<PAGE> 1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Weatherford International, Inc.:
We have audited the accompanying consolidated balance sheet of Enterra
Compression Company (a Delaware corporation and indirect wholly-owned subsidiary
of Weatherford International, Inc.) and subsidiaries as of December 31, 1999,
and the related consolidated statement of operations, stockholders' equity and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Enterra Compression Company and subsidiaries as of December 31, 1999, and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
November 17, 2000
136
<PAGE> 2
ENTERRA COMPRESSION COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA AND PAR VALUE)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents................................. $ 29,189 $ 8,559
Accounts Receivable, Net of Allowance for Uncollectible
Accounts of $979 at December 31, 1999 and $1,169 at
September 30, 2000 (unaudited)......................... 31,276 56,068
Inventories............................................... 78,803 100,207
Current Deferred Tax Asset................................ 2,414 2,414
Other Current Assets...................................... 9,669 9,385
-------- --------
151,351 176,633
-------- --------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land...................................................... 3,323 2,351
Buildings and Leasehold Improvements...................... 14,927 17,167
Rental and Service Equipment.............................. 275,107 279,083
Machinery and Other Equipment............................. 43,651 51,051
-------- --------
337,008 349,652
Less: Accumulated Depreciation.................... (57,537) (71,467)
-------- --------
279,471 278,185
-------- --------
GOODWILL, NET............................................... 224,941 238,280
OTHER ASSETS................................................ 10,267 11,048
-------- --------
$666,030 $704,146
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-Term Borrowings and Current Portion of Long-Term
Debt................................................... $ 982 $ 14,170
Accounts Payable.......................................... 18,837 26,445
Accrued Liabilities....................................... 20,718 20,291
-------- --------
40,537 60,906
-------- --------
LONG-TERM DEBT.............................................. 2,157 1,945
UNEARNED INCOME............................................. 77,350 92,888
DEFERRED INCOME TAXES AND OTHER............................. 32,218 33,676
MINORITY INTEREST LIABILITY................................. 197,111 198,508
LONG-TERM PAYABLE DUE TO WEATHERFORD........................ 99,033 100,751
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, $1 Par Value, 2,000 Shares Authorized,
Issued and Outstanding................................. 2 2
Capital in Excess of Par Value............................ 198,221 198,221
Retained Earnings......................................... 19,777 17,812
Accumulated Other Comprehensive Loss...................... (376) (563)
-------- --------
217,624 215,472
-------- --------
$666,030 $704,146
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
137
<PAGE> 3
ENTERRA COMPRESSION COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED -------------------
DECEMBER 31, 1999 2000 1999
------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES:
Products............................................ $ 73,183 $ 55,920 $ 53,349
Services and Rentals................................ 152,734 137,370 113,115
-------- -------- --------
225,917 193,290 166,464
-------- -------- --------
COSTS AND EXPENSES:
Cost of Products.................................... 70,439 52,059 54,856
Cost of Services and Rentals........................ 97,963 104,459 68,110
Selling, General and Administrative................. 35,941 32,802 26,704
-------- -------- --------
204,343 189,320 149,670
-------- -------- --------
OPERATING INCOME...................................... 21,574 3,970 16,794
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest Income..................................... 882 820 560
Interest Expense.................................... (304) (393) (202)
Interest Expense from Weatherford................... (6,757) (5,512) (5,067)
Other, Net.......................................... 1,306 (634) (5)
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY
INTEREST............................................ 16,701 (1,749) 12,080
INCOME TAX (PROVISION) BENEFIT........................ (7,539) 632 (5,453)
-------- -------- --------
INCOME (LOSS) BEFORE MINORITY INTEREST................ 9,162 (1,117) 6,627
MINORITY INTEREST EXPENSE, NET OF TAX................. (4,623) (848) (3,557)
-------- -------- --------
NET INCOME (LOSS)..................................... $ 4,539 $ (1,965) $ 3,070
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
138
<PAGE> 4
ENTERRA COMPRESSION COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARES)
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN ACCUMULATED TOTAL
------------------ EXCESS OF RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES PAR VALUE PAR VALUE EARNINGS INCOME (LOSS) EQUITY
------ --------- ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999.......... 2,000 $2 $173,609 $15,238 $(1,767) $187,082
Comprehensive Income................ -- -- -- 3,070 1,188 4,258
Contribution from Weatherford....... -- -- 24,612 -- -- 24,612
----- -- -------- ------- ------- --------
Balance at September 30, 1999
(Unaudited)....................... 2,000 2 198,221 18,308 (579) 215,952
Comprehensive Income (Loss)......... -- -- -- 1,469 203 1,672
----- -- -------- ------- ------- --------
Balance at December 31, 1999........ 2,000 2 198,221 19,777 (376) 217,624
Comprehensive Loss (Unaudited)...... -- -- -- (1,965) (187) (2,152)
----- -- -------- ------- ------- --------
Balance at September 30, 2000
(Unaudited)....................... 2,000 $2 $198,221 $17,812 $ (563) $215,472
===== == ======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
139
<PAGE> 5
ENTERRA COMPRESSION COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -------------------
1999 2000 1999
------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss)....................................... $ 4,539 $ (1,965) $ 3,070
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Depreciation and Amortization........................ 33,125 28,907 25,193
Deferred Income Tax Provision........................ 6,819 29 1,164
Minority Interest Expense, Net of Tax................ 4,623 848 3,557
Gain on Sale of Property, Plant and Equipment........ (4,474) (543) (1,900)
Provision for Uncollectible Accounts Receivable...... 772 290 316
Change in Assets and Liabilities:
Accounts Receivable................................ 186 (15,599) (14,821)
Inventories........................................ (18,241) (8,246) (20,131)
Other Current Assets............................... (4,342) 1,427 (17,088)
Accounts Payable................................... (561) 4,094 (757)
Other Current Liabilities.......................... (769) (8,941) 13,389
Other.............................................. (15,098) 929 (13,889)
-------- -------- --------
Net Cash Provided by (Used in) Operating
Activities.................................... 6,579 1,230 (21,897)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of Businesses, Net of Cash Acquired........ 1,354 (33,403) 1,354
Capital Expenditures for Property, Plant and
Equipment............................................ (94,755) (61,361) (79,732)
Proceeds from Sales of Property, Plant and Equipment.... 8,898 3,831 7,212
Proceeds from Sale and Leaseback of Equipment........... 139,815 55,068 139,815
Proceeds from Sale of Business.......................... 14,620 -- 14,620
-------- -------- --------
Net Cash Provided by (Used in) Investing
Activities.................................... 69,932 (35,865) 83,269
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (Repayments) on Debt, Net.................... (910) 11,738 (681)
Borrowings from Weatherford, Net........................ 18,908 2,267 8,899
Repayments to GE Capital................................ (65,350) -- (65,350)
-------- -------- --------
Net Cash Provided by (Used in) Financing
Activities.................................... (47,352) 14,005 (57,132)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... 29,159 (20,630) 4,240
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.......... 30 29,189 30
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................ $ 29,189 $ 8,559 $ 4,270
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest Paid........................................... $ 303 $ 391 $ 202
Taxes Paid (Refunded)................................... $ (307) $ 1,559 $ 332
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
140
<PAGE> 6
ENTERRA COMPRESSION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
General
Enterra Compression Company is an indirect wholly-owned subsidiary of
Weatherford International, Inc. ("Weatherford") and is incorporated in the state
of Delaware. These financial statements of Enterra Compression Company include
the accounts of Enterra Compression Company and all its majority-owned
subsidiaries (the "Company"). Weatherford contributed its predecessor
compression businesses to the Company and in February 1999 formed a joint
venture with GE Capital Corporation ("GE").
Joint Venture
The Company primarily is held and operates in a joint venture with GE where
the Company owns 64% and GE owns 36% (See Note 4). The joint venture, which
combined Weatherford's Compression Services division and GE's Global Compression
Services operations, is the world's second largest provider of natural gas
contract compression services and owns and manages over 4,000 compressor units
worldwide having more that one million horsepower.
During the formation of the joint venture Weatherford contributed all of
its compression businesses, including those investments held in the legal
entities of Weatherford Canada Ltd., Weatherford Venezuela S.A., Weatherford
Australia Pty Ltd., Weatherford de Peru S.R.L., Weatherford Industria e Comercio
Ltda. and Weatherford Enterra S.A., to the joint venture. The compression
businesses of these entities became indirect wholly-owned subsidiaries of the
Company, with the exception of the Canadian operations. The Canadian operations
are a majority-owned subsidiary of the Company. In connection with the formation
of the joint venture, Weatherford contributed non-cash capital through the
forgiveness of certain long-term payables due to Weatherford.
Nature of Operations
The Company is engaged in the business of renting, selling and servicing
natural gas compressor packages used in the oil and gas industry. Factors
influencing compressor rental operations include the number and age of gas
producing wells, the ownership of these properties and natural gas prices. The
Company is headquartered in Houston, Texas. The Company also has service and
rental operations in Canada, and rental contract management and service
operations in Argentina, Venezuela, Brazil, Peru, Thailand, Singapore and
Australia.
2. BASIS OF PRESENTATION
The consolidated financial statements as of December 31, 1999 and for the
year then ended are audited. The consolidated financial statements as of
September 30, 2000 and for the nine months ended September 30, 2000 and 1999 are
unaudited. The interim consolidated financial statements reflect all adjustments
which the Company considers necessary for the fair presentation of such
financial statements. Although the Company believes that the disclosures in
these interim consolidated financial statements are adequate to make the interim
information presented not misleading, certain information relating to the
Company's organization and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
has been condensed or omitted pursuant to rules and regulations of interim
reporting.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include all accounts of the Company.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
141
<PAGE> 7
ENTERRA COMPRESSION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
Cash Flow Information
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
During the year ended December 31, 1999 and nine months ended September 30,
2000, the Company had noncash investing activities of $1.5 million and $1.2
million (unaudited), respectively, relating to the assumption of certain capital
leases. There were no noncash capital lease investing activities during the nine
months ended September 30, 1999.
The following summarizes investing activities relating to acquisitions
integrated into the Company's operations:
<TABLE>
<CAPTION>
YEAR NINE MONTHS ENDED
ENDED SEPTEMBER 30,
DECEMBER 31, --------------------
1999 2000 1999
------------ -------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Fair value of assets, net of cash acquired........ $ 224,662 $ 30,992 $ 224,662
Goodwill.......................................... 52,197 20,364 52,197
Total liabilities................................. (278,213) (17,953) (278,213)
--------- -------- ---------
Cash consideration, net of cash
acquired.............................. $ (1,354) $ 33,403 $ (1,354)
========= ======== =========
</TABLE>
Inventories
Inventories are valued at the lower of cost or market. Cost is determined
using the moving average cost method for parts inventories or by using standards
which approximate moving average cost.
Inventories by category are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
<S> <C> <C>
Raw materials............................................... $51,493 $ 57,747
Work in process............................................. 15,897 22,241
Finished goods.............................................. 11,413 20,219
------- --------
$78,803 $100,207
======= ========
</TABLE>
Work in process includes the costs of materials, labor and overhead.
Property, Plant and Equipment
Property, plant and equipment is carried at cost. Maintenance and repairs
are expensed as incurred. The costs of refurbishment (i.e. renewals,
replacements and betterments) are capitalized. Depreciation on
142
<PAGE> 8
ENTERRA COMPRESSION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fixed assets is computed using the straight-line method over the estimated
useful lives for the respective categories. The useful lives of the major
classes of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
USEFUL LIVES
------------
<S> <C>
Buildings and leasehold improvements................... 10-40 years
Rental and service equipment........................... 5-15 years
Machinery and other equipment.......................... 3-7 years
</TABLE>
Depreciation expense for the year ended December 31, 1999 and the nine
months ended September 30, 2000 and 1999 was $27.0 million, $23.2 million and
$20.8 million, respectively.
When property is retired or otherwise disposed of, the cost and accumulated
depreciation are removed from the related accounts and any resulting gain or
loss is included in the statements of operations with the exception of gains
related to the sale and leaseback arrangements (See Note 10).
Goodwill
The Company's goodwill represents the excess of the aggregate price paid by
the Company in acquisitions accounted for as purchases over the fair market
value of the net assets acquired. Goodwill is being amortized on a straight-line
basis over the lesser of the estimated useful life or 40 years. The Company
periodically evaluates goodwill, net of accumulated amortization, for impairment
based on the undiscounted cash flows associated with the asset compared to the
carrying amounts of that asset. Management believes that there have been no
events or circumstances which warrant revision to the remaining useful life or
which affect the recoverability of goodwill. Amortization expense for goodwill
for the year ended December 31, 1999, nine months ended September 30, 2000 and
nine months ended September 30, 1999 was $6.2 million, $5.5 million (unaudited)
and $4.4 million (unaudited), respectively. Accumulated amortization related to
goodwill was $26.1 million and $31.6 million (unaudited) as of December 31, 1999
and September 30, 2000, respectively.
Equipment Held for Lease
The Company leases certain equipment to customers under agreements that
contain an option to purchase the equipment at any time. The option amount is
computed based on the original purchase price, less payments received, plus
interest and insurance covering the period from the inception of the lease to
the date the option is exercised. The lease payments are generally computed to
payout the original purchase price plus interest over approximately 36 months.
Leases with noncancelable lease terms greater than 18 months are considered
sales-type leases, because by the end of the original lease term, the option
price is expected to be lower than the equipment's fair market value.
Equipment Under Operating Leases
Equipment leased under agreements with noncancelable lease terms of less
than 18 months and those which do not include a purchase option are accounted
for as operating leases and included in property, plant and equipment. This
equipment had a net book value of $221.8 million at December 31, 1999 and $204.2
million (unaudited) at September 30, 2000. Rental fleet depreciation expense
totaled approximately $23.0 million, $21.1 million (unaudited) and $17.1 million
(unaudited) for the twelve months ended December 31, 1999, nine months ended
September 30, 2000 and nine months ended September 30, 1999, respectively.
143
<PAGE> 9
ENTERRA COMPRESSION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounting for Income Taxes
Under Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.
Foreign Currency Translation
The functional currency for most of the Company's international operations
is the applicable local currency. Results of operations for foreign subsidiaries
for which the functional currencies are the applicable foreign currencies are
translated using average exchange rates during the period. Assets and
liabilities of these foreign subsidiaries are translated using the exchange
rates in effect at the balance sheet date, and the resulting translation
adjustments are included as accumulated other comprehensive income (loss), a
separate component of stockholders' equity. Currency transaction gains and
losses are reflected in income for the period.
Concentration of Credit Risk
The Company sells, leases and rents gas compressors to customers in the oil
and gas industry. The Company generally does not require collateral. However,
cash prepayments and security deposits are required for accounts with indicated
credit risks. The Company maintains reserves for potential losses, and credit
losses have historically been within management's expectations.
Revenue Recognition
Revenues are recognized as rental equipment is provided, as services are
performed, or as parts or equipment deliveries are made. Most rental contracts
have an initial contract term of six to twelve months and then continue on a
month-to-month basis. The Company provides a limited warranty on certain
equipment and services. The warranty period varies depending on the equipment
sold or service performed. A liability for performance under warranty
obligations is accrued based upon the nature of the warranty and historical
experience. The warranty expense for the year ended December 31, 1999, nine
months ended September 30, 2000 and nine months ended September 30, 1999 was
$1.3 million, $0.5 million and $0.7 million, respectively.
The Company provides management services under various gas compressor
system fleet rental agency agreements with four limited partnerships and four
Subchapter S corporations. During the year ended December 31, 1999, nine months
ended September 30, 2000 and nine months ended September 30, 1999, management
fee income of $0.7 million, $0.4 million (unaudited) and $0.5 million
(unaudited), respectively, was recognized under the agency agreements.
Minority Interest
The Company records minority interest expense which reflects the portion of
earnings of majority-owned operations which are applicable to the minority
interest partner.
New Reporting Requirements
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements, to provide guidance on the recognition, presentation and disclosure
of revenue in financial statements. In March 2000, the SEC issued SAB 101A,
which delayed the implementation date of SAB 101 until the second quarter after
December 15, 1999 for companies with fiscal years beginning between December 16,
1999 and March 15,
144
<PAGE> 10
ENTERRA COMPRESSION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000. The SEC staff issuance of SAB 101B on June 26, 2000 further extends the
compliance requirement until the fourth quarter of fiscal years beginning after
December 15, 1999, with an effective date of January 1, 2000. The Company has
reviewed its revenue recognition policies and believes that they are in
compliance with GAAP and the related interpretive guidance set forth in SAB 101
with the exception of its classification in the Consolidated Statements of
Operations of certain pass-through costs. The anticipated restatements caused by
the application of this bulletin are not expected to have a material impact on
its financial position or results of operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. In June 1999, the FASB issued SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of SFAS No. 133, amending the effective date of SFAS No. 133 to
years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities,
amending accounting and reporting standards of SFAS No. 133 for certain
derivative instruments and certain hedging activities. The Company is evaluating
the impact of SFAS No. 133 and SFAS No. 138 on its consolidated financial
statements and does not anticipate that application of these statements will
have a material impact on its financial position or results of operations.
4. ACQUISITIONS AND SALE OF BUSINESS
On July 17, 2000, the Company acquired the Canadian compression parts and
services division of Cooper Cameron Limited ("Cooper") for approximately $10.8
million cash (unaudited). The acquisition expands the Company's range of
capabilities to provide field gas production solutions to the Canadian
marketplace. Cooper's aftermarket services is dedicated to providing customers
with maximum equipment availability at the lowest possible operating cost, along
with being a single source for genuine replacement parts.
The Company acquired Singapore-based Gas Services International Limited
("GSI") on January 12, 2000 for a total of approximately $20.2 million cash
(unaudited). The acquisition is intended to expand this division's platform of
full service capabilities in the Asia-Pacific and Middle Eastern markets. GSI's
main business units include compressor package rental, maintenance and service,
and floating production storage and offloading platforms. In addition to
Singapore, GSI has service locations in Indonesia and the United Arab Emirates.
On February 2, 1999, the Company completed a joint venture with GE in which
the Company's operations were combined with GE's Global Compression Services
operations. The joint venture is known as Weatherford Global Compression
Services. The Company owns 64% of the joint venture and GE owns 36%. The Company
has the right to acquire GE's interest at anytime at a price equal to a third
party market-determined value that is not less than book value. GE also has the
right to require the Company to purchase its interest at anytime after February
2001 at a market-determined third party valuation as well as request a public
offering of its interest after that date, if the Company has not purchased its
interest by that time.
The Company also effected various other smaller acquisitions during the
nine months ended September 30, 2000 for total consideration of approximately
$7.4 million (unaudited). There were no acquisitions, other than the formation
of the joint venture with GE, during the twelve months ended December 31, 1999
and the nine months ended September 30, 1999.
The acquisitions discussed above were accounted for using the purchase
method of accounting. Results of operations for acquisitions accounted for as
purchases are included in the accompanying
145
<PAGE> 11
ENTERRA COMPRESSION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consolidated financial statements since the date of acquisition. The purchase
price was allocated to the net assets acquired based upon their estimated fair
market values at the date of acquisition. The balances included in the
Consolidated Balance Sheets related to the current year acquisitions are based
upon preliminary information and are subject to change when final asset and
liability valuations are obtained. Material changes in the preliminary
allocations are not anticipated by management.
The following presents the consolidated financial information for the
Company on a pro forma basis assuming the joint venture with GE had occurred on
January 1, 1999. All 2000 acquisitions are not material individually nor in the
aggregate, therefore, pro forma information is not presented. The pro forma
information set forth below is not necessarily indicative of the results that
actually would have been achieved had such transactions been consummated as of
January 1, 1998, or that may be achieved in the future.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, 1999 SEPTEMBER 30, 1999 DECEMBER 31, 1998
----------------- ------------------ -----------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues............................. $232,014 $172,561 $254,824
Net income (loss).................... 3,357 1,888 (4,528)
</TABLE>
The compressors marketed by the Company were historically manufactured by
the Company at its facility located in Corpus Christi, Texas or purchased from
third parties. In the fourth quarter of 1999, the Company sold its manufacturing
facility in Corpus Christi to GE Power Systems for a total of $14.6 million and
recorded a gain of $0.8 million. Under terms of the sale, the Company has agreed
to make purchases from that facility for approximately $38.0 million for
products over a five-year period and $3.0 million for parts over a three-year
period.
5. ACCRUED LIABILITIES
Accrued liabilities are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
<S> <C> <C>
Other taxes................................................. $ 944 $ 1,762
Customer deposits........................................... 2,215 1,427
Wages and benefits.......................................... 5,559 7,179
Lease obligations........................................... 2,843 3,476
Accrued warranty............................................ 2,388 328
Other....................................................... 6,769 6,119
------- -------
$20,718 $20,291
======= =======
</TABLE>
6. SHORT-TERM DEBT (UNAUDITED)
In July 2000, the Company put into place a $25.0 million uncommitted line
of credit. Interest rates are at LIBOR plus 1.75% or the "Quoted Rate," defined
as any rate of interest mutually agreed upon by the two parties. As of September
30, 2000, $12.0 million was available under this line of credit.
146
<PAGE> 12
ENTERRA COMPRESSION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT
The Company had long-term debt obligations at December 31, 1999 as follows
(in thousands):
<TABLE>
<S> <C>
Capital lease obligations under various agreements.......... $1,454
Bonds....................................................... 1,685
------
3,139
Less: amounts due in one year............................... (982)
------
Long-term debt.............................................. $2,157
======
</TABLE>
The Industrial Development Corporation of Port of Corpus Christi
Variable/Fixed Rate Demand Industrial Development Revenue Refunding Bonds,
Series 2002 (Lantana Corporation Project) (the "Bonds") require annual payment
of principal and interest with the final payment due on July, 2002. The Bonds
are secured by letters of credit outstanding of $1.7 million as of December 31,
1999. Interest is variable and determined to be the lowest rate which will
permit the Bonds to be sold at par. The rate at December 31, 1999 was 3.5%.
Accordingly, the estimated fair value of the Bonds approximates book value.
Maturities of the Company's long-term debt at December 31, 1999 are as
follows (in thousands):
<TABLE>
<S> <C>
2000........................................................ $ 982
2001........................................................ 885
2002........................................................ 920
2003........................................................ 310
2004........................................................ 42
------
$3,139
======
</TABLE>
8. STOCKHOLDERS' EQUITY
Common Stock
The Company has authorized and issued 2,000 shares of common stock, $1.00
par value as of December 31, 1999 and September 30, 2000 to WEUS Holding Inc.,
which is a wholly-owned subsidiary of Weatherford.
9. INCOME TAXES
The domestic and foreign components of Income before Taxes and Minority
Interest consisted of the following for the year ended December 31, 1999 (in
thousands):
<TABLE>
<S> <C>
Domestic.................................................. $ 5,858
Foreign................................................... 10,843
-------
$16,701
=======
</TABLE>
147
<PAGE> 13
ENTERRA COMPRESSION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's provision (benefit) for income taxes for the year ended
December 31, 1999, consisted of the following (in thousands):
<TABLE>
<S> <C>
Current
U.S. Federal and State.................................. $(2,728)
Foreign................................................. 3,448
-------
$ 720
=======
Deferred
U.S. Federal and State.................................. $ 6,057
Foreign................................................. 762
-------
6,819
-------
$ 7,539
=======
</TABLE>
The difference between the tax provision at the statutory federal income
tax rate and the tax provision attributable to income before income taxes for
the year ended December 31, 1999 is analyzed below (in thousands).
<TABLE>
<S> <C>
Tax provision at statutory rate............................ $5,845
Increase in taxes resulting from:
Nondeductible goodwill................................... 1,174
Foreign tax rates greater than statutory rate............ 415
Other.................................................... 105
------
$7,539
======
</TABLE>
Deferred tax assets and liabilities are recognized for the estimated future
tax effects of temporary differences between the tax basis of an asset or
liability and its reported amount in the financial statements. The measurement
of deferred tax assets and liabilities is based on enacted tax laws and rates
currently in effect in each of the jurisdictions in which the Company has
operations.
Deferred tax assets and liabilities are classified as current or noncurrent
according to the classification of the related asset or liability for financial
reporting. The components of the net deferred tax asset (liability) were as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
Net Current Deferred Tax Asset:
Receivables........................................... $ 640
Inventory............................................. 1,248
Other accrued expenses................................ 526
--------
2,414
--------
Net Noncurrent Deferred Tax Liability:
Property, plant and equipment......................... (29,172)
Goodwill.............................................. (3,046)
--------
(32,218)
--------
Net Deferred Tax Liability.............................. $(29,804)
========
</TABLE>
148
<PAGE> 14
ENTERRA COMPRESSION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
Sales-Type Lease Receivables
The Company provides a capital lease financing option to its customers.
Future minimum lease payments receivable resulting from the sale of compression
packages under sales-type leases are due as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
<S> <C> <C>
2000........................................ $ 839 $ 164
2001........................................ 756 658
2002........................................ 811 703
2003........................................ 309 479
------ ------
$2,715 $2,004
====== ======
</TABLE>
Sale and Leaseback of Equipment
The Company has entered into various sale and leaseback arrangements where
it has sold $294.9 million (unaudited) of compression units through September
30, 2000 and has a right to sell up to another $55.1 million of compression
units. Under these arrangements, legal title to the compression units are sold
to third-parties and leased back to the Company under a five-year operating
lease with a market-based purchase option.
During the twelve months ended December 31, 1999, the Company sold
compressors having an appraised value of $120.2 million and received cash of
$139.8 million, of which $19.6 million related to 1998 sales. The sale and
leaseback agreements resulted in a pretax deferred gain of approximately $34.6
million, classified as Unearned Income on the accompanying Consolidated Balance
Sheets, which may be deferred until the end of the lease. During the nine months
ended September 30, 2000, the Company sold additional compressors having an
appraised value equal to the cash received of $55.1 million (unaudited). The
sales resulted in an additional pretax deferred gain of approximately $15.5
million. As of December 31, 1998 the Company had sold compressors under this
arrangement having an appraised value of $119.6 million, and received cash of
$100.0 million and a receivable of $19.6 million. The net book value of the
equipment sold was approximately $77.4 million, resulting in a pre-tax gain of
$42.8 million. Weatherford has provided for a residual value guarantee at the
end of the term of the lease for the assets sold prior to the formation of the
joint venture.
Of the proceeds received by the Company from the sale and leaseback of the
compressor units $65.4 million was distributed to GE as part of the joint
venture. The remaining proceeds from these sale and leaseback agreements were
utilized by the Company for internal corporate purposes and growth. Weatherford
has guaranteed certain of the obligations of the Company with respect to the
sale of $200.0 million of the compression units, completed by Weatherford prior
to the formation of the Company. Weatherford has guaranteed a minimum residual
value of the leased equipment at the end of the lease. The Company has similarly
agreed to guarantee a portion of the residual value of all of the leased
equipment under these leases. The remaining sales by the Company were done on a
non-recourse basis to Weatherford and the recourse is limited solely to the
assets of the Company.
149
<PAGE> 15
ENTERRA COMPRESSION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The lease agreement calls for quarterly rental payments. The following
table provides future minimum lease payments (in thousands) under the
aforementioned lease exclusive of any guarantee payments:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
<S> <C> <C>
2000........................................................ $16,856 $ 6,018
2001........................................................ 16,856 24,072
2002........................................................ 16,856 24,072
2003........................................................ 16,156 23,273
2004........................................................ 4,193 9,596
2005........................................................ -- 1,493
------- -------
$70,917 $88,524
======= =======
</TABLE>
Operating Leases Payable
The Company leases certain buildings and service equipment under
noncancelable operating leases. Aggregate minimum rental commitments under
noncancelable operating leases with lease terms in excess of one year are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
2000................................................ $1,719 $ 619
2001................................................ 1,632 3,420
2002................................................ 1,227 2,134
2003................................................ 1,082 1,836
2004................................................ 710 1,341
Thereafter.......................................... 3,182 4,576
------ -------
$9,552 $13,926
====== =======
</TABLE>
Total rent expense incurred under operating leases was approximately $2.3
million, $3.2 million (unaudited) and $1.8 million (unaudited) for the year
ended December 31, 1999, and the nine months ended September 30, 2000 and
September 30, 1999, respectively.
Claims and Litigation
The Company is defending various claims and litigation arising in the
normal course of business. In the opinion of management, uninsured losses, if
any, resulting from these matters will not have a material adverse effect on the
Company's results of operations, financial position or liquidity.
11. RELATED PARTY TRANSACTIONS
Overhead Allocation
Weatherford provides certain administrative services for the Company,
primarily including 1) management information systems services, 2) payroll
services and 3) certain regional accounting services. The Company expensed
approximately $0.6 million, $1.0 million (unaudited) and $0.5 million
(unaudited) in overhead charges related to these services for the year ended
December 31, 1999, nine months ended September 30, 2000 and September 30, 1999,
respectively. Transactions with Weatherford are based on time devoted to and
direct costs associated with services provided to the Company.
150
<PAGE> 16
ENTERRA COMPRESSION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Insurance
The Company participates with Weatherford for the partial self-insurance of
its general, product, property, and workers' compensation liabilities. The
Company expensed approximately $1.8 million, $1.3 million (unaudited) and $1.2
million (unaudited) related to such self-insurance during the year ended
December 31, 1999, and the nine months ended September 30, 2000 and September
30, 1999, respectively.
Benefit Plans
The Company participates in Weatherford's 401(k) plan. The Company expensed
$0.5 million, $0.4 million (unaudited) and $0.4 million (unaudited) related to
the 401(k) plan in the year ended December 31, 1999, and the nine months ended
September 30, 2000 and September 30, 1999, respectively.
Long-term Payable Due to Weatherford
Weatherford regularly transacts with and provides funding of certain
activities of the Company. In accordance with a shared service agreement,
certain current expenses are paid by the Company to Weatherford. Payment of the
remaining liability occurs only when surplus cash is available. Amounts due to
Weatherford are payable on demand and accrue interest, based on average
balances, at a rate of 8.0% as of December 31, 1999 and 9.0% as of September 30,
2000.
12. SEGMENT INFORMATION
Foreign Operations
Financial information by geographic segment for the year ended December 31,
1999 is summarized below. Revenues are attributable to countries based on the
location of the entity selling the products or performing the services.
Long-lived assets are long-term assets.
<TABLE>
<CAPTION>
UNITED LATIN ASIA-
STATES CANADA AMERICA PACIFIC TOTAL
-------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Revenues from unaffiliated
customers......................... $169,554 $41,001 $14,539 $ 823 $225,917
Long-lived assets................... 423,759 28,643 60,209 2,068 514,679
</TABLE>
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following sets forth unaudited quarterly financial data for 1999.
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Revenues.................... $42,583 $55,950 $67,931 $59,453 $225,917
Gross profit................ 12,750 13,294 17,454 14,017 57,515
Net income.................. 832 813 1,425 1,469 4,539
</TABLE>
14. SUBSEQUENT EVENT (UNAUDITED)
On October 24, 2000, Weatherford announced the proposed acquisition of
13.75 million shares of common stock (a 48% interest) of Universal Compression
Holdings, Inc. ("Universal") in exchange for the contribution of substantially
all of the assets of the Company into a subsidiary of Universal. Weatherford
will retain approximately $40 million of the assets of the Company, including
Singapore-based GSI and the Company's Asia Pacific compressor rental operations,
other than those in Thailand and Australia. Weatherford will, however, continue
to operate compressor rentals in those regions either alone
151
<PAGE> 17
ENTERRA COMPRESSION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
or in conjunction with Universal. Weatherford will value the transaction based
on the stock price of Universal as of the closing date of the transaction.
Closing of the transaction is conditioned upon the average closing price of
Universal's common stock during the 20 consecutive trading days prior to the
transaction being not less than $25 per share.
In connection with this investment Weatherford has entered into an
agreement to purchase GE Capital's 36% interest in the joint venture in which
its Compression Division is operated for $206.5 million, subject to the
concurrent closing of our investment in Universal. The transactions are subject
to various conditions, including governmental approvals, approval of Universal's
stockholders, and the refinancing of its joint venture's and Universal's debt
and compressor sale leaseback arrangements. Although there can be no assurance
the merger and purchase will close, Weatherford anticipates that the
transactions will be consummated by the end of the year, or early in the first
quarter of 2001.
152
