<PAGE> 1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Universal Compression, Inc.
We have audited the accompanying statements of income, stockholder's equity
and cash flows of Tidewater Compression Service, Inc. (the "Company") for the
period from April 1, 1997 through February 20, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of operations and cash flows of Tidewater Compression
Service, Inc. for the period from April 1, 1997 through February 20, 1998, in
conformity with generally accepted accounting principles in the United States of
America.
DELOITTE & TOUCHE LLP
Houston, Texas
June 1, 1998
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<PAGE> 2
TIDEWATER COMPRESSION SERVICE, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1997
THROUGH
FEBRUARY 20, 1998
-----------------
(IN THOUSANDS)
<S> <C>
Revenues:
Rentals................................................... $71,644
Sales..................................................... 19,924
Other..................................................... 3,024
Gain on asset sales....................................... 1,094
-------
Total revenues.................................... 95,686
-------
Costs and expenses:
Rentals................................................... 31,924
Cost of sales............................................. 14,753
Depreciation and amortization............................. 23,310
General and administrative................................ 8,669
Interest expense.......................................... --
-------
Total costs and expenses.......................... 78,656
-------
Income before income taxes.................................. 17,030
Income taxes................................................ 6,271
-------
Net income........................................ $10,759
=======
</TABLE>
See accompanying notes to financial statements.
121
<PAGE> 3
TIDEWATER COMPRESSION SERVICE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM APRIL 1, 1997 THROUGH FEBRUARY 20, 1998
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ---------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, April 1, 1997................................ $49 $25,627 $31,871 $57,547
Net income............................................ -- -- 10,759 10,759
--- ------- ------- -------
Balance, February 20, 1998............................ $49 $25,627 $42,630 $68,306
=== ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
122
<PAGE> 4
TIDEWATER COMPRESSION SERVICE, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1997
THROUGH
FEBRUARY 20, 1998
-----------------
(IN THOUSANDS)
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 10,759
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 23,310
Gain on asset sales.................................... (1,094)
Deferred income tax benefit............................ (1,825)
Decrease in receivables................................ 700
Increase in inventories................................ (610)
Decrease in other current assets....................... 11
Increase in accounts payable........................... 2,716
Decrease in accrued expenses........................... (476)
--------
Net cash provided by operating activities......... 33,491
--------
Cash flows from investing activities:
Proceeds from asset sales................................. 3,803
Additions to properties and equipment..................... (17,600)
--------
Net cash used in investing activities............. (13,797)
--------
Cash flows from financing activities:
Net change in amount due to Tidewater Inc. ............... (17,870)
Repayments of long-term debt.............................. --
--------
Net cash used in financing activities............. (17,870)
--------
Net increase in cash........................................ 1,824
Cash at beginning of period................................. --
--------
Cash at end of period....................................... $ 1,824
========
Supplemental cash flow information -- cash paid for
interest.................................................. --
</TABLE>
See accompanying notes to financial statements.
123
<PAGE> 5
TIDEWATER COMPRESSION SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM APRIL 1, 1997 THROUGH FEBRUARY 20, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Tidewater Compression Service, Inc. ("TCS" or the "Company") is, and has
been for all periods presented, a wholly owned subsidiary of Tidewater Inc.
("Tidewater"). The accompanying financial statements are presented as if TCS had
been an entity separate from its parent during the periods presented and include
the revenues and expenses that are directly related to TCS' operations. As a
subsidiary of Tidewater, TCS was a participating employer in certain employee
benefit plans and also received certain administrative services such as data
processing, legal, insurance placement and claims handling from its parent. The
costs associated with providing TCS with such employee benefit programs and
administrative services, where significant, have been allocated to TCS based on
management's estimate of the time involved in providing such services and are
included in the accounts of TCS. Management believes the method used to allocate
the cost of these services is reasonable.
Nature of Operations
TCS operates one of the largest rental fleets of natural gas compressors in
the United States. The compressors are rented to oil and gas producers and
processors and are used primarily to boost the pressure of natural gas from the
wellhead into gas-gathering systems, into nearby gas-processing plants or into
high-pressure pipelines. TCS also designs and fabricates compression packages
for its own fleet as well as for sale to customers.
Use of Estimates
In preparing TCS' financial statements, management makes estimates and
assumptions that affect the amounts reported in the financial statements and
related disclosures. Actual results may differ from these estimates.
Revenue Recognition
Revenue from equipment rentals and parts sales is recognized when earned.
Compressor fabrication revenue is recognized using the completed-contract
method. This method is used because the typical contract is completed within two
months and financial position and results of operations do not vary
significantly from those which would result from use of the
percentage-of-completion method.
Income Taxes
TCS' operations are included in the consolidated U.S. federal income tax
returns of Tidewater Inc. The tax provisions presented in these financial
statements have been determined as if TCS' operations were a stand-alone
business filing a separate income tax return with the amount of current tax owed
(refundable) charged or credited to the amounts due to Tidewater Inc. Deferred
tax assets and liabilities which are also included in the amounts due to
Tidewater Inc. are determined based on the differences between the financial
statements and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to be recovered or
settled.
Environmental Liabilities
The costs to remediate and monitor environmental matters are accrued when
such liabilities are considered probable and a reasonable estimate of such costs
is determinable.
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<PAGE> 6
TIDEWATER COMPRESSION SERVICE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pension, Postretirement and Other Benefit Plans
TCS employees participate in Tidewater pension and other postretirement
plans. TCS has accounted for its participation in the Tidewater plans as a
participation in multiemployer plans. Accordingly, the statement of operations
includes an allocation from Tidewater for the costs associated with the TCS
employees who participate in these plans that is comparable to TCS' required
contribution to the plans for the periods presented. Additionally, no assets and
liabilities have been reflected in the balance sheet related to the overall
Tidewater pension and other postretirement benefit plans since it is not
practicable to segregate the amounts applicable to TCS. TCS employees also
participate in the medical, dental, life and workers' compensation insurance
plans sponsored by Tidewater. The costs of these plans are allocated to TCS
based on the number of TCS employees participating in the plans.
Foreign Currency Transactions
Activities outside the United States, except those located in highly
inflationary economies, are measured using the local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated at the
rates of exchange at the balance sheet date. Income and expense items are
translated at average monthly rates of exchange. The resultant translation
adjustments for the period from April 1, 1997 through February 20, 1998 were not
significant.
Foreign Operations and Export Sales
Foreign operations were not deemed significant for the period from April 1,
1997 through February 20, 1998. Export sales for the period from April 1, 1997
through February 20, 1998 were $15,528,000.
2. INCOME TAXES
For the period from April 1, 1997 through February 20, 1998, substantially
all of TCS' income before income taxes was derived from its U.S. operations.
Income tax expense (benefit) consisted of the following (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1997
THROUGH
FEBRUARY 20, 1998
-----------------
<S> <C>
Current:
U.S. Federal...................................... $ 7,220
State and foreign................................. 876
Deferred............................................ (1,825)
-------
Total..................................... $ 6,271
=======
</TABLE>
The actual income tax expense for each of the periods shown above differs
from the amount computed by applying the U.S. federal tax rate of 35% to income
before income taxes principally because of state income taxes.
3. EMPLOYEE BENEFITS
Defined Benefit Pension Plans and Defined Contribution Retirement Plan
Until January 1, 1996, substantially all of the TCS personnel participated
in a defined benefit pension plan sponsored by Tidewater. Tidewater's pension
benefits are based principally on years of service and
125
<PAGE> 7
TIDEWATER COMPRESSION SERVICE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
employee compensation. Beginning April 1996, TCS field service personnel, along
with all new employees of TCS eligible for pension plan membership, were
enrolled in a new, defined contribution retirement plan. Tidewater allocated
pension expense to TCS of approximately $282,000 for the period from April 1,
1997 through February 20, 1998.
Postretirement Benefits Other Than Pension
Tidewater sponsors a program which provides limited health care and life
insurance benefits to qualified retired employees. Costs of the program are
based on actuarially determined amounts and are accrued over the period from the
date of hire to the full eligibility date of employees who are expected to
qualify for these benefits. Tidewater has allocated postretirement health care
and life insurance expense to TCS of approximately $274,000 for the period from
April 1, 1997 through February 20, 1998.
4. COMMITMENTS AND CONTINGENCIES
Rent expense for the period from April 1, 1997 through February 20, 1998
was approximately $390,000. Commitments for future minimum lease payments were
not significant at February 20, 1998.
5. SUBSEQUENT EVENTS
On February 20, 1998, pursuant to the Stock Purchase Agreement, dated
December 18, 1997, between Tidewater and TW Acquisition Corporation
("Acquisition Corp."), the Acquisition Corp. acquired 100% of the voting
securities of TCS for a purchase price of approximately $350 million (the
"Acquisition"). Immediately following the Acquisition, Acquisition Corp. was
merged with and into TCS, which changed its name to Universal Compression, Inc.
126
