 12% of
20
<PAGE> 21
revenues for the three months ended September 30, 1999. The decrease is
primarily due to the elimination of management fees paid as a result of
termination of such fees in connection with the Company's initial public
offering consummated May 30, 2000. In addition, Universal has been able to
reduce other costs as compared to the same period in the prior year. These
reductions have been offset partially by increases in certain expenses related
to the Company operating as a publicly traded company.
EBITDA for the three months ended September 30, 2000 increased 24% to $16.7
million from $13.5 million for the three months ended September 30, 1999,
primarily due to increases in horsepower and utilization of the compression
rental fleet in addition to operating cost improvements realized by rental
operations and decreased selling, general and administrative expenses, as
discussed above. EBITDA is defined as net income plus income taxes, interest
expense, leasing expense, management fees, depreciation and amortization. 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 Universal'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. EBITDA represents a measure upon which
management assesses financial performance, and certain covenants in Universal's
borrowing arrangements will be tied to similar measures. Universal believes that
EBITDA is a standard measure of financial performance used for valuing companies
in the compression industry. EBITDA is a useful common yardstick as it measures
the capacity of companies to generate cash without reference to how they are
capitalized, how they account for significant non-cash charges for depreciation
and amortization associated with assets used in the business (the bulk of which
are long-lived assets in the compression industry), or what their tax attributes
may be.
Depreciation and Amortization. Depreciation and amortization increased by $0.6
million to $6.7 million during the three months ended September 30, 2000
compared to $6.1 million during the three months ended September 30, 1999. The
increase resulted primarily from the expansion of Universal's rental fleet
offset partially by the compression equipment sold and leased back under the
Operating Lease Facility.
Operating Lease. Universal incurred leasing expense of $2.0 million during the
three months ended September 30, 2000 resulting from the Operating Lease
Facility entered into in May 2000. The outstanding balance under the Operating
Lease Facility at September 30, 2000 was $139.6 million.
Interest Expense. Interest expense decreased $2.5 million to $5.2 million for
the three months ended September 30, 2000 from $7.7 million for the three months
ended September 30, 1999, primarily as the result of the reduction of debt
resulting from the Company's initial public offering and related debt
restructuring. The decrease in interest expense was offset partially by
increased accretion of discount notes and the assumption of debt related to the
GCSI acquisition.
Net Income. Universal had net income of $1.8 million for the three months ended
September 30, 2000 compared to a net loss of $1.1 million for the three months
ended September 30, 1999, primarily as a result of an increase in gross margins
and interest expense decreasing from $7.7 million to $5.2 million, offset
partially by increased depreciation and amortization related to the continued
expansion of Universal's assets and leasing expense of $2.0 million resulting
from the new Operating Lease Facility.
SIX MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1999
Revenues. Universal Compression Inc.'s ("Universal") total revenues for the six
months ended September 30, 2000 increased $4.8 million, or 7%, to $73.6 million
compared to $68.8 million for the six months ended September 30, 1999. Rental
revenue increased by $8.1 million, or 17%, to $55.0 million during the six
months ended September 30, 2000 from $46.9 million during the six months ended
September 30, 1999. Domestic rental revenue increased by $6.5 million, or 16%,
to $46.6 million during the six months ended September 30, 2000 from $40.1
million during the six months ended September 30, 1999. International rental
revenue increased by $1.6 million, or 24%, to $8.4 million during the six months
ended September 30, 2000 from $6.8 million during the six months ended September
30, 1999. The increase in both domestic and international rental revenue
primarily resulted from expansion of Universal's rental fleet.
Domestic average rented horsepower for the six months ended September 30, 2000
increased by 22% to approximately 514,000 horsepower from approximately 420,000
horsepower for the six months ended September 30, 1999. In addition,
international average rented horsepower for the six months ended September 30,
2000 increased by 32% to approximately 54,000 horsepower from approximately
41,000 horsepower for the six months ended September 30, 1999, primarily through
additional service in South America. Universal's average horsepower utilization
rate for the six months ended September 30, 2000, was approximately 85.3%, up
from 78.9% in the same period a year ago. At the end of the quarter, Universal
had approximately 810,000 available horsepower with another 167,000 horsepower
operated and maintained for customers. The horsepower utilization rate at
September 30, 2000 was
21
<PAGE> 22
approximately 87.5%. The preceding horsepower and utilization amounts include
GCSI for the 15 days from the date of the merger.
Revenue from fabrication and sales decreased to $18.4 million for the six months
ended September 30, 2000 from $21.9 million for the same period a year ago, a
decrease of 16%. The decline in sales revenue, consisting mostly of equipment
fabrication and parts sales was due primarily to the impact in the prior-year
period of an equipment purchase option exercised by a rental customer and the
sale of a small air compression distributorship. The backlog of fabrication
projects at the end of the second fiscal quarter was approximately $26.8
million, compared with a backlog of $5.2 million at the same time a year
earlier. From June 30, 2000 to September 30, 2000, backlog has increased $8.4
million.
Gross Margin. Gross margin (defined as total revenue less rental expense, cost
of sales (exclusive of depreciation and amortization), gain on asset sales and
interest income) for the six months ended September 30, 2000 increased $6.6
million, or 20%, to $39.5 million from gross margin of $32.9 million for the six
months ended September 30, 1999. The rental gross margin for the six months
ended September 30, 2000 increased $6.3 million, or 21%, to $36.1 million
compared to gross margin of $29.8 million for the six months ended September 30,
1999. Gross margin increased primarily as the result of the rental revenue
growth discussed above and operating cost improvements realized by rental
operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six months ended September 30, 2000 decreased
$1.4 million compared to the six months ended September 30, 1999. As a
percentage of revenue, selling, general and administrative expenses represented
10% of revenues for the six months ended September 30, 2000 compared to 13% of
revenues for the six months ended September 30, 1999. The decrease is primarily
due to the elimination of management fees as a result of termination of such
fees in connection with the Company's initial public offering consummated May
30, 2000. In addition, Universal has been able to reduce other costs as compared
to the same period in the prior year. These reductions have been offset
partially by increases in certain expenses related to the Company operating as a
publicly traded company.
EBITDA for the six months ended September 30, 2000 increased 25% to $32.4
million from $25.9 million for the six months ended September 30, 1999,
primarily due to increases in horsepower and utilization of the compression
rental fleet in addition to operating cost improvements realized by rental
operations and decreased selling, general and administrative expenses, as
discussed above. EBITDA is defined as net income plus income taxes, interest
expense, leasing expense, management fees, depreciation and amortization. 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 Universal'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. EBITDA represents a measure upon which
management assesses financial performance, and certain covenants in Universal's
borrowing arrangements will be tied to similar measures. Universal believes that
EBITDA is a standard measure of financial performance used for valuing companies
in the compression industry. EBITDA is a useful common yardstick as it measures
the capacity of companies to generate cash without reference to how they are
capitalized, how they account for significant non-cash charges for depreciation
and amortization associated with assets used in the business (the bulk of which
are long-lived assets in the compression industry), or what their tax attributes
may be.
Non-recurring Charges. During the quarter ended June 30, 2000, Universal
incurred non-recurring charges of $4.4 million, net of income taxes of $2.7
million, related to the early termination of a management agreement and a
consulting agreement and other related fees in connection with the Company's
initial public offering and the concurrent financing transactions.
Depreciation and Amortization. Depreciation and amortization increased by $2.5
million to $14.2 million during the six months ended September 30, 2000 compared
to $11.7 million during the six months ended September 30, 1999. The increase
resulted primarily from the expansion of Universal's rental fleet offset
partially by the compression equipment sold and leased back under the Operating
Lease Facility.
Operating Lease. Universal incurred leasing expense of $2.7 million during the
six months ended September 30, 2000 resulting from the Operating Lease Facility
entered into in May 2000. The outstanding balance under the Operating Lease
Facility at September 30, 2000 was $139.6 million.
Interest Expense. Interest expense decreased $2.2 million to $12.6 million for
the six months ended September 30, 2000 from $14.8 million for the six months
ended September 30, 1999, primarily as the result of the reduction of debt
resulting from the Company's initial public offering and related debt
restructuring. The decrease in interest expense was offset partially by
increased accretion of discount notes and the assumption of debt related to the
GCSI acquisition.
22
<PAGE> 23
Extraordinary Losses. During the quarter ended June 30, 2000, Universal incurred
extraordinary losses of $3.4 million, net of income taxes of $2.0 million,
related to its debt restructuring.
Net Loss. Universal had a net loss of $5.9 million for the six months ended
September 30, 2000 compared to a net loss of $1.8 million for the six months
ended September 30, 1999, primarily as a result of extraordinary losses of $3.4
million, net of income taxes, non-recurring charges of $4.4 million, net of
income taxes, increased depreciation and amortization related to the continued
expansion of Universal's assets and the factors discussed above. The increase in
the net loss was partially offset by increased gross margins, decreased selling,
general and administrative expenses and decreased interest expense.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to some market risk due to the floating interest rate
under its revolving credit facility and Operating Lease Facility. The revolving
credit facility and Operating Lease Facility have interest and lease payments
based on a floating rate (a base rate or LIBOR, at the Company's option, in the
case of the revolving credit facility, and LIBOR, in the case of the Operating
Lease Facility) plus a variable amount based on operating results. The revolving
credit facility and the Operating Lease Facility run through May 2005 and have
outstanding principal balances at September 30, 2000 of $0 and $139.6 million,
respectively. The LIBOR rate at September 30, 2000 was 6.62%. A 1.0% increase in
interest rates could result in a $1.4 million annual increase in interest
expense on the existing principal balances. In order to minimize any significant
foreign currency credit risk, the Company generally contractually requires that
payment by customers be made in U.S. dollars. If payment is not made in U.S.
dollars, the Company generally utilizes the exchange rate into U.S. dollars on
the payment date or balances payments in local currency against local expenses.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
During the quarter ended September 30, 2000, the Company issued the following
equity securities that were not registered under the Securities Act of 1933, as
amended: on September 15, 2000, 1,400,726 shares of common stock to the two
shareholders, the Reuben James Helton Trust Dated January 24, 2000 (the "Helton
Trust") and Michael Pahl of GCSI, in connection with the Company's acquisition
of all of the outstanding capital stock of GCSI by merger of GCSI into
Universal. All of such shares were issued in reliance on an exemption from the
registration requirements of the Securities Act pursuant to Section 4(2) under
such Act.
Pursuant to the terms of the registration agreement entered into in connection
with its acquisition of GCSI, the Company filed a shelf Registration Statement
on Form S-3 with the Securities and Exchange Commission (the "Commission") with
respect to the registration of the resale from time to time of up to 500,000
shares of common stock of the Company by the Helton Trust and Michael Pahl. The
Registration Statement was declared effective by the Commission on November 2,
2000. In compliance with the registration agreement, the selling shareholders
may sell up to an aggregate of 500,000 shares of common stock in one or more
offerings under such Registration Statement following expiration of the November
20, 2000 lock-up period, except that the Helton Trust may request to sell up to
250,000 shares under a hardship exemption prior to the expiration of such
lock-up period. The Company will not receive any of the proceeds from any sale
of such shares. The Company has also agreed to register the resale of the
remaining 900,726 shares issued to the two former GCSI shareholders in the
merger in accordance with the terms of the registration agreement. Also, in
connection with the GCSI transaction, the Company entered into an escrow
agreement with the selling shareholders pursuant to which 135,887 shares of the
Company's common stock issued to the two former GCSI shareholders are being held
in escrow to indemnify the Company against losses it may incur as a result of a
breach by GCSI or the selling shareholders of their representations and
warranties or as a result of their failure to perform their obligations set
forth in the GCSI merger agreement, or as a result of contingencies and matters
identified in the merger agreement and escrow agreement. Such shares held under
the escrow agreement may not be sold by the former GCSI shareholders unless and
until released to such selling shareholders.
ITEM 5. OTHER INFORMATION
Effective as of October 1, 2000, Edmund P. Segner III was appointed as a new
Class B director of the Company and also was appointed to the Company's Audit
Committee.
23
<PAGE> 24
On October 9, 2000, Mark L. Carlton commenced employment with the Company and
Universal serving in the capacity as Senior Vice President, Co-General Counsel
and Assistant Secretary to each entity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following documents have been included as Exhibits to this report:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 -- Agreement and Plan of Merger, dated as of August 4, 2000,
by and among Universal Compression Holdings, Inc., Universal
Compression, Inc., Gas Compression Services, Inc., the Reuben
James Helton Trust Dated January 24, 2000, and Michael Pahl
(incorporated by reference to Exhibit 2.1 of Universal
Compression Holdings, Inc.'s and Universal Compression, Inc.'s
Current Report on Form 8-K dated September 29, 2000).
2.2* -- Agreement and Plan of Merger, dated October 23, 2000, by
and among Weatherford International, Inc., WEUS Holding, Inc.,
Enterra Compression Company, Universal Compression Holdings,
Inc., and Universal Compression, Inc.
4.1 -- Financing arrangements of Universal Compression, Inc.
(formerly Gas Compression Services, Inc.) with NBD Bank, N.A.,
for Limited Obligation Revenue Bonds, dated November 29, 1994.
A copy of these arrangements will be provided to the
Commission upon request, the authorized principal amount of
which does not exceed 10% of the consolidated assets of
Universal Compression Holdings, Inc., and its subsidiaries.
4.2 -- Financing arrangements of Universal Compression, Inc.
(formerly Gas Compression Services, Inc.) with General
Electric Capital Business Asset Funding Corporation. A copy of
these arrangements will be provided to the Commission upon
request, the authorized principal amount of which does not
exceed 10% of the consolidated assets of Universal Compression
Holdings, Inc., and its subsidiaries.
4.3* -- Second Supplemental Indenture, dated as of May 30, 2000, by
and among Universal Compression, Inc., Universal Compression
Holdings, Inc., and United States Trust Company of New York,
as trustee.
4.4* -- Third Supplemental Indenture, dated as of October 15, 2000,
by and among Universal Compression, Inc., Gas Compression
Finance Corporation, G.C.S. Distributing, L.L.C., Gas
Compression Realty, L.L.C., and United States Trust Company of
New York, as trustee.
4.5 -- Registration Agreement, dated September 15, 2000, by and
among Universal Compression Holdings, Inc., the Reuben James
Helton Trust Dated January 24, 2000, and Michael Pahl
(incorporated by reference to Exhibit 4.1 of Universal
Compression Holdings, Inc.'s and Universal Compression, Inc.'s
Current Report on Form 8-K dated September 29, 2000).
24
<PAGE> 25
10.1 -- Escrow Agreement, dated as of September 15, 2000, by and
among Universal Compression Holdings, Inc., the Reuben James
Helton Trust Dated January 24, 2000, Garlin Rhymes, as
representative of the trust, Michael Pahl and State Street
Bank and Trust Company (incorporated by reference to Exhibit
10.1 of Universal Compression Holdings, Inc.'s and Universal
Compression, Inc.'s Current Report on Form 8-K dated September
29, 2000).
10.2 -- Consulting and Non-Competition Agreement, effective as of
September 14, 2000, by and between Universal Compression
Holdings, Inc., and Reuben James Helton (incorporated by
reference to Exhibit 10.2 of Universal Compression Holdings,
Inc.'s and Universal Compression, Inc.'s Current Report on
Form 8-K dated September 29, 2000).
10.3 -- Non-Disclosure and Non-Competition Agreement, effective as
of September 14, 2000, by and between Universal Compression
Holdings, Inc., and Michael Pahl (incorporated by reference to
Exhibit 10.3 of Universal Compression Holdings, Inc.'s and
Universal Compression, Inc.'s Current Report on Form 8-K dated
September 29, 2000).
10.4* -- Subsidiary Assumption Agreement, dated as of October 15,
2000, by and among Gas Compression Finance Corporation, G.C.S.
Distributing, L.L.C., and Gas Compression Realty, L.L.C.
10.5* -- Waiver and Agreement, dated as of September 13, 2000, by
and among Universal Compression Holdings, Inc., Universal
Compression, Inc., Wilmington Trust Company, Bankers Trust
Company, certain Certificate Holders and certain Lenders party
thereto.
10.6* -- Stock Option Agreement, effective as of October 18, 2000,
by and between Universal Compression Holdings, Inc. and Mark
L. Carlton.
10.7 -- Form of Indemnification Agreements for each of Edmund P.
Segner III and Mark L. Carlton (incorporated by reference to
Exhibit 10.27 of Amendment No. 1 dated May 3, 2000 to
Universal Compression Holdings, Inc.'s Registration Statement
on Form S-1 (File No. 333-34090)).
10.8* -- Special Retention Payment Plan for Selected GCSI Employees,
dated as of August 4, 2000.
10.9* -- Special Retention Bonus Plan for GCSI Employees, dated as
of August 4, 2000.
10.10* -- Stockholders' Agreement, dated as of October 23, 2000, by
and among WEUS Holding, Inc., Universal Compression Holdings,
Inc., Castle Harlan Partners III, Castle Harlan Offshore
Partners III, L.P., Castle Harlan Affiliates III, L.P., and
John K. Castle.
10.11* -- First Amendment and Consent, dated as of September 1, 2000,
by and among Universal Compression Holdings, Inc., Universal
Compression, Inc., certain Lenders party thereto and Bankers
Trust Company.
27.1* -- Financial Data Schedule - Universal Compression Holdings,
Inc.
27.2* -- Financial Data Schedule - Universal Compression, Inc.
-------------
* Filed herewith
25
<PAGE> 26
(b) Reports on Form 8-K.
Two reports were filed on Form 8-K during the second quarter of fiscal 2001:
o The Company and Universal filed a Current Report on Form 8-K
on August 9, 2000 to report under Item 5 the issuance of a
press release on August 7, 2000 announcing the execution of an
Agreement and Plan of Merger dated August 4, 2000 with respect
to the acquisition of all the outstanding capital stock of
GCSI and certain additional assets through the merger of GCSI
with and into Universal.
o The Company and Universal filed a Current Report on Form 8-K
on September 29, 2000, to report: (A) under Item 2 the
completion on September 15, 2000 of its acquisition of GCSI;
(B) under Item 5 the filing on September 20, 2000 of a
Registration Statement on Form S-3 (Reg. No. 333-46208)
related to the registration of the resale of up to 500,000
shares of Company common stock by the former shareholders of
GCSI; and (C) under Item 5 the expansion of the Company's
board of directors from seven to eight members, and the
subsequent appointment of Edmund P. Segner III as a Class B
director.
In addition, the Company and Universal filed a Current Report on Form 8-K on
October 26, 2000 to report under Item 5 the issuance of a press release on
October 24, 2000 announcing the execution of an Agreement and Plan of Merger
dated October 23, 2000, which contemplates the acquisition of the gas
compression business of Weatherford International, Inc. through the merger of
Weatherford's subsidiary with and into Universal in exchange for 13.75 million
shares of the Company's common stock, which will represent approximately 48% of
the outstanding shares of the combined company, and the assumption of
approximately $300 million of related Weatherford debt.
In addition, the Company and Universal filed a Current Report on Form 8-K on
November 9, 2000 to report under Item 5 the issuance of a press release on
November 7, 2000 announcing earnings for the second quarter of fiscal 2001, and
a public conference call on November 7, 2000, to discuss the second quarter
earnings and other corporate matters.
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UNIVERSAL COMPRESSION HOLDINGS, INC.
Date: November 14, 2000 By /s/ RICHARD W. FITZGERALD
-------------------------------
Richard W. FitzGerald,
Chief Financial Officer and
Senior Vice President
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UNIVERSAL COMPRESSION, INC.
Date: November 14, 2000 By /s/ RICHARD W. FITZGERALD
-------------------------------
Richard W. FitzGerald,
Chief Financial Officer and
Senior Vice President
<PAGE> 28
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.1 -- Agreement and Plan of Merger, dated as of August 4, 2000, by and
among Universal Compression Holdings, Inc., Universal Compression,
Inc., Gas Compression Services, Inc., the Reuben James Helton Trust
Dated January 24, 2000, and Michael Pahl (incorporated by reference to
Exhibit 2.1 of Universal Compression Holdings, Inc.'s and Universal
Compression, Inc.'s Current Report on Form 8-K dated September 29,
2000).
2.2* -- Agreement and Plan of Merger, dated October 23, 2000, by and among
Weatherford International, Inc., WEUS Holding, Inc., Enterra
Compression Company, Universal Compression Holdings, Inc., and
Universal Compression, Inc.
4.1 -- Financing arrangements of Universal Compression, Inc. (formerly Gas
Compression Services, Inc.) with NBD Bank, N.A., for Limited Obligation
Revenue Bonds, dated November 29, 1994. A copy of these arrangements
will be provided to the Commission upon request, the authorized
principal amount of which does not exceed 10% of the consolidated
assets of Universal Compression Holdings, Inc., and its subsidiaries.
4.2 -- Financing arrangements of Universal Compression, Inc. (formerly Gas
Compression Services, Inc.) with General Electric Capital Business
Asset Funding Corporation. A copy of these arrangements will be
provided to the Commission upon request, the authorized principal
amount of which does not exceed 10% of the consolidated assets of
Universal Compression Holdings, Inc., and its subsidiaries.
4.3* -- Second Supplemental Indenture, dated as of May 30, 2000, by and
among Universal Compression, Inc., Universal Compression Holdings,
Inc., and United States Trust Company of New York, as trustee.
4.4* -- Third Supplemental Indenture, dated as of October 15, 2000, by and
among Universal Compression, Inc., Gas Compression Finance Corporation,
G.C.S. Distributing, L.L.C., Gas Compression Realty, L.L.C. and United
States Trust Company of New York, as trustee.
4.5 -- Registration Agreement, dated September 15, 2000, by and among
Universal Compression Holdings, Inc., the Reuben James Helton Trust
Dated January 24, 2000, and Michael Pahl (incorporated by reference to
Exhibit 4.1 of Universal Compression Holdings, Inc.'s and Universal
Compression, Inc.'s Current Report on Form 8-K dated September 29,
2000).
10.1 -- Escrow Agreement, dated as of September 15, 2000, by and among
Universal Compression Holdings, Inc., the Reuben James Helton Trust
Dated January 24, 2000, Garlin Rhymes, as representative of the trust,
Michael Pahl and State Street Bank and Trust Company (incorporated by
reference to Exhibit 10.1 of Universal Compression Holdings, Inc.'s and
Universal Compression, Inc.'s Current Report on Form 8-K dated
September 29, 2000).
10.2 -- Consulting and Non-Competition Agreement, effective as of September
14, 2000, by and between Universal Compression Holdings, Inc., and
Reuben James Helton (incorporated by reference to Exhibit 10.2 of
Universal Compression Holdings, Inc.'s and Universal Compression,
Inc.'s Current Report on Form 8-K dated September 29, 2000).
10.3 -- Non-Disclosure and Non-Competition Agreement, effective as of
September 14, 2000, by and between Universal Compression Holdings,
Inc., and Michael Pahl (incorporated by reference to Exhibit 10.3 of
Universal Compression Holdings, Inc.'s and Universal Compression,
Inc.'s Current Report on Form 8-K dated September 29, 2000).
10.4* -- Subsidiary Assumption Agreement, dated as of October 15, 2000, by
and among Gas Compression Finance Corporation, G.C.S. Distributing,
L.L.C., and Gas Compression Realty, L.L.C.
</TABLE>
<PAGE> 29
<TABLE>
<S> <C>
10.5* -- Waiver and Agreement, dated as of September 13, 2000, by and among
Universal Compression Holdings, Inc., Universal Compression, Inc.,
Wilmington Trust Company, Bankers Trust Company, certain Certificate
Holders and certain Lenders party thereto.
10.6* -- Stock Option Agreement, effective as of October 18, 2000, by and
between Universal Compression Holdings, Inc. and Mark L. Carlton.
10.7 -- Form of Indemnification Agreements for each of Edmund P. Segner III
and Mark L. Carlton (incorporated by reference to Exhibit 10.27 of
Amendment No. 1 dated May 3, 2000 to Universal Compression Holdings,
Inc.'s Registration Statement on Form S-1 (File No. 333-34090)).
10.8* -- Special Retention Payment Plan for Selected GCSI Employees, dated as
of August 4, 2000.
10.9* -- Special Retention Bonus Plan for GCSI Employees, dated as of August
4, 2000.
10.10*-- Stockholders' Agreement, dated as of October 23, 2000, by and among
WEUS Holding, Inc., Universal Compression Holdings, Inc., Castle Harlan
Partners III, Castle Harlan Offshore Partners III, L.P., Castle Harlan
Affiliates III, L.P., and John K. Castle.
10.11*-- First Amendment and Consent, dated as of September 1, 2000, by and
among Universal Compression Holdings, Inc., Universal Compression,
Inc., certain Lenders party thereto and Bankers Trust Company.
27.1* -- Financial Data Schedule - Universal Compression Holdings, Inc.
27.2* -- Financial Data Schedule - Universal Compression, Inc.
</TABLE>
----------
* Filed herewith.
