<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 June 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 Identification Nos.)
incorporation of organization)
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 August 4, 2000, there were 13,260,021 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.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
2000 2000
--------- ---------
(unaudited)
(in thousands, except share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,842 $ 1,403
Accounts receivable, net 16,125 17,267
Inventories 8,237 8,727
Current deferred tax asset 227 227
Other 1,140 1,571
--------- ---------
Total current assets 32,571 29,195
Property, plant and equipment
Rental equipment 316,872 349,198
Other 19,811 19,617
Accumulated depreciation (38,380) (38,466)
--------- ---------
Net property, plant and equipment 298,303 330,349
Goodwill, net of accumulated amortization 98,575 99,250
Other assets, net 9,028 7,570
Non-current deferred tax asset 7,337 3,578
--------- ---------
Total assets $ 445,814 $ 469,942
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 15,178 $ 17,780
Current portion of long-term debt 1,400 4,206
--------- ---------
Total current liabilities 16,578 21,986
Capital lease obligation 1,651 10,243
Long-term debt 186,750 363,036
Other liabilities 20,032 --
--------- ---------
Total liabilities 225,011 395,265
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 June 30, 2000 and March 31, 2000, respectively -- 13
Common stock, $.01 par value, 200,000,000 and
994,000 shares authorized, 13,270,494 and
330,032 shares issued, 13,257,332 and 329,724
shares outstanding at June 30, 2000 and March 31,
2000, respectively 133 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 June 30,
2000 and March 31, 2000, respectively -- --
Treasury stock, 13,162 and 2,450 shares at cost at
June 30, 2000 and March 31, 2000, respectively (132) (123)
Additional paid-in capital 239,643 82,697
Retained deficit (18,841) (7,913)
--------- ---------
Total stockholders' equity 220,803 74,677
--------- ---------
Total liabilities and stockholders' equity $ 445,814 $ 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 SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Rentals $ 26,274 $ 23,188
Sales 8,270 10,619
Other 216 1
--------- --------
Total revenues 34,760 33,808
Costs and expenses:
Rentals, exclusive of depreciation
and amortization 8,970 8,602
Cost of sales, exclusive of depreciation and amortization 6,548 9,102
Depreciation and amortization 7,498 5,617
Selling, general and administrative 3,455 4,538
Operating lease 689 --
Interest expense 8,004 7,946
Non-recurring charges 7,059 --
--------- --------
Total costs and expenses 42,223 35,805
--------- --------
Loss before income taxes and extraordinary items (7,463) (1,997)
Income tax benefit (2,799) (759)
--------- --------
Loss before extraordinary items $ (4,664) $ (1,238)
========= ========
Extraordinary loss, net of $3,759
income tax benefit 6,264 --
--------- --------
Net loss $ (10,928) $ (1,238)
========= ========
Weighted average common and common
equivalent shares outstanding:
Basic 8,817 --
--------- --------
Diluted 8,817 --
--------- --------
Earnings per share - basic:
Loss before extraordinary items $ (0.53) $ --
Extraordinary loss (0.71) --
--------- --------
Net loss $ (1.24) $ --
========= ========
Earnings per share - diluted:
Loss before extraordinary items $ (0.53) $ --
Extraordinary loss (0.71) --
--------- --------
Net loss $ (1.24) $ --
========= ========
</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>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (10,928) $ (1,238)
Adjustments to reconcile net loss to cash
provided from operating activities:
Depreciation and amortization 7,498 5,617
(Gain) loss on asset sales (93) 19
Amortization of debt issuance costs 329 290
Accretion of discount notes 5,055 4,853
Deferred income taxes (3,759) 0
Other 4,588 7,051
--------- ---------
Net cash provided by operating activities 2,690 16,592
Cash flows from investing activities:
Additions to property, plant and equipment, net (18,559) (10,171)
Capital leaseback of vehicles (334) (3,935)
Proceeds from sale of fixed assets 62,647 --
--------- ---------
Net cash provided by (used in) investing activities 43,754 (14,106)
Cash flows from financing activities:
Principal repayments of long-term debt (107,091) (188)
Net repayment under revolving line of credit (75,000) (4,900)
Net proceeds (repayment) on sale-leaseback of vehicles (68) 3,935
Net repayment of financing lease (10,580) --
Common stock issuance 157,063 --
Debt issuance costs (5,320) --
Treasury stock (9) (5)
--------- ---------
Net cash used in financing activities (41,005) (1,158)
Net increase in cash and cash equivalents 5,439 1,328
Cash and cash equivalents at beginning of period 1,403 2,927
--------- ---------
Cash and cash equivalents at end of period $ 6,842 $ 4,255
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
UNIVERSAL COMPRESSION HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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-month period
ended June 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 June 30, 2000, the Company
had a broad base of over 650 customers and operated a fleet of over 2,700
compression rental units with an aggregate capacity of approximately 707,000
horsepower. The Company operates in every significant natural gas producing
region in the United States through its 30 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.
EARNINGS PER SHARE
Basic and diluted earnings per share are computed using the weighted average
number of shares outstanding for the period. Diluted earnings per share 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. Earnings per share
information is not presented for the three months ended June 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.
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. 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
5
<PAGE> 6
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.
3. INVENTORIES
Inventories consisted of (in thousands):
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
2000 2000
-------- ---------
<S> <C> <C>
Finished goods $ 5,577 $ 5,551
Work-in-progress 2,660 3,176
------- -------
Total $ 8,237 $ 8,727
======= =======
</TABLE>
4. OPERATING LEASE FACILITY
In May 2000, the Company 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 received
approximately $63 million in proceeds from the initial sale of compression
equipment in May 2000, and may sell up to an additional $137 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 $43 million and the equipment sale resulted in a gain of
approximately $20 million that is being deferred until the end of the lease. The
Company has substantial residual value guarantees on the equipment under the
operating lease facility (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.
5. 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.
6. 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.
7. RELATED PARTY TRANSACTIONS
In connection with the initial public offering, 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 $3.0 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.
6
<PAGE> 7
8. 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. 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 represents primarily corporate
activities, part sales and services and all other items that could not be
allocated to an identifiable segment. The Corporate and Other 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 June 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>
June 30, 2000:
Revenues ................. $ 22,175 $ 4,099 $ 7,661 $ 825 $ 34,760
Gross margin ............. $ 14,245 $ 3,059 $ 1,522 $ 260 $ 19,086
Operating income ......... $ 5,703 $ 1,308 $ 921 $ (488) $ 7,444
June 30, 1999:
Revenues ................. $ 19,761 $ 3,426 $ 5,988 $ 4,633 $ 33,808
Gross margin ............. $ 12,018 $ 2,568 $ 576 $ 958 $ 16,120
Operating income ......... $ 4,246 $ 1,199 $ (99) $ 580 $ 5,926
</TABLE>
9. 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 June 30, 2000, Castle Harlan's
accreted investment was approximately $25.50 per share, which will continue to
grow at a compounded rate of 6.25% per quarter. As of June 30, 2000, no
liquidity event, as defined in the agreement, 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.
10. SUBSEQUENT EVENTS
In August 2000, the Company and Universal signed a definitive merger agreement
to acquire Gas Compression Services, Inc. ("GCSI"), a supplier of natural gas
compression equipment and services. Under the terms of the agreement, the
Company will acquire GCSI for a combination of $12 million in cash, shares of
the Company's common stock valued at $46 million, and the assumption of
approximately $53 million in debt and operating leases. The transaction will be
accounted for as a purchase. The transaction is subject to customary closing
conditions, including regulatory approvals, and is expected to be consummated by
the end of September 2000.
7
<PAGE> 8
UNIVERSAL COMPRESSION, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
2000 2000
----------- ----------
(unaudited)
(in thousands, except share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,842 $ 1,403
Accounts receivable, net 16,125 17,267
Inventories 8,237 8,727
Current deferred tax asset 227 227
Other 1,076 1,519
--------- ---------
Total current assets 32,507 29,143
Property, plant and equipment:
Rental equipment 316,872 349,198
Other 19,811 19,617
Accumulated depreciation (38,380) (38,466)
--------- ---------
Net property, plant and equipment 298,303 330,349
Goodwill, net of accumulated amortization 98,339 99,013
Other assets, net 9,028 6,878
Non-current deferred tax asset 2,999 962
--------- ---------
Total assets $ 441,176 $ 466,345
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 15,404 $ 17,780
Payable to parent 115,991 1,288
Current portion of long-term debt 1,400 4,206
--------- ---------
Total current liabilities 132,795 23,274
Capital lease obligation 1,651 10,243
Long-term debt 186,750 331,383
Other liabilities 20,032 --
--------- ---------
Total liabilities 341,228 364,900
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 (11,417) (3,735)
--------- ---------
Total stockholder's equity 99,948 101,445
--------- ---------
Total liabilities and stockholder's equity $ 441,176 $ 466,345
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
8
<PAGE> 9
UNIVERSAL COMPRESSION, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Rentals $ 26,274 $ 23,188
Sales 8,270 10,619
Other 216 1
-------- --------
Total revenues 34,760 33,808
Costs and expenses:
Rentals, exclusive of depreciation
and amortization 8,970 8,602
Cost of sales, exclusive of
depreciation and amortization 6,548 9,102
Depreciation and amortization 7,496 5,615
Selling, general and administrative 3,455 4,538
Operating lease 689 --
Interest expense 7,406 7,132
Non-recurring charges 7,059 --
-------- --------
Total costs and expenses 41,623 34,989
-------- --------
Loss before income taxes and extraordinary items (6,863) (1,181)
Income tax benefit (2,574) (449)
-------- --------
Loss before extraordinary items $ (4,289) $ (732)
======== ========
Extraordinary loss, net of $2,037 income tax benefit 3,393 --
-------- --------
Net loss $ (7,682) $ (732)
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
9
<PAGE> 10
UNIVERSAL COMPRESSION, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,682) $ (732)
Adjustments to reconcile net loss to cash
provided from operating activities:
Depreciation and amortization 7,496 5,615
(Gain) loss on asset sales (93) 19
Amortization of debt issuance costs 314 268
Accretion of discount notes 4,472 4,060
Increase (decrease) in payable to parent 114,703 (16)
Deferred income taxes (2,037) 0
Other 4,150 7,373
---------- ---------
Net cash provided by operating activities 121,323 16,587
Cash flows from investing activities:
Additions to property, plant and equipment, net (18,559) (10,171)
Capital leaseback of vehicles (334) (3,935)
Proceeds from sale of fixed assets 62,647 --
---------- ---------
Net cash provided by (used in) investing activities 43,754 (14,106)
Cash flows from financing activities:
Principal repayments of long-term debt (74,855) (188)
Net repayment under revolving line of credit (75,000) (4,900)
Net proceeds (repayment) on sale-leaseback of vehicles (68) 3,935
Net repayment of financing lease (10,580) --
Acquisition 6,185 --
Debt issuance costs (5,320) --
---------- ---------
Net cash used in financing activities (159,638) (1,153)
Net increase in cash and cash equivalents 5,439 1,328
Cash and cash equivalents at beginning of period 1,403 2,927
---------- ---------
Cash and cash equivalents at end of period $ 6,842 $ 4,255
========== =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
10
<PAGE> 11
UNIVERSAL COMPRESSION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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-month period ended June 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 June 30, 2000, Universal
had a broad base of over 650 customers and operated a fleet of over 2,700
compression rental units with an aggregate capacity of approximately 707,000
horsepower. Universal operates in every significant natural gas producing region
in the United States through its 30 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. 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.
3. INVENTORIES
Inventories consisted of (in thousands):
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
2000 2000
-------- ---------
<S> <C> <C>
Finished goods $ 5,577 $ 5,551
Work-in-progress 2,660 3,176
------- -------
Total $ 8,237 $ 8,727
======= =======
</TABLE>
4. OPERATING LEASE FACILITY
In May 2000, 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 received
approximately $63
11
<PAGE> 12
million in proceeds from the initial sale of compression equipment in May 2000,
and may sell up to an additional $137 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 $43 million and
the equipment sale resulted in a gain of approximately $20 million that is being
deferred until the end of the lease. Universal has substantial residual value
guarantees on the equipment under the operating lease facility (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.
5. 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.
6. 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.
7. RELATED PARTY TRANSACTIONS
In connection with the initial public offering, Universal 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, Universal paid $3.0 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.
8. 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 asset sales and interest
income plus interest 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 of asset sales and interest
income. The Corporate and Other segment represents primarily corporate
activities, part sales and services and all other items that could not be
allocated to an identifiable segment. The Corporate and Other 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 June 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>
June 30, 2000:
Revenues ............. $ 22,175 $ 4,099 $ 7,661 $ 825 $ 34,760
Gross margin ......... $ 14,245 $ 3,059 $ 1,522 $ 260 $ 19,086
Operating income ..... $ 5,703 $ 1,308 $ 921 $ (486) $ 7,446
June 30, 1999:
Revenues ............. $ 19,761 $ 3,426 $ 5,988 $ 4,633 $ 33,808
Gross margin ......... $ 12,018 $ 2,568 $ 576 $ 958 $ 16,120
Operating income ..... $ 4,246 $ 1,199 $ (99) $ 582 $ 5,928
</TABLE>
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9. 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.
10. SUBSEQUENT EVENTS
In August 2000, the Company and Universal signed a definitive merger agreement
to acquire Gas Compression Services, Inc. ("GCSI"), a supplier of natural gas
compression equipment and services. Under the terms of the agreement, the
Company will acquire GCSI by merger into Universal for a combination of $12
million in cash, shares of the Company's common stock valued at $46 million and
the assumption of approximately $53 million in debt and operating leases. The
transaction will be accounted for as a purchase. The transaction is subject to
customary closing conditions, including regulatory approvals, and is expected to
be consummated by the end of September 2000.
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, the Company's pending merger transaction, 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) conditions in the
oil and gas industry, including the price of oil and natural gas and the demand
for natural gas, (2) competition among the various providers of contract
compression services, (3) changes in safety and environmental regulations
pertaining to the production and transportation of natural gas, (4) changes in
economic or political conditions in the markets in which the Company operates,
and (5) introduction of competing technologies by other companies. The
forward-looking statements included herein are only made as of the date of this
report and the Company undertakes no obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances.
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.
UNIVERSAL COMPRESSION HOLDINGS, INC.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Revenues. The Company's total revenues for the three months ended June 30, 2000
increased $1.0 million to $34.8 million compared to $33.8 million for the three
months ended June 30, 1999. Rental revenue increased by $3.1 million, or 13%, to
$26.3 million during the three months ended June 30, 2000 from $23.2 million
during the three months ended June 30, 1999. Domestic rental revenue increased
by $2.4 million, or 12%, to $22.2 million during the three months ended June 30,
2000 from $19.8 million during the three
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months ended June 30, 1999. International rental revenue increased by $0.7
million, or 21%, to $4.1 million during the three months ended June 30, 2000
from $3.4 million during the three months ended June 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 June 30, 2000 increased by 21% to approximately 492,000 horsepower
from approximately 407,000 horsepower for the three months ended June 30, 1999.
In addition, international average rented horsepower for the three months ended
June 30, 2000 increased by 33% to approximately 53,000 horsepower from
approximately 40,000 horsepower for the three months ended June 30, 1999,
primarily through additional service in Argentina and Colombia. The Company's
average horsepower utilization rate for the quarter ended June 30, 2000, was
approximately 84.3%, up from 78.4% in the same quarter a year ago. At the end of
the quarter the Company had approximately 653,000 available horsepower with
another 54,000 horsepower operated and maintained for customers. Revenue from
fabrication and sales decreased to $8.3 million from $10.6 million, a decrease
of 22%. The decline in sales revenue, consisting mostly of equipment fabrication
and parts sales, for the first fiscal quarter was due primarily to the impact in
the prior-year period of an equipment sale option exercised by a rental customer
and the sale of a small air compression distributorship. These two events
totaled $3.6 million. Excluding these transactions, equipment and parts sales
revenues in the first quarter of the current year increased $1.2 million over
the same period a year earlier. The backlog of fabrication projects at the end
of the first quarter was approximately $18.4 million, compared with a backlog of
$12.3 million at the same time a year earlier.
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 June 30, 2000 increased $3.0
million, or 19%, to $19.1 million from gross margin of $16.1 million for the
three months ended June 30, 1999. The rental gross margin for the three months
ended June 30, 2000 increased $2.7 million, or 18%, to $17.3 million compared to
gross margin of $14.6 million for the three months ended June 30, 1999. Gross
margin increased primarily as the result of the rental revenue growth discussed
above, while rental margins increased to approximately 66% for the three months
ended June 30, 2000 compared to approximately 63% for the three months ended
June 30, 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended June 30, 2000 decreased $1.1
million compared to the three months ended June 30, 1999. As a percentage of
revenue, selling, general and administrative expenses represented 10% of
revenues for the three months ended June 30, 2000 compared to 13% of revenues
for the three months ended June 30, 1999. The decrease is primarily due to the
elimination of management fees paid during the three months ended June 30, 2000
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.
EBITDA for the three months ended June 30, 2000 increased 27% to $15.7 million
from $12.4 million for the three months ended June 30, 1999, primarily due to
increases in horsepower and utilization of the compression rental fleet in
addition to 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 $1.9
million to $7.5 million during the three months ended June 30, 2000, compared to
$5.6 million during the three months ended June 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 $0.7 million during the
three months ended June 30, 2000 resulting from the new operating lease facility
entered into in May 2000.
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Interest Expense. Interest expense increased $0.1 million to $8.0 million for
the three months ended June 30, 2000 from $7.9 million for the three months
ended June 30, 1999, primarily as a result of increased borrowings under the
revolving credit facility, increased accretion of discount notes, the financing
lease and increased interest rates. The increase in interest expense was offset
partially by the reduction of debt resulting from the Company's initial public
offering and related debt restructuring.
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 $10.9 million for the three months ended
June 30, 2000 compared to a net loss of $1.2 million for the three months ended
June 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. Excluding the effect of
the non-recurring and extraordinary after-tax charges, the Company's net loss
for the fiscal 2001 first quarter was $252,000.
LIQUIDITY AND CAPITAL RESOURCES
In May 2000, concurrently with the Company's initial public offering, the
Company entered into a $200 million, five-year operating lease facility (the
"Operating Lease Facility") arranged by Deutsche Bank Securities Inc. The
transaction has been structured as a sale and lease back of compression
equipment to a trust formed by Deutsche Bank AG (the "Trust"). Under the
Operating Lease Facility, certain of the compression equipment was sold to the
Trust for approximately $63 million and leased back by the Company for a
five-year period and the Company may sell an additional $137 million of
equipment to the Trust through November 2001. The compression equipment will
continue to be deployed by the Company under its 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 $43
million and the equipment sale resulted in a gain of approximately $20 million,
which is being deferred until the end of the lease. As of June 30, 2000, the
rate for the rental payments under the Operating Lease Facility was
approximately 9.5%.
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 our option
at a base rate or LIBOR plus, in each case, a variable amount depending on our
operating results. The revolver is secured by a lien on all of our personal
property that is not subject to our new Operating Lease Facility. The revolver
contains limitations on our ability to enter into acquisition and sales
transactions, incur additional indebtedness and place additional liens on our
assets. Although we are able to borrow the full amount of the commitment under
the new revolver, as of June 30, 2000, no amounts were outstanding. Universal is
the borrower, and one of its subsidiaries, together with the Company, is a
guarantor under the Credit Agreement.
The Company's cash and cash equivalents balance at June 30, 2000 was $6.8
million compared to $1.4 million at March 31, 2000. For the three months ended
June 30, 2000, the Company generated cash flow from operations of $2.7 million,
received $62.6 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 $19.3 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. See Part II, Item 2, "Changes in Securities and Use
of Proceeds" in this report for more information.
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.
The Company expects to expend approximately $75 million on capital projects
during fiscal 2001. 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 fund
working capital needs and to meet required principal and interest payments on
debt obligations.
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<PAGE> 16
The successful completion of the Company's initial public offering of its
common stock and financing and operating lease arrangements during the 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 new 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.
UNIVERSAL COMPRESSION, INC.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Revenues. Universal Compression Inc.'s ("Universal") total revenues for the
three months ended June 30, 2000 increased $1.0 million to $34.8 million
compared to $33.8 million for the three months ended June 30, 1999. Rental
revenue increased by $3.1 million, or 13%, to $26.3 million during the three
months ended June 30, 2000 from $23.2 million during the three months ended June
30, 1999. Domestic rental revenue increased by $2.4 million, or 12%, to $22.2
million during the three months ended June 30, 2000 from $19.8 million during
the three months ended June 30, 1999. International rental revenue increased by
$0.7 million, or 21%, to $4.1 million during the three months ended June 30,
2000 from $3.4 million during the three months ended June 30, 1999. The increase
in both domestic and international rental revenue primarily resulted from
expansion of the Universal's rental fleet. Domestic average rented horsepower
for the three months ended June 30, 2000 increased by 21% to approximately
492,000 horsepower from approximately 407,000 horsepower for the three months
ended June 30, 1999. In addition, international average rented horsepower for
the three months ended June 30, 2000 increased by 33% to approximately 53,000
horsepower for the three months ended June 30, 2000 from approximately 40,000
horsepower for the three months ended June 30, 1999, primarily through
additional service in Argentina and Colombia. Universal's average horsepower
utilization rate for the quarter ended June 30, 2000, was approximately 84.3%,
up from 78.4% in the same quarter a year ago. At the end of the quarter,
Universal had approximately 653,000 available horsepower with another 54,000
horsepower operated and maintained for customers. Revenue from fabrication and
sales decreased to $8.3 million from $10.6 million, a decrease of 22%. The
decline in sales revenue, consisting mostly of equipment fabrication and parts
sales, for the first fiscal quarter was due primarily to the impact in the
prior-year period of an equipment sale option exercised by a rental customer and
the sale of a small air compression distributorship. These two events totaled
$3.6 million. Excluding these transactions, equipment and parts sales revenues
in the first quarter of the current year increased $1.2 million over the same
period a year earlier. The backlog of fabrication projects at the end of the
first quarter was approximately $18.4 million, compared with a backlog of $12.3
million at the same time a year earlier.
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 June 30, 2000 increased $3.0
million, or 19%, to $19.1 million from gross margin of $16.1 million for the
three months ended June 30, 1999. The rental gross profit for the three months
ended June 30, 2000 increased $2.7 million, or 18%, to $17.3 million compared to
gross margin of $14.6 million for the three months ended June 30, 1999. Gross
margin increased primarily as the result of the rental revenue growth discussed
above, while rental margins increased to approximately 66% for the three months
ended June 30, 2000 compared to approximately 63% for the three months ended
June 30, 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended June 30, 2000 decreased $1.1
million compared to the three months ended June 30, 1999. As a percentage of
revenue, selling, general and administrative expenses represented 10% of
revenues for the three months ended June 30, 2000 compared to 13% of revenues
for the three months ended June 30, 1999. The decrease is primarily due to the
elimination of management fees paid during the three months ended June 30, 2000
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.
EBITDA for the three months ended June 30, 2000 increased 27% to $15.7 million
from $12.4 million for the three months ended June 30, 1999, primarily due to
increases in horsepower and utilization of the compression rental fleet in
addition to 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
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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 $1.9
million to $7.5 million during the three months ended June 30, 2000 compared to
$5.6 million during the three months ended June 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 $0.7 million during the
three months ended June 30, 2000 resulting from the Operating Lease Facility
entered into in May 2000.
Interest Expense. Interest expense increased $0.3 million to $7.4 million for
the three months ended June 30, 2000 from $7.1 million for the three months
ended June 30, 1999, primarily as the result of increased borrowings under the
revolving credit facility, increased accretion of discount notes, the financing
lease and increased interest rates. The increase in interest expense was offset
partially by the reduction of debt resulting from the Company's initial public
offering and related debt restructuring.
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 $7.7 million for the three months ended
June 30, 2000 compared to a net loss of $0.7 million for the three months ended
June 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,
interest expense increasing from $7.1 million to $7.4 million, increased
depreciation and amortization related to the continued expansion of Universal's
assets and the factors discussed above.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to some market risk due to the floating interest rate
under the new 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 June 30, 2000 of $0 and $62.6
million, respectively. The LIBOR rate at June 30, 2000 was 6.65%. A 1.0%
increase in interest rates could result in a $0.6 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 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 June 30, 2000, the Company issued the following equity
securities that were not registered under the Securities Act of 1933, as
amended: (A) on April 28, 2000, 17,201 shares of common stock and 68,804 shares
of preferred stock to Energy Spectrum Partners LP in connection with the
Company's acquisition of all of the outstanding capital stock of Spectrum Rotary
Compression, Inc. (which shares were subsequently converted into an aggregate of
287,723 shares of common stock by virtue of the Company's initial public
offering and related recapitalization); and (B) on May 30, 2000, (i) 136,364
shares of common stock to Castle
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Harlan, Inc. with respect to the early termination of its Management Agreement
with the Company in connection with the initial public offering, (ii) 6,818
shares of common stock to Samuel Urcis, a director of the Company, with respect
to the early termination of his Finders and Consulting Agreement with the
Company in connection with the initial public offering and (iii) 13,636 shares
of common stock to Ernie L. Danner, a director and officer of the Company, in
connection with his services relating to the initial public offering. 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 and
disclosed in the Company's Registration Statement on Form S-1, which was
declared effective on May 23, 2000.
USE OF PROCEEDS FROM INITIAL PUBLIC OFFERING
On April 5, 2000, the Company filed a Registration Statement on Form S-1 (File
No. 333-34090) relating to the initial public offering of its common stock. On
May 23, 2000, the Company's Registration Statement on Form S-1 relating to its
initial public offering was declared effective. The Company initially sold
7,000,000 shares of its common stock in the offering, which closed on May 30,
2000. The public offering price was $22.00 per share, and the underwriting
discount was $1.485 per share. The net proceeds to the Company from the initial
offering, after deducting underwriting discounts and commissions, were
approximately $143.6 million. Concurrently with the closing of the initial
public offering, the Company entered into a new revolving credit facility and
the Operating Lease Facility.
On June 2, 2000, the underwriters for the initial public offering exercised a
portion of the over-allotment option granted to them by the Company in
connection with the offering. On June 7, 2000, the Company issued and sold an
additional 275,000 shares of its common stock pursuant to this option. The net
proceeds to the Company from the issuance of the over-allotment shares, after
deducting underwriting discounts and commissions, were approximately $5.6
million.
The $149.2 million in total net proceeds to the Company from the initial public
offering (including the issuance of the over-allotment shares) and the $62.6
million in initial proceeds to the Company from the Operating Lease Facility
were used as follows: $148.3 million was used to repay all outstanding
indebtedness under the Company's term loan and revolving credit facility; $32.2
million was used to redeem all of the Company's outstanding 11 3/8% Senior
Discount Notes; $10.6 million was used to repay all indebtedness under the
Company's Colombian financing lease that was entered into in July 1999; and the
remaining proceeds were used for working capital and to pay expenses associated
with the offering and the concurrent financing transactions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In lieu of a special meeting of stockholders, on or about May 1, 2000,
resolutions were duly adopted by written consent of a majority of the Company's
stockholders entitled to vote on the following matters: (i) amending and
restating the Company's existing certificate of incorporation (as amended and
restated, the "Restated Certificate of Incorporation"), a copy of which is filed
as Exhibit 3.1 to this report, which included an increase to the authorized
common stock and preferred stock and a recapitalization of the outstanding
capital stock of the Company in connection with of the Company's initial public
offering; (ii) amending the Company's existing Incentive Stock Option Plan (a)
to modify certain definitions, (b) to allow for adjustment of shares subject to
outstanding options and reserved under such plan in connection with the
recapitalization of the Company's capital stock, and (c) to increase the number
of shares reserved thereunder as well as to approve stock option grants
thereunder; (iii) amending the Company's bylaws to provide for a staggered board
with three classes of directors; (iv) implementing the classified board of
directors and electing to the Board of Directors (a) C. Kent May and Thomas C.
Case to Class A to serve for the ensuing year, (b) Ernie L. Danner and Stephen
A. Snider to Class B to serve for the next two years, and (c) John K. Castle,
Samuel Urcis, and William Pruellage to Class C to serve for the next three
years; and (v) appointing the independent auditors of the Company. The foregoing
directors account for all of the directors on the Board of Directors.
In lieu of a special meeting of stockholders, on or about May 16, 2000,
resolutions were duly adopted by written consent of a majority of the Company's
stockholders entitled to vote on an amendment to the Company's Incentive Stock
Option Plan to modify the terms and conditions under which an option may be
granted and exercised. The stockholders of the 346,925 shares of the Company's
voting common stock and 1,387,700 shares of the Company's preferred stock
unanimously approved such matters pursuant to such written consent.
On or about May 18, 2000, a majority of the Company stockholders representing
1,720 shares of our 3,050 outstanding shares of non-voting common stock approved
the Restated Certificate of Incorporation pursuant to a written consent in lieu
of special meeting with the remainder of such shares not voting.
18
<PAGE> 19
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
3.1 -- Restated Certificate of Incorporation of Universal
Compression Holdings, Inc.
3.2 -- Restated Bylaws of Universal Compression Holdings, Inc.
10.1 -- Participation Agreement, dated May 30, 2000, among Universal
Compression, Inc., Universal Compression Holdings, Inc.,
Wilmington Trust Company, as Trustee and in its individual
capacity, Deutsche Bank AG, New York Branch, and the other
Certificate Holders party thereto, Bankers Trust Company, as
Administrative Agent and Collateral Agent, and the Lenders
party thereto.
10.2 -- Master Equipment Lease Agreement, dated May 30, 2000, between
Wilmington Trust Company, as Trustee, and Universal
Compression, Inc.
10.3 -- Loan Agreement, dated May 30, 2000, among Wilmington Trust
Company, as Trustee, Bankers Trust Company, as Administrative
Agent and Collateral Agent, and the Lenders party thereto.
10.4 -- Assembly Agency Agreement, dated May 30, 2000, between
Wilmington Trust Company, as Trustee, and Universal
Compression, Inc.
10.5 -- Trust Agreement, dated May 25, 2000, between the Certificate
Holders and Wilmington Trust Company, as Trustee.
10.6 -- Credit Agreement, dated May 30, 2000, among Universal
Compression Holdings, Inc., Universal Compression, Inc.,
Deutsche Bank Securities, Inc., as Lead Arranger, Bankers
Trust Company, as Administrative Agent, and the lenders party
thereto.
10.7 -- Security Agreement, dated May 30, 2000, among Universal
Compression Holdings, Inc., Universal Compression, Inc.,
certain of its subsidiaries and Bankers Trust Company, as
Collateral Agent.
10.8 -- Pledge Agreement, dated May 30, 2000, among Universal
Compression Holdings, Inc., Universal Compression, Inc., and
Bankers Trust Company, as Collateral Agent.
10.9 -- Subsidiaries Guaranty, dated May 30, 2000, by Universal
Compression International, Inc. in favor of Bankers Trust
Company, as Administrative Agent.
27.1 -- Financial Data Schedule - Universal Compression Holdings, Inc.
27.2 -- Financial Data Schedule - Universal Compression, Inc.
19
<PAGE> 20
(b) Reports on Form 8-K.
Four reports were filed on Form 8-K during the first fiscal quarter of 2000:
o The Company and Universal filed a Current Report on Form 8-K on April 7,
2000 to report under Item 5 the filing on April 5, 2000 of a registration
statement on Form S-1 (Reg. No. 333-34090) for the proposed public offering
of the Company's common stock.
o The Company and Universal filed a Current Report on Form 8-K on May 5, 2000
to report under Item 5 the filing on May 3, 2000 of an amendment to the
Company's registration statement on Form S-1 (Reg. No. 333-34090), which
included financial statements for the fiscal year ended March 31, 2000.
o The Company and Universal filed a Current Report on Form 8-K on June 2,
2000 to report under Item 5 the issuance of a press release on May 24, 2000
and on May 31, 2000 announcing the Company's initial public offering of
7,000,000 shares of its common stock at $22.00 per share, and the
concurrent closing of a new $200.0 million operating lease facility and
$50.0 million revolving credit facility.
o The Company and Universal filed a Current Report on Form 8-K on June 8,
2000 to report under Item 5 the issuance of a press release on June 8, 2000
announcing the issuance of an additional 275,000 shares of the Company's
common stock at $22.00 per share to cover over-allotments relating to its
initial public offering.
In addition, 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, which contemplates the acquisition of all the outstanding capital stock
of Gas Compression Services, Inc. ("GCSI") and certain additional assets through
GCSI's merger with and into Universal Compression, Inc.
20
<PAGE> 21
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: August 11, 2000 By: /s/ RICHARD W. FITZGERALD
-----------------------------------------
Richard W. FitzGerald,
Chief Financial Officer and
Senior Vice President
21
<PAGE> 22
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: August 11, 2000 By: /s/ RICHARD W. FITZGERALD
-----------------------------------------
Richard W. FitzGerald,
Chief Financial Officer and
Senior Vice President
22
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
3.1 -- Restated Certificate of Incorporation of Universal
Compression Holdings, Inc.
3.2 -- Restated Bylaws of Universal Compression Holdings, Inc.
10.1 -- Participation Agreement, dated May 30, 2000, among Universal
Compression, Inc., Universal Compression Holdings, Inc.,
Wilmington Trust Company, as Trustee and in its individual
capacity, Deutsche Bank AG, New York Branch, and the other
Certificate Holders party thereto, Bankers Trust Company, as
Administrative Agent and Collateral Agent, and the Lenders
party thereto.
10.2 -- Master Equipment Lease Agreement, dated May 30, 2000, between
Wilmington Trust Company, as Trustee, and Universal
Compression, Inc.
10.3 -- Loan Agreement, dated May 30, 2000, among Wilmington Trust
Company, as Trustee, Bankers Trust Company, as Administrative
Agent and Collateral Agent, and the Lenders party thereto.
10.4 -- Assembly Agency Agreement, dated May 30, 2000, between
Wilmington Trust Company, as Trustee, and Universal
Compression, Inc.
10.5 -- Trust Agreement, dated May 25, 2000, between the Certificate
Holders and Wilmington Trust Company, as Trustee.
10.6 -- Credit Agreement, dated May 30, 2000, among Universal
Compression Holdings, Inc., Universal Compression, Inc.,
Deutsche Bank Securities, Inc., as Lead Arranger, Bankers
Trust Company, as Administrative Agent, and the lenders party
thereto.
10.7 -- Security Agreement, dated May 30, 2000, among Universal
Compression Holdings, Inc., Universal Compression, Inc.,
certain of its subsidiaries and Bankers Trust Company, as
Collateral Agent.
10.8 -- Pledge Agreement, dated May 30, 2000, among Universal
Compression Holdings, Inc., Universal Compression, Inc., and
Bankers Trust Company, as Collateral Agent.
10.9 -- Subsidiaries Guaranty, dated May 30, 2000, by Universal
Compression International, Inc. in favor of Bankers Trust
Company, as Administrative Agent.
27.1 -- Financial Data Schedule - Universal Compression Holdings, Inc.
27.2 -- Financial Data Schedule - Universal Compression, Inc.
</TABLE>
