<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for
Use of the
Commission Only (as
permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
UNIVERSAL COMPRESSION HOLDINGS, INC.
--------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
$414,810,000 *
* The filing fee is calculated by multiplying 1/50 of 1% by the book
value, as of September 30, 2000 (the latest practicable date before
the date of this filing), of the business being acquired plus the
net amount of debt, as of September 30, 2000, of the business being
acquired that will be eliminated as of the time of the acquisition.
(4) Proposed maximum aggregate value of transaction: $414,810,000 *
(5) Total fee paid: $82,962 *
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
[Universal Compression logo]
UNIVERSAL COMPRESSION HOLDINGS, INC.
4440 Brittmoore Road
Houston, Texas 77041
December 27, 2000
Dear Shareholder:
We cordially invite you to attend an important special meeting of the
shareholders of Universal Compression Holdings, Inc., to be held on Tuesday,
February 6, 2001 at 10:00 a.m., local time, at the Drury Inn, 100 Highway 6,
Houston, Texas 77079.
Attached is the Notice of Meeting and the Proxy Statement, which describes
in detail the matters that you will be asked to vote on. At the special meeting,
you will be asked to vote on a proposal to issue 13,750,000 shares of our common
stock to WEUS Holding, Inc., a wholly owned subsidiary of Weatherford
International, Inc., in connection with our acquisition of Weatherford Global
Compression Services, L.P., a joint venture formed by Weatherford and General
Electric Capital Corporation, and certain related entities. Immediately prior to
the merger, Enterra Compression Company, a wholly owned subsidiary of WEUS and
the owner of Weatherford's interest in the joint venture, will acquire GE
Capital's interest in the joint venture. Enterra will then merge with and into
Universal Compression, Inc., a wholly owned subsidiary of Universal Compression
Holdings, Inc. As a result of the merger, we will acquire, through Universal
Compression, Inc., our operating subsidiary, 100% of Weatherford Global, and
WEUS will own approximately 48% of our common stock, subject to a voting
agreement described in the Proxy Statement.
You will also be asked to approve an amendment to Universal's Incentive
Stock Option Plan to increase the number of shares of common stock authorized
for issuance under the Plan, which will include a sufficient amount of shares to
cover options to be issued to new Universal employees as a result of the merger.
Our board of directors has carefully considered the terms and conditions of
the proposed merger and has unanimously determined that the merger is fair to
and in the best interest of our shareholders. Our board has unanimously approved
the issuance of the 13,750,000 additional shares to WEUS and the amendment to
increase the shares available for issuance under our Incentive Stock Option
Plan. The merger is subject to a number of conditions, including regulatory
approvals and approval by our shareholders of the share issuance.
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE
PROPOSED ISSUANCE OF 13,750,000 SHARES OF OUR COMMON STOCK IN THE MERGER AND FOR
THE PROPOSED AMENDMENT TO OUR INCENTIVE STOCK OPTION PLAN.
The Proxy Statement contains additional information regarding the proposed
merger and related issuance of shares and their effects on Universal. I
encourage you to read this document carefully.
It is important that your shares be represented at the special meeting,
either in person or by proxy. Please take the time to vote and complete, sign
and date the enclosed proxy card and return it in the enclosed postage prepaid
envelope or follow the telephone or Internet voting instructions set forth on
the proxy card. If you attend the special meeting, you may vote in person if you
wish, even if you have previously returned your proxy card. We appreciate your
cooperation.
/s/ STEPHEN A. SNIDER
Stephen A. Snider
President and Chief Executive
Officer
<PAGE> 3
UNIVERSAL COMPRESSION HOLDINGS, INC.
4440 BRITTMOORE ROAD
HOUSTON, TEXAS 77041
---------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 6, 2001
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Universal
Compression Holdings, Inc. will be held on Tuesday, February 6, 2001, at 10:00
a.m., local time, at the Drury Inn, 100 Highway 6, Houston, Texas 77079, for the
following purposes:
(1) To approve the issuance of 13,750,000 shares of our common stock
to WEUS Holding, Inc. in connection with our acquisition of Weatherford
Global Compression Services, L.P. and certain related entities by way of a
merger of Enterra Compression Company, a wholly owned subsidiary of WEUS,
with and into Universal Compression, Inc., our wholly owned subsidiary;
(2) To approve an amendment to our Incentive Stock Option Plan to
increase the number of shares of our common stock authorized for issuance
under the Plan from 1,912,421 shares to 3,012,421 shares which will include
a sufficient number to cover new employees of Universal as a result of the
merger; and
(3) To transact such other business as may properly come before the
Special Meeting or any adjournment or postponement thereof.
The merger cannot be consummated unless the issuance of shares in the
merger is approved by our shareholders. The approval of the issuance of shares
to WEUS in the merger and the approval of the amendment to our Incentive Stock
Option Plan require the affirmative vote of a majority of the votes cast,
provided that at least a majority of the shares entitled to vote at the special
meeting cast a vote.
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE TO APPROVE THE
PROPOSED ISSUANCE OF OUR SHARES IN THE MERGER AND THE PROPOSED AMENDMENT TO OUR
INCENTIVE STOCK OPTION PLAN. FOR A DETAILED DESCRIPTION OF THE PROPOSALS, PLEASE
READ THE ACCOMPANYING PROXY STATEMENT.
Only holders of record of our common stock as of the close of business on
December 8, 2000 are entitled to notice of and to vote at the Special Meeting
and any adjournments or postponements thereof. A list of shareholders entitled
to vote at the Special Meeting will be available at the Special Meeting for
examination by any shareholder, or his or her agent or attorney.
Your attention is directed to the proxy statement and the other documents
submitted with this Notice.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ STEPHEN A. SNIDER
Stephen A. Snider
President and Chief Executive
Officer
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, YOU ARE
URGED TO DATE, SIGN AND RETURN PROMPTLY THE ENCLOSED PROXY IN THE ACCOMPANYING
ENVELOPE. YOU MAY REVOKE SUCH PROXY AT ANY TIME PRIOR TO ITS EXERCISE IN THE
MANNER DESCRIBED IN THE ACCOMPANYING DOCUMENT. YOU MAY ALSO VOTE YOUR SHARES VIA
TELEPHONE OR THE INTERNET BY FOLLOWING THE INSTRUCTIONS ON THE ENCLOSED PROXY
CARD.
This notice and the proxy statement are dated December 27, 2000. We are
first mailing these documents to our shareholders on December 29, 2000.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Questions and Answers About the Merger...................... 1
Summary..................................................... 3
The Companies............................................. 3
The Universal Special Meeting............................. 4
Record Date; Voting Power.............................. 4
Vote Required.......................................... 4
Proxies................................................ 5
Castle Harlan Stockholders' Agreement.................. 5
Share Ownership of Management and Directors............ 5
Reasons for the Merger................................. 5
Recommendations of Universal's Board of Directors...... 5
Opinion of Universal's Financial Advisor............... 5
The Merger................................................ 6
Conditions to the Merger............................... 6
Our Board of Directors and Management Following the
Merger................................................ 6
Interests of Certain Persons in the Merger............. 6
Required Regulatory Filings and Approvals.............. 7
Certain U.S. Federal Income Tax Consequences of the
Merger................................................ 7
No Appraisal Rights.................................... 7
Accounting Treatment................................... 7
Termination of the Merger Agreement.................... 7
Related Agreements..................................... 8
Stockholders' Agreement.............................. 8
Registration Rights Agreement........................ 8
Voting Agreement..................................... 8
Transitional Services Agreement...................... 8
Market Price and Dividend Information.................. 8
Selected Historical Consolidated Financial Data of Universal
Compression Holdings, Inc. and Subsidiaries............... 10
Selected Historical Combined and Consolidated Financial Data
of Enterra Compression Company............................ 15
Selected Unaudited Pro Forma Combined Condensed Financial
Information of Universal Compression Holdings, Inc........ 17
Risk Factors................................................ 18
Cautionary Statement Concerning Forward-Looking
Information............................................... 22
Management's Discussion and Analysis of Financial Condition
and Results of Operations of Universal.................... 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations of Enterra...................... 33
Unaudited Pro Forma Combined Condensed Financial
Information............................................... 43
The Special Meeting......................................... 51
The Merger.................................................. 54
Background of the Merger.................................. 54
Universal's Reasons for the Merger; Recommendation of
Universal's Board of Directors......................... 55
Opinion of Universal's Financial Advisor.................. 57
Analysis of Merrill Lynch................................. 58
Merrill Lynch Financial Advisor Fee....................... 61
Certain U.S. Federal Income Tax Consequences of the
Merger................................................. 61
Required Regulatory Filings and Approvals................. 61
Restricted Shares......................................... 62
Our Board of Directors and Management Following the
Merger................................................. 62
Interests of Certain Persons in the Merger................ 62
Option Grants to Weatherford Global Employees............. 63
</TABLE>
i
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
No Appraisal Rights....................................... 63
Accounting Treatment...................................... 63
The Merger Agreement........................................ 64
Structure of the Merger................................... 64
Consideration for the Merger.............................. 64
Representations and Warranties............................ 64
Conduct of Business Prior to the Merger................... 66
Certain Pre-Closing Transfers............................. 66
Related Agreements........................................ 66
Restricted Shares of Universal Common Stock............... 67
Conditions to the Merger.................................. 67
Termination Rights........................................ 68
Termination Fee........................................... 69
Indemnification Rights.................................... 69
Amendment and Waiver...................................... 69
Related Agreements.......................................... 71
Stockholders' Agreement................................... 71
Registration Rights Agreement............................. 71
Voting Agreement.......................................... 72
Transitional Services Agreement........................... 72
Market Price and Dividend Information....................... 73
Historical Market Price Data.............................. 73
Dividend Information...................................... 73
Business of Universal....................................... 74
Background................................................ 74
Overview.................................................. 74
Our Growth Strategy....................................... 75
Industry.................................................. 77
Operations................................................ 80
Backlog................................................... 83
Geographic Segments....................................... 83
Employees................................................. 83
Competition............................................... 83
Governmental Regulation................................... 84
Markets and Customers..................................... 85
Legal Proceedings......................................... 85
Business of Weatherford Global.............................. 86
Background................................................ 86
Overview.................................................. 86
Operations................................................ 87
Facilities................................................ 87
Capital Expenditures...................................... 87
Markets and Customers..................................... 88
Backlog................................................... 88
Competition............................................... 88
Employees................................................. 88
Federal Regulation and Environmental Matters.............. 89
Legal Proceedings......................................... 89
Amendment to Universal's Incentive Stock Option Plan........ 90
Proposed Amendment........................................ 90
Description of Amendment.................................. 90
Board Recommendation...................................... 90
Executive Compensation...................................... 91
Employment Agreements..................................... 93
</TABLE>
ii
<PAGE> 6
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Change of Control Agreements.............................. 93
Incentive Stock Option Plan............................... 93
Employee Stock Ownership.................................. 95
Compensation of Directors................................. 96
Indemnification of Officers and Directors................. 96
Compensation Committee Interlocks and Insider
Participation.......................................... 96
Security Ownership of Management and Certain Beneficial
Owners.................................................... 97
Shareholder Proposals....................................... 99
Where You Can Find More Information......................... 99
Index to Financial Statements............................... 101
</TABLE>
ANNEXES:
<TABLE>
<S> <C>
Agreement and Plan of Merger dated October 23, 2000......... A-1
Opinion of Merrill Lynch & Company dated October 23, 2000... B-1
Stockholders' Agreement dated October 23, 2000.............. C-1
Form of Registration Rights Agreement....................... D-1
Form of Voting Agreement.................................... E-1
Form of Amendment No. 3 to Universal's Incentive Stock
Option Plan............................................... F-1
</TABLE>
iii
<PAGE> 7
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT IS THE MERGER?
A: We have entered into an agreement to acquire Weatherford Global
Compression Services, L.P., a joint venture between Weatherford
International, Inc. and General Electric Capital Corporation, and certain
related entities, which currently comprise the second largest compression
services company in terms of horsepower. To complete the acquisition,
Enterra Compression Company, a wholly owned subsidiary of Weatherford
International, Inc., will merge with and into Universal Compression, Inc.,
our wholly owned subsidiary. As a result of the merger, 13,750,000 shares
of our common stock will be issued to WEUS, the sole shareholder of
Enterra, and we will become the owner of Weatherford Global and certain
related entities. For a more complete description of the merger, see "The
Merger Agreement -- Structure of the Merger" on page 64.
Q: WHY IS UNIVERSAL PROPOSING THE MERGER?
A: The acquisition of Weatherford Global will significantly increase our
size, providing us with a stronger asset base to better serve customers.
We believe this will give us a competitive advantage and increase our
opportunities to grow.
Q: WHAT WILL UNIVERSAL RECEIVE IN THE MERGER?
A: In the merger, Enterra will merge into Universal Compression, Inc., our
operating subsidiary, and thereby give us ownership of Weatherford Global
and certain related entities. Immediately prior to the merger,
Weatherford, through Enterra, will purchase all of GE Capital's interest
in Weatherford Global so that, upon consummation of the merger, we will
receive 100% ownership of Weatherford Global and the related entities.
Prior to the merger, Enterra will transfer to other Weatherford entities
approximately $40 million of assets consisting of $30 million of
compression assets relating to its recently acquired Singapore-based
operations and $10 million in accounts receivable.
Q: WHAT WILL UNIVERSAL'S BUSINESS LOOK LIKE AFTER THE MERGER?
A: Following the merger, we will be the second largest provider of gas
compression services in terms of horsepower. The combined company will
have a fleet of approximately 7,000 units comprising approximately 1.8
million horsepower, and will operate in a number of key international
regions, including Canada, Asia, Australia, Mexico and elsewhere in Latin
America. We expect that the combined company will be stronger and better
positioned to meet the increasing compression needs of our customers.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working to complete the merger as quickly as possible, and hope to
complete the merger in the first quarter of 2001.
Q: WHAT AM I BEING ASKED TO VOTE ON?
A: You are being asked to approve the issuance of 13,750,000 shares of our
common stock to WEUS in the merger and to approve an increase in the
number of shares of our common stock authorized for issuance under our
Incentive Stock Option Plan, which will include a sufficient amount of
shares to cover options to be issued to the new employees we will receive
in the merger. Approval of the share issuance to WEUS and the amendment to
our Incentive Stock Option Plan each require the affirmative vote of a
majority of the votes cast, provided that at least a majority of the
shares entitled to vote at the special meeting cast a vote.
Q: WHAT DO I NEED TO DO NOW?
A: Just indicate on your proxy card how you want to vote, and sign and mail
it in the enclosed envelope as soon as possible, so that your shares will
be represented at the special meeting. If you are a shareholder of record,
you may also vote via telephone by calling toll-free (877) 779-8683 or via
the Internet by logging on http://www.eproxyvote.com/uco. If you hold your
shares through a bank, broker or other holder of record, there may be
different telephone and Internet voting instructions on your proxy card
that you must follow.
1
<PAGE> 8
If you sign and send in your proxy and do not indicate how you want to
vote, your proxy will be voted in favor of the proposals. If you do not
sign and send in your proxy or if you abstain, your proxy will not be
voted and it will have no effect on the results of the vote, provided that
holders of at least a majority of the shares entitled to vote at the
special meeting cast votes.
The special meeting will take place on Tuesday, February 6, 2001 at 10:00
a.m., local time, at the Drury Inn, 100 Highway 6, Houston, Texas 77079.
You may attend the special meeting and vote your shares in person, rather
than voting by proxy, telephone or the Internet. In addition, you may
withdraw your proxy up to and including the day of the special meeting by
following the directions on page 53 and either changing your vote or
attending the special meeting and voting in person.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE
MY SHARES FOR ME?
A: Your broker will vote your shares of common stock on the proposals only if
you provide instructions on how to vote. You should instruct your broker
how to vote your shares, following the directions your broker provides. If
you do not provide instructions to your broker, your shares will not be
voted on the proposals, and will have no effect on the result of the vote,
provided that holders of at least a majority of the shares entitled to
vote at the special meeting cast votes.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. There are four ways that you may revoke your proxy and change your
vote. First, you may send a written notice to our Secretary at our
principal executive offices prior to the special meeting stating that you
would like to revoke your proxy. Second, you may complete and submit a new
proxy card to our Secretary prior to the special meeting, at our principal
executive offices. Third, you may use the telephone or Internet voting
procedures described in the enclosed proxy card. Fourth, you may attend
the special meeting and vote in person. Simply attending the special
meeting without voting, however, will not revoke your proxy. If you have
instructed a broker to vote your shares, you must follow directions
received from your broker to change your vote.
Q: WHOM SHOULD I CALL WITH MY QUESTIONS?
A: If you would like additional copies of this proxy statement, or if you
have questions about the procedures for voting your shares, please
contact:
Morrow & Company, Inc.
(800) 566-9061
If you have questions about the merger or the proposals described in this
proxy statement, please contact:
Mr. Mark L. Carlton
Senior Vice President and
General Counsel
Universal Compression Holdings, Inc.
(713) 335-7000
2
<PAGE> 9
SUMMARY
This summary highlights selected information from this proxy statement.
This summary may not contain all of the information that is important to you.
You should carefully read the entire proxy statement, as well as the additional
documents to which we refer you, including the merger agreement and the related
agreements, for a more complete understanding of the acquisition of Weatherford
Global and the matters that you are being requested to vote on at the special
meeting. See "Where You Can Find More Information" (page 99). The terms
"Universal," "our company," "we," "us" and "our," when used in this proxy
statement, 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. For purposes of this
proxy statement, references to the Weatherford Global entities as wholly owned
subsidiaries presume that the pre-merger share transfers described in "The
Merger Agreement -- Certain Pre-Closing Transfers" (page 66) have been
completed.
THE COMPANIES
UNIVERSAL COMPRESSION HOLDINGS, INC.
4440 BRITTMOORE ROAD
HOUSTON, TEXAS 77041
(713) 335-7000
Universal is a leading natural gas compression services company, providing
a full range of rental, sales, operations, maintenance and fabrication services
and products to the natural gas industry. These services and products are
essential to the production, transportation and processing of natural gas by
producers, gatherers and pipeline companies. Universal acquired its business in
1998 through the acquisition of Tidewater Compression Service, Inc., which has
been in the gas compression services business since 1954. Today, Universal owns
one of the largest gas compressor fleets in the United States in terms of
horsepower, and has a growing presence in key international markets.
UNIVERSAL COMPRESSION, INC.
4440 BRITTMOORE ROAD
HOUSTON, TEXAS 77041
(713) 335-7000
Universal Compression, Inc. is a wholly owned subsidiary of Universal
Compression Holdings, Inc. through which Universal operates its gas compression
business.
WEATHERFORD INTERNATIONAL, INC.
515 POST OAK PARK, SUITE 600
HOUSTON, TEXAS 77027-3415
(713) 693-4000
Weatherford International, Inc. is one of the largest global providers of
innovative mechanical solutions, technology and services for the drilling and
production sectors of the oil and gas industry. Weatherford operates in over 50
countries and employs approximately 10,000 people worldwide.
WEUS HOLDING, INC.
515 POST OAK PARK, SUITE 600
HOUSTON, TEXAS 77027-3415
(713) 693-4000
WEUS Holding, Inc. is a wholly owned subsidiary of Weatherford through
which Weatherford owns its interest in Weatherford Global, the compression
business that it owns jointly with GE Capital.
3
<PAGE> 10
ENTERRA COMPRESSION COMPANY
515 POST OAK PARK, SUITE 600
HOUSTON, TEXAS 77027-3415
(713) 693-4000
Enterra Compression Company is a wholly owned subsidiary of WEUS Holding.
Weatherford's compression business is operated through Weatherford Global
Compression Services, L.P., a joint venture of Weatherford and GE Capital, and
certain related entities. Currently, Enterra indirectly owns 64% of this joint
venture, and GE Capital owns the remaining 36%. Immediately prior to the merger,
Enterra will purchase GE Capital's 36% interest in Weatherford Global so that,
at the time of the merger, Weatherford, through Enterra, will own 100% of
Weatherford Global. Weatherford Global is one of the largest providers of
natural gas compression products and services in terms of horsepower. The
products and services offered by Weatherford Global include:
- the rental of natural gas compressors;
- packaging and sales of natural gas compressors;
- custom-designed compression systems;
- full service turnkey compression management;
- maintenance and reconditioning services; and
- select services such as repair services, offshore platform installation,
and management of compression equipment.
Enterra does not have any assets other than its ownership interests in
Weatherford Global, certain related entities and compression assets and certain
deferred taxes.
THE SPECIAL MEETING (PAGE 51)
The special meeting will be held at the Drury Inn, 100 Highway 6, Houston,
Texas 77079, at 10:00 a.m., local time, on Tuesday, February 6, 2001. At the
special meeting, our shareholders will be asked to consider and vote upon a
proposal to approve the issuance of 13,750,000 shares of our common stock to
WEUS in connection with the merger, and to consider and vote upon a proposal to
approve an amendment to our Incentive Stock Option Plan to increase the number
of shares of our common stock authorized for issuance under the Plan, which will
include a sufficient amount of shares to cover options to be issued to the new
employees that we will receive as a result of the merger.
Record Date; Voting Power (page 51)
Holders of record of our common stock at the close of business on December
8, 2000, the record date, are entitled to notice of and to vote at the special
meeting and any adjournment or postponement thereof. As of such date, there were
14,664,038 shares of our common stock issued and outstanding held by
approximately 350 holders of record. Holders of record of our common stock on
the record date are entitled to one vote per share on any matter that may
properly come before the special meeting.
Vote Required (page 52)
Approval by our shareholders of the proposal to approve the issuance of
shares to WEUS in the merger and the proposal to amend our Incentive Stock
Option Plan to increase the number of shares available under the Plan require
the affirmative vote of a majority of the votes cast, provided that at least a
majority of the shares entitled to vote at the special meeting cast a vote.
4
<PAGE> 11
Proxies (page 52)
You may use the accompanying proxy or vote via telephone or the Internet if
you are unable to attend the Universal special meeting in person, or if you wish
to have your shares voted by proxy even if you do attend our special meeting.
All shares of our common stock represented by valid proxies received pursuant to
this solicitation and not revoked before they are exercised will be voted in the
manner specified therein. Proxies received that do not contain voting
instructions will be voted in favor of the issuance of shares of our common
stock in the merger and in favor of the related amendment to our Incentive Stock
Option Plan.
Castle Harlan Stockholders' Agreement (page 52)
Concurrently with our execution of the merger agreement, Castle Harlan
Partners III, L.P. and its affiliates entered into a Stockholders' Agreement
with WEUS and Universal pursuant to which Castle Harlan and its affiliates
agreed to vote, subject to certain conditions, all of their shares of our common
stock, including shares over which they have voting control and any additional
shares that they may acquire, in favor of the issuance of the shares in the
merger and related matters. As of the record date, Castle Harlan and its
affiliates owned or had the right to vote a total of 5,494,874 shares of our
common stock, or approximately 38% of our outstanding shares.
Share Ownership of Management and Directors (page 52)
As of the record date, our executive officers and directors, including
their affiliates, owned an aggregate of 5,599,974 shares of our common stock, or
approximately 38% of our common shares then outstanding. This number includes
the 5,494,874 shares that Castle Harlan and its affiliates own or have the right
to vote.
It is currently expected that our directors and executive officers will
vote the shares of common stock owned by them FOR the proposal to approve the
issuance of common stock in the merger and FOR the related amendment to our
Incentive Stock Option Plan.
Reasons for the Merger (page 55)
We believe that the merger offers an excellent opportunity to create value
for our shareholders by creating a larger company with:
- the opportunity to realize significant cost savings;
- increased opportunities for growth, particularly through our
complementary domestic operations and Weatherford Global's strong
international presence and international operating experience; and
- lower capital costs as a result of our increased access to capital
markets.
Recommendations of Universal's Board of Directors (pages 52 and 55)
Our board of directors has unanimously approved and adopted the merger
agreement and the related share issuance, as well as the amendment to our
Incentive Stock Option Plan. Accordingly, our board unanimously recommends that
our shareholders vote FOR the issuance of our common stock in the merger and FOR
the proposed amendment to our Incentive Stock Option Plan.
Opinion of Universal's Financial Advisor (page 57)
In making the determination to approve the merger, the merger agreement and
the related share issuance, our board considered the opinion of Merrill Lynch,
our financial advisor, which is attached to this proxy statement as Annex B,
that as of October 23, 2000, the merger consideration was fair from a financial
point of view to Universal.
5
<PAGE> 12
THE MERGER
If all conditions to the merger are satisfied, Enterra will merge with and
into Universal Compression, Inc., and Universal Compression, Inc. will be the
surviving corporation. As a result of the merger, Universal will acquire the
operations of Weatherford Global and certain related entities and assets.
The merger agreement is attached to this document as Annex A. You are
encouraged to read the merger agreement in its entirety. It is the legal
document that governs our acquisition of Weatherford Global.
Conditions to the Merger (page 67)
The respective obligations of Universal, Weatherford, and the other parties
to the merger agreement to complete the merger are subject to the satisfaction
of a number of conditions on or before the closing date, including the
following:
- the approval of our shareholders of the issuance of 13,750,000 shares of
our common stock to WEUS;
- the approval for listing of the shares on the NYSE;
- the average closing price of our common stock for the 20 trading days
prior to the date of the merger not being less than $25;
- the receipt of all necessary governmental consents, including expiration
or termination of applicable waiting periods under U.S. antitrust laws
(which expired on December 14, 2000) and Canadian antitrust laws;
- the consummation of financing by Universal sufficient to refinance our
outstanding indebtedness and that of Weatherford Global;
- the conditions to Weatherford's acquisition of GE Capital's interest in
the joint venture having been satisfied or waived;
- the truth and correctness of all representations and warranties of, and
performance of covenants by, the other party, except to the extent the
failure to be true or to be performed would not reasonably be expected to
have a material adverse effect on such other party, taken as a whole; and
- the receipt of opinions of counsel that the merger will qualify as a
reorganization under Section 368(a) of the Internal Revenue Code.
Either Universal or Weatherford may choose to waive certain conditions to
their respective obligations to complete the merger if those conditions have not
been satisfied.
Our Board of Directors and Management Following the Merger (page 62)
Following the merger, WEUS will have the right to designate three members
of our board of directors for so long as WEUS and its affiliates own at least
20% of our outstanding shares of common stock. If such ownership falls below
20%, WEUS may designate only two directors. If WEUS's ownership falls to below
10%, WEUS may no longer designate directors.
WEUS will become a significant shareholder of Universal as a result of the
merger, owning approximately 48% of our outstanding shares of common stock,
subject to the restrictions in the voting agreement.
Interests of Certain Persons in the Merger (page 62)
Our directors and executive officers do not have any interests in the
merger that are different from, or in addition to, the interests of our
shareholders generally. As a result of various voting arrangements, Castle
Harlan has the right to vote the shares owned by some of our directors and their
affiliates. Castle
6
<PAGE> 13
Harlan has agreed to vote these shares in favor of the issuance of shares in the
merger pursuant to the Stockholders' Agreement.
Required Regulatory Filings and Approvals (page 61)
The Hart-Scott-Rodino Antitrust Improvements Act of 1976 requires Universal
and Weatherford to furnish certain information and materials to the Antitrust
Division of the Department of Justice and the Federal Trade Commission and
requires a specified waiting period to expire or be terminated before the
acquisition can be completed. This waiting period expired on December 14, 2000.
Even after the waiting period expires or terminates, the Antitrust Division has
the authority to challenge the merger on antitrust grounds before or after the
merger is completed. We will have to make similar filings with Canadian
authorities.
We may be required to make additional filings with or obtain additional
approvals from regulatory authorities in connection with the acquisition. We
cannot predict whether or when we will obtain all required regulatory approvals,
the timing of these approvals, or whether any approvals will include adverse
conditions that would cause the parties to abandon the merger.
Certain U.S. Federal Income Tax Consequences of the Merger (page 61)
The merger is expected to qualify as a reorganization under Section 368(a)
of the Internal Revenue Code. No gain or loss will be recognized by Universal,
Enterra, WEUS or our shareholders as a result of the merger if it so qualifies.
No Appraisal Rights (page 63)
Under Delaware law, you are not entitled to appraisal rights with respect
to the share issuance in connection with the merger.
Accounting Treatment (page 63)
The merger will be accounted for as a "purchase" in accordance with
generally accepted accounting principles, which means that the assets and
liabilities of Weatherford Global will be recorded on our books at their fair
value, with the excess allocated to goodwill.
Termination of the Merger Agreement (page 68)
Universal and WEUS may agree in writing to terminate the merger agreement
and abandon the merger at any time prior to completion of the merger. In
addition, the merger agreement may be terminated under the circumstances
summarized below:
- by WEUS, if we have materially breached our representations and
warranties or materially failed to perform our covenants or agreements
and such breach or failure to perform has not been cured within certain
time periods prior to the closing;
- by us, if the Weatherford entities have materially breached their
representations and warranties or materially failed to perform their
covenants or agreements and such breach or failure to perform has not
been cured within certain time periods prior to the closing;
- by either Universal or WEUS, if our special meeting shall have been held
and the required approval of our shareholders shall not have been
obtained;
- by either Universal or WEUS, if all of the conditions to the merger
agreement have not been satisfied or waived on or before March 31, 2001,
other than as a result of a breach by the terminating party;
- by either Universal or WEUS, if an order by a federal or state court that
would make illegal or otherwise prohibit the consummation of the merger
has become final and nonappealable; or
7
<PAGE> 14
- by Universal or WEUS, if the conditions relating to the acquisition of GE
Capital's interest in Weatherford Global are not satisfied or waived;
provided that WEUS may not terminate the merger agreement if WEUS is
responsible for the failure to satisfy such conditions.
RELATED AGREEMENTS
Stockholders' Agreement (page 71)
In order to induce Weatherford to enter into the merger agreement, Castle
Harlan and its affiliates have entered into a Stockholders' Agreement with WEUS
and us which provides, among other things, that they will, subject to certain
limitations, vote their shares, including shares over which they have voting
control and any additional shares they may acquire, in favor of the issuance of
shares of Universal common stock to WEUS in the merger and against any action or
agreement that would interfere with the merger or the related share issuance. As
of the record date, Castle Harlan and its affiliates beneficially owned or had
the right to vote 5,494,874 shares of our common stock, constituting
approximately 38% of our total shares outstanding. The stockholders' agreement
is attached to this proxy statement as Annex C.
Registration Rights Agreement (page 71)
As a condition to the closing of the merger, Universal and WEUS will enter
into a registration rights agreement, a form of which is attached to this proxy
statement as Annex D, covering the shares of our stock received by WEUS in the
merger. Under the registration rights agreement, WEUS will have the right, on up
to three occasions, to cause us to register at our expense its shares of our
common stock under the Securities Act of 1933 at any time following the merger
by providing a written demand to us, subject to certain minimum dollar values.
The registration rights agreement also provides that WEUS will have certain
"piggyback" registration rights, or rights to cause us, subject to certain
limitations, to include its shares in other registration statements that we may
file.
Voting Agreement (page 72)
As a condition to the closing of the merger, Universal, Weatherford and
WEUS will enter into a voting agreement, a form of which is attached to this
proxy statement as Annex E. The voting agreement restricts the ability of WEUS
and its affiliates to vote shares of common stock in excess of 33 1/3% of our
total outstanding shares until the earlier of two years following the merger or
the date that Castle Harlan and its affiliates own less than 5% of our
outstanding common stock. The excess shares owned by WEUS and its affiliates
will be voted in the same proportion as the vote of our shareholders other than
WEUS, Castle Harlan and their affiliates.
Transitional Services Agreement (page 72)
Concurrently with the closing of the merger, Weatherford and Weatherford
Global will enter into a transitional services agreement pursuant to which
Weatherford will continue to provide certain administrative services, such as
shared corporate office space and general communication and information
services, to Weatherford Global for a period of time following the merger.
Weatherford Global will pay Weatherford a negotiated fee for the services
provided based on the cost of the services.
MARKET PRICE AND DIVIDEND INFORMATION (PAGE 73)
Our common stock is listed on the New York Stock Exchange under the ticker
symbol "UCO." The following table sets forth the closing price per share of our
common stock on the NYSE on October 23, 2000, the last trading day before the
public announcement of the proposed merger, and December 26,
8
<PAGE> 15
2000, the last trading day for which closing prices were available at the time
of printing this proxy statement.
<TABLE>
<CAPTION>
UNIVERSAL
COMMON STOCK
------------
<S> <C>
October 23, 2000....................................... $26.19
December 26, 2000...................................... $33.50
</TABLE>
The market price of our common stock will fluctuate prior to the merger. As
a result, the value of the shares to be issued to WEUS in the merger will also
fluctuate. No assurance can be given as to the future prices or markets for our
common stock. You should obtain a current quotation for our common stock.
Each of Weatherford and Universal has the right to terminate the merger
agreement if the average closing price of our common stock for the 20 trading
days prior to the date of the merger is less than $25 per share. For information
with respect to the high and low sales prices of our common stock, see "Market
Price and Dividend Information" on page 73.
9
<PAGE> 16
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF
UNIVERSAL COMPRESSION HOLDINGS, INC. AND SUBSIDIARIES
The following selected consolidated financial data of Universal should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Universal" and the consolidated financial
statements and related notes included elsewhere in this proxy statement. The
summary historical financial and operating data for Tidewater Compression as of
and for each of the years in the two-year period ended March 31, 1997 and for
the period from April 1, 1997 through February 20, 1998 and the summary
historical financial data for Universal as of and for the 39-day period ending
March 31, 1998 and for the years ended March 31, 1999 and March 31, 2000 have
been derived from the respective audited financial statements. Such historical
consolidated financial statements, and the reports thereon, are included
elsewhere in this proxy statement. The financial information for the six-month
period ended September 30, 2000 presented below has been derived from the
unaudited consolidated financial statements of Universal. The unaudited
six-month data reflects, in our judgment, all appropriate adjustments, all of
which are normally recurring adjustments unless otherwise noted, considered
necessary for a fair presentation of the results for such interim periods.
Results of operations for the unaudited six-month period may not be indicative
of results to be expected for an entire year of operations.
<TABLE>
<CAPTION>
TIDEWATER COMPRESSION
(PREDECESSOR COMPANY) UNIVERSAL
----------------------------------- -------------------------------------
PERIOD FROM
PERIOD FROM DECEMBER 12,
YEARS ENDED APRIL 1, 1997 1997 PRO FORMA
MARCH 31, THROUGH THROUGH THROUGH YEAR ENDED
------------------- FEBRUARY 20, FEBRUARY 20, MARCH 31, MARCH 31,
1996 1997 1998 1998(6) 1998(7) 1999
-------- -------- ------------- ------------ --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............................. $110,464 $113,886 $ 95,686 $ 13,119 $108,805 $129,498
Gross margin(1)...................... 51,685 48,332 47,752 6,891 58,443 61,887
Selling, general and administrative
expenses........................... 10,508 11,004 8,669 1,305 13,037 16,863
Depreciation and amortization........ 26,997 26,163 23,310 1,560 19,307 19,314
Operating income(2).................. 14,180 11,165 15,773 4,026 26,099 25,710
Interest expense..................... 3,706 -- -- 3,203 32,474 29,313
Income tax expense (benefit)......... 3,745 4,724 6,271 409 (1,888) (1,031)
Income (loss) before extraordinary
items.............................. 5,972 7,842 10,759 430 (3,214) (2,361)
Net income (loss).................... 5,972 7,842 10,759 430 (3,214) (2,361)
Weighted average common and common
equivalent shares outstanding:
Basic.............................. -- -- -- 2,413 2,413 2,446
Diluted............................ -- -- -- 2,413 2,413 2,446
Earnings per share:
Basic.............................. -- -- -- $ 0.18 $ (1.33) $ (0.97)
Diluted............................ -- -- -- $ 0.18 $ (1.33) $ (0.97)
OTHER FINANCIAL DATA:
EBITDA(3)............................ $ 40,420 $ 38,729 $ 40,340 $ 5,930 $ 49,742 $ 48,435
Acquisitions(4)(5)................... -- -- -- 351,872 -- --
Capital expenditures:
Expansion.......................... $ (2,423) $(12,464) $(11,902) $ (1,820) $(13,722) $(63,408)
Maintenance........................ (3,971) (4,056) (5,698) (218) (9,716) (7,626)
Other.............................. 5,124 7,684 3,803 (351,107) (347,304) 8,038
Cash flows from (used in):
Operating activities............... $ 50,810 $ 41,923 $ 33,491 $ (1,005) $ 22,076 $ 22,793
Investing activities............... (1,270) (8,836) (13,797) (353,145) (370,742) (62,996)
Financing activities............... 49,506 (33,121) (17,870) 356,532 352,872 40,748
</TABLE>
10
<PAGE> 17
<TABLE>
<CAPTION>
UNIVERSAL
--------------------------------
SIX MONTHS
YEAR ENDED ENDED
MARCH 31, SEPTEMBER 30,
2000 2000
------------ ---------------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
INCOME STATEMENT DATA:
Revenues.................................................. $136,449 $ 73,613
Gross margin(1)........................................... 68,961 39,481
Selling, general and administrative expenses.............. 16,797 7,224
Depreciation and amortization............................. 26,006 14,177
Operating income(2)....................................... 26,158 18,080
Interest expense.......................................... 34,327 13,225
Income tax expense (benefit).............................. (1,994) (1,746)
Income (loss) before extraordinary items.................. (5,982) (2,911)
Net income (loss)......................................... (5,982) (9,175)
Weighted average common and common equivalent shares
outstanding:
Basic................................................... 2,476 11,173
Diluted................................................. 2,476 11,173
Earnings per share:
Basic................................................... $ (2.42) $ (0.82)
Diluted................................................. $ (2.42) $ (0.82)
OTHER FINANCIAL DATA:
EBITDA(3)................................................. $ 55,557 $ 32,488
Acquisitions(4)(5)........................................ -- 124,852
Capital expenditures:
Expansion............................................... $(49,871) $(23,258)
Maintenance............................................. (9,920) (6,955)
Other................................................... (1,312) 13,516
Cash flows from (used in):
Operating activities.................................... $ 47,144 $ 8,783
Investing activities.................................... (61,103) (16,697)
Financing activities.................................... 12,435 8,046
</TABLE>
11
<PAGE> 18
<TABLE>
<CAPTION>
TIDEWATER COMPRESSION
(PREDECESSOR COMPANY) UNIVERSAL
--------------------- ----------------------------------------------
AS OF MARCH 31, AS OF MARCH 31, AS OF
--------------------- ------------------------------ SEPTEMBER 30,
1996 1997 1998 1999 2000 2000
--------- --------- -------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital(8)....... $ 16,192 $ 13,953 $ 13,882 $ 23,742 $ 7,209 $ 11,324
Total assets............. 274,312 257,090 380,226 437,991 469,942 539,460
Total debt(9)............ 229,657 194,371 286,862 344,677 377,485 344,019(10)
Stockholders' equity..... 49,705 57,547 81,680 80,774 74,677 261,678
</TABLE>
---------------
(1) Gross margin is defined as total revenue less (i) rental expense, (ii) cost
of sales (exclusive of depreciation and amortization), (iii) gain on asset
sales and (iv) interest income.
(2) Operating income is defined as income before income taxes less gain on
asset sales and interest income plus interest expense and operating lease
expense.
(3) EBITDA is defined as net income plus income taxes, interest expense,
leasing expense, management fees, depreciation and amortization. EBITDA
represents a measure upon which management assesses financial performance,
and certain covenants in our current borrowing arrangements are tied to
similar measures. EBITDA is not a measure of financial performance under
generally accepted accounting principles ("GAAP") and should not be
considered an alternative to operating income or net income as an indicator
of our operating performance or to net cash provided by operating
activities as a measure of our liquidity. Additionally, the EBITDA
computation used herein may not be comparable to other similarly titled
measures of other companies, including Enterra.
(4) On February 20, 1998, we acquired 100% of the voting securities of
Tidewater Compression for approximately $350.0 million. The results of
Tidewater Compression's operations have been included in our operations
from the date of the acquisition.
(5) On September 15, 2000, we completed the merger of Gas Compression Services,
Inc. into Universal for a combination of approximately $12 million in cash
and 1,400,726 shares of our common stock valued at approximately $39
million, the assumption of approximately $57 million in debt and operating
leases of GCSI, and $6 million of debt related to GCSI's customer equipment
financing and associated customer notes receivable. The results of GCSI's
operations have been included in our operations from the date of the
acquisition.
(6) Represents our historical consolidated financial statements for the period
from December 12, 1997 (inception) through March 31, 1998. However, we had
no operations until the acquisition of Tidewater Compression on February
20, 1998.
(7) The pro forma selected financial data for the year ended March 31, 1998
were derived from the unaudited pro forma consolidated financial statements
and give effect to the acquisition of Tidewater Compression as if it had
occurred on April 1, 1997. The unaudited pro forma consolidated financial
statements and other data have been prepared under the purchase method of
accounting. Under this method of accounting, based on an allocation of the
purchase price of Universal, its identifiable assets and liabilities have
been adjusted to their estimated fair values. The unaudited pro forma
12
<PAGE> 19
consolidated financial statements and other data have been prepared based
on the foregoing and on certain assumptions described in the notes below:
<TABLE>
<CAPTION>
TIDEWATER ACQUISITION UNIVERSAL PRO
COMPRESSION(a) UNIVERSAL(b) ADJUSTMENTS FORMA
-------------- -------------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Rentals............................ $71,644 $ 9,060 $ -- $ 80,704
Sales.............................. 19,924 4,037 -- 23,961
Other.............................. 3,024 22 -- 3,046
Gain on asset sales................ 1,094 -- -- 1,094
------- ------- -------- --------
Total revenues............. 95,686 13,119 -- 108,805
Costs and expenses:
Rentals............................ 31,924 2,804 (3,800)(c) 30,928
Cost of sales...................... 14,753 3,408 -- 18,161
Depreciation and amortization...... 23,310 1,560 (5,563)(d) 19,307
General and administrative......... 8,669 1,305 3,063(e) 13,037
Interest expense................... -- 3,203 29,271(f) 32,474
------- ------- -------- --------
78,656 12,280 22,971 113,907
Income (loss) before income taxes.... 17,030 839 (22,971) (5,102)
Income tax expense (benefit)......... 6,271 409 (8,568)(g) (1,888)
------- ------- -------- --------
Net income (loss).......... $10,759 $ 430 $(14,403) $ (3,214)
======= ======= ======== ========
</TABLE>
---------------
<TABLE>
<C> <S>
(a) Represents the historical financial statements of Tidewater
Compression, our predecessor, for the period from April 1,
1997 through February 20, 1998.
(b) Represents our historical consolidated financial statements
for the period from December 12, 1997 (inception) through
March 31, 1998. However, we had no operations until the
acquisition of Tidewater Compression on February 20, 1998.
(c) Reflects the effect of a change in accounting policy for
capitalization of major overhauls.
</TABLE>
<TABLE>
<C> <S>
(d) Reflects an adjustment to depreciation expense resulting
from the allocation of purchase price and the change in
accounting policy referred to in note (c). Depreciation and
amortization expense for rental equipment is calculated
using a 20% salvage value and an estimated useful life of 15
years. All remaining depreciation for property and equipment
is calculated on the straight-line basis with estimated
useful lives ranging from two to 25 years. Depreciation for
capitalization of overhauls is calculated using a three-year
estimated useful life. Goodwill amortization is calculated
over an estimated 40-year life.
(e) Reflects the management fee paid to Castle Harlan of $3.0
million and estimated incremental costs associated with
being a stand-alone public company. Such stand-alone costs
include legal, accounting and personnel costs.
(f) Interest expense adjustments are as follows based on the
assumptions described below:
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1998
----------------
(IN THOUSANDS)
<S> <C>
Revolving credit facility, $35.0 million at 9.75%........... $ 3,427
Senior discount notes, $25.0 million at 11.375%, due 2009... 3,313
Senior discount notes, $152.0 million at 9.875%, due 2008... 16,886
Term loan credit facility, $75.0 million at 10%............. 7,481
Commitment fee, $48.0 million at 0.5%....................... 239
-------
31,346
Amortization of deferred financing costs.................... 1,128
-------
Total interest expense............................ $32,474
=======
</TABLE>
13
<PAGE> 20
Interest on the revolving credit facility and the term loan credit
facility is based on LIBOR plus 2.25% and LIBOR plus 2.50%,
respectively. The interest rates on the revolving credit facility and
the term loan credit facility at March 31, 1998 under an available prime
rate option were 9.75% and 10.0%, respectively. Interest on each of the
senior discount notes due 2009 (which we redeemed in May 2000) and the
senior discount notes due 2008 has been calculated based on the fixed
rate of 11.375% and 9.875%, respectively, compounded semiannually on
principal plus accumulated interest. A fluctuation of .125% of actual
rates related to the revolving credit facility and the term loan credit
facility would result in an approximate change of $137,000 in interest
expense.
<TABLE>
<C> <S>
(g) Reflects an adjustment to income tax expense to reflect a
tax rate of 37%.
</TABLE>
(8) Working capital is defined as current assets minus current liabilities.
(9) Includes capital lease obligations.
(10) Includes $139.6 million outstanding under our operating lease facility.
14
<PAGE> 21
SELECTED HISTORICAL COMBINED AND CONSOLIDATED FINANCIAL DATA OF
ENTERRA COMPRESSION COMPANY
The following selected combined and consolidated financial data of Enterra
should be read in conjunction with the combined and consolidated financial
statements and related notes included elsewhere in this proxy statement. Gas
Services International Limited is included in the balance sheet data and results
of operations from January 12, 2000, the date it was acquired. The following
data also includes other assets that, like GSI, will be excluded from the merger
as discussed under "The Merger Agreement -- Certain Pre-Closing Transfers" (page
66). The selected historical combined financial information presented below for,
and as of the end of, each of the years in the two-year period ended December
31, 1998, and the selected historical consolidated financial information for,
and as of the end of, the one-year period ended December 31, 1999, have been
derived from the historical combined and consolidated financial statements of
Enterra, which have been audited by Arthur Andersen LLP, independent public
accountants. Such historical combined and consolidated financial statements, and
the report thereon, are included elsewhere in this proxy statement. The selected
historical combined financial information for, and as of the end of, each of the
years in the two years ended December 31, 1996 are unaudited. The historical
financial statements for Weatherford's compression businesses prior to the
formation of the joint venture are presented herein on a combined basis because
the predecessor Weatherford business was operated as a single entity. The
financial statements for, and as of the end of, the one-year period ended
December 31, 1999 present the consolidated results of Enterra Compression
Company.
The selected historical consolidated financial information as of September
30, 2000 and for the nine-month periods ended September 30, 1999 and September
30, 2000 presented below has been derived from the unaudited consolidated
financial statements of Enterra. The unaudited historical consolidated financial
statements as of September 30, 2000 and for the nine-month periods ended
September 30, 1999 and September 30, 2000 reflect, in the judgment of Enterra's
management, all adjustments necessary for a fair presentation of the results for
such interim periods. Results of operations for the unaudited nine-month period
ended September 30, 2000 may not be indicative of results to be expected for an
entire year of operations.
<TABLE>
<CAPTION>
WEATHERFORD COMPRESSION
(PREDECESSOR COMPANY) ENTERRA COMPRESSION COMPANY
---------------------------------------- ----------------------------------
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED SEPTEMBER 30,
---------------------------------------- DECEMBER 31, -------------------
1995 1996 1997 1998 1999(1) 1999(1) 2000
------- -------- -------- -------- ------------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.......................... $94,386 $154,503 $178,896 $181,326 $225,917 $166,464 $193,290
Operating Income.................. 7,788 7,833 12,188 17,975 21,574 16,794 3,970
Net Income (Loss)................. (3,176) (3,127) 752 1,584 4,539 3,070 (1,965)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF AS OF
----------------------------------------- DECEMBER 31, SEPTEMBER 30,
1995 1996 1997 1998 1999(1) 2000
-------- -------- -------- -------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total Assets...................... $267,458 $413,071 $441,027 $389,162(2) $666,030 $704,146
Long-Term Debt.................... 5,091 5,061 2,216 1,831 2,157 1,945
Long-Term Payable due to
Weatherford(3).................. 174,606 180,091 208,594 105,765(2) 99,033 100,751
Minority Interest Liability(4).... -- -- -- -- 197,111 198,508
Equity............................ 58,044 185,061 185,010 192,980 217,624 215,472
</TABLE>
15
<PAGE> 22
---------------
(1) On February 2, 1999, Weatherford entered into a joint venture with General
Electric Capital Corporation. The contribution of GE Capital's assets was
accounted for under the "purchase method" of accounting, and therefore the
results of operations are included since the date of formation.
(2) In December, 1998, Enterra entered into a sale and leaseback arrangement in
which they sold $119.6 million of compressor units and received cash of
$100.0 million and a receivable of $19.6 million. The $100.0 million cash
was used to pay down the Long-Term Payable due to Weatherford.
(3) The Long-Term Payable due to Weatherford will be forgiven in connection with
the merger.
(4) The Minority Interest Liability to GE Capital will be eliminated as a result
of the purchase of GE Capital's interest by Enterra in connection with the
merger.
16
<PAGE> 23
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
INFORMATION OF UNIVERSAL COMPRESSION HOLDINGS, INC.
The data presented in this table is derived from the Unaudited Pro Forma
Combined Condensed Financial Statements and the notes thereto which are included
elsewhere in this proxy statement. You should read those sections for a further
description of the financial data summarized here. The selected unaudited pro
forma statements of operations data for the six months ended September 30, 2000
and the year ended March 31, 2000 is derived from the application of pro forma
adjustments to the historical financial statements of Universal to reflect
Universal's initial public offering, the merger with Enterra and related
transactions as if the transactions had occurred on April 1, 2000 and 1999,
respectively. The unaudited pro forma balance sheet data reflects Universal's
initial public offering, the merger with Enterra and related transactions as if
the transactions had occurred on September 30, 2000. Because the fiscal years of
Universal and Enterra differ, Enterra's historical operating results for the
year ended March 31, 2000 include its first quarter results of 2000, combined
with its results for the nine months ended December 31, 1999. These pro forma
adjustments are described in detail in "Unaudited Pro Forma Combined Condensed
Financial Information" later in this proxy statement. The pro forma operating
results and financial position shown in this table are not necessarily
indicative of what Universal's results or financial position would have been had
the merger been completed as of the dates reflected or that may be achieved in
the future. You should also read Universal's Annual Report on Form 10-K for the
fiscal year ended March 31, 2000, as amended, Universal's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000 and Universal's Current
Reports on Form 8-K.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 2000 MARCH 31, 2000
------------------ --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Statements of Operations Data:
Revenues.................................................. $187,585 $374,212
Total operating expenses.................................. 170,339 328,340
Income (loss) before income taxes and minority interest... 17,246 45,872
Income (loss) before extraordinary items.................. 11,025 26,631
Per Share Data:
Basic income (loss) before extraordinary items per
share.................................................. $ 0.41 $ 1.00
Shares used in computing basic income (loss) before
extraordinary items per share.......................... 27,089 26,721
Diluted income (loss) before extraordinary items per
share.................................................. $ 0.40 $ 0.97
Shares used in computing diluted net income (loss) before
extraordinary items per share.......................... 27,254 27,407
<CAPTION>
AS OF
SEPTEMBER 30, 2000
------------------
(IN THOUSANDS)
<S> <C> <C>
Balance Sheet Data at Period End:
Cash and equivalents...................................... $ 5,369
Total current assets...................................... 196,847
Total current liabilities................................. 80,288
Total noncurrent liabilities.............................. 142,267
Total stockholders' equity................................ 647,266
</TABLE>
Please see "Unaudited Pro Forma Combined Condensed Financial Information"
on pages 43 through 50 for a description of the pro forma adjustments to the
historical financial statements of Universal and Enterra showing the effect of
the merger.
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<PAGE> 24
RISK FACTORS
In addition to the other information included in this document (including
the matters addressed in "Cautionary Statement Concerning Forward-Looking
Information" on page 22), you should carefully consider the risk factors
described below in determining whether or not to approve the issuance of shares
in connection with the merger and the related amendment to our Incentive Stock
Option Plan.
WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE WEATHERFORD GLOBAL INTO OUR BUSINESS
FOLLOWING THE MERGER.
Integration of Weatherford Global's business into ours following the merger
will involve a number of potential challenges, including people, systems,
processes, administrative functions and corporate cultures. Management issues
facing the combined company are likely to be more complex and challenging than
those faced by Universal to date. In addition, Weatherford Global has
significant foreign operations in areas where we have little or no operating
experience. The integration process could divert the attention of our management
to the assimilation of the operations and personnel of the acquired business and
could have adverse effects on our operating results. Furthermore, if the
integration is not successful, we may lose personnel, not be able to retain our
customer base to the extent expected and experience increased costs and reduced
revenues.
WE MAY NOT ACHIEVE THE COST SAVINGS AND OTHER SYNERGIES WE EXPECT TO RESULT FROM
THE MERGER.
We expect the integration of Weatherford Global into our business following
the merger to result in significant cost savings. However, our success in
realizing these cost savings, and the timing of this realization, depends on the
quality and speed of the integration of our two companies. We may not realize
the cost savings that we anticipate from integrating our operations following
completion of the merger as quickly or as fully as we expect, if at all, for a
number of reasons, including:
- the large size and broad geographic presence and the resulting complexity
of the combined company;
- our lack of operating experience in several international areas in which
Weatherford Global operates;
- errors in our planning or integration;
- loss of key personnel;
- information technology systems failure;
- unexpected events such as major changes in the markets in which we
operate; and
- costs associated with the merger may exceed our current expectations.
THE VALUE OF OUR SHARES TO BE ISSUED IN THE MERGER WILL FLUCTUATE -- IF OUR
STOCK PRICE INCREASES PRIOR TO THE CLOSING OF THE MERGER, THE VALUE OF THE
MERGER SHARES WILL INCREASE CORRESPONDINGLY.
Because the number of shares of our common stock that WEUS will receive in
the merger is fixed at 13,750,000, the market value of these shares will depend
on the market price of our common stock on the date of the merger. If our stock
price increases, the value of the shares we are issuing to WEUS in the merger
will correspondingly increase. Since our initial public offering in May 2000,
our stock price has been volatile. As a result, the value of the merger shares
may be substantially higher at the time of the merger than the value at the time
our board of directors approved the merger or the date that we received the
fairness opinion from Merrill Lynch.
SUBJECT TO CERTAIN LIMITATIONS, WEUS MAY SELL OUR STOCK AT ANY TIME FOLLOWING
THE MERGER. IF WEUS SELLS A SUBSTANTIAL NUMBER OF OUR SHARES WITHIN A SHORT TIME
PERIOD, IT COULD CAUSE OUR STOCK PRICE TO DECREASE.
The shares of our common stock that WEUS will receive upon consummation of
the merger are restricted, but WEUS may sell these shares following the merger
by registering the shares under the Securities Act or in accordance with Rule
144 under the Securities Act. Concurrently with the closing of
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<PAGE> 25
the merger, we will enter into a Registration Rights Agreement with WEUS, which
will give WEUS the right to require us to register all or a portion of its
shares at any time following the merger. The sale of a substantial number of our
shares by WEUS or our other shareholders within a short period of time could
cause our stock price to decrease, or make it more difficult for us to raise
funds through future offerings of our common stock or acquire other businesses
using our stock as consideration.
PRIOR TO THE MERGER, CASTLE HARLAN HAS PRACTICAL CONTROL OVER MOST MATTERS
REQUIRING APPROVAL OF OUR SHAREHOLDERS.
Castle Harlan Partners III and its affiliates currently own approximately
22% of our common stock (11% if the proposed merger is consummated). In
addition, Castle Harlan is a party to various voting agreements and voting
trusts with other shareholders that currently give Castle Harlan control of up
to approximately 38% of our voting stock (20% if the merger is consummated).
Further, we have agreed to nominate a total of three persons designated by
Castle Harlan for election to our board of directors, so long as Castle Harlan
and its affiliates beneficially own at least 15% of our outstanding stock
(including shares over which it has voting control pursuant to voting agreements
and trusts). Currently, John K. Castle and William M. Pruellage are serving as
Castle Harlan designees to our board of directors, and Castle Harlan has not
designated its third designee. In addition, shares held by Samuel Urcis, one of
our directors who is not considered a director designee of Castle Harlan, are
subject to a voting trust agreement with Castle Harlan.
Castle Harlan's significant ownership and control of our stock and board
representation give it the ability to exercise substantial influence over our
policies, management and affairs, and significant control over corporate actions
requiring approval of our shareholders, including the approval of transactions
involving a change in control. The interests of Castle Harlan could conflict
with the interests of our other shareholders.
Concurrently with our execution of the merger agreement, Castle Harlan and
its affiliates entered into a Stockholders' Agreement pursuant to which they
agreed to vote their shares of common stock, including shares over which they
have voting control and any additional shares they may acquire, in favor of the
issuance of shares to WEUS in the merger, subject to certain limitations. As a
result, Castle Harlan's vote will significantly influence the outcome of the
proposals described in this proxy statement.
FOLLOWING THE MERGER, WEATHERFORD WILL HAVE SIGNIFICANT CONTROL OVER MATTERS
REQUIRING APPROVAL OF OUR SHAREHOLDERS.
If the merger is consummated, WEUS will own 13,750,000 shares of our common
stock, or approximately 48% of our total outstanding shares. Pursuant to the
voting agreement to be entered into concurrently with the completion of the
merger, WEUS has agreed to limit its voting power to 33 1/3% of our common stock
until the earlier of two years from the closing of the merger or the date that
Castle Harlan and its affiliates own less than 5% of our outstanding common
stock. In addition, we have agreed that for so long as WEUS and its affiliates
own at least 20% of our outstanding common stock, they will be entitled to
designate three persons to serve on our board of directors. If WEUS's ownership
falls below 20%, WEUS may designate only two directors. If WEUS's ownership
falls below 10%, WEUS will no longer have the right to designate directors to
our board. This significant ownership of our stock and board representation will
give Weatherford the ability to exercise substantial influence over our
policies, management and affairs and significant control over future actions
requiring shareholder approval. The interests of WEUS and its affiliates could
conflict with the interests of our other shareholders.
In addition, our board of directors has taken action to approve the
issuance of our shares of common stock to WEUS in the merger and certain related
matters under Section 203 of the Delaware General Corporation Law. In general,
Section 203 prohibits a publicly-held Delaware corporation from engaging in a
business combination with an "interested stockholder," which is any beneficial
owner of 15% or more of a corporation's outstanding voting stock, for a period
of three years after the interested stockholder achieved that level of
ownership, unless (subject to certain exceptions) the business combination or
the
19
<PAGE> 26
transaction in which the person became an interested stockholder is approved in
a prescribed manner. Generally, a "business combination" includes a merger,
asset or stock sale, or other transaction resulting in a financial benefit to
the interested stockholder. By approving the merger and related transactions for
purposes of Section 203, our board has removed a barrier to WEUS or its
affiliates engaging in certain transactions with Universal.
WE ARE DEPENDENT ON OUR KEY PERSONNEL.
We depend on the continuing efforts of our executive officers and senior
management. That dependence may be intensified following the merger. We are
particularly dependent on Stephen A. Snider, our President and Chief Executive
Officer. The departure of any of our key personnel, including Weatherford Global
employees who join us as a result of the merger, could have a material adverse
effect on our business, operating results and financial condition. In addition,
we believe that our success depends on our ability to attract and retain
additional qualified employees. If we fail to recruit other skilled personnel,
we could be unable to compete effectively.
THE MERGER AGREEMENT MAY BE TERMINATED IF THE AVERAGE CLOSING PRICE OF OUR
COMMON STOCK PRIOR TO THE CONSUMMATION OF THE MERGER IS LESS THAN $25 PER SHARE.
Weatherford and Universal each have the right to seek to terminate the
merger agreement if the average closing price of our common stock on the New
York Stock Exchange for the 20 consecutive trading days prior to consummation of
the merger is less than $25 per share. Thus, even if all of the other conditions
to the merger are satisfied, there can be no assurance that the merger will be
consummated. If the average price is below $25 but the parties elect to proceed
with the merger, we are not obligated to adjust the number of shares to be
issued to WEUS in the merger.
THE COMBINED COMPANY WILL CONTINUE TO HAVE SIGNIFICANT LEVERAGE AND BE
VULNERABLE TO INTEREST RATE INCREASES.
As of September 30, 2000, we had approximately $344.0 million in
outstanding indebtedness, and Weatherford Global had approximately $311.0
million in outstanding indebtedness, including, in each case, operating lease
obligations. Concurrently with the merger, we expect to refinance, to the extent
required, substantially all of this indebtedness. We will not be required to
refinance our 9 7/8% senior discount notes, except pursuant to our tender offer
and related consent solicitation for the notes, or to the extent the holders of
any of these notes exercise their right under the indenture to require us to
redeem the notes following consummation of the merger. Certain of our
outstanding indebtedness and that of Weatherford Global bears interest at
floating rates, and we expect that the refinanced indebtedness will also.
Changes in economic conditions could result in higher interest and lease payment
rates, thereby increasing our interest expense and lease payments and reducing
our funds available for capital investment, operations or other purposes. In
addition, a substantial portion of our cash flow must be used to service our
debt, which may affect our ability to make future acquisitions or capital
expenditures.
Substantially all of our assets have been pledged as collateral under our
current operating lease facility and our revolving credit facility. We expect
that a substantial portion of our assets, as well as a substantial portion of
the assets acquired in our Weatherford Global acquisition, will continue to be
pledged as collateral under our new facilities. In addition, our debt agreements
and operating lease facility currently contain, and our new facilities will also
contain, covenants that restrict our operations. These covenants place
limitations on, among other things, our ability to enter into acquisitions and
sales and operating lease transactions, to incur additional indebtedness, to
create liens and to pay dividends, and could hinder our flexibility and restrict
our ability to take advantage of market opportunities or respond to changing
market conditions.
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<PAGE> 27
OUR INTERNATIONAL OPERATIONS, WHICH WILL INCREASE AS A RESULT OF THE MERGER,
SUBJECT US TO RISKS THAT ARE DIFFICULT TO PREDICT.
Approximately 10.8% of our revenues during the fiscal year ended March 31,
2000 and 11.0% of our revenues during the six months ended September 30, 2000
were derived from international operations. Excluding certain of its
Singapore-based operations, which will not be included in the merger,
approximately 25.0% of Weatherford Global's revenues during the fiscal year
ended December 31, 1999 and 34.8% of its revenues for the nine months ended
September 30, 2000 came from international operations. The merger will
significantly increase our international operations and, correspondingly, our
exposure to risks from international operations. Further, we have little or no
operating experience in certain of the international regions in which
Weatherford Global operates, including Canada and Thailand. We intend to
continue to expand our business in Latin America and Southeast Asia and,
ultimately, other international markets.
Our international operations are affected by global economic and political
conditions. Changes in economic or political conditions in any of the countries
in which Universal or Weatherford Global operates could result in exchange rate
movement, new currency or exchange controls or other restrictions being imposed
on our operations or expropriation. In addition, the financial condition of
foreign customers may not be as strong as that of our current domestic
customers.
Our operations may also be adversely affected by significant fluctuations
in the value of the U.S. dollar. This risk may be heightened following the
merger as our revenues from international operations increase. Although we
attempt to match costs and revenues in terms of local currencies, we anticipate
that as we continue our expansion on a global basis, there may be many instances
in which costs and revenues will not be matched with respect to currency
denomination. As a result, we anticipate that increasing portions of our
revenues, costs, assets and liabilities will be subject to fluctuations in
foreign currency valuations. While we may use foreign currency forward contracts
or other currency hedging mechanisms to minimize our exposure to currency
fluctuation, there can be no assurance that hedges will be implemented, or if
implemented, will achieve the desired effect. We may experience economic loss
and a negative impact on earnings or net assets solely as a result of foreign
currency exchange rate fluctuations. Further, the markets in which we conduct
business could restrict the removal or conversion of the local or foreign
currency, resulting in our inability to hedge against these risks.
WEATHERFORD WILL CONTINUE TO COMPETE WITH US FOLLOWING THE MERGER.
Immediately following the merger, Weatherford will continue to compete with
us in certain geographic regions, such as the Middle East and Asia-Pacific,
including Australia and Thailand. In addition, Weatherford will not be
contractually restricted from competing with us in other areas.
YOU SHOULD NOT PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS.
With the exception of historical information, the matters in this proxy
statement and those matters incorporated into this document by reference to our
SEC filings may include forward-looking statements that involve risks and
uncertainties. Discussions containing forward-looking statements may be found
throughout this document and specifically in the material under "Summary," "Risk
Factors," "The Merger -- Universal's Reasons for the Merger; Recommendation of
Universal's Board of Directors," "Business of Universal," "Business of
Weatherford Global," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" (of both our company and Enterra).
Forward-looking statements represent management's current expectations and are
inherently uncertain. Our actual results may differ significantly from
management's expectations, and thus from the results discussed in the
forward-looking statements. Factors that may cause such differences include
those described in "Cautionary Statement Concerning Forward-Looking
Information," as well as "Risk Factors," "Business of Universal," "Business of
Weatherford Global," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" (of both us and Enterra), and in our Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form
8-K on file with the SEC.
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<PAGE> 28
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
Certain matters discussed in this proxy statement 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 fact included in this proxy statement or
incorporated by reference to other documents filed with the SEC by Universal are
forward-looking statements. You can identify many of these statements by looking
for words such as "believes," "expects," "will," "intends," "projects,"
"anticipates," "estimates" or similar expressions. Such forward-looking
statements include, without limitation, statements regarding:
- anticipated cost savings and other synergies resulting from the merger;
- the sufficiency of available cash flows to fund continuing operations;
- the terms of the new financing arrangements we will enter into in
connection with the merger;
- capital improvements;
- the expected amount of capital expenditures;
- our future financial position;
- growth strategy and projected costs; and
- plans and objectives of management for future operations.
Such forward-looking statements are subject to various risks and uncertainties
that could cause actual results to differ materially from those anticipated as
of the date of this proxy statement. The risks related to the business of
Universal and Weatherford and the risks relating to the merger transaction
discussed under "Risk Factors," as well as the risk factors described in
Universal's Annual Report on Form 10-K and its other filings with the SEC, among
other factors, could cause actual results to differ from those described in, or
otherwise projected or implied by, the forward-looking statements.
Although our management believes the expectations for Universal 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 our actual results to differ materially from
the expectations reflected in the forward-looking statements include, among
other things:
- inability to successfully consummate the proposed merger and integrate
the business of Weatherford Global and other businesses we have acquired
or may acquire in the future;
- conditions in the oil and gas industry, including the demand for natural
gas and impacts from the price of natural gas;
- competition among the various providers of contract compression services;
- changes in safety and environmental regulations pertaining to the
production and transportation of natural gas;
- changes in economic or political conditions in the markets in which we
operate;
- introduction of competing technologies by other companies;
- ability to retain and grow our customer base;
- regulatory delays or conditions imposed by regulatory bodies in approving
the merger;
- employment workforce factors, including loss of key employees; and
- liability claims related to the use of our products and services.
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<PAGE> 29
See also "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Enterra -- Forward-Looking Statements by Enterra" for
additional factors that may affect forward-looking statements made by Enterra.
All subsequent written and oral forward-looking statements attributable to
Universal or any person acting on our behalf are expressly qualified in their
entirety by the cautionary statements contained or referred to in this section.
The forward-looking statements included herein are only made as of the date of
this proxy statement and we undertake no obligation to publicly update such
forward-looking statements to reflect new information, subsequent events or
otherwise.
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<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF UNIVERSAL
GENERAL
We were formed in December 1997 to acquire all of the outstanding stock of
Tidewater Compression. Upon completion of the acquisition in February 1998,
Tidewater Compression became our wholly owned operating subsidiary and changed
its name to Universal Compression, Inc. Through this subsidiary, our gas
compression service operations date back to 1954.
During the quarter ended June 30, 2000, we completed an initial public
offering of 7,275,000 shares of our common stock (including 275,000 shares of
common stock issued pursuant to the underwriters' over-allotment option), which
provided us with net proceeds, after deducting underwriting discounts and
commissions, of approximately $149.2 million. Concurrently with our initial
public offering, we implemented a recapitalization pursuant to which all of our
then existing classes of preferred and common stock were converted and split
into common stock. Also concurrently with our initial public offering, we
entered into a $50 million revolving credit facility and $200 million operating
lease facility. We used the proceeds of the offering and the $62.6 million in
initial proceeds from the operating lease facility to repay $192.7 million of
indebtedness, and the remaining proceeds for working capital and to pay expenses
associated with our offering and concurrent financing transactions.
We are 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 have a
growing presence in key international markets. As of September 30, 2000, we had
a broad base of over 750 customers and maintained a fleet of over 3,400
compression rental units. In addition, we own or service under contract a total
of approximately 977,000 horsepower. We operate in every significant natural gas
producing region in the United States through our 38 compression sales and
service locations. As a complement to our rental operations, we design and
fabricate compression units for our own fleet as well as for our global customer
base.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Revenues. Our total revenues for the three months ended September 30, 2000
increased $3.9 million, or 11%, to $38.9 million compared to $35.0 million for
the three months ended September 30, 1999. Rental revenue increased by $5.0
million, or 21%, to $28.7 million during the three months ended September 30,
2000 from $23.7 million during the three months ended September 30, 1999.
Domestic rental revenue increased by $4.0 million, or 20%, to $24.4 million
during the three months ended September 30, 2000 from $20.4 million during the
three months ended September 30, 1999. International rental revenue increased by
$1.0 million, or 30%, to $4.3 million during the three months ended September
30, 2000 from $3.3 million during the three months ended September 30, 1999. The
increase in both domestic and international rental revenue primarily resulted
from expansion of our rental fleet. Domestic average rented horsepower for the
three months ended September 30, 2000 increased by 24% to approximately 535,000
horsepower from approximately 433,000 horsepower for the three months ended
September 30, 1999. In addition, international average rented horsepower for the
three months ended September 30, 2000 increased by 31% to approximately 55,000
horsepower from approximately 42,000 horsepower for the three months ended
September 30, 1999, primarily through additional service in South America. Our
average horsepower utilization rate for the quarter ended September 30, 2000,
was approximately 86.2%, up from 79.3% in the same quarter a year ago. At the
end of the quarter, we had approximately 810,000 horsepower with another 167,000
horsepower operated and maintained for customers. The horsepower utilization
rate at September 30, 2000 was approximately 87.5%. The preceding horsepower and
utilization amounts include Gas Compression Services, Inc. for the 15 days from
September 15, 2000, the date of the GCSI merger.
Revenue from fabrication and sales decreased to $10.1 million from $11.3
million, a decrease of 11%. The decline in sales revenue, consisting mostly of
equipment fabrication and parts sales, for the second
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<PAGE> 31
fiscal quarter was due primarily to a slightly lower level of fabrication
activity and the sale of a small air compression distributorship. The backlog of
fabrication projects at the end of the second fiscal quarter was approximately
$26.8 million, compared with a backlog of $5.2 million at the same time a year
earlier. From June 30, 2000 to September 30, 2000, backlog has increased $8.4
million.
Gross Margin. Gross margin (defined as total revenue less rental expense,
cost of sales (exclusive of depreciation and amortization), gain on asset sales
and interest income) for the three months ended September 30, 2000 increased
$3.6 million, or 21%, to $20.4 million from gross margin of $16.8 million for
the three months ended September 30, 1999. The rental gross margin for the three
months ended September 30, 2000 increased $3.6 million, or 24%, to $18.8 million
compared to gross margin of $15.2 million for the three months ended September
30, 1999. Gross margin increased primarily as the result of the rental revenue
growth discussed above and operating cost improvements realized by rental
operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended September 30, 2000 decreased
$0.3 million compared to the three months ended September 30, 1999. As a
percentage of revenue, selling, general and administrative expenses represented
10% of revenues for the three months ended September 30, 2000 compared to 12% of
revenues for the three months ended September 30, 1999. The decrease is
primarily due to the elimination of management fees paid as a result of
termination of such fees in connection with our initial public offering
consummated May 30, 2000. In addition, we have been able to reduce other costs
as compared to the same period in the prior year. These reductions have been
offset partially by increases in certain expenses related to our operating as a
publicly traded company.
EBITDA for the three months ended September 30, 2000 increased 24% to $16.7
million from $13.5 million for the three months ended September 30, 1999,
primarily due to increases in horsepower and utilization of the compression
rental fleet in addition to operating cost improvements realized by rental
operations and decreased selling, general and administrative expenses, as
discussed above. EBITDA is defined as net income plus income taxes, interest
expense, leasing expense, management fees, depreciation and amortization. EBITDA
is not a measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to operating income or
net income as an indicator of our 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 our borrowing arrangements will
be tied to similar measures. We believe that EBITDA is a standard measure of
financial performance used for valuing companies in the compression industry.
EBITDA is a useful common yardstick as it measures the capacity of companies to
generate cash without reference to how they are capitalized, how they account
for significant non-cash charges for depreciation and amortization associated
with assets used in the business (the bulk of which are long-lived assets in the
compression industry), or what their tax attributes may be.
Depreciation and Amortization. Depreciation and amortization increased by
$0.6 million to $6.7 million during the three months ended September 30, 2000,
compared to $6.1 million during the three months ended September 30, 1999. The
increase resulted primarily from the expansion of our rental fleet offset
partially by the compressor equipment sold and leased back under the new
operating lease facility.
Operating Lease. We incurred leasing expense of $2.0 million during the
three months ended September 30, 2000 resulting from the new operating lease
facility entered into in May 2000. The outstanding balance under the operating
lease facility at September 30, 2000 was $139.6 million.
Interest Expense. Interest expense decreased $3.3 million to $5.2 million
for the three months ended September 30, 2000 from $8.5 million for the three
months ended September 30, 1999, primarily as a result of the reduction of debt
resulting from our initial public offering and related debt restructuring. The
decrease in interest expense was offset partially by increased accretion of
discount notes and the assumption of debt related to the GCSI acquisition.
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<PAGE> 32
Net Income. We had net income of $1.8 million for the three months ended
September 30, 2000 compared to a net loss of $1.6 million for the three months
ended September 30, 1999, primarily as a result of an increase in gross margins
and interest expense decreasing from $8.5 million to $5.2 million, offset
partially by increased depreciation and amortization related to the continued
expansion of our assets and leasing expense of $2.0 million resulting from the
new operating lease facility.
SIX MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1999
Revenues. Our total revenues for the six months ended September 30, 2000
increased $4.8 million, or 7%, to $73.6 million compared to $68.8 million for
the six months ended September 30, 1999. Rental revenue increased by $8.1
million, or 17%, to $55.0 million during the six months ended September 30, 2000
from $46.9 million during the six months ended September 30, 1999. Domestic
rental revenue increased by $6.5 million, or 16%, to $46.6 million during the
six months ended September 30, 2000 from $40.1 million during the six months
ended September 30, 1999. International rental revenue increased by $1.6
million, or 24%, to $8.4 million during the six months ended September 30, 2000
from $6.8 million during the six months ended September 30, 1999. The increase
in both domestic and international rental revenue primarily resulted from
expansion of our rental fleet.
Domestic average rented horsepower for the six months ended September 30,
2000 increased by 22% to approximately 514,000 horsepower from approximately
420,000 horsepower for the six months ended September 30, 1999. In addition,
international average rented horsepower for the six months ended September 30,
2000 increased by 32% to approximately 54,000 horsepower from approximately
41,000 horsepower for the six months ended September 30, 1999, primarily through
additional service in South America. Our average horsepower utilization rate for
the six months ended September 30, 2000, was approximately 85.3%, up from 78.9%
in the same period a year ago. At the end of the quarter, we had approximately
810,000 available horsepower with another 167,000 horsepower operated and
maintained for customers. The horsepower utilization rate at September 30, 2000
was approximately 87.5%. The preceding horsepower and utilization amounts
include GCSI for the 15 days from September 15, 2000, the date of the merger.
Revenue from fabrication and sales decreased to $18.4 million for the six
months ended September 30, 2000 from $21.9 million for the same period a year
ago, a decrease of 16%. The decline in sales revenue, consisting mostly of
equipment fabrication and parts sales was due primarily to the impact in the
prior-year period of an equipment purchase option exercised by a rental customer
and the sale of a small air compression distributorship. The backlog of
fabrication projects at the end of the second fiscal quarter was approximately
$26.8 million, compared with a backlog of $5.2 million at the same time a year
earlier. From June 30, 2000 to September 30, 2000, backlog has increased $8.4
million.
Gross Margin. Gross margin (defined as total revenue less rental expense,
cost of sales (exclusive of depreciation and amortization), gain on asset sales
and interest income) for the six months ended September 30, 2000 increased $6.6
million, or 20%, to $39.5 million from gross margin of $32.9 million for the six
months ended September 30, 1999. The rental gross margin for the six months
ended September 30, 2000 increased $6.3 million, or 21%, to $36.1 million
compared to gross margin of $29.8 million for the six months ended September
30,1999. Gross margin increased primarily as the result of the rental revenue
growth discussed above and operating cost improvements realized by rental
operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six months ended September 30, 2000 decreased
$1.4 million compared to the six months ended September 30, 1999. As a
percentage of revenue, selling, general and administrative expenses represented
10% of revenues for the six months ended September 30, 2000 compared to 13% of
revenues for the six months ended September 30, 1999. The decrease is primarily
due to the elimination of management fees as a result of termination of such
fees in connection with our initial public offering consummated May 30, 2000. In
addition, we have been able to reduce other costs as compared to the same period
in the prior
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<PAGE> 33
year. These reductions have been offset partially by increases in certain
expenses related to our operating as a publicly traded company.
EBITDA for the six months ended September 30, 2000 increased 25% to $32.4
million from $25.9 million for the six months ended September 30, 1999,
primarily due to increases in horsepower and utilization of the compression
rental fleet in addition to operating cost improvements realized by rental
operations and decreased selling, general and administrative expenses, as
discussed above. EBITDA is defined as net income plus income taxes, interest
expense, leasing expense, management fees, depreciation and amortization. EBITDA
is not a measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to operating income or
net income as an indicator of our 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 our borrowing arrangements will
be tied to similar measures. We believe 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, we 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 our initial public offering
and concurrent financing transactions.
Depreciation and Amortization. Depreciation and amortization increased by
$2.5 million to $14.2 million during the six months ended September 30, 2000,
compared to $11.7 million during the six months ended September 30, 1999. The
increase resulted primarily from the expansion of our rental fleet offset
partially by the compressor equipment sold and leased back under the new
operating lease facility.
Operating Lease. We incurred leasing expense of $2.7 million during the
six months ended September 30, 2000 resulting from the new operating lease
facility entered into in May 2000. The outstanding balance under the operating
lease facility at September 30, 2000 was $139.6 million.
Interest Expense. Interest expense decreased $3.2 million to $13.2 million
for the six months ended September 30, 2000 from $16.4 million for the six
months ended September 30, 1999, primarily as a result of the reduction of debt
resulting from our initial public offering and related debt restructuring. The
decrease in interest expense was offset partially by increased accretion of
discount notes and the assumption of debt related to the GCSI acquisition.
Extraordinary Losses. During the quarter ended June 30, 2000, we incurred
extraordinary losses of $6.3 million, net of income taxes of $3.7 million,
related to our debt restructuring.
Net Loss. We had a net loss of $9.2 million for the six months ended
September 30, 2000 compared to a net loss of $2.8 million for the six months
ended September 30, 1999, primarily as a result of extraordinary losses of $6.3
million, net of income taxes, non-recurring charges of $4.4 million, net of
income taxes, increased depreciation and amortization related to the continued
expansion of our assets and the factors discussed above. The increase in the net
loss was partially offset by increased gross margins, decreased selling, general
and administrative expenses and decreased interest expense. Excluding the effect
of the non-recurring and extraordinary after-tax charges, we had net income of
$1.5 million for the six months ended September 30, 2000.
FISCAL YEAR ENDED MARCH 31, 2000 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1999
Revenues. Our total revenues for the fiscal year ended March 31, 2000
increased $6.9 million, or 5.3%, to $136.4 million compared to $129.5 million
for the fiscal year ended March 31, 1999 due to an increase in rental revenues.
Rental revenues increased by $12.7 million, or 14.8%, to $98.3 million during
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<PAGE> 34
the fiscal year ended March 31, 2000 from $85.6 million during the fiscal year
ended March 31, 1999. Domestic rental revenues increased by $4.8 million, or
6.0%, to $83.6 million during the fiscal year ended March 31, 2000 from $78.8
million during the fiscal year ended March 31, 1999. International rental
revenues increased by $7.9 million, or 116%, to $14.7 million during the fiscal
year ended March 31, 2000 from $6.8 million during the fiscal year ended March
31, 1999. The increase in both domestic and international rental revenues
primarily resulted from expansion of our rental fleet. Domestic average rented
horsepower for the fiscal year ended March 31, 2000 increased by 11.3% to
approximately 444,000 horsepower from approximately 399,000 horsepower for the
fiscal year ended March 31, 1999. In addition, international average rented
horsepower more than doubled to approximately 45,000 horsepower for the fiscal
year ended March 31, 2000 from approximately 20,000 horsepower for the fiscal
year ended March 31, 1999, primarily through additional service in Argentina and
Colombia. Revenues from fabrication and sales decreased to $38.1 million from
$43.6 million, a decrease of 12.6%, due to a lower level of equipment and parts
activity.
Gross Margin. Gross margin before depreciation and amortization for the
fiscal year ended March 31, 2000 increased $7.1 million, or 11.5%, to $69.0
million from gross margin of $61.9 million for the fiscal year ended March 31,
1999. The rental gross margin for the fiscal year ended March 31, 2000 increased
$8.3 million, or 15.2%, to $62.9 million compared to gross margin of $54.6
million for the fiscal year ended March 31, 1999. Gross margin increased
primarily as the result of the revenue growth discussed above while rental
margins remained constant at 64% for the fiscal years ended March 31, 2000 and
1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the fiscal year ended March 31, 2000 decreased $0.1
million, or 0.5%, to $16.8 million compared to $16.9 million for the fiscal year
ended March 31, 1999. As a percentage of revenue, selling, general and
administrative expenses represented 12.3% of revenues for the fiscal year ended
March 31, 2000 compared to 13.0% of revenues for the fiscal year ended March 31,
1999.
Interest Expense. Interest expense increased $5.0 million to $34.3 million
for the fiscal year ended March 31, 2000 from $29.3 million for the fiscal year
ended March 31, 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.
Net Loss. We had a net loss of $6.0 million for the fiscal year ended
March 31, 2000 compared to a net loss of $2.4 million for the fiscal year ended
March 31, 1999. This increase in net loss was primarily due to interest expense
increasing from $29.3 million to $34.3 million and deprecation and amortization
related to the continued expansion of our assets increasing from $19.3 million
to $26.0 million, which was offset by an increased income tax benefit and the
factors discussed above.
FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO PRO FORMA FISCAL YEAR ENDED MARCH
31, 1998
The Tidewater Compression acquisition closed on February 20, 1998 and was
accounted for under purchase accounting. To provide for a comparison of the two
twelve-month periods, actual results for the twelve months ended March 31, 1999
are compared to pro forma results for the Tidewater Compression acquisition for
the twelve months ended March 31, 1998.
Revenues. Revenues for fiscal year 1999 increased $20.7 million, or 19.0%,
to $129.5 million compared to revenues of $108.8 million for pro forma fiscal
1998, due to increases in both rental revenues and revenues from fabrication and
equipment sales. Rental revenues increased 6.1% to $85.6 million. The increase
in rental revenues was principally due to a 10.6% expansion of the rental fleet,
which was partially offset by a slight reduction in utilized horsepower and
rental pricing. Additionally, we increased the amount of our horsepower rented
in international markets by 15.0% through additional service in Latin America.
Revenue from fabrication and other sales increased to $43.6 million from $24.0
million, an increase of 81.7%, due to a higher level of fabrication activity and
the sale of equipment from the rental fleet to customers who exercised purchase
options on equipment previously rented.
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<PAGE> 35
Gross Margin. Gross margin before depreciation and amortization for fiscal
1999 increased $3.5 million, or 6.0%, to $61.9 million from $58.4 million for
pro forma fiscal 1998. The rental gross margin for fiscal 1999 increased $4.8
million, or 9.6%, to $54.6 million compared to gross margin of $49.8 million for
fiscal 1998. Gross margin increased primarily as the result of revenue growth
which was offset by reduced fabrication margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal 1999 increased $3.8 million, or 29.3%,
compared to selling, general and administrative expenses for pro forma fiscal
1998. As a percentage of revenues, selling, general and administrative expenses
for fiscal 1999 represented 13.0% of revenues compared to 12.0% of revenues from
pro forma fiscal 1998. The increase was primarily due to increased sales and
engineering expense in fiscal 1999 as we added the additional personnel
necessary to manage and rent a larger rental fleet, and the increase in expense
necessary to operate as a stand alone company.
Net Loss. Primarily as a result of interest expense of $29.3 million
related to the indebtedness incurred in the Tidewater Compression acquisition,
increased income taxes and the factors discussed above, we generated a net loss
for fiscal 1999 of $2.4 million, as compared to net loss of $3.2 million for pro
forma fiscal 1998.
EFFECTS OF INFLATION
In recent years, inflation has been modest and has not had a material
impact upon the results of our operations.
LIQUIDITY AND CAPITAL RESOURCES
In May 2000, concurrently with our initial public offering and together
with our operating subsidiary, we entered into a $200 million, five-year
operating lease facility arranged by Deutsche Bank Securities Inc. The
transaction involves a sale and leaseback of compression equipment to a trust
formed by Deutsche Bank AG. Under the operating lease facility, through
September 30, 2000, we have sold some of our compression equipment to the trust
for approximately $140 million and leased the equipment back for a five-year
period. Under the terms of the operating lease facility, we may sell up to an
additional $60 million of equipment to the trust from September 30, 2000 through
November 2001. The compression equipment sold under the operating lease facility
is deployed by us under our normal operating procedures. Additionally, we have
the option to repurchase the equipment from the trust at any time. The equipment
sold had a book value of approximately $97 million and the equipment sale
resulted in a gain of approximately $43 million, which is being deferred until
the end of the lease. As of September 30, 2000, the rate for the rental payments
under the operating lease facility was approximately 9.5%. Under the operating
lease facility, our operating subsidiary is the lessee and we guarantee certain
of its obligations thereunder.
In May 2000, we repaid and terminated our 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 the 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 revolver, as
of September 30, 2000, no amounts were outstanding. Our operating subsidiary,
Universal Compression, Inc., is the borrower, and four of its subsidiaries,
together with us, are guarantors under the revolver.
As of September 30, 2000, we had $191.4 million aggregate principal amount
outstanding under our 9 7/8% senior discount notes. We intend to commence a
tender offer to purchase for cash our 9 7/8% senior discount notes at a price
equal to 101% of the accreted value (which value is approximately the aggregate
principal amount outstanding), plus unpaid interest. In connection with the
tender offer, we also intend to solicit the consent of the noteholders to amend
the indenture governing these notes to eliminate
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<PAGE> 36
substantially all restrictive covenants for a consent fee equal to approximately
0.50% of the accreted value. Our obligation to accept and pay for any tendered
notes and to pay the consent fee will be conditioned upon consummation of the
proposed acquisition of Weatherford Global, although completion of the tender
offer and consent solicitation for the notes is not required and is not a
condition to the closing of the merger. Pursuant to the indenture governing
these notes, consummation of the proposed merger with Weatherford Global gives
the holders of these notes the right to require that we redeem those notes at a
price equal to 101% of the accreted value, plus accrued and unpaid interest to
date.
Our cash and cash equivalents balance at September 30, 2000 was $1.5
million, compared to $1.4 million at March 31, 2000. For the six months ended
September 30, 2000, we generated cash flow from operations of $8.8 million,
received $139.6 million from the sale of compression equipment under the
operating lease facility and received $149.2 million from our initial public
offering. We primarily used this cash flow to purchase $32.9 million of
equipment and inventory for our rental operations and to make net principal
payments of $192.7 million on our outstanding debt balances, which included
termination of our term loan and credit facility, redemption of all of our
11 3/8% Senior Discount Notes and retirement of a finance lease arrangement, and
approximately $77 million for the cash portion and refinancing of assumed debt
and other obligations in connection with our acquisition of GCSI.
We expect to expend approximately $89 million on capital projects during
fiscal 2001, excluding acquisitions. We have spent approximately $33 million
during the six months ended September 30, 2000. We continue to emphasize our
investment in larger horsepower compression rental units and the purchase and
leaseback of customer owned equipment. Our other principal uses of cash will be
to meet interest and lease payments as well as support changes in our working
capital.
In April 2000, we acquired all of the outstanding stock of Spectrum Rotary
Compression Inc. from Energy Spectrum Partners LP in exchange for 287,723 shares
of our common stock. Spectrum added approximately 10,700 horsepower to our fleet
and provided us with an increased presence in the screw compressor market.
On September 15, 2000, we completed the merger of Gas Compression Services,
Inc., a supplier of natural gas compression equipment and services with
fabrication and overhaul facilities in Michigan and Texas, into our operating
subsidiary for a combination of approximately $12 million in cash, 1,400,726
shares of our common stock and the assumption of approximately $57 million in
debt and operating leases of GCSI, as well as $6 million of debt related to GCSI
customer equipment financing and associated customer notes receivable. The
acquisition was accounted for under the purchase method of accounting and
resulted in the recognition of approximately $33 million in goodwill. The GCSI
acquisition has added approximately 138,000 aggregate horsepower to our fleet
and provides us with an increased customer base, additional market segments and
additional fabrication capabilities. Certain information included in this proxy
statement as of September 30, 2000 includes GCSI's operations for 15 days. We
expect to add $35 million to $38 million in revenues and approximately $14.5
million per year in EBITDA as a result of the GCSI acquisition.
We expect to add approximately 40,000 horsepower to our fleet in the
current fiscal 2001 third quarter. Such increase includes the 10,000 horsepower
to be added for our first compression service project in Mexico, which project
will contribute an approximately $4.7 million one time turn key installation
payment to us at a modest margin. We also expect to invoice in the current
quarter approximately $12 million of our $26.8 million backlog at September 30,
2000.
The successful completion of our initial public offering of our common
stock and financing and operating lease arrangements during the first fiscal
quarter improved our financial resources. We anticipate that absent the
Weatherford Global acquisition, our internally generated cash flow, including
improvement in our working capital position and availability under our revolving
credit facility, operating lease facility and permitted international borrowings
would be sufficient to fund domestic and international operations, capital
projects, and our obligations for fiscal year 2001, excluding acquisitions.
However, if the proposed Weatherford Global acquisition is consummated, we
expect to refinance our existing indebtedness, to the extent required, and our
operating lease arrangement, as well as indebtedness and operating lease
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<PAGE> 37
arrangements of Weatherford Global, as described below. We will not be required
to refinance our 9 7/8% senior discount notes, except pursuant to our tender
offer and related consent solicitation for the notes, or to the extent the
holders of any of these notes exercise their right under the indenture to
require us to redeem the notes following consummation of the merger.
On October 24, 2000, we announced the signing of a definitive merger
agreement to acquire Weatherford Global as described in this proxy statement. If
the merger is consummated, the combined company will be the second largest
provider of gas compression services in terms of horsepower. The combined
company will have a fleet of approximately 7,000 units comprising approximately
1.8 million horsepower. We expect that the merger will result in pre-tax cost
savings of approximately $20 million in our fiscal 2002 through consolidation
and streamlining of operations. We may not realize these cost savings as quickly
or as fully as we expect, if at all.
If our proposed acquisition of Weatherford Global is consummated, we will
refinance our existing indebtedness, to the extent required, and our operating
lease arrangement, as well as Weatherford Global's existing indebtedness and two
operating lease arrangements. We are presently negotiating a new $125 million
revolving bank credit facility as well as two new operating lease facilities.
One of the new operating lease facilities is expected to be at least $425
million, which will be funded primarily through the issuance of senior debt
securities by an unaffiliated bankruptcy remote lessor and secured by the
assignment to the noteholders of the lessor's lease with us, as well as a
security interest in all assets of the lessor, including the leased equipment.
Our operating subsidiary will provide a residual value guarantee structured to
be equal to approximately 82-85% of the acquisition cost of the compression
equipment. The second new operating lease facility is contemplated to be up to
$300 million that may be funded primarily through the issuance of asset-backed
securitization notes issued by an unaffiliated bankruptcy remote lessor and
secured by the assignment to the noteholders of the lessor's lease with us, a
security interest in all assets of the lessor, and a security interest in up to
$130 million of equipment owned by our subsidiary. It is anticipated that under
the new operating lease facilities described above, assets under our existing
operating lease facility and those of Weatherford Global will be transferred
directly to the lessors under the new facilities, and we will sell some of our
currently owned and/or hereafter acquired compression equipment to the new
lessors and lease that equipment back for a specified term.
Also, we intend to commence an offer to purchase for cash our 9 7/8% senior
discount notes and amend our indenture for such notes conditioned upon
consummation of the proposed Weatherford Global merger. Completion of the tender
offer and consent solicitation for the notes is not required and is not a
condition to the closing of the Weatherford Global merger. In addition, pursuant
to the terms of our indenture, the holders of our 9 7/8% senior discount notes
can require us to redeem their notes as a result of the consummation of the
proposed merger. We plan to finance this tender offer, consent solicitation and
redemption through the proposed new operating lease facilities.
There can be no assurance that any or all of the operating lease
arrangements or revolving credit facility will be obtained or, if obtained, will
be on favorable terms.
In connection with our new proposed financing, we are negotiating with
Bankers Trust Company, an affiliate of Deutsche Bank Securities Inc., and with
First Union Securities Inc., both of which are affiliates of certain of our
principal stockholders. Pursuant to the terms of a purchase price adjustment
agreement entered into in connection with our acquisition of Tidewater
Compression in 1998, consummation of the proposed merger will not constitute a
liquidity event (as defined in the agreement) requiring payment to Tidewater
Inc.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 2000, the FASB issued
SFAS 138, which amends certain provisions of SFAS 133 to clarify four areas
causing difficulties in implementation. The amendment included expanding the
normal purchase and sale exemption for supply contracts, permitting the
offsetting of certain intercompany foreign currency
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derivatives and thus reducing the number of third party derivatives, permitting
hedge accounting for foreign-currency denominated assets and liabilities, and
redefining interest rate risk to reduce sources of ineffectiveness. SFAS 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 (1) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (2) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (3) 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. We will adopt SFAS 133 and the corresponding amendments
under SFAS 138 on April 1, 2001. We are currently determining the impact of SFAS
133 on our consolidated results of operations and financial position. This
statement should have no impact on consolidated cash flows.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101,
"Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the
SEC's views in applying generally accepted accounting principles to revenue
recognition in financial statements. On June 26, 2000, the SEC issued an
amendment to SAB 101, effectively delaying its implementation until the fourth
quarter of fiscal years beginning after December 15, 1999. After reviewing SAB
101 and its amendment, our management believes that our revenue recognition
policy is appropriate and that any possible effects of SAB 101 and its amendment
will be immaterial to our results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to some market risk due to the floating interest rate under
our 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 our option, in the case of our
revolving credit facility, and LIBOR, in the case of our operating lease
facility) plus a variable amount based on operating results. The revolving
credit facility and the operating lease facility run through May 2005 and have
outstanding principal balances at September 30, 2000 of $0 and $139.6 million,
respectively. The LIBOR rate at September 30, 2000 was 6.62%. A 1.0% increase in
interest rates could result in a $1.4 million annual increase in interest
expense on the existing principal balances.
In order to minimize any significant foreign currency credit risk, we
generally contractually require that payment by customers be made in U.S.
dollars. If payment is not made in U.S. dollars, we generally utilize the
exchange rate into U.S. dollars on the payment date or balance payments in local
currency against local expenses.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF ENTERRA
GENERAL
Prior to February 1999, Weatherford conducted its compression services
operations through Enterra Compression Company and several domestic and foreign
entities. In February 1999, Weatherford and GE Capital formed a joint venture.
In connection with the formation, Weatherford and GE Capital each contributed
their respective gas compression services businesses to the joint venture, which
is operated through Weatherford Global Compression Services, L.P., its direct
and indirect subsidiaries, and two Canadian subsidiaries of Enterra. In exchange
for the contributions to Weatherford Global, Weatherford received a 64%
ownership interest and GE Capital received a 36% interest.
Enterra Compression Company is a wholly owned subsidiary of WEUS Holding,
Inc., which is a wholly owned subsidiary of Weatherford. Through Weatherford
Global and its other direct and indirect subsidiaries, Enterra is engaged in the
business of renting, selling and servicing natural gas compressor packages used
in the oil and gas industry. Factors influencing Enterra's compressor rental
operations include the number and age of gas producing wells, the ownership of
these properties and natural gas prices and demand.
On October 24, 2000, Weatherford announced the proposed acquisition of
13,750,000 newly issued shares of common stock (approximately 48%) of Universal
in exchange for the merger of Enterra into a subsidiary of Universal.
Weatherford will retain approximately $40 million of Enterra's assets, including
Singapore-based Gas Services International Limited (including GSI's subsidiaries
and their respective branches), Weatherford's Asia-Pacific compressor rental
operations (other than operations in Thailand and Australia, which will be
included in the merger) and $10 million in accounts receivable, as described in
"The Merger Agreement -- Certain Pre-Closing Transfers" (page 66). Weatherford
will value the merger based on the price of Universal common stock as of the
closing date of the merger. Closing of the merger is conditioned upon the
average closing price of Universal's common stock during the 20 consecutive
trading days prior to the merger being not less than $25 per share.
In connection with the merger, Weatherford has entered into an agreement to
purchase GE Capital's 36% interest, which is currently held by Global
Compression Services, Inc., a subsidiary of GE Capital, in the Weatherford
Global joint venture, as well as GE Capital's interests in related entities, for
$206.5 million, subject to the concurrent closing of the merger. The
transactions are subject to various conditions. See "The Merger
Agreement -- Conditions to the Merger."
RESULTS OF OPERATIONS
The historical financial statements for Weatherford's compression
businesses prior to the formation of the joint venture are presented herein on a
combined basis because the predecessor Weatherford business was operated as a
single entity. The financial statements for, and as of the end of, the one-year
period ended December 31, 1999 present the consolidated results of Enterra
Compression Company. The contribution of GE Capital's assets were accounted for
under the "purchase" method of accounting and accordingly, the results of
operations were included since the date of the formation of the joint venture.
The following is a discussion of Enterra's results of operations for the
nine months ended September 30, 2000 and 1999 and the three years ended December
31, 1999, 1998 and 1997. This discussion should be read in conjunction with
Enterra's financial statements and the financial statements of Global
Compression Holdings, Inc. and subsidiaries (GE Capital's gas compression
business which became part of the Weatherford Global joint venture when it was
formed in February 1999) for the period January 1, 1999 through February 2, 1999
and for the two years ended December 31, 1998 and 1997, that are included in
this proxy statement. Both this discussion and Enterra's financial statements
include the results of operations of Gas Services International, as well as
other assets that will not be acquired by Universal in the merger, as more fully
described in "The Merger Agreement -- Certain Pre-Closing Transfers" (page 66).
These assets and GSI were acquired by Enterra in January 2000. The discussion of
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Enterra's results and financial condition includes various forward-looking
statements about markets, the demand for its products and services and its
future results. These statements are based on certain assumptions that Enterra's
management considers reasonable. For information about these assumptions, you
should refer to the subsection entitled "Forward-Looking Statements by Enterra"
on page 41.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1999
Enterra reported revenues of $193.3 million for the first nine months of
2000 compared to $166.5 million for the same period of 1999. Operating income
declined to $4.0 million in the first nine months of 2000 from $16.8 million in
the same period of 1999. The decline in operating income for the period was
primarily attributable to lower margins on rentals, higher costs related to its
reorganization during the first nine months of 2000, higher selling, general and
administrative expenses and start-up costs associated with international
expansion, including the purchase of Gas Services International Limited, its
Singapore-based operations.
Enterra experienced a decline in profitability during the first nine months
of 2000 as it implemented a reorganization of its operations and incurred some
start-up costs with the expansion of its operations outside of North America,
particularly in Asia-Pacific and the Middle East. With the reorganization
substantially complete, Enterra believes it is now positioned for renewed growth
in the fourth calendar quarter and into next year. Some benefits from this
reorganization and Enterra's international operations were realized during the
third quarter of 2000. Enterra management currently expects that the results
will continue to improve for the remainder of the year and it will be well
positioned for growth next year, as its operations are consolidated with those
of Universal.
The following chart sets forth data regarding Enterra's results for the
nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS, EXCEPT
PERCENTAGES)
<S> <C> <C>
Revenues:
Rentals................................................... $ 98,591 $ 87,116
Equipment Sales........................................... 52,544 45,274
Parts and Services........................................ 42,155 34,074
-------- --------
Total Revenues.................................... $193,290 $166,464
Gross Profit: (a)
Rental.................................................... $ 22,421 $ 31,109
Equipment Sales........................................... 3,431 2,295
Parts and Services........................................ 10,920 10,094
-------- --------
Total Gross Profit................................ $ 36,772 $ 43,498
Gross Profit %............................................ 19.0% 26.1%
Selling, General and Administrative....................... $ 32,802 $ 26,704
Operating Income.......................................... 3,970 16,794
EBITDAR(b)................................................ 48,234 49,191
Minority Interest, Net of Tax............................. (848) (3,557)
</TABLE>
---------------
(a) Gross profit is defined as revenues less cost of sales, including
depreciation expense and lease expense.
(b) EBITDAR is calculated by taking operating income and adding back
depreciation, amortization and lease expenses from compressor leases that
are subject to sale and leaseback arrangements. EBITDAR is included for
informational purposes because this is a financial measure under which the
investment community analyzes other publicly traded compression companies.
Calculations of EBITDAR should not be viewed as a substitute for
calculations under generally accepted accounting
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<PAGE> 41
principles, in particular cash flows from operations, operating income,
income from continuing operations and net income. In addition, EBITDAR
calculations by one company may not be comparable to those of another
company, including Universal.
Sales by Geographic Region
The following chart sets forth information regarding Enterra's sales by
geographic region for the nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------
2000 1999
----- -----
<S> <C> <C>
REGION:
U.S. ....................................................... 57% 77%
Canada...................................................... 18 18
Latin America............................................... 9 5
Asia-Pacific and Other...................................... 16 --
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
Other material items reflected in Enterra's results for the nine months
ended September 30, 2000 as compared to the nine months ended September 30, 1999
were:
- The increase in revenues reflects $10.5 million in revenues from
Enterra's rental contracts with YPF Sociedad Anonima in Argentina and
$24.9 million of incremental revenues from its January 2000 acquisition
of GSI. All of Enterra's product lines showed improvements in revenues.
- Gross profit as a percentage of revenues decreased 27.2% due to:
- lower margins on rental contracts due to pricing pressures, primarily in
the United States;
- higher lease expenses due to an increased number of compressors having
been sold and subject to the sale and leaseback arrangements referred to
in "Liquidity and Capital Resources" below; and
- lower parts and services margins due in part to product mix and higher
overall parts and service sales as a percentage of total sales.
- Gross margins, excluding depreciation and compressor lease expenses, for
Enterra's U.S. rental fleet were 56.5% for the nine months ended
September 30, 2000, compared to 61.6% in the same period of 1999.
- Horsepower utilization was 80.2% in the nine months ended September 30,
2000, compared to 79.6% in the same period of 1999. The average size of
compressors in Enterra's fleet during the first nine months of 2000 was
237 horsepower, with an average rental rate of $14.06 per horsepower,
compared to 210 horsepower and $14.19 per horsepower in the comparable
period of 1999.
- Parts and service margins were 25.9% for the nine months ended September
30, 2000 compared to 29.6% in the same period of 1999.
- The increase in selling, general and administrative expenses reflects
costs associated with increased market activity, costs related to the
reorganization of Enterra that commenced in the first quarter of 2000 and
$1.2 million in additional goodwill amortization and costs associated
with new foreign operations, including Latin America and Asia.
- During the first quarter of 2000, Weatherford Global acquired
Singapore-based Gas Services International Limited and began start-up
operations in the Middle East. The selling, general and administrative
costs associated with GSI for the first nine months of 2000 were
approximately $3.5 million, with little profit attributable to that unit
due to the start-up nature of operations. GSI,
35
<PAGE> 42
however, commenced operations in Oman in the second quarter of 2000 and
has recently commenced a large construction contract. The operations of
GSI (excluding those operations in Australia and Thailand) will be
retained by Weatherford following the merger.
- In July 2000, Weatherford Global Compression Services, Ltd., a Canadian
subsidiary of Enterra, acquired the Canadian compression parts and
services division of Cooper Cameron Limited for approximately $10.8
million in cash.
- Enterra's effective tax rate for the nine months ended September 30, 2000
was 36.1%, as compared to 45.1% for the same period of 1999, due to the
change in the mix between foreign and U.S. tax attributes.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues, margins and operating income in 1999 improved from the prior year
primarily due to a better revenue mix and the impact of the Weatherford Global
joint venture entered into with GE Capital in February 1999. This joint venture
combined Weatherford's compression business with GE Capital's Global Compression
Services business to create the second largest natural gas compression fleet in
the industry. This joint venture has allowed expansion of Enterra's compression
operations into the higher margin, higher horsepower market as well as the
growing international markets.
However, Enterra was affected during the year ended December 31, 1999 with
respect to pricing on the lower margin, lower horsepower compressors. Enterra
was also affected by costs associated with the integration of the Global
Compression business into its business.
The following chart sets forth additional data regarding Enterra's results
for 1999 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Revenues.................................................... $225,917 $181,326
Gross Profit................................................ 57,515 41,683
Gross Profit %.............................................. 25.5% 23.0%
Selling, General and Administrative......................... $ 35,941 $ 22,208
Operating Income............................................ 21,574 17,975(a)
Net Income.................................................. 4,539 1,584
EBITDAR..................................................... 66,141 41,231(a)
</TABLE>
---------------
(a) Includes non-recurring charges of $1.5 million that relate primarily to the
write-down of assets.
Sales by Geographic Region
The following chart sets forth information regarding Enterra's sales by
geographic region for the year ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1999 1998
----- -----
<S> <C> <C>
REGION:(a)
U.S. ....................................................... 75% 73%
Canada...................................................... 18 26
Latin America............................................... 7 1
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
---------------
(a) Sales are based on the region of origination and do not reflect sales by
ultimate destination.
36
<PAGE> 43
Material items affecting Enterra's results for 1999 compared to 1998 were
as follows:
- Revenues in 1999 increased 24.6% from 1998 levels due to the formation of
the Weatherford Global joint venture in February 1999 and the execution
of a compression contract with YPF in Argentina.
- Gross profit as a percentage of revenues increased from 23.0% in 1998 to
25.5% in 1999. This increase reflected a more favorable product mix
following the creation of the Weatherford Global joint venture.
- Selling, general and administrative costs as a percentage of revenues
increased to 15.9% in 1999 from 12.2% in 1998 primarily as a result of
costs associated with the integration of the businesses acquired in the
Weatherford Global joint venture and the costs associated with Enterra's
international expansion.
- Operating income as a percentage of revenues remained flat year over year
as improvements in operating margins were offset by higher administrative
costs associated with the integration of the GE Capital businesses.
- The effective tax rate for 1999 was approximately 45.1%, as compared to
59.1% for 1998. The decrease in the 1999 effective tax rate as compared
to 1998 is due in part to lower non-deductible goodwill as a percentage
of earnings before tax.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
The following chart sets forth certain data regarding Enterra's results for
1998 and 1997 as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Revenues.................................................... $181,326 $178,896
Gross Profit................................................ 41,683 39,009
Gross Profit %.............................................. 23.0% 21.8%
Selling, General and Administrative......................... $ 22,208 $ 26,351
Operating Income............................................ 17,975(a) 12,188(b)
Net Income.................................................. 1,584 752
EBITDAR..................................................... 41,231(a) 33,854(b)
</TABLE>
---------------
(a) Includes non-recurring charges of $1.5 million that relate primarily to the
write-down of assets.
(b) Includes $0.5 million of asset impairment charges.
Sales by Geographic Region
The following chart sets forth information regarding Enterra's sales by
geographic region for the year ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1998 1997
----- -----
<S> <C> <C>
REGION:(a)
U.S. ....................................................... 73% 77%
Canada...................................................... 26 23
Latin America............................................... 1 --
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
---------------
(a) Sales are based on the region of origination and do not reflect sales by
ultimate destination.
37
<PAGE> 44
Material items affecting the results for 1998 compared to 1997 were:
- Revenues in 1998 remained constant as compared to 1997.
- Gross profit as a percentage of revenues increased from 21.8% in 1997 to
23.0% in 1998. This increase reflected an improvement in the design of
the compressor packages sold and operational efficiencies.
- The decrease in selling, general and administrative expenses for 1998
compared to 1997 primarily reflects lower costs of services provided by
Enterra's parent.
- Operating income before charges was $19.5 million in 1998, benefiting
from improved margins.
- The effective tax rate on income for 1998 was approximately 59.1% as
compared to 75.8% for 1997. The 1998 and 1997 effective tax rates are
high due to non-deductible goodwill as a percentage of earnings before
tax.
LIQUIDITY AND CAPITAL RESOURCES
Enterra's current sources of capital are reserves of cash, cash generated
from operations, funds under a sale and leaseback arrangement at the Weatherford
Global level, borrowings from Weatherford and borrowings under bank lines of
credit. Enterra believes that the current reserves of cash and short-term
investments, access to its existing credit lines (which will be refinanced if
the proposed merger with Universal is consummated) and internally generated cash
from operations are sufficient to finance the projected cash requirements of its
current and future operations.
The following chart contains information regarding Enterra's capital
resources and borrowings as of September 30, 2000 and as of December 31, 1999:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Cash and Cash Equivalents................................... $ 8,559 $29,189
Short-Term Borrowings and Current Portion of Long-Term
Debt...................................................... 14,170 982
</TABLE>
The net decrease in its cash and cash equivalents since December 31, 1999
was primarily attributable to the following:
- Borrowings, net, on long-term debt and short-term facilities of $11.7
million;
- Borrowings, net, from Weatherford of $2.3 million;
- Proceeds from the sale and leaseback of compression units of $55.1
million;
- Capital expenditures of property, plant and equipment of $61.4 million
funded in part by sale and leaseback arrangements;
- Acquisition of new businesses of approximately $33.4 million that were
partially funded with the proceeds of the sale and leaseback arrangements
noted above; and
- Cash inflows from operating activities of $1.2 million.
Financing Arrangements
Weatherford Global has entered into various sale and leaseback arrangements
under which legal title to the compression units are sold to third parties and
leased back to Weatherford Global under a five-year operating lease with a
market-based repurchase option. These obligations and leases are expected to be
refinanced as part of the proposed merger with Universal.
As of December 31, 1999, Weatherford Global had sold compressors under
these arrangements having appraised values, and received cash of, $239.8
million. As of December 31, 1999, the sales resulted in a
38
<PAGE> 45
pre-tax deferred gain of $77.3 million, which may be deferred until the end of
the lease term. During the nine months ended September 30, 2000, Weatherford
Global sold additional compressors for which it received cash equal to the
appraised value of $55.1 million. The sales resulted in an additional pre-tax
deferred gain of approximately $15.5 million. Weatherford Global has a right to
sell up to an additional $55.1 million of compression units under its existing
lease facility.
Of the proceeds received by Weatherford Global from the sale and leaseback
of the compressor units, $100.0 million was distributed to Weatherford in 1998
and $65.4 million was distributed to GE Capital in 1999 as part of the creation
of the Weatherford Global joint venture. The remaining proceeds of these sales
were utilized by the joint venture for internal corporate purposes and growth.
Weatherford has guaranteed certain of the obligations of Weatherford Global with
respect to the sale of $200.0 million of the compression units. The remaining
sales by Weatherford Global were made on a non-recourse basis to Weatherford
with recourse limited solely to the assets of Weatherford Global.
In July 2000, Weatherford Global put in place a $25.0 million uncommitted
line of credit. The interest rate under this line of credit is LIBOR plus 1.75%
or another rate of interest mutually agreed upon by Weatherford Global and the
lender. As of September 30, 2000, $12.0 million was available under this line of
credit.
Capital Expenditures
Compression operations are, by their nature, capital intensive and, in
order to grow, require substantial investments in compressor units. Enterra's
capital expenditures for the nine months ended September 30, 2000 were $61.4
million and primarily related to compressors and related assets for U.S.
operations. Depreciation expense during the first nine months of 2000 was $23.2
million. Depreciation expense for the current year is expected to be
approximately $30.8 million.
Acquisitions
On July 17, 2000, Weatherford Global Compression Services, Ltd., a Canadian
subsidiary of Enterra, acquired the Canadian compression parts and services
division of Cooper Cameron Limited for approximately $10.8 million in cash. The
acquisition expands Enterra's range of capabilities to provide field gas
production solutions to the Canadian marketplace.
On January 12, 2000, Weatherford Global acquired Singapore-based GSI for a
total of approximately $20.2 million in cash. The acquisition expanded Enterra's
capabilities in the Asia-Pacific and Middle Eastern markets. GSI's main business
units include compressor packaging, 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. Weatherford
will retain the GSI operations (other than operations in Australia and Thailand)
following the proposed merger with Universal.
In February 1999, Weatherford completed the formation of the Weatherford
Global joint venture with GE Capital which combined Weatherford's compression
services operations with GE Capital's Global Compression Services operations.
The Weatherford Global joint venture is the world's second largest provider of
natural gas contract compression services and owns or manages over 4,000
compression units worldwide having more than one million horsepower. Enterra
owns 64% of the joint venture and GE Capital owns 36%. In connection with the
proposed merger with Universal, Weatherford has entered into an agreement to
purchase GE Capital's 36% interest in the joint venture for $206.5 million so
that, immediately following the merger, Universal will own 100% of Weatherford
Global.
During the nine months ended September 30, 2000, Enterra also completed
several small acquisitions of compression service, packaging and parts
distribution companies for total consideration of $7.4 million.
Enterra's acquisitions during 1999 and 2000 were accounted for using the
purchase method of accounting. Results of operations for acquisitions accounted
for as purchases are included in Enterra's consolidated financial statements
since the dates of acquisition. The purchase price is allocated to the net
assets acquired based upon the estimated fair market values at the date of
acquisition. The balances
39
<PAGE> 46
included in Enterra's Consolidated Balance Sheets related to its current year
acquisitions are based upon preliminary information and are subject to change
when final asset and liability valuations are obtained.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC released 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, 2000. The SEC's 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. Enterra 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 Enterra's classification in
the 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 Enterra's financial position or results of operations.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. In June 1999, the FASB issued SFAS 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of SFAS No. 133," amending the effective date of SFAS 133 to years beginning
after June 15, 2000. In June 2000, the FASB issued SFAS 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," amending
accounting and reporting standards of SFAS 133 for certain derivative
instruments and certain hedging activities. Enterra is evaluating the impact of
SFAS 133 on its consolidated financial statements and does not anticipate that
application of this statement will have a material impact on Enterra's financial
position or results of operations.
EXPOSURES
Industry Exposure
Substantially all of Enterra's customers are engaged in the energy
industry. This concentration of customers may impact its overall exposure to
credit risk, either positively or negatively, in that its customers may be
similarly affected by changes in economic and industry conditions. Enterra
performs ongoing credit evaluations of its customers and does not generally
require collateral in support of its trade receivables extensions of credit. It
maintains reserves for potential credit losses, and historically, actual losses
have been within its management's expectations.
Litigation and Environmental Exposure
In the ordinary course of business, Enterra becomes the subject of various
claims and litigation. It maintains insurance to cover many of its potential
losses and is subject to various self-retentions and deductibles with respect to
its insurance. Although it is subject to various ongoing items of litigation,
Enterra does not believe that any of the items of litigation that Enterra is
currently subject to will result in any material uninsured losses to Enterra. It
is possible, however, that an unexpected judgment could be rendered against
Enterra in cases in which it may be uninsured and beyond the amounts that it
currently has reserved or anticipates incurring for that matter.
Enterra is also subject to various federal, state and local laws and
regulations relating to the energy industry in general and the environment in
particular. Environmental laws have in recent years become more stringent and
have generally sought to impose greater liability on a larger number of
potentially responsible parties. While Enterra is not currently aware of any
situation involving an environmental claim which would be likely to have a
material adverse effect on its business, it is always possible that an
environmental claim with respect to one or more of its current businesses or a
business or property that
40
<PAGE> 47
one of its predecessors owned or used could arise that could involve the
expenditure of a material amount of funds.
International Exposure
Like most multinational oilfield service companies, Enterra has operations
in certain international areas, including parts of the Middle East, Latin
America and the Asia-Pacific region that are inherently subject to risks of war,
political disruption, civil disturbance and policies that may:
- disrupt oil and gas exploration and production activities;
- restrict the movement of funds;
- lead to U.S. government or international sanctions; or
- limit access to markets for periods of time.
Historically, the economic impact of such disruptions has been temporary,
and oil and gas exploration and production activities have resumed eventually
and became subject to more normal market forces. Certain areas, including the
Asia-Pacific region and Latin America, have been subjected to political
disruption that has negatively impacted Enterra's results of operations
following such events.
Currency Exposure
Approximately 57.6% of Enterra's net assets attributable to continuing
operations are located outside the United States and are carried on its books in
local currencies. Changes in those currencies in relation to the U.S. dollar
result in translation adjustments and are reflected as accumulated other
comprehensive loss in the equity section on the balance sheets. Enterra
recognizes remeasurement and transactional gains and losses on currencies in its
statements of operations.
FORWARD-LOOKING STATEMENTS BY ENTERRA
This proxy statement contains statements relating to Enterra's future
results, including its projections and business trends. Enterra believes these
statements constitute "Forward-Looking Statements" as defined in the Private
Securities Litigation Reform Act of 1995.
Certain risks and uncertainties may cause actual results to be materially
different from projected results contained in forward-looking statements in this
proxy statement. These risks and uncertainties include, but are not limited to,
the following:
A Downturn in Market Conditions Could Affect Enterra's Results. Any
unexpected material changes in drilling activity or oil and gas prices or
other market trends would likely affect the forward-looking information
provided by Enterra. Any unexpected material changes in oil and gas prices
or other market trends that would impact drilling activity would likely
affect the forward-looking information contained in this proxy statement.
The oil and gas industry is extremely volatile and subject to change based
on political and economic factors outside Enterra's control.
Enterra's estimates as to future results and industry trends are based
on assumptions regarding the future prices of oil and gas, the North
American and international rig counts and their effect on the demand and
pricing of its products and services. These assumptions are based on
various macroeconomic factors, and actual market conditions could vary
materially from those assumed.
In analyzing the market and its impact on Enterra for the remainder of
2000 and for 2001, Enterra's management has made the following assumptions
regarding gas prices, demand and pricing:
- there will not be any material decline in world demand for natural
gas;
- average natural gas prices will exceed $4.00 per thousand cubic feet;
and
41
<PAGE> 48
- pricing will continue to be subject to market conditions and
competitive pricing pressures in certain markets and with respect to
certain product lines.
Projected Cost Savings Could Be Insufficient. During the last two
years, Enterra implemented a number of programs intended to reduce costs
and align our cost structure with the current market environment. Enterra's
forward-looking statements regarding cost savings and their impact on its
business assume these measures will generate the savings expected.
Integration of Acquisitions. During 1999 and 2000, Enterra
consummated various acquisitions of businesses. The success of these
acquisitions will be dependent on Enterra's ability to integrate these
businesses with its existing businesses and to eliminate duplicative costs.
Enterra has, or will have, incurred various duplicative costs with respect
to the operations of companies and businesses acquired by it during 1999
and 2000 pending the integration of the acquired businesses with its
businesses. Enterra's forward-looking statements assume the successful
integration of the acquired businesses and their contribution to its income
during 2001. Integration of acquisitions is something that cannot occur in
the short term and is something that requires constant effort at the local
level to be successful. Accordingly, there can be no assurance as to the
ultimate success of these integration efforts.
An Economic Downturn Could Adversely Affect Demand for Products and
Services. The economic downturn that began in Asia in 1997 affected the
economies of other regions of the world, including South America and the
former Soviet Union, and contributed to the decline in the price of oil and
the level of drilling activity worldwide. Although the economy in the
United States has experienced one of its longest periods of growth in
recent history, the continued strength of the United States economy cannot
be assured. If the United States or European economies were to begin to
decline or if the economies of South America or Asia were to decline again,
the demand for and prices of oil and gas and Enterra's products and
services could again adversely affect its revenues and income. Enterra has
assumed that a worldwide recession, or significant recession in any major
region of the world, or a material downturn in the United States economy,
will not occur.
Currency Fluctuations Could Have a Material Adverse Financial
Impact. A material decline in foreign currency values (compared to the
United States dollar) in Enterra's foreign markets could affect its future
results as well as affect the carrying values of its assets. World
currencies have been subject to much volatility in recent years. The United
States dollar has been strong against most currencies over the past year.
Enterra's forward-looking statements assume no material impact from future
changes in currency values.
Unexpected Litigation and Legal Disputes Could Have a Material Adverse
Financial Impact. If Enterra experiences unexpected litigation or
unexpected results in its existing litigation having a material effect on
results, the accuracy of its forward-looking statements contained in this
proxy statement would be affected. Enterra's forward-looking statements
assume that there will be no such unexpected litigation or results.
QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
Enterra is currently exposed to market risk from changes in foreign
currency and changes in interest rates. A discussion of its market risk exposure
in financial instruments follows under "Interest Rates."
INTEREST RATES
Enterra is subject to interest rate risk on its variable interest rate
borrowings under its sale and leaseback arrangements and uncommitted line of
credit. These facilities have lease and interest payments based on LIBOR. As of
September 30, 2000, the aggregate principal balance was $307.9 million. A one
percent increase in interest rates would result in $3.1 million of additional
expense annually.
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<PAGE> 49
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial information
is based on the historical consolidated financial statements and the notes
thereto of Universal and Enterra and has been prepared to illustrate the effect
of the merger and other transactions. The unaudited pro forma combined condensed
financial information should be read in conjunction with the historical
financial statements and accompanying disclosures contained in this proxy
statement. You should also read Universal's Annual Report on Form 10-K for the
fiscal year ended March 31, 2000, as amended, its Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000 and its Current Reports on Form 8-K.
The unaudited pro forma combined condensed balance sheet as of September
30, 2000 and the unaudited pro forma combined condensed statements of operations
for the six months ended September 30, 2000 and the fiscal year ended March 31,
2000 have been prepared to give effect to the transactions set forth below as if
those transactions had occurred at the balance sheet date and at the beginning
of the income statement periods. Because the fiscal years of Universal and
Enterra differ, Enterra's historical operating results for the fiscal year ended
March 31, 2000 include its first quarter results of 2000, combined with its
results for the nine months ended December 31, 1999.
The unaudited pro forma combined condensed financial statements presented
herewith give effect to:
- our initial public offering of our common stock and concurrent debt
restructuring and operating lease facility, which occurred in May 2000,
as well as our common stock split and conversion of our preferred stock
and non-voting common stock that occurred concurrently with our initial
public offering;
- the transfer of GSI and related assets to Weatherford entities other than
Enterra and its subsidiaries prior to the merger as described more fully
in "The Merger Agreement -- Certain Pre-Closing Transfers" (page 66);
- the restructuring of Universal's and Enterra's debt and operating lease
arrangements; and
- the merger.
We have not included in the unaudited pro forma combined condensed
financial statements the expected benefits from operational savings and other
synergies of an estimated $20 million. While Universal believes these savings
and synergies will occur, we cannot assure you they will be realized either as
quickly or as fully as expected, if at all. We also have not made a pro forma
adjustment to our historical results from operations for our acquisition of Gas
Compression Services, Inc. on September 15, 2000. The unaudited pro forma
condensed combined financial statements presented below do not reflect future
events that may occur after the merger.
At this time, Universal's management is currently in negotiations with
several financial institutions to determine the appropriate debt structure of
the combined company. For purposes of the accompanying unaudited pro forma
combined condensed financial information the assumptions are (a) a $125 million
revolving credit facility, (b) a $425 million operating lease facility funded
primarily through the issuance of senior debt securities by an unaffiliated
bankruptcy remote lessor, and a second $300 million operating lease facility
and/or asset-backed securitization, and (c) retirement of the current senior
notes. We have also assumed that all current holders of senior notes will tender
their notes in our cash purchase offer and related consent solicitation at
101.5% of the accreted value. At this time, Universal cannot determine the final
terms of the new indebtedness and operating lease arrangements, or the ultimate
amount of its existing senior notes that the holders of such notes will tender
to us or require us to redeem pursuant to the terms of the indenture following
the closing of the acquisition, which amount could vary significantly.
The proposed merger is reflected in the unaudited pro forma combined
condensed financial statements using the purchase method of accounting.
Enterra's property, plant and equipment balances have been adjusted to their
estimated fair values. In addition, Enterra's reported current assets and
current liabilities are assumed to be their estimated fair values included in
the unaudited pro forma combined condensed
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<PAGE> 50
financial statements. The final allocation of the purchase price of the merger
will differ from the amounts represented in the unaudited pro forma combined
condensed financial statements.
The accompanying unaudited pro forma combined condensed financial
information should be read in conjunction with the historical consolidated
financial statements of Universal and Enterra and the notes thereto, which are
included elsewhere in this proxy statement. The unaudited pro forma combined
condensed financial statements are provided for informational purposes only and
do not purport to represent what our financial position or results of operations
would actually have been had the acquisition of Enterra occurred on such dates
or to project our results of operations or financial position for any future
period.
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<PAGE> 51
UNIVERSAL COMPRESSION HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000
---------------------------------------------------
ENTERRA ENTERRA
UNIVERSAL ADJUSTED MERGER PRO FORMA
ACTUAL ACTUAL(1) ADJUSTMENTS AS ADJUSTED
--------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents......................... $ 1,535 $ 3,834 $ -- $ 5,369
Accounts receivable, net..................... 26,847 43,957 -- 70,804
Inventories.................................. 14,722 95,965 -- 110,687
Current deferred tax asset................... 227 2,414 -- 2,641
Other........................................ 1,396 5,950 -- 7,346
-------- --------- --------- --------
Total current assets................. 44,727 152,120 -- 196,847
Property, plant and equipment
Rental equipment............................. 359,993 279,083 (249,216)(2) 389,860
Other........................................ 26,525 64,817 (39,817)(2) 51,525
Less: accumulated depreciation............... (44,391) (71,064) 93,298(2) (22,157)
-------- --------- --------- --------
Net property, plant, and equipment........ 342,127 272,836 (195,735) 419,228
Goodwill and intangibles, net of
amortization................................. 131,557 224,724 (141,229)(3) 215,052
Notes receivable............................... 4,929 1,719 -- 6,648
Other assets, net.............................. 8,611 8,925 7,001(4) 24,537
Long-term deferred tax asset................... 7,509 -- -- 7,509
-------- --------- --------- --------
Total assets......................... $539,460 $ 660,324 $(329,963) $869,821
======== ========= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities..... $ 31,412 $ 42,889 $ 3,996(5) $ 78,297
Current portion of long-term debt............ 1,991 14,170 (14,170)(6) 1,991
-------- --------- --------- --------
Total current liabilities............ 33,403 57,059 (10,174) 80,288
Capital lease obligation....................... 5,952 1,260 (1,260)(6) 5,952
Long-term deferred tax liabilities............. 2,806 32,248 (4,267)(7) 30,787
Long-term debt................................. 196,429 685 (192,077)(6) 5,037
Minority interest liability.................... -- 198,508 (198,508)(8) --
Long-term payable due to Weatherford........... -- 59,946 (59,946)(9) --
Other.......................................... 39,192 94,316 (33,017)(10) 100,491
-------- --------- --------- --------
Total liabilities.................... 277,782 444,022 (499,249) 222,555
Total stockholders' equity........... 261,678 216,302 169,286(11) 647,266
-------- --------- --------- --------
Total liabilities and stockholders'
equity............................. $539,460 $ 660,324 $(329,963) $869,821
======== ========= ========= ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma
Combined Condensed Financial Statements.
45
<PAGE> 52
UNIVERSAL COMPRESSION HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30, 2000
-------------------------------------------------------------------
UNIVERSAL
IPO/DEBT ENTERRA ENTERRA
UNIVERSAL RESTRUCTURE ADJUSTED MERGER PRO FORMA
ACTUAL ADJUSTMENTS ACTUAL(1) ADJUSTMENTS AS ADJUSTED
--------- ----------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues.................................. $73,613 $ -- $113,972 $ -- $187,585
Rentals and cost of sales................. 33,901 -- 66,311 -- 100,212
------- -------- -------- -------- --------
Gross margin............................ 39,712 -- 47,661 -- 87,373
Selling, general and administrative....... 7,224 -- 15,688 -- 22,912
------- -------- -------- -------- --------
Operating profit........................ 32,488 -- 31,973 -- 64,461
Depreciation and amortization............. 14,177 (382)(24) 18,829 (13,814)(12) 18,810
Operating lease........................... 2,684 924(22) 10,860 12,777(13) 27,245
Interest expense.......................... 13,225 (2,793)(25) 5,860 (15,249)(14) 1,043
Non-recurring charges..................... 7,059 (7,059)(26) -- -- --
Other, net................................ -- -- 117 -- 117
------- -------- -------- -------- --------
Income (loss) before income taxes and
minority interest..................... (4,657) 9,310 (3,693) 16,286 17,246
Income taxes (benefit).................... (1,746) 3,491(15) (1,631) 6,107(15) 6,221
Minority interest expense, net of taxes... -- -- 306 (306)(16) --
------- -------- -------- -------- --------
Income (loss) before extraordinary
items................................. $(2,911) $ 5,819 $ (2,368) $ 10,485 $ 11,025
======= ======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding:
Basic................................. 11,173 2,166 -- 13,750 27,089(27)
------- -------- -------- -------- --------
Diluted............................... 11,173 2,331 -- 13,750 27,254(27)
------- -------- -------- -------- --------
Earnings (loss) per share:
Basic................................. $ (0.26) $ -- $ 0.41
======= ======== ========
Diluted............................... $ (0.26) $ -- $ 0.40
======= ======== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma
Combined Condensed Financial Statements.
46
<PAGE> 53
UNIVERSAL COMPRESSION HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 2000
---------------------------------------------------------------------
UNIVERSAL
IPO/DEBT ENTERRA ENTERRA
UNIVERSAL RESTRUCTURE ADJUSTED MERGER PRO FORMA
ACTUAL ADJUSTMENTS ACTUAL(1) ADJUSTMENTS AS ADJUSTED
--------- ----------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues................................ $136,449 $ -- $237,763 $ -- $374,212
Rental and cost of sales................ 67,295 -- 139,346 -- 206,641
-------- -------- -------- -------- --------
Gross margin.......................... 69,154 -- 98,417 -- 167,571
Selling, general and administrative..... 16,797 (3,200)(20) 30,272 -- 43,869
-------- -------- -------- -------- --------
Operating profit...................... 52,357 3,200 68,145 -- 123,702
Depreciation and amortization........... 26,006 (3,559)(21) 34,739 (21,979)(17) 35,207
Operating lease......................... -- 5,702(22) 14,344 23,668(18) 43,714
Interest expense........................ 34,327 (15,727)(23) 5,293 (22,606)(19) 1,287
Other, net.............................. -- -- (2,378) -- (2,378)
-------- -------- -------- -------- --------
Income (loss) before income taxes and
minority interest................... (7,976) 16,784 16,147 20,917 45,872
Income taxes (benefit).................. (1,994) 6,378(15) 7,013 7,844(15) 19,241
Minority interest expense, net of
taxes................................. -- -- 4,194 (4,194)(16) --
-------- -------- -------- -------- --------
Income (loss) before extraordinary
items............................... $ (5,982) $ 10,406 $ 4,940 $ 17,267 $ 26,631
======== ======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding:
Basic............................... 2,476 10,495 -- 13,750 26,721(28)
-------- -------- -------- -------- --------
Diluted............................. 2,476 11,181 -- 13,750 27,407(28)
-------- -------- -------- -------- --------
Earnings (loss) per share:
Basic............................... $ (2.42) $ -- $ 1.00
======== ======== ========
Diluted............................. $ (2.42) $ -- $ 0.97
======== ======== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma
Combined Condensed Financial Statements.
47
<PAGE> 54
UNIVERSAL COMPRESSION HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS
(1) Reflects Enterra's historical balances adjusted to exclude its
Singapore-based operations (other than Australia and Thailand) and $10
million of accounts receivable, which are not a part of the merger
transaction.
(2) Reflects (a) the preliminary revaluation of Enterra's property, plant and
equipment historical balances to estimated fair value ($63.2 million) and
(b) the estimated initial sale and leaseback of additional compression
equipment ($258.9 million) pursuant to the proposed new operating lease
facilities assumed to be consummated concurrently with the merger.
(3) Represents the elimination of Enterra Adjusted Actual goodwill ($224.7
million) offset by Universal's preliminary estimate of the excess of the
total purchase price over the allocated fair value of the net assets of
Enterra ($83.5 million). The purchase price includes advisory fees but not
all merger related costs. The final allocation of the purchase price in
the merger will differ from the amounts represented in the unaudited pro
forma combined condensed financial statements.
(4) Represents adjustment for (a) the elimination of prepaid financing costs
associated with Universal's existing senior notes, operating lease
facility and revolving credit facility ($8.5 million), which for purposes
of these pro forma adjustments are assumed to be entirely refinanced
concurrently with the merger and (b) the recording of prepaid finance
costs associated with the proposed new operating lease facilities and
revolving credit facility ($15.5 million).
(5) Represents accrued advisory fees included in the purchase price as
discussed in note 3 above.
(6) Represents the retirement of Enterra's debt using proceeds from the
proposed new operating lease facilities ($16.1 million), and the
retirement of the senior notes ($191.4 million).
(7) Represents the estimated deferred income taxes related to expense items
associated with the elimination of prepaid financing costs associated with
Universal's existing senior notes, its existing operating lease facility
and existing revolving credit facility.
(8) Reflects the elimination of Enterra's minority interest liability as a
result of the purchase of GE Capital's interest by Enterra concurrently
with the merger.
(9) Reflects the forgiveness of Enterra's payable to Weatherford concurrently
with the merger.
(10) Represents the elimination of the deferred gain associated with the
retirement of the existing operating lease facilities of Enterra ($92.9
million). Also reflects the estimated additional deferred gain ($59.9
million) associated with the sale of compression equipment pursuant to the
proposed new operating lease facilities. Additional deferred gain is
assumed to equal approximately 30% of the proceeds from the sale of
compression equipment pursuant to the proposed new operating lease
facilities.
(11) Reflects the elimination of Enterra's stockholders' equity ($216.3
million) and the valuation of Universal's common stock issued to Enterra
related to the merger ($392.7 million). Valuation assumes 13,750,000
shares of common stock valued at $28.56 per share, which is a five-day
average closing price surrounding the announcement date of October 24,
2000. Also reflects the write-off of prepaid finance costs ($5.3 million,
net of taxes) and the redemption premium on the senior notes ($1.8
million, net of taxes) associated with the proposed restructuring of the
existing operating lease facility and revolving credit facility and the
proposed retirement of the senior notes.
(12) Reflects (a) an estimated adjustment to goodwill amortization resulting
from the change in the goodwill balance resulting from the preliminary
allocation of the purchase price in the merger ($1.8 million), (b) the
estimated reduction of depreciation expense resulting from the preliminary
revaluation of the purchase price to rental equipment acquired in the
merger and the estimated
48
<PAGE> 55
additional sale of compression equipment pursuant to the proposed new
operating lease facilities ($8.6 million), with assumed funding under the
proposed operating leases of $558.6 million by the end of the period,
which funding includes the transfer of equipment from the existing
facilities and the sale and leaseback of additional equipment under the
new facilities and (c) the reduction of depreciation expense resulting
from the preliminary revaluation of the purchase price to non-compression
equipment acquired in the merger ($3.4 million). Depreciation and
amortization is calculated using an estimated useful life of 15 years with
a 20% salvage value for rental equipment and an estimated useful life of 7
years for non-compression equipment, while goodwill is amortized over 40
years.
(13) Reflects the net rental payments associated with the proposed new
operating lease facilities ($25.2 million) and amortization of the lease
structuring and arrangement fee ($1.1 million) estimated to be
approximately $14.7 million on the closing of the facilities. Also
reflects the elimination of the existing facilities ($13.5 million),
including the expected related commitment fee, with assumed funding of
$558.6 million by the end of the period, which facilities are currently
being negotiated. The proposed operating lease facilities will replace
Universal's and Enterra's existing facilities. The rental payments under
the leases are assumed to include an amount based on LIBOR plus a variable
amount depending on Universal's operating results, applied to the funded
amount of the leases. The operating lease calculations assume an interest
rate of 9.44% and a seven-year lease term. A fluctuation of .125% of
actual rates related to the proposed new operating lease facilities would
result in an approximate change of $676,000 in rental payments. In the
event all of the senior notes are not retired and additional assets are
not sold under the new operating lease facilities, net income and earnings
per share would be reduced by $160,000 and $0.006, respectively, for every
$10 million principal amount of such senior notes that are not retired and
remain outstanding.
(14) Reflects the adjustment of interest expense ($5.9 million) related to the
retirement of Enterra's indebtedness at the beginning of the period and
the assumed interest adjustment related to the assumed retirement of
Universal's senior notes ($9.3 million).
(15) An estimated statutory tax rate of 37.5% is assumed for pro forma
adjustments. The effective tax rate may differ.
(16) Reflects the elimination of Enterra's minority interest expense as a
result of the purchase of GE Capital's interest by Enterra concurrently
with the merger.
(17) Reflects (a) an estimated adjustment to goodwill amortization resulting
from the change in the goodwill balance resulting from the preliminary
allocation of the purchase price in the merger ($3.3 million), (b) the
estimated reduction of depreciation expense resulting from the preliminary
revaluation of the purchase price to rental equipment acquired in the
merger and the estimated additional sale of compression equipment pursuant
to the proposed new operating lease facilities ($12.0 million), with
assumed funding under the proposed operating leases of $425 million by the
end of the period, which funding includes the transfer of equipment from
the existing facilities and the sale and leaseback of additional equipment
under the new facilities and (c) the reduction of depreciation expense
resulting from the preliminary revaluation of the purchase price to
non-compression equipment acquired in the merger ($6.7 million).
Depreciation and amortization for rental equipment is calculated using an
estimated useful life of 15 years with a 20% salvage value for rental
equipment and an estimated useful life of 7 years for non-compression
equipment, while goodwill is amortized over 40 years.
(18) Reflects the net rental payments associated with the proposed new
operating lease facilities ($41.6 million) and amortization ($2.1 million)
of the lease structuring and arrangement fee, estimated to be
approximately $14.7 million on the closing of the facilities. Also
reflects the elimination of the existing facilities ($20.0 million),
including the expected related commitment fee, with assumed funding of
$425 million by the end of the period, which facilities are currently
being negotiated. The proposed operating lease facilities will replace
Universal's and Enterra's
49
<PAGE> 56
existing facilities. The rental payments under the proposed new leases are
assumed to include an amount based on LIBOR plus a variable amount
depending on Universal's operating results, applied to the funded amount
of the leases. The operating lease calculations assume an interest rate of
9.44% and a seven-year lease term. A fluctuation of .125% of actual rates
related to the proposed new operating lease facilities would result in an
approximate change of $531,000 in rental payments. In the event all of the
senior notes are not retired and additional assets are not sold under the
new operating lease facilities, net income and earnings per share would be
reduced by $415,000 and $0.015, respectively, for every $10 million
principal amount of such senior notes that are not retired and remain
outstanding.
(19) Reflects the adjustment of interest expense ($5.3 million) related to the
retirement of Enterra's indebtedness at the beginning of the period and
the assumed interest adjustment related to the assumed retirement of
Universal's senior notes ($16.9 million). Also includes the net adjustment
for the amortization of up-front financing costs and commitment fees
associated with the proposed revolving credit facility ($0.4 million).
(20) Represents elimination of Castle Harlan management fees ($3.0 million) and
Mr. Urcis' consulting fees ($0.2 million) which were terminated at the
time of Universal's initial public offering and related debt
restructuring.
(21) Reflects the elimination of depreciation expense associated with the sale
of compression equipment pursuant to the existing operating lease
facility, with initial funding under the existing operating lease of $61.3
million.
(22) Reflects the expenses associated with the existing operating lease
facility, including the related commitment fee.
(23) Reflects the adjustment of interest expense related to the redemption of
certain indebtedness at the beginning of the period totaling $177.8
million and $12.8 million of incremental borrowing during the period from
the proceeds of Universal's initial public offering and its existing
operating lease facility. Also includes the commitment fees associated
with Universal's existing revolving credit facility.
(24) Reflects the elimination of depreciation expense associated with the sale
of compression equipment, pursuant to the existing operating lease
facility, with initial funding under the existing operating lease of
$343.1 million.
(25) Reflects the adjustment of interest expense related to the redemption of
certain indebtedness at the beginning of the period and incremental
borrowing during the period from the proceeds of Universal's initial
public offering and its existing operating lease facility. Also includes
the commitment fees associated with the new revolving credit facility.
(26) Represents the non-recurring charges related to the elimination of a
management agreement and a consulting agreement and other related fees in
connection with Universal's initial public offering and concurrent
financing transactions.
(27) Includes the effect of the 7,275,000 shares of common stock offered in,
and the outstanding common stock split and the conversion of the
outstanding preferred stock and non-voting Class A common stock
concurrently with, Universal's initial public offering and the 13,750,000
shares of Universal common stock to be issued to WEUS in the proposed
merger as if these transactions had occurred at April 1, 2000. Also
includes the weighted average effect of the 1,400,726 shares issued as
partial consideration for the GCSI acquisition which occurred on September
15, 2000. Excludes the options to purchase up to 318,000 shares of our
common stock that we are obligated to issue to certain Weatherford Global
employees in connection with the merger.
(28) Includes the effect of the 7,275,000 shares offered in, and the
outstanding common stock split that occurred concurrent with, Universal's
initial public offering and the 13,750,000 shares of Universal stock to be
issued to WEUS in the proposed merger as if these transactions had
occurred at April 1, 1999. Excludes the options to purchase up to 318,000
shares of our common stock that we are obligated to issue to certain
Weatherford Global employees in connection with the merger.
50
<PAGE> 57
THE SPECIAL MEETING
DATE, TIME AND PLACE OF THE SPECIAL MEETING
The special meeting will be held on Tuesday, February 6, 2001 at 10:00
a.m., local time, at the Drury Inn, 100 Highway 6, Houston, Texas 77079.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the special meeting, you will be asked to consider and vote upon a
proposal to approve the issuance of 13,750,000 shares of our common stock to
WEUS in connection with the merger of Enterra, the owner of Weatherford Global
Compression Services, L.P. and certain related entities, with and into Universal
Compression, Inc., our wholly owned operating subsidiary. Universal Compression,
Inc. will be the surviving corporation in the merger. In addition, our
shareholders will be asked to approve an amendment to our Incentive Stock Option
Plan to increase the number of shares of our common stock authorized for
issuance under the Plan from 1,912,421 to 3,012,421 shares, which will include
shares sufficient to cover options issued to employees we receive as a result of
the merger. You may also be asked to vote upon a proposal to adjourn or postpone
the special meeting for the purpose of, among other things, allowing additional
time for the solicitation of proxies from Universal shareholders to approve the
merger agreement.
NO APPRAISAL RIGHTS
You have no appraisal rights in connection with the proposed issuance of
shares in the merger or the related amendment to our Incentive Stock Option
Plan.
RECORD DATE
Only holders of record of our common stock at the close of business on
December 8, 2000 (the "record date") are entitled to notice of and to vote at
the special meeting. As of the record date, there were 14,664,038 shares of our
common stock issued and outstanding held by approximately 350 holders of record.
VOTING POWER
Holders of record of our common stock on the record date are entitled to
one vote per share on any matter that may properly come before the special
meeting. Brokers who hold shares of common stock as nominees will not have
discretionary authority to vote such shares on the issuance of shares to WEUS in
connection with the merger or on the amendment to the Incentive Stock Option
Plan in the absence of instructions from the beneficial owners of such shares.
Any such shares of common stock as to which a broker has submitted an executed
proxy, but as to which the beneficial owner thereof has not given instructions
to such broker, are referred to as "broker non-votes."
QUORUM
The presence in person or by proxy of the holders of a majority of the
shares of our common stock outstanding on the record date will constitute a
quorum for the purpose of transacting business at the special meeting.
Abstentions and broker non-votes will be counted for purposes of establishing
the presence of a quorum at the special meeting. As discussed below, however,
Castle Harlan and its affiliates, which hold or control the vote of
approximately 38% of our shares of common stock outstanding as of the record
date, have agreed with WEUS to vote their shares and the shares over which they
have voting control at the special meeting and such shares will be counted for
purposes of determining the presence or absence of a quorum.
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<PAGE> 58
VOTE REQUIRED
Because the number of shares of our common stock to be issued in the
proposed merger exceeds 20% of the number of our shares outstanding prior to the
merger, New York Stock Exchange rules require shareholder approval of the share
issuance. The approval of the proposals to issue the 13,750,000 additional
shares of our common stock in the merger and to amend our Incentive Stock Option
Plan require the affirmative vote of the majority of the votes cast, provided
that the total vote cast on each proposal represents at least a majority of the
shares entitled to vote at the special meeting. Broker non-votes and abstentions
will have no effect on the result of the vote, provided that holders of at least
a majority of the shares entitled to vote at the special meeting cast votes. Any
other matter that may come before the meeting will be adopted if the votes cast
for such matter exceed the votes cast against.
In order to induce WEUS to enter into the merger agreement, Castle Harlan
and its affiliates have entered into a stockholders' agreement with us and WEUS
obligating them to vote their shares, including shares over which they have
voting control and any additional shares they may acquire, in favor of the
issuance of shares to WEUS in the merger and against any action that would
interfere with the merger or the related share issuance. As of the record date,
such shareholders as a group controlled the vote of 5,494,874 shares (exclusive
of any shares that may be transferred pursuant to the terms of the voting
arrangements) of our common stock, representing approximately 38% of our shares
of common stock outstanding as of the record date.
SHARE OWNERSHIP OF MANAGEMENT AND DIRECTORS
As of the record date, our executive officers and directors, including
their affiliates, owned an aggregate of 5,599,974 shares of our common stock
that such persons are entitled to vote, or approximately 38% of our total shares
of common stock then outstanding (which number includes the 5,494,874 shares
that Castle Harlan and its affiliates own or have the right to vote). We expect
that such directors and officers will vote all of their shares in favor of the
proposals to approve the issuance of shares to WEUS in the merger and to amend
our Incentive Stock Option Plan. As discussed above, these figures include the
shares that Castle Harlan and its affiliates hold or have the right to vote
(approximately 38% of our shares of common stock outstanding as of the record
date), which they have agreed to vote in favor of the proposals at the special
meeting, subject to certain conditions.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
Our board of directors has unanimously approved the merger, the merger
agreement and the related proposals to issue the 13,750,000 additional shares of
our common stock in the merger and to amend our Incentive Stock Option Plan,
which will include sufficient shares to cover the options to be granted to new
employees we will receive in the merger. Our board believes that the transaction
is fair to and in the best interests of Universal and our shareholders and
unanimously recommends that you vote FOR the proposed issuance of shares in the
merger and FOR the proposed amendment to our Incentive Stock Option Plan.
VOTING BY PROXY
As a Universal shareholder, you are encouraged to use the enclosed written
proxy or appoint a proxy by telephone or on the Internet if you are unable to
attend our special meeting in person, or if you wish to have your shares voted
even if you do attend the special meeting. All shares of common stock
represented by properly executed proxies (whether through the return of the
enclosed proxy card, by telephone or on the Internet) will, unless such proxies
have been previously revoked, be voted in accordance with the instructions
indicated through such proxies. If no instructions are indicated, such shares
will be voted FOR the proposed issuance of our shares to WEUS in the merger and
FOR the proposed amendments to our Incentive Stock Option Plan to cover the
options to be issued to new employees we will add in the merger, and in the
discretion of the proxy holder as to any other matter which may properly come
before the special meeting.
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<PAGE> 59
VOTING VIA THE TELEPHONE OR INTERNET
If you are a shareholder of record, you may also vote by telephone by
calling toll-free (877) 779-8683, or via the Internet by logging on
http://www.eproxyvote.com/uco. The telephone and Internet voting procedures are
described in greater detail on your proxy card. Telephone and Internet voting
access will close at midnight, Houston time, on the day prior to the special
meeting. If you hold your shares through a bank, broker or other holder of
record, there may be different telephone and Internet voting instructions on
your proxy card that you must follow. Each proxy is revocable and will not
affect your right to vote in person in the event you attend the special meeting.
REVOCATION OF PROXIES
Any shareholder that has previously delivered a properly executed proxy or
appointed a proxy via telephone or the Internet may revoke such proxy or
appointment at any time before the vote is taken at the special meeting. A proxy
may be revoked either by (1) filing with our Secretary prior to the special
meeting, at our principal executive offices, a written notice of revocation of
such proxy, (2) filing with our Secretary, at our principal executive offices, a
duly executed proxy bearing a later date, so long as it is received by us prior
to the date of the special meeting, (3) using the telephone or Internet voting
procedures or (4) attending the special meeting and voting in person. Presence
at the special meeting alone will not revoke your proxy unless you vote in
person. All written notices of revocation and other communications with respect
to revocation of proxies should be addressed to Universal Compression Holdings,
Inc., 4440 Brittmoore Road, Houston, Texas 77041, Attention: Secretary. If you
have instructed your broker to vote your shares, you must follow the directions
received from your broker to change your vote.
SOLICITATION OF PROXIES
We have retained Morrow & Company, Inc. to aid in the solicitation of
proxies for our special meeting. We estimate the cost of these services to be
approximately $7,500, plus out-of-pocket expenses, which we will bear. Proxies
may be solicited by personal interview, mail or telephone. In addition, we may
reimburse brokerage firms and other persons representing beneficial owners of
shares of our common stock for their expenses in forwarding solicitation
materials to beneficial owners. Certain of our executive officers, directors and
regular employees may also solicit proxies, personally or by telephone or
facsimile transmission, without additional compensation.
OTHER MATTERS THAT MAY BE CONSIDERED AT THE MEETING
Our board of directors presently does not intend to bring any business
before the special meeting other than the specific proposals referred to in this
proxy statement and the Notice of Special Meeting. We are unaware of any matter
to be presented at the special meeting other than the proposals to issue
13,750,000 additional shares of our common stock to WEUS in the merger and to
amend our Incentive Stock Option Plan to increase the number of shares available
for issuance under the Plan. If other matters are properly presented at the
special meeting, the persons named in the enclosed form of proxy will have
authority to vote all properly executed proxies in accordance with their
judgment on any such matter, including, without limitation, any proposal to
adjourn or postpone the special meeting.
STOCK CERTIFICATES
YOU SHOULD NOT SEND IN ANY STOCK CERTIFICATES WITH YOUR PROXY CARD. OUR
SHAREHOLDERS WILL NOT EXCHANGE THEIR STOCK CERTIFICATES IN CONNECTION WITH THE
MERGER.
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<PAGE> 60
THE MERGER
The detailed terms of the merger are contained in the merger agreement
attached as Annex A to this document. The following discussion describes certain
aspects of the merger, and may not contain all of the information that is
important to you. The following discussion is qualified in its entirety by
reference to the merger agreement, which is incorporated by reference in this
document. We encourage you to read the merger agreement carefully.
BACKGROUND OF THE MERGER
In April 2000, representatives of Merrill Lynch and our senior management
met with representatives of senior management of Weatherford to preliminarily
explore whether a combination transaction with Weatherford with respect to its
gas compression business would be mutually desirable. After discussion and
consideration, we and Weatherford agreed that we would not pursue a transaction
at that time.
Consistent with our growth strategy, we continued to pursue acquisition
opportunities of complementary businesses to expand our fleet and customer base.
In June 2000, Weatherford and Universal executed a customary confidentiality
agreement concerning the exchange of nonpublic information between the
companies. Throughout the summer of 2000, representatives of senior management
of both companies participated in informal discussions regarding the possible
combination of the companies' gas compression businesses. Our board was apprised
during this period of discussions with possible business acquisition candidates,
including Weatherford.
On August 17, 2000, our senior executive representative provided
Weatherford's senior executive representative a preliminary term sheet for a
proposed transaction, which contemplated payment to Weatherford and its joint
venture partner, GE Capital, of an aggregate fixed percentage of the shares of
our company for all of their gas compression business. On August 25, 2000,
representatives of our senior management and our legal advisors attended an
organizational meeting with Weatherford to discuss due diligence, the potential
terms of a transaction and the timing of a possible acquisition. On September 7,
2000, Weatherford's legal counsel distributed a draft of a merger agreement
contemplating the merger of the Weatherford and GE Capital compression entities
into our operating subsidiary.
Discussions and meetings regarding potential transaction terms, the merger
agreement and other documents continued, and due diligence was conducted through
the remainder of September. On September 18, 2000, representatives of
Weatherford and GE Capital met with us and our advisors to conduct due diligence
with regard to our business and to discuss the terms of a possible transaction.
On September 26, 2000, we, with Merrill Lynch, met with the Executive Committee
of our board of directors to discuss the status of the negotiations and other
issues related to the transaction and to obtain approval to continue with
negotiations.
From September 26, 2000 through October 3, 2000, we had a series of
meetings with Weatherford to discuss potential transaction structures and terms
and to negotiate a merger agreement. Between October 3, 2000 and October 5,
2000, we attended meetings at Weatherford's headquarters with senior management
as well as management and other employees of its compression business. During
these discussions, the parties determined that the most viable proposal was an
all stock transaction, and that the transaction would have to be structured to
address the interests of Universal, Weatherford and GE Capital, Weatherford's
joint venture partner.
We advised Weatherford that it was our desire to minimize the dilutive
effect of an all stock transaction to our existing shareholders and to minimize
Weatherford's control of our company. Weatherford advised us that its interests
included liquidity for both GE Capital and Weatherford in respect of their
interest in our company and the ability of Weatherford to account for its
interest in Universal using the equity method of accounting.
We and Weatherford discussed various transactional structures, including
the use of a convertible preferred stock or debt as part of the consideration
and voting agreements that might limit Weatherford's ability to control us.
Ultimately, we were unable to reach an agreement on terms for a transaction. On
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October 5, 2000, the legal advisors for each party delivered letters
acknowledging that the negotiations regarding a transaction had been terminated.
On October 9, 2000, we met with Merrill Lynch to explore alternative means
to completing a transaction. We then proposed to acquire the gas compression
business of Weatherford and GE Capital, excluding their Singapore-based GSI
business and $10 million of accounts receivable, in exchange for a percentage of
shares of our common stock representing 48% of the pro forma combined company.
On October 12, 2000, representatives of our senior management and Merrill Lynch
made a presentation to the Executive Committee of our board of directors
regarding the revised terms. On October 16, 2000, Weatherford advised us that it
would be willing to pursue the transaction on these terms with the understanding
that the transaction would be preceded by Weatherford's purchase of GE Capital's
interest in the Weatherford Global joint venture such that Weatherford would own
48% of our outstanding shares following the transaction and would retain its
Singapore-based GSI business (including with GSI for this purpose, Weatherford's
Indonesian, Malaysian, Vietnamese, and Middle Eastern compression businesses).
On October 17, 2000, we formally engaged Merrill Lynch as our financial advisor.
Each side then proceeded to negotiate, review and revise the proposed
transaction documents.
On October 18, 2000, our board of directors received a presentation on the
terms of the proposed transaction from representatives of our senior management
and Merrill Lynch. Following the discussion, our board authorized management to
continue negotiations of the proposed transaction on substantially the terms
discussed at the meeting.
During the course of the negotiations, Weatherford required that
concurrently with the execution of the merger agreement, Castle Harlan and its
affiliates sign a stockholders' agreement requiring Castle Harlan to vote shares
of our common stock over which it has the power to vote, or the power to direct
the vote, in favor of the proposed transaction. In addition, Weatherford agreed
to purchase GE Capital's interest in Weatherford Global and certain related
entities as a condition prior to the closing of the merger so that, at the time
of the merger, Weatherford, through its subsidiary Enterra, would own 100% of
the joint venture and the related entities being acquired.
On October 23, 2000, our board of directors met to consider the proposed
transaction and review the terms pursuant to documents previously provided to
them. Representatives of our senior management, Merrill Lynch and our legal
advisors made presentations and reviewed the terms of the proposed transaction
and of the draft merger agreement, stockholders' agreement, registration rights
agreement and voting agreement. Merrill Lynch rendered an opinion that as of
that date and considering the factors and assumptions set forth in such opinion,
the consideration to be paid in the transaction was fair from a financial point
of view to us. After discussion and consideration, including discussion of our
ability to consider alternate transactions and accept a superior proposal, our
board of directors unanimously approved the merger agreement and all of the
related agreements on substantially the terms discussed at the meeting and
delegated authority for final approval to the Executive Committee of our board.
Later that evening, our senior management and legal advisors had a telephonic
meeting with the Executive Committee, who approved the final terms of the
proposed merger.
The Agreement and Plan of Merger and Stockholders' Agreement were executed
by the parties, and Weatherford and Universal publicly announced the merger and
agreements the morning of October 24, 2000.
UNIVERSAL'S REASONS FOR THE MERGER; RECOMMENDATION OF UNIVERSAL'S BOARD OF
DIRECTORS
We believe that combining Weatherford Global's business with ours will
create significant long-term value for our shareholders by providing
opportunities for accelerated growth. Giving effect to the transaction (and
based on current industry structure), we will be the second largest natural gas
compression services company in terms of horsepower.
We believe the acquisition of Weatherford Global will result in a stronger
company with greater scope and expanded services for our customers. In addition,
the merger significantly enhances our presence
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internationally. Weatherford Global adds sales and service infrastructure and
expertise in a number of international markets, including Canada, Thailand,
Argentina, Mexico and Australia.
We also expect to generate significant opportunities for cost savings
through consolidation of purchasing activities and inventory management,
resulting in greater scale, improved utilization rates of the Weatherford Global
fleet, streamlining of administrative functions and cost savings from combined
operating activities. Management expects to realize pre-tax cost savings of
approximately $20 million in our fiscal 2002.
In approving the merger agreement and the merger and in reaching its
determination to recommend approval of the share issuance in the merger, our
board of directors considered a number of factors, including the following:
- the anticipated cost savings, accelerated growth and the combined
company's expanded asset base and customer base;
- the strategic nature of the transaction, which combines Universal's and
Weatherford Global's complementary businesses, and creates a broader and
more diverse company with expanded global reach and greater resources
and, with the depth of its resources, enhanced future operating
flexibility and increased opportunities for growth;
- the judgment, advice and analyses of our management team with respect to
the strategic, financial and potential operational benefits of the
merger;
- the combined company's significantly stronger international presence;
- the stronger financial resources and, as a result, increased flexibility
and opportunity for future growth of the combined company;
- the opinion of Merrill Lynch that, as of October 23, 2000, and subject to
the matters set forth in its opinion, the consideration to be paid by
Universal in the merger is fair, from a financial point of view, to
Universal;
- information concerning the business, assets, liabilities, results of
operations and financial performance of Weatherford Global;
- the expected composition of the combined company's senior management team
following the merger, including the fact that Stephen A. Snider will
remain as our President and Chief Executive Officer following the merger;
- the condition to closing requiring that Universal, Weatherford and WEUS
enter into a voting agreement which restricts Weatherford's voting rights
with respect to shares of our common stock for a period of up to two
years following the merger;
- the long-term interests of Universal and our shareholders, as well as the
effects of the proposed merger on our employees, customers, creditors and
suppliers;
- the merger is consistent with our objective to grow through acquisitions;
- the expected accretive effect of the merger on our pro forma combined
earnings per share; and
- the ability of our board of directors under the merger agreement to
modify or withdraw its recommendation of the merger and related share
issuance if it receives an unsolicited proposal for a competing
transaction that is superior to the proposed merger and to recommend such
a competing transaction, terminate the merger agreement and enter into a
competing transaction under certain circumstances (including possible
payment of a $15 million termination fee).
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Our board of directors and management also identified and considered a
number of countervailing factors in its deliberations concerning the merger,
including:
- the challenges and costs of combining the business of Weatherford Global
into ours, including combining, reducing and relocating work forces and
consolidating, relocating and eliminating facilities and offices, and the
risk that we will not be able to integrate Weatherford Global's business
into ours without encountering operational difficulties, or that we will
fail to realize the cost savings expected from the integration of the
business;
- the possibility that the merger agreement and related share issuance to
WEUS may eliminate or inhibit the ability of Universal to enter into
business combinations with companies other than Weatherford and may
require us to pay a termination fee to Weatherford in certain events;
- the number of shares of our common stock to be issued to WEUS in the
merger is fixed, even if our stock price increases prior to the date of
the merger; and
- Weatherford Global's significant share ownership in us following the
merger and the exemption of the issuance of shares in the merger from
Section 203 of the Delaware corporation laws, which generally prohibits
beneficial owners of 15% or more of our common stock from entering into
certain transactions with us that are financially beneficial to those
owners.
The discussion above addresses certain material factors considered by our
board of directors in its consideration of the merger. In view of the variety of
factors and the amount of information considered, our board of directors did not
find it practicable to, and did not make specific assessments of, quantify or
otherwise assign relative weights to the specific factors considered in reaching
its determination. The determination was made after consideration of all of the
factors as a whole. In addition, individual members of our board may have given
different weights to different factors.
Our board of directors has unanimously approved the merger agreement and
the merger, declared that the merger agreement and the merger are advisable and
determined that the consideration to be paid by Universal in the merger is fair
to, and in the best interests of, Universal and its shareholders. Accordingly,
our board of directors unanimously recommends that you vote FOR the approval of
the issuance of shares of our common stock to WEUS in the merger and FOR the
related amendment to our Incentive Stock Option Plan.
OPINION OF UNIVERSAL'S FINANCIAL ADVISOR
We retained Merrill Lynch to act as our financial advisor in connection
with the merger. On October 18, 2000, Merrill Lynch rendered its oral opinion to
our board of directors, which was confirmed in writing on October 23, 2000 at a
meeting of our board of directors held to evaluate the proposed merger, that, as
of such date, based upon and subject to the various factors and assumptions
described in such opinion, the consideration in the merger was fair, from a
financial point of view, to Universal.
The full text of the Merrill Lynch fairness opinion, which sets forth the
assumptions made, matters considered, and qualifications and limitations on the
review undertaken by Merrill Lynch, is attached as Annex B to this proxy
statement and is incorporated in this document by reference. The summary of the
Merrill Lynch fairness opinion set forth in this proxy statement is qualified in
its entirety by reference to the full text of the opinion. You are urged to read
the opinion in its entirety. The Merrill Lynch fairness opinion was provided to
our board for its information and is directed only to the fairness from a
financial point of view of the merger consideration to Universal and does not
address the merits of the underlying decision by Universal to engage in the
merger and does not constitute a recommendation to you as to how you should vote
on the approval of the issuance of shares in the merger or any matter related to
the merger. Merrill Lynch has not expressed any opinion as to the prices at
which Universal common stock will trade following the announcement or
consummation of the merger.
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The following is a brief summary of the material financial analyses
performed by Merrill Lynch and reviewed with our board of directors in
connection with Merrill's opinion, which is attached to this proxy statement as
Annex B.
ANALYSIS OF MERRILL LYNCH
The summary set forth below does not purport to be a complete description
of the analyses underlying the Merrill Lynch fairness opinion or the
presentation made by Merrill Lynch to Universal's board. The preparation of a
fairness opinion is a complex and analytical process involving various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances
and, therefore, the opinion is not readily susceptible to partial analysis or
summary description. In arriving at its opinion, Merrill Lynch did not attribute
any particular weight to any analysis or factor considered by it, but rather
made qualitative judgments as to the significance and relevance of each analysis
and factor. Accordingly, Merrill Lynch believes that its analyses must be
considered as a whole and that selecting portions of its analyses, without
considering all of its analyses, would create an incomplete view of the process
underlying the Merrill Lynch fairness opinion.
In performing its analyses, numerous assumptions were made with respect to
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of Merrill
Lynch, Weatherford Global or Universal. Any estimates contained in the analyses
performed by Merrill Lynch are not necessarily indicative of actual values or
future results, which may be significantly more or less favorable than suggested
by the analyses. Additionally, estimates of the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which the
businesses or securities might actually be sold. Accordingly, the analyses and
estimates are inherently subject to substantial uncertainty. In addition, the
delivery of the Merrill Lynch fairness opinion was among several factors taken
into consideration by Universal's board in making its determination to approve
the merger agreement and the merger and in reaching its determination to
recommend approval of the share issuance in the merger. Consequently, the
Merrill Lynch analyses described below should not be viewed as determinative of
the decision of Universal's board or Universal's management with respect to the
fairness of the merger consideration.
In arriving at its opinion, Merrill Lynch, among other things:
- Reviewed certain publicly available business and financial information
relating to Weatherford Global, Weatherford and Universal that Merrill
Lynch deemed relevant;
- Reviewed certain information, including financial forecasts, relating to
the business, earnings, cash flow, assets, liabilities and prospects of
Weatherford Global and Universal, as well as the amount and timing of the
cost savings and related expenses and synergies expected to result from
the merger, furnished to Merrill Lynch by Weatherford, Weatherford Global
and Universal;
- Conducted discussions with members of senior management of Weatherford
Global, Weatherford and Universal concerning the matters described above,
as well as their respective businesses and prospects before and after
giving effect to the merger and the expected synergies;
- Reviewed the market prices and valuation multiples for Universal common
stock and compared them with those of certain publicly traded companies
that Merrill Lynch deemed relevant;
- Reviewed the results of operations of Weatherford Global and Universal
and compared them with those of certain publicly traded companies that
Merrill Lynch deemed relevant;
- Compared the proposed financial terms of the merger with the financial
terms of certain other transactions that Merrill Lynch deemed relevant;
- Participated in certain discussions and negotiations among
representatives of Weatherford Global, Weatherford and Universal and
their financial and legal advisors;
- Reviewed the potential pro forma impact of the merger;
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- Reviewed a draft of the merger agreement dated October 23, 2000;
- Reviewed forms of the Voting Agreement, Registration Rights Agreement and
Stockholders' Agreement, in each case related to the merger agreement;
and
- Reviewed such other financial studies and analyses and took into account
such other matters as Merrill Lynch deemed necessary, including its
assessment of general economic, market and monetary conditions.
In preparing its opinion, Merrill Lynch assumed and relied on the accuracy
and completeness of all information supplied or otherwise made available to
Merrill Lynch by Weatherford Global, Weatherford and Universal, discussed with
or reviewed by or for Merrill Lynch, or publicly available. Merrill Lynch did
not assume any responsibility for independently verifying such information or
undertake an independent evaluation or appraisal of any of the assets or
liabilities of Weatherford Global or Universal nor was Merrill Lynch furnished
with any such evaluation or appraisal. In addition, Merrill Lynch did not assume
any obligation to conduct any physical inspection of the properties or
facilities of Weatherford Global or Universal. With respect to the financial
forecast information and the expected synergies furnished to or discussed with
Merrill Lynch by Weatherford Global, Weatherford or Universal, Merrill Lynch
assumed that they were reasonably prepared and reflected the best currently
available estimates and judgment of Weatherford Global's, Weatherford's or
Universal's management as to the expected future financial performance of
Weatherford Global or Universal, as the case may be, and the expected synergies
from the merger. Merrill Lynch made no independent investigation of any legal
matters or accounting advice given to such parties and their respective boards
of directors, including, without limitation, advice as to the accounting and tax
consequences of the merger. Merrill Lynch further assumed that the merger will
qualify as a tax-free reorganization for U.S. federal income tax purposes.
Merrill Lynch also assumed that the terms and provisions contained in the final
form of the merger agreement and the related agreements would not differ from
the last draft reviewed by Merrill Lynch in any matter material to Merrill
Lynch's opinion.
Merrill Lynch's opinion is necessarily based upon market, economic and
other conditions as they exist and can be evaluated on, and on the information
made available to Merrill Lynch as of, the date of the opinion. Merrill Lynch
assumed that in the course of obtaining the necessary regulatory or other
consents or approvals (contractual or otherwise) for the merger, no
restrictions, including any divestiture requirements or amendments or
modifications, would be imposed that will have a material adverse effect on the
contemplated benefits of the merger.
Financial Forecasts
Weatherford Global and Universal provided Merrill Lynch with their
respective forecasted financial performance. Revenue forecasts and associated
costs were also supplied by Weatherford Global and Universal. Operating expenses
and maintenance capital expenditures were based on respective management
estimates. Certain adjustments were made to the forecast supplied by Weatherford
Global to make the forecast more comparable with Universal's forecast. These
adjustments were provided by Universal's management.
Contribution Analysis
Using the forecasts described above for both Weatherford Global and
Universal for the projected fourth quarter 2000 results annualized by
multiplying such results by four, Merrill Lynch compared the relative projected
levels of earnings before interest, taxes, depreciation, amortization and rental
expense ("EBITDAR") for each company during this period.
Relative levels of EBITDAR were used to develop implied total enterprise
value contributions. From these total enterprise value contributions, each of
Universal's and Weatherford Global's respective
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estimated debt levels at December 31, 2000 were subtracted to determine implied
equity market value contributions for each company. The results of this analysis
are set forth below:
<TABLE>
<CAPTION>
WEATHERFORD'S
IMPLIED EQUITY
MARKET VALUE
VALUATION BASIS CONTRIBUTION
--------------- --------------
<S> <C>
Pro Forma 2000 Annualized EBITDAR (projected).......... 48%
</TABLE>
The contribution analysis implied a Weatherford Global implied equity
market value contribution of 48%.
Comparable Company Trading Analysis
Merrill Lynch reviewed and compared certain financial information, ratios
and public market multiples derived from the Universal and Weatherford Global
projections to corresponding financial information, ratios and public market
multiples for the following publicly traded corporations in the oilfield service
industry:
- BJ Services Company
- Carbo Ceramics, Inc.
- Smith International, Inc.
- Hanover Compressor Company
- Cal Dive International, Inc.
- Oceaneering International, Inc.
- Weatherford International, Inc.
The selected companies were chosen because they are publicly traded
companies with financial and operating characteristics that Merrill Lynch deemed
to be similar to those of Universal and Weatherford Global, including, among
other things, equity market capitalization and natural gas production-focused
operations. Merrill Lynch calculated various financial ratios for the selected
companies and compared them to those calculated for Universal and Weatherford
Global. The ratios for the selected companies were based on publicly available
information, including estimates provided by Merrill Lynch research and First
Call. Merrill Lynch calculated the following financial ratios:
- equity market value multiples of:
- 2000 estimated discretionary cash flow and
- 2001 estimated discretionary cash flow; and
- enterprise value (defined as market value of common equity plus book
value of debt, lease facilities preferred equity and minority interest
less cash) multiples of:
- 2000 estimated EBITDAR and
- 2001 estimated EBITDAR.
The following table shows the mean of the results of these calculations for
the selected companies.
<TABLE>
<CAPTION>
FINANCIAL MEASURE MEAN
----------------- -----
<S> <C>
2000 discretionary cash flow (projected).................... 16.4x
2001 discretionary cash flow (projected).................... 12.0x
2000 EBITDAR (projected).................................... 14.0x
2001 EBITDAR (projected).................................... 9.9x
</TABLE>
None of the selected companies is identical to Universal or Weatherford
Global. Accordingly, an analysis of these results is not purely mathematical.
Rather, it involves complex considerations and judgments concerning differences
in financial and operating characteristics of the selected companies and other
factors that could affect the public trading value of the comparable companies
or company to which they are being compared.
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MERRILL LYNCH FINANCIAL ADVISOR FEE
Pursuant to an engagement letter dated October 17, 2000, Universal retained
Merrill Lynch to act as its financial advisor in connection with the merger.
Universal has agreed to pay Merrill Lynch a fee of $3,000,000 for services
rendered in connection with the merger. Universal also has agreed to reimburse
Merrill Lynch for the expenses reasonably incurred by it entering into and
performing services by it in connection with its engagement and to indemnify
Merrill Lynch and its affiliates and their respective officers, directors,
employees, agents and controlling persons against certain expenses, losses,
claims, damages or liabilities in connection with its services performed in
connection with its engagement. Universal has also agreed to reimburse Merrill
Lynch for its reasonable out-of-pocket expenses, including reasonable fees and
disbursements of its legal counsel. Additionally, Universal has agreed to
indemnify Merrill Lynch and certain related persons for certain liabilities
related to its engagement, including liabilities under federal securities laws.
Universal retained Merrill Lynch based upon Merrill Lynch's experience and
expertise. Merrill Lynch is an internationally recognized investment banking and
advisory firm. Merrill Lynch, as part of its investment banking business, is
continuously engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. Merrill Lynch has in the past
provided financial advisory and/or financing services to Universal, including
lead managing its initial public offering in May 2000, for which it received
fees, and may render similar services in the future.
In the ordinary course of its business, Merrill Lynch and its affiliates
may actively trade the debt and equity securities of Universal and Weatherford
(and anticipate trading after the merger in the securities of Universal and
Weatherford) for their own accounts and for the accounts of customers.
Accordingly, Merrill Lynch may at any time hold a long or short position in
these securities.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The parties have not requested and will not request a ruling from the
Internal Revenue Service regarding the tax consequences of the merger. The
merger agreement provides that the merger is conditioned upon our receipt as of
the closing date of an opinion of King & Spalding, our legal counsel, and the
receipt as of the closing date by Enterra of an opinion of Andrews & Kurth,
L.L.P., its legal counsel, in each case subject to the qualifications discussed
below, to the effect that, on the basis of the facts, representations and
reasonable assumptions set forth in those opinions, for United States federal
income tax purposes, the merger will be treated as a "reorganization" within the
meaning of Section 368 of the Internal Revenue Code.
In rendering these tax opinions and as to the accuracy of the discussion
herein of certain United States federal income tax consequences of the merger,
counsel will rely upon, and will assume as accurate and correct (without any
independent investigation) certain representations as to factual matters
contained in certificates delivered by us, Enterra and others. If such
representations are inaccurate, the opinions could be adversely affected. The
tax opinions will represent tax counsels' best judgment as to the tax treatment
of the merger, but will not be binding on the IRS, and we cannot assure you that
the IRS will not contest the conclusions expressed therein.
If the merger constitutes a reorganization within the meaning of the
Internal Revenue Code, none of Enterra, Universal or our shareholders will
recognize income, gain or loss as a result of the merger.
REQUIRED REGULATORY FILINGS AND APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and related
rules, Universal and WEUS cannot complete the merger until they notify and
furnish information regarding the acquisition to the Federal Trade Commission
and the Antitrust Division of the U.S. Department of Justice and satisfy
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specified waiting period requirements. These requirements were satisfied by the
expiration of the waiting period on December 14, 2000.
At any time before or after completion of the merger, the Antitrust
Division or the FTC could take such action under the antitrust laws as it deems
necessary or desirable in the public interest, including seeking to enjoin the
consummation of the merger or seeking divestiture of substantial assets of
Universal, our operating subsidiary, WEUS or Enterra. Private parties may also
bring actions under the antitrust laws under certain circumstances. Although
Universal and WEUS believe that the merger is legal under the antitrust laws,
there can be no assurance that a challenge to the merger on antitrust grounds
will not be made or, if such a challenge is made, that it would not be
successful.
We will also need to make filings with the Canadian Competition Bureau and
Industry Canada under the Investment Canada Act, and comply with the applicable
waiting periods under Part IX of the Competition Act (Canada).
Neither WEUS nor Universal is aware of any other material governmental or
regulatory approval required for completion of the merger.
RESTRICTED SHARES
All shares of our common stock issued to WEUS in the merger will be
restricted shares and will not be available for public resale unless such shares
are registered under the Securities Act or sold pursuant to Rule 144 under the
Securities Act. In general, under Rule 144, any person who has beneficially
owned restricted shares for at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1% of
our then outstanding shares of common stock (approximately 284,140 shares
immediately following the merger), or the average weekly trading volume during
the four calendar weeks preceding such sale. Sales under Rule 144 are also
subject to requirements as to the manner of sale, notice and availability of
current public information about our company.
Pursuant to a registration rights agreement to be entered into by Universal
and WEUS concurrently with the merger, WEUS will have the right, upon written
demand, to cause us, on up to three separate occasions, to register its shares
under the Securities Act. Each demand for registration must cover at least $20
million of shares of our common stock in an underwritten offering, or $5 million
of our shares in a non-underwritten offering. WEUS may also require us to
include the shares of our common stock then held by WEUS in any registration
statement we propose to file, subject to certain limitations.
OUR BOARD OF DIRECTORS AND MANAGEMENT FOLLOWING THE MERGER
Following the merger, WEUS will have the right to designate three members
of our board of directors for so long as WEUS and its affiliates own at least
20% of our outstanding shares of common stock. If such ownership falls below
20%, WEUS may designate only two directors. One WEUS nominee will be appointed
as a Class A director with a term of office expiring in 2001, one WEUS nominee
will be appointed as a Class B director with a term of office expiring in 2002,
and the third WEUS nominee will be appointed as a Class C director with a term
of office expiring in 2003. If WEUS's ownership falls to below 10%, WEUS may no
longer designate directors.
WEUS will become a significant shareholder of Universal as a result of the
merger, owning approximately 48% of our outstanding shares of common stock. This
significant ownership of our common stock, coupled with WEUS's board
representation, will give Weatherford (through WEUS) the ability to exercise
substantial influence over our actions and in matters requiring approval of our
shareholders. Its rights as a shareholder will be governed by our Restated
Certificate of Incorporation and Bylaws, as well as the voting agreement to be
entered into concurrently with the consummation of the merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Universal's directors and executive officers do not have interests in the
merger that are in addition to their interests as Universal shareholders
generally. As a result of various voting arrangements, Castle
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Harlan has the right to vote the shares owned by some of our directors and their
affiliates. Castle Harlan has agreed to vote these shares in favor of the
issuance of shares in the merger pursuant to the Stockholders' Agreement.
OPTION GRANTS TO WEATHERFORD GLOBAL EMPLOYEES
Pursuant to the Merger Agreement, we have agreed to grant options at the
then current fair market value of our common stock at the date of grant to
purchase approximately 318,000 shares of our common stock to certain Weatherford
Global employees following consummation of the merger. In addition to these
contractual obligations, we expect to grant options covering additional shares
to Weatherford Global employees to assist in the retention of these employees
following the merger. As a result of such issuances and the increase in the
number of employees eligible to participate in our Incentive Stock Option Plan,
we are amending the Plan, a form of which is attached to this proxy statement as
Annex F, to increase the number of shares available for issuance under the Plan
from 1,912,421 shares to 3,012,421 shares.
NO APPRAISAL RIGHTS
Under Delaware General Corporation Law, our shareholders are not entitled
to appraisal rights with respect to the issuance of shares of our common stock
in connection with the merger or any other matters addressed in this proxy
statement.
ACCOUNTING TREATMENT
The merger will be accounted for using the "purchase" method in accordance
with Accounting Principles Board Opinion No. 16. Accordingly, the assets and
liabilities of Weatherford Global will be recorded on our books at their
respective fair values at the effective time of the merger, with the excess
allocated to goodwill.
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THE MERGER AGREEMENT
The detailed terms of the merger are contained in the merger agreement
attached as Annex A to this proxy statement. The following discussion describes
certain aspects of the merger agreement, and may not contain all of the
information that is important to you. This discussion is qualified in its
entirety by reference to the merger agreement, which is incorporated by
reference in this document. We encourage you to read the merger agreement
carefully.
STRUCTURE OF THE MERGER
The merger agreement provides for the merger of Enterra, a Delaware
corporation and a wholly owned subsidiary of Weatherford, with and into
Universal Compression, Inc., a Texas corporation and our wholly owned operating
subsidiary, with Universal Compression, Inc. surviving the merger and continuing
as our wholly owned subsidiary. The merger will become effective upon the filing
of a certificate of merger with the Secretary of State of Delaware and articles
of merger with the Secretary of State of Texas. We expect to make these filings
as soon as practicable after the last of the conditions to the merger, as set
forth in the merger agreement, has been satisfied or waived.
When the merger is completed:
- the separate corporate existence of Enterra will terminate;
- the surviving company will be a Texas corporation named Universal
Compression, Inc.;
- the Articles of Incorporation and Bylaws of Universal Compression, Inc.
existing immediately prior to the merger will remain the articles of
incorporation and bylaws of the surviving company;
- WEUS will receive 13,750,000 shares of our common stock in the merger,
representing approximately 48% of our outstanding common stock following
the merger and subject to the voting restrictions contained in the voting
agreement; and
- WEUS will be entitled to designate three individuals to serve on our
board of directors.
We hope to complete the merger in the first quarter of 2001.
CONSIDERATION FOR THE MERGER
The merger agreement provides that we will issue 13,750,000 shares of our
common stock to WEUS at the closing. If the average closing price per share of
our common stock during the 20 trading days ending on the day prior to the
merger is less than $25, Weatherford and Universal will each have the option to
terminate the merger agreement.
Since our initial public offering in May 2000, the market price of our
common stock has been volatile. During the 90-day period ending December 26,
2000, the last day for which a closing price for our common stock was available
prior to the printing of this proxy statement, the highest closing price for our
common stock was $34.50 per share and the lowest closing price for our common
stock was $26.19 per share. The market price for our common stock will fluctuate
prior to the merger. Consequently, the value of our shares to be issued to WEUS
in the merger will also fluctuate. No assurance can be given as to the per share
value of our common stock at the time of the merger or following the merger.
REPRESENTATIONS AND WARRANTIES
Weatherford, WEUS, Enterra and Universal each made a number of customary
representations and warranties in the merger agreement regarding each party's
authority to enter into the merger agreement and to consummate the transactions
contemplated thereby, and with regard to certain aspects of their businesses,
financial condition, structure and other matters relevant to the merger. None of
the representations and warranties to the merger agreement will survive
consummation of the merger, except
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that the representations with respect to capitalization of the companies will
survive for a period of twelve months following the merger.
The merger agreement contains essentially reciprocal representations and
warranties made by Weatherford, WEUS and Enterra, on the one hand, and Universal
and its operating subsidiary, on the other hand, covering the following topics
as they relate to each of the parties:
- due organization and good standing;
- capitalization;
- corporate power and authority to enter into and consummate the merger
agreement and related matters;
- necessary regulatory consents and approvals;
- absence of conflicts with organizational documents, agreements and
applicable laws;
- financial statements;
- absence of undisclosed liabilities since the date of the most recent
balance sheet;
- absence of certain changes since the date of the most recent balance
sheet;
- absence of litigation;
- possession of licenses and permits necessary for ownership and operation
of the business;
- certain labor issues and absence of collective bargaining agreements;
- compliance with laws;
- insurance policies (Enterra only);
- material contracts;
- compliance with environmental laws and certain other environmental
matters;
- payment of taxes and related matters;
- employee benefits matters;
- brokers, finders or financial advisors engaged in connection with the
merger;
- circumstances that would prevent the merger from qualifying as a tax free
reorganization;
- accuracy of information provided for use in this proxy statement;
- absence of excess parachute payments;
- transactions with officers, directors or other affiliated persons;
- title to assets; and
- the inapplicability of certain anti-takeover statutes to the merger.
In addition, we have made additional representations in the merger
agreement addressing the following topics:
- our reports filed with the SEC;
- the vote of our shareholders required to approve the issuance of our
shares in the merger;
- receipt of the fairness opinion from Merrill Lynch; and
- authorization and recommendation by our board of directors.
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The representations and warranties in the merger agreement are complicated
and not easily summarized. You are urged to carefully read the representations
and warranties in the merger agreement.
CONDUCT OF BUSINESS PRIOR TO THE MERGER
Weatherford Global. Enterra will, and WEUS has agreed to cause Enterra to,
continue to conduct the business of Weatherford Global and maintain its business
relationships in a manner that is consistent with the ordinary and usual course
of business and not to take certain specified actions that might materially
adversely affect Enterra or Weatherford Global without our written consent.
Enterra has agreed to carry on and to preserve the business of Weatherford
Global and its relationships with customers and suppliers in substantially the
same manner as it has prior to the date of the merger agreement.
Universal. We have agreed to continue to conduct our business and maintain
our business relationships in a manner that is consistent with our ordinary and
usual course of business and not to take certain specified actions that might
materially adversely affect us without Enterra's written consent. Consistent
with this covenant, we have agreed to carry on and to preserve our business and
our relationships with customers and suppliers in substantially the same manner
as we had prior to the date of the merger agreement.
CERTAIN PRE-CLOSING TRANSFERS
The merger agreement provides that, prior to the closing of the merger,
Weatherford will transfer or distribute to one or more Weatherford entities
other than Enterra and its subsidiaries the assets and liabilities associated
with its gas compression sales and rental operations in Malaysia, Vietnam, Oman,
Dubai, Ivory Coast and Indonesia, including the assets, business and related
employees associated with the compression sales and rental operations of GSI,
its subsidiaries and their respective branches acquired by Weatherford in
January 2000. Weatherford will also transfer to another Weatherford entity all
intercompany or other debt owed by the GSI related entities or by any of the GSI
related entities to Enterra or its subsidiaries that is an amount less than
$15.9 million, as well as $10 million in accounts receivable. Thus, these assets
and liabilities will not be included in the merger. However, Weatherford will
transfer to one or more entities designated by Universal the following relating
to the compression sales and rental operations of GSI, its subsidiaries and
their respective branches in Australia and Thailand:
- the assets physically located in those countries;
- the contracts related specifically to work performed in those countries;
- the accounts receivables related to those contracts; and
- the employees who are located in those countries and whose dedicated job
is for performance of the contracts being transferred.
Thus, these assets will be included in the merger.
In addition, immediately prior to the merger, Weatherford, through Enterra,
will purchase GE Capital's 36% interest in Weatherford Global and certain
related entities. As a result, we will acquire in the merger 100% of the
outstanding interests in the joint venture and those related entities.
A nominal number of shares of several foreign subsidiaries of Enterra are
currently held by Weatherford, its nominees, and several of its subsidiaries.
Prior to the merger, all of such shares will be transferred to Enterra and its
subsidiaries so that we will acquire 100% ownership of these foreign
subsidiaries as a result of the merger.
RELATED AGREEMENTS
Stockholders' Agreement. Concurrently with the execution of the merger
agreement, we entered into a Stockholders' Agreement with WEUS and Castle Harlan
and its affiliates. The Stockholders' Agreement provides that, subject to
certain conditions, Castle Harlan and its affiliates will vote their shares of
our
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common stock, including shares over which they have voting control and any
additional shares that they may acquire, in favor of the issuance of the shares
in the merger.
Registration Rights Agreement. Concurrently with the closing of the
merger, we will enter into a registration rights agreement with WEUS, pursuant
to which WEUS will receive certain demand and piggyback registration rights
covering the shares of our common stock received in the merger.
Voting Agreement. As a condition to the closing of the merger, WEUS and
Universal will enter into a voting agreement pursuant to which, among other
things, WEUS and its affiliates will agree to certain restrictions on the voting
of shares of our common stock in excess of 33 1/3% of our total outstanding
common stock until the earlier of (1) two years after consummation of the merger
and (2) that date that Castle Harlan and its affiliates own less than 5% of our
outstanding common stock. Such excess will not be voted directly by WEUS, but
instead will be voted in proportion to the votes of our other shareholders,
excluding WEUS, Castle Harlan and their respective affiliates.
Transitional Services Agreement. Concurrently with the closing of the
merger, Weatherford and Weatherford Global will enter into a transitional
services agreement pursuant to which Weatherford will continue to provide
certain administrative and support services, such as shared corporate office
space and general communication and information services, to Weatherford Global
for a period of time following the merger. Weatherford Global will pay
Weatherford negotiated service fees for the services provided based on the cost
of the services.
RESTRICTED SHARES OF UNIVERSAL COMMON STOCK
All shares of our common stock issued to WEUS in the merger will be
restricted shares and will not be available for public resale unless they are
registered under the Securities Act (which WEUS will have the right to demand
pursuant to the registration rights agreement) or sold pursuant to Rule 144
under the Securities Act.
CONDITIONS TO THE MERGER
The obligations of Weatherford, WEUS and Enterra and of Universal under the
merger agreement are subject to the satisfaction or waiver of certain conditions
described in the merger agreement. These conditions include, but are not limited
to, conditions relating to:
- the accuracy of representations and warranties and performance of
covenants in all material respects (unless the failure of all of such
representations and warranties to be true or the failure of such
covenants to be performed would not have, or reasonably be expected to
have, a material adverse effect on the entity making such representation,
warranty or covenant, taken as a whole);
- the performance of and compliance with covenants in all material
respects;
- the absence of any judgment, injunction, order or decree or any
applicable statute or regulation which would prohibit the merger;
- the receipt of all necessary governmental consents, including expiration
or termination of the applicable waiting periods under U.S. antitrust
laws (which expired December 14, 2000) and similar Canadian competition
laws;
- the receipt of all consents or assignments required under material
contracts of Universal and Enterra;
- approval by our shareholders of the issuance of shares of our common
stock to WEUS in the merger;
- the receipt by each of WEUS and Universal of opinions of their respective
tax counsel that the merger will qualify as a reorganization within the
meaning of Section 368 of the Internal Revenue Code;
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- the shares of our common stock to be issued in the merger being approved
for listing on the New York Stock Exchange;
- WEUS and Universal entering into the registration rights and voting
agreements contemplated by the merger agreement;
- WEUS and Universal entering into the transitional services agreement
contemplated by the merger agreement;
- the average closing price of our common stock for the 20 trading days
prior to the date of the merger not being less than $25;
- the consummation of financing by Universal sufficient to refinance our
outstanding indebtedness and that of Weatherford Global;
- the acquisition by Enterra of GE Capital's interest in Weatherford Global
being satisfied or waived;
- the release of Enterra from certain obligations in connection with the
formation of Weatherford Global; and
- the exemption of the newly issued shares of our common stock in the
merger from the registration requirements of the Securities Act of 1933.
TERMINATION RIGHTS
The merger agreement may be terminated by mutual consent of WEUS and
Universal or, under certain circumstances, at any time prior to the merger
(whether before or after approval of the share issuance by our shareholders), as
summarized below:
- by WEUS, if we have materially breached our representations and
warranties or materially failed to perform our covenants and such breach
or failure to perform has not been cured prior to the closing;
- by us, if WEUS has materially breached its representations and warranties
or materially failed to perform its covenants and such breach or failure
to perform has not been cured prior to the closing;
- by either WEUS or us, if the special meeting shall have been held and the
approval of our shareholders of the issuance of shares of our common
stock to WEUS in the merger shall not have been obtained;
- by either WEUS or us, if all the conditions to the merger have not been
satisfied or waived on or before March 31, 2000, other than as a result
of a breach by the terminating party;
- by either WEUS or us, if an order by a federal or state court that would
make illegal or otherwise prohibit the consummation of the merger is
issued and becomes final and nonappealable;
- by WEUS, if our board of directors or any committee of the board fails to
give its approval or recommendation regarding the issuance of shares in
the merger;
- by WEUS, if we enter into or publicly announce our intention to enter
into an agreement with respect to a takeover proposal;
- by us, in certain circumstances if we receive a superior proposal with
respect to certain significant transactions involving our company; or
- by Universal or WEUS, if the conditions relating to the acquisition of GE
Capital's interest in Weatherford Global are not satisfied or waived;
provided that WEUS may not terminate the merger agreement if WEUS is
responsible for the failure to satisfy such conditions.
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TERMINATION FEE
If the merger agreement is terminated by us and an offer or inquiry from
another person to acquire 15% or more of our assets is outstanding at the time
of termination, we must pay WEUS a termination fee of $15 million. If the merger
agreement is terminated by Enterra because we have materially breached our
representations and warranties or materially failed to perform our covenants and
such breach or failure has not been cured within specified time periods, or if
we announce our intention to enter into a merger or similar agreement with
others, then we may have to pay WEUS a termination fee of $15 million. If the
merger agreement is terminated by us due to a material breach of representation
or warranty by Weatherford or Enterra or material failure by them to perform
their covenants is not cured within specified time periods, WEUS must pay us a
termination fee of $15 million.
INDEMNIFICATION RIGHTS
Weatherford and WEUS have agreed to jointly and severally indemnify us and
our affiliates, officers, directors, employees and agents for all losses and
expenses incurred by us that arise in the merger agreement out of any breach of
certain representations or warranties made by Weatherford, WEUS or Enterra in
the merger agreement, relating to the capitalization of Enterra, the breach of
any covenants of Weatherford, WEUS, or Enterra in the merger agreement, certain
liabilities retained by Weatherford or WEUS, or any third party claim relating
to written information provided by Weatherford, WEUS or Enterra for use in this
proxy statement. Similarly, we have agreed to indemnify Weatherford and WEUS and
their affiliates, officers, directors, employees and agents for all losses and
expenses incurred by them that arise out of a breach of any representation or
warranty of Universal in the merger agreement relating to the capitalization of
Universal, the breach of any covenants of Universal in the merger agreement, any
agreement to which Weatherford or its affiliates is a party that relates to the
Weatherford Global gas compression business, any third party claim relating to
written information provided by Universal for use in this proxy statement, or
the use of the name "WEUS" or "Weatherford" or the trademarks of Weatherford and
its affiliates. None of the representations and warranties to the merger
agreement will survive consummation of the merger, except for the
representations with respect to capitalization of the companies. Claims for
indemnification with respect to capitalization and the covenants and other
obligations of each party to the merger agreement, must be made within 12 months
after the date the merger is consummated. Indemnification obligations of the
Weatherford entities with respect to certain tax matters and excluded
liabilities continue indefinitely, provided that claims with respect to tax
matters are made within 90 days of the expiration of any applicable statute of
limitations. In addition, our indemnification obligations with respect to
certain contracts of the acquired business also continue indefinitely.
Universal, Weatherford, WEUS and Enterra have each agreed to certain
limitations on the amount of losses that will be subject to an indemnification
claim. Claims for indemnification with respect to breaches of representations
and warranties and certain misstatements included in this proxy statement may
not be made unless the aggregate amount of all losses incurred by the party
entitled to indemnification exceeds $2.5 million, in which event such party
shall be entitled only to the amount of losses that exceed $2.5 million. In
addition, no party will be able to recover losses from the other party in excess
of the aggregate market value of the Universal common stock issued in connection
with the merger as of the consummation of the merger. The amount that the party
entitled to indemnification may receive will be further reduced by any insurance
proceeds received by such party. These rights of indemnification are the
exclusive remedies of each party for the breach of any representations or
warranties in the merger agreement or with respect to any other matter related
to the merger agreement and its related transactions.
AMENDMENT AND WAIVER
The merger agreement may be amended by the parties at any time before or
after the special meeting of the Universal shareholders, provided that any
amendment made after the special meeting that would otherwise require
shareholder approval under applicable law must be submitted to the shareholders.
In particular, we agreed to amend the merger agreement prior to the printing of
this proxy statement for
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mailing to our shareholders to reflect the purchase by an affiliate of
Weatherford of an interest in Enterra if requested by Weatherford, with the
shares of our stock to be issued in the merger to be allocated between WEUS and
such affiliate, which amendment was not requested by Weatherford. All amendments
to the merger agreement must be in writing signed by each party. Any provision
of the merger agreement may be waived in writing by the party against whom the
waiver is to be effective.
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RELATED AGREEMENTS
The following discussion is a brief summary of certain aspects of the
Stockholders' Agreement entered into by Castle Harlan and its affiliates,
Universal and WEUS, and the Registration Rights Agreement, Voting Agreement and
Transitional Services Agreement to be entered into by Universal and WEUS
concurrently with the consummation of the merger. This summary is not complete.
Summaries of the Stockholders' Agreement, Registration Rights Agreement and
Voting Agreement are qualified in their entirety by the complete agreements,
which are attached hereto as Annexes C, D and E, respectively.
STOCKHOLDERS' AGREEMENT
Castle Harlan and its affiliates have entered into a Stockholders'
Agreement with WEUS and Universal, dated as of October 23, 2000, which provides
that, until the earliest of the closing of the merger, the termination of the
merger agreement, or April 1, 2001, such shareholders will vote their shares
(including shares over which they have voting control or any additional shares
that they may acquire) (1) in favor of the issuance of shares of our common
stock to WEUS in connection with the merger and all matters requiring approval
of our shareholders in connection with the merger, (2) against any action or
agreement that would compete with, impede, interfere with or tend to discourage
the merger or the issuance of our common stock to WEUS, and (3) against any
action or agreement that would result in any material breach of any covenant,
representation, warranty or obligation of Universal or WEUS under the merger
agreement. These shareholders have also agreed not to transfer or dispose of, in
any manner, any of their shares, except in accordance with the Stockholders'
Agreement and unless the transferee agrees to be bound by the provisions of the
agreement, which restriction does not apply to shares owned by third parties and
subject to a voting agreement with Castle Harlan. However, Castle Harlan and its
affiliates have a right to terminate the Stockholders' Agreement should any
Weatherford party to the merger agreement materially breach its representations,
warranties, or covenants contained in the merger agreement, which breach is not
cured within 45 days of notice thereof and which breach, when aggregated with
any other breaches by them, would reasonably be expected to have a material
adverse effect on such entities, taken as a whole. As of the record date, Castle
Harlan and its affiliates as a group controlled the voting of 5,484,874 shares
of our common stock, representing approximately 38% of the shares of our common
stock outstanding as of the record date. The Stockholders' Agreement is attached
to this proxy statement as Annex C and is incorporated into this proxy statement
by reference. You should read it carefully in its entirety.
REGISTRATION RIGHTS AGREEMENT
As a condition to the closing of the merger, Universal and WEUS will enter
into a registration rights agreement, a form of which is attached to this proxy
statement as Annex D and is incorporated into this proxy statement by reference.
You should read this agreement carefully in its entirety. Under the registration
rights agreement, WEUS will have the right to cause us to register, at our
expense, its shares of our common stock received in the merger under the
Securities Act as follows:
- Demand Registration Rights. At any time following the closing of the
merger, WEUS may, on up to three occasions, require us to prepare and
file a registration statement to register shares of our common stock held
by WEUS by providing a written demand for the registration of shares with
an aggregate market value of at least $20 million in an underwritten
offering, or $5 million in a non-underwritten offering. The agreement
provides that we must use our reasonable best efforts to register the
requested shares as soon as possible after receipt of such notice.
- Piggyback Registration Rights. At any time following the closing of the
merger, WEUS may request to have its shares included in any registration
statement under the Securities Act with respect to any proposed public
offering by us or other holders of our common stock. Such piggyback
registration rights are unlimited, but the number of shares that can be
included may be eliminated entirely or reduced in certain situations at
the request of the underwriters managing the offering of shares being
registered.
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VOTING AGREEMENT
As a condition to the closing of the merger, Universal and WEUS will enter
into a voting agreement, a copy of which is attached to this proxy statement as
Annex E and is incorporated into this proxy statement by reference. You should
read the voting agreement carefully in its entirety. The voting agreement
provides that until the earlier of (1) two years after the closing of the merger
or (2) the date that Castle Harlan and its affiliates own less than 5% of our
outstanding common stock, WEUS and its affiliates will vote any shares of our
common stock that they own in excess of 33 1/3% of our total outstanding shares
in the same proportion as shares of our stock owned by the public are voted.
Shares owned by the public include all shares of our common stock other than
shares owned by WEUS, Castle Harlan and their respective affiliates.
TRANSITIONAL SERVICES AGREEMENT
Prior to or concurrently with the closing of the merger, Weatherford and
Weatherford Global will enter into a transitional services agreement pursuant to
which Weatherford will continue to provide certain administrative and
operational services, such as shared corporate office space and general
communication and information services, to Weatherford Global for a period of
time following the merger. Weatherford Global will pay Weatherford negotiated
service fees for the services provided based on the cost of the services.
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MARKET PRICE AND DIVIDEND INFORMATION
HISTORICAL MARKET PRICE DATA
Our common stock is listed on the New York Stock Exchange under the symbol
"UCO." On December 26, 2000, the last sales price of our common stock as
reported on the New York Stock Exchange was $33.50 per share. As of December 8,
2000, there were approximately 350 holders of record of our common stock based
on the records of our transfer agent. This number does not include beneficial
owners of common stock whose shares are held in the names of various securities
brokers, dealers and registered clearing agencies.
The table below sets forth the high and low sales prices per share of our
common stock, as reported on the New York Stock Exchange from May 23, 2000, the
date that our common stock first became publicly traded, through December 26,
2000, the last practicable trading day for which information was available prior
to the date of this proxy statement. There is no established public trading
market for Enterra's common stock.
<TABLE>
<CAPTION>
UNIVERSAL COMMON STOCK
----------------------
PERIOD HIGH LOW
------ ------- -------
<S> <C> <C>
May 23 through June 30, 2000................................ $35.50 $20.63
Quarter Ended September 30, 2000............................ $34.13 $22.13
October 1 through December 26, 2000......................... $34.63 $25.50
</TABLE>
DIVIDEND INFORMATION
Following the merger, our shareholders will be entitled to receive such
dividends as may be declared by our board of directors, if any. We have never
paid cash dividends on our common stock. We currently anticipate that we will
retain earnings, if any, to support our operations and to finance the growth and
development of our business and do not anticipate paying cash dividends in the
foreseeable future. In addition, our current bank credit facility and other
financing arrangements contain restrictions on the payment of dividends, and our
new financing arrangements in connection with the merger will likely contain
similar restrictions. Any future determination as to the declaration and
payments of dividends will be at the discretion of our board of directors and
will depend on then existing conditions, including our financial condition,
results of operations, contractual restrictions, capital requirements, business
prospects and other factors that our board of directors considers relevant.
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BUSINESS OF UNIVERSAL
BACKGROUND
We were formed in December 1997 to acquire all of the outstanding stock of
Tidewater Compression. Upon completion of the Tidewater Compression acquisition
in February 1998, Tidewater Compression became our wholly owned operating
subsidiary and changed its name to Universal Compression, Inc. Through this
subsidiary, our gas compression service operations date back to 1954. The
business grew dramatically from 1993 to 1995 through the acquisition of four
rental compression companies: Allison Production Services and BJC Operating
Company in 1993 and Halliburton Compression Services and Brazos Gas Compressing
Company in 1994. Following these acquisitions and prior to the Tidewater
Compression acquisition, management focused on standardizing our compressor
fleet, and also completed a number of smaller acquisitions. Since the Tidewater
Compression acquisition, we have focused on our growth strategy, which has
included the acquisition of Spectrum Rotary Compression Inc. in April 2000 and
Gas Compression Services, Inc. in September 2000.
OVERVIEW
We are a leading natural gas compression services company, providing a full
range of rental, sales, operations, maintenance and fabrication services and
products to the natural gas industry. These services and products are essential
to the production, transportation and processing of natural gas by producers,
gatherers and pipeline companies. Today, we own one of the largest gas
compressor fleets in the United States, and have a growing presence in key
international markets.
Since 1998, we have increased our capital investments in our business and,
as a result, have experienced significant growth. The horsepower of our fleet
has increased 64.5%, from 492,417 as of March 31, 1998 to 810,000 as of
September 30, 2000, with our average capacity per unit increasing from 179
horsepower to 233 horsepower. Our revenues have increased 7.0%, from $68.8
million for the six months ended September 30, 1999 to $73.6 million for the six
months ended September 30, 2000. For the six months ended September 30, 2000,
approximately $55.0 million of our revenues was derived from our compression
rental services, with the remaining approximately $18.6 million being derived
from fabrication and other compression activities.
We distinguish ourselves by providing comprehensive, high quality natural
gas compression services to over 750 customers that are involved in natural gas
production, transportation and processing -- from the wellhead through the
gathering system and through the pipeline. Due to our low cost, centralized
operating structure, we are able to offer these high quality services to our
customers at competitive prices while maintaining high margins. By outsourcing
their compression needs, we believe our customers generally are able to increase
their revenues by producing a higher volume of natural gas through decreased
compressor downtime. In addition, outsourcing allows our customers to reduce
their operating and maintenance costs and capital investments and meet their
changing compression needs more efficiently. Our full service orientation
enhances customer loyalty, enables us to attract new customers and allows us to
grow our business with our existing customers.
We operate in every significant natural gas producing region in the United
States through our 38 compression sales and service locations. We have a highly
standardized compressor fleet, with approximately 651,000 horsepower operating
under contract in 27 states as of September 30, 2000. Our revenues from domestic
compression rental services were $46.6 million for the six months ended
September 30, 2000. We believe that our size and broad scope result in economies
of scale since the addition of incremental compressors in a region does not
require us to proportionately increase our investment in field personnel and
administrative support.
Since 1993, we have expanded our presence in select international markets,
including Argentina, Colombia, Venezuela and Australia. As of September 30,
2000, we had 51 units aggregating approximately 54,000 horsepower operating
under contract in these markets. In addition, we expect to add 10,000 horsepower
to our fleet during the quarter ending December 31, 2000 from our first
compression service
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project in Mexico. We are also pursuing opportunities in other strategic
international areas, including South American countries, especially Argentina,
and Southeast Asia. Our revenues from international operations have increased by
23.5% from $6.8 million for the six months ended September 30, 1999 to $8.4
million for the six months ended September 30, 2000.
Our financial performance has been generally less affected by the
short-term market cycles and volatile commodity prices than the financial
performance of companies operating in other sectors of the oil and gas industry
because:
- compression is an essential component of natural gas production,
- our operations are tied primarily to natural gas consumption, which is
less cyclical in nature than exploration activities,
- compression equipment rental is often a lower cost alternative for
natural gas production, gathering and transportation companies,
- we have a broad customer base,
- we operate in diverse geographic regions,
- our compressors remain on-site for an average of 30 months before
reassignment, and
- our standardized compressor fleet is durable and reliable.
Adding to this stability is the fact that while compressors often must be
highly engineered or reconfigured to meet the unique demands of our customers,
the fundamental technology of compression equipment has been stable and has not
experienced rapid technological change.
OUR GROWTH STRATEGY
Our growth strategy is to continue to focus on meeting the evolving needs
and demands of our customers by providing consistent, superior services and
dependable, high quality products. We believe that this approach strengthens our
relationships with our existing customers, helps us to attract new customers and
diversifies our revenue base, resulting in increased market share, revenues and
earnings. The key elements of our strategy are described below:
- Focusing on Providing a Complete Range of High Quality Services. We
believe that the key to our success is providing our customers with
consistent, high quality service and a full range of dependable
compression equipment tailored to their needs at competitive prices. Our
services and products deliver higher run-times resulting in increased
production and revenues for our customers.
- We have the equipment, personnel and logistical capabilities to provide
our customers with a wide variety of compression equipment and services
on a timely basis. We work with our customers to provide engineering
solutions to help them design a customized compression plan and then
provide them with the services and products to implement that plan. We
continuously expand, upgrade and reconfigure our rental fleet to ensure
our ability to meet the changing requirements of our customers in the
diverse geographic markets that we serve. In addition, our rigorous
preventative maintenance program and extensive field service network
permits us to promptly address maintenance issues. In recent years, we
have increased the overall size and average horsepower of our fleet and
have increased our fabrication of upper range units (generally over 600
horsepower) to better serve the needs of our customers at wellheads,
gathering systems, processing plants and pipelines. Since March 31,
1998, the horsepower of our fleet has increased by 64.5%, which includes
the additional horsepower obtained through acquisitions.
- In April 1999, we completed construction of a high bay, heavy capacity
fabrication facility in Houston, Texas which allows us to increase our
capacity to fabricate larger compression units. In
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September 2000, we acquired additional fabrication capabilities in
Traverse City, Michigan and Schulenberg, Texas with our acquisition of
Gas Compression Services, Inc.
- Our operations and maintenance personnel are highly trained and, we
believe, among the most experienced in the industry. We have an
extensive maintenance and diagnostic program for our equipment and
provide remote monitoring of large horsepower units and compression
systems. As a result, we are able to provide consistent, high quality
service and achieve very high run-times for our compressors, resulting
in increased production and revenues for our customers.
- Continuing a Centralized, Standardized Approach to Our Business.
- We have centralized our management, corporate functions, training and
inventory controls. Our centralized system enables us to respond quickly
to market opportunities and changing conditions, and allows us to
provide consistent, high quality service and standardized pricing to our
customers operating in multiple locations worldwide.
- As a complement to these centralized functions, we have positioned
highly trained sales and field personnel in all of the major domestic
gas producing regions in which our customers operate and, in some cases,
on-site with our key customers. This local presence, experience and
in-depth knowledge of our customers' operating needs and growth plans
provides us with significant competitive advantages and internally
driven market share growth. Our field service and sales personnel assist
in identifying the needs of our customers and communicate those needs to
our sales force and corporate headquarters, which allows us to
participate in growth opportunities in the industry, wherever they may
occur.
- Using our automated inventory system, we are able to determine product
availability, identify the most efficient solution and promptly provide
the necessary parts and labor to any location worldwide.
- We have standardized our fleet of rental compressors to three compressor
platforms, Gemini, Ajax and Ariel. By standardizing, we are able to
develop extensive expertise in operating and maintaining our
compressors, provide consistent, high quality training of our operations
and maintenance personnel, efficiently resize and reconfigure our
compressors and reduce our costs by minimizing our inventory. Natural
gas compressors are long-lived assets, with an expected useful economic
life of 25-40 years. Although compressor units are costly, we have a
comprehensive preventive maintenance program designed to maximize the
useful life and efficient operation of our units and maintain their
value.
- We believe that we have one of the best safety records in the industry,
which enhances our customer loyalty and our ability to attract and
retain quality employees.
- In order to attract, motivate and retain our highly experienced sales
force and operations personnel, we have implemented a profit sharing
plan designed to link the compensation of our employees at all levels
with their individual performance as well as ours. In addition, we have
provided broad employee stock ownership opportunities. We have awarded
shares of our stock to employees following the Tidewater Compression
acquisition, have given all of our employees the opportunity to purchase
shares of our stock and have granted stock options to 17% of our
workforce.
- Expanding Our Operations in Select International Markets. With
approximately 54,000 horsepower operating internationally as of September
30, 2000 and an expected additional 10,000 horsepower for our Mexico
project, we have a strategic presence in the rapidly growing compression
markets of Argentina, Colombia, Venezuela and Australia, and are building
a presence in Mexico. We plan to leverage our existing presence and
customer base and strong reputation for the engineering and fabrication
of high specification gas and air compressors to expand our offerings in
these markets as well as others, including other South American countries
and Southeast Asia.
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- Expanding Our Rental Fleet and Customer Base through the Purchase and
Leaseback of Compressors. As the trend toward outsourcing of compression
services continues, we are providing an increasing number of customers
the opportunity to sell their existing compression equipment to us in
purchase and leaseback transactions. In these transactions, we purchase a
customer's in-place compression equipment at the current market value and
then lease that equipment back to the customer under long-term operating
and maintenance contracts. As a result, the customer is able to outsource
its compression operations and reallocate capital to its core business
activities while typically enjoying improved operational performance. In
addition, these arrangements expand our rental fleet and provide us with
the opportunity to promote our operations and maintenance services, as
well as to strengthen our relationships with these customers. As of
September 30, 2000, we have consummated ten purchase leaseback
transactions aggregating approximately 29,000 horsepower with our
customers.
- Pursuing Industry Consolidation Opportunities. The rental compression
services industry has experienced significant consolidation over the past
several years but remains highly fragmented, with only a small number of
companies providing comprehensive compression services. We actively
participate in this consolidation trend. Since 1993, we have completed
six acquisitions, including our recent acquisitions of Spectrum Rotary
Compression Inc. in April 2000 and Gas Compression Services, Inc. in
September 2000, which is described in more detail below. Integration of
these acquired businesses allows us to expand our fleet and to offer our
comprehensive range of products and services to an expanded customer
base. We believe that continuing industry consolidation will present us
with opportunities to acquire attractive smaller regional operators and
large compression service companies and assets in the future.
On September 15, 2000, we acquired all of the stock of Gas Compression
Services, Inc. from the shareholders of GCSI in exchange for approximately
$12 million in cash, 1,400,726 newly issued shares of our common stock,
representing approximately 9.6% of our then outstanding shares, the
assumption of approximately $57 million in debt and operating leases of
GCSI, and $6 million of debt related to GCSI customer equipment financing
and associated customer notes receivable. The GCSI acquisition has added
approximately 138,000 aggregate horsepower to our fleet and provides us
with an increased customer base, additional market segments and additional
fabrication capabilities. Certain information included in this proxy
statement as of September 30, 2000 includes GCSI's operations for the 15
days from the closing date of the acquisition.
INDUSTRY
Natural Gas Compression Overview
Natural gas compression is a mechanical process whereby a volume of gas at
an existing pressure is compressed to a desired higher pressure. We offer both
slow and high speed reciprocating compressors driven either by internal
combustion engines or electric motors. We also offer screw compressors for
applications involving low pressure natural gas. Most natural gas compression
applications involve compressing gas for its delivery from one point to another.
Low pressure or partially depleted natural gas wells require compression for
delivery of produced gas into higher pressured gas gathering systems.
Compression is required because over the life of an oil or gas well, natural
reservoir pressure typically declines as reserves are produced. As the natural
reservoir pressure of the well declines below the line pressure of the gas
gathering or pipeline system used to transport the gas to market, gas no longer
naturally flows into the pipeline. It is at this time that compression equipment
is applied in both field and gathering systems to boost the well's pressure
levels and allow gas to be brought to market. Compression is also used to
reinject natural gas down producing oil wells to help lift liquids to the
surface, known as gas lift operations. In secondary oil recovery operations,
natural gas compression is used to inject natural gas into wells to maintain
reservoir pressure. Compression is also used in gas storage projects to inject
gas into underground reservoirs during off-peak seasons for withdrawal later
during periods of high demand.
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Natural gas compression services are also used for compressing feedstocks in
refineries and for refrigeration applications in natural gas processing plants.
Natural gas compression that is used prior to the "main line transmission
system," which transports gas from production to storage or the end user, is
considered "field" compression. We have been active in both segments of the
field compression market, production and gas gathering. During the production
phase, compression is used to boost the pressure of natural gas from the
wellhead so that natural gas can flow into the gathering system or pipeline for
transmission to an end-user. Typically, these applications require portable low
to mid-range horsepower compression equipment located at or near the wellhead.
The continually dropping pressure levels in natural gas fields require constant
modification and variation of on-site compression equipment.
In an effort to reduce costs for wellhead operators, operators of gathering
systems tend to keep the pressure of the gathering systems low. As a result,
more pressure is often needed to force the gas from the low pressure gathering
systems into the higher pressure pipelines. These applications generally require
larger horsepower compression equipment (600 horsepower and higher). Similarly,
as gas is transported through a pipeline, large compression units are applied
all along the pipeline to allow the natural gas to continue to flow through the
pipeline to its destination.
Gas producers, transporters and processors have historically owned and
maintained most of the compression equipment used in their operations. However,
in recent years, there has been a growing trend toward outsourcing compression
equipment. Customers that elect to outsource compression equipment have two
options for maintaining and/or operating such equipment. Full maintenance calls
for the service company to be responsible for the scheduled preventative
maintenance, repair and general up-keep of the equipment, while the customer
usually remains responsible for installing and handling the day-to-day operation
of the equipment. The other option is contract compression, which requires the
service company to maintain and operate and, in many cases, to install the
equipment. Often, a service company providing contract compression will inspect
the equipment daily, provide consumables such as oil and antifreeze and, if
necessary, be present at the site for several hours each day.
Rental compression units are primarily employed in the field compression
segment encompassing production and natural gas gathering. Renting compression
equipment offers customers:
- the ability to efficiently meet their changing compression needs over
time while limiting their capital investments in compression equipment,
- access to the compression service provider's specialized personnel and
technical skills, including engineers, field service and maintenance
employees, which generally leads to improved run-times and production
rates and
- overall reduction in their compression costs through the elimination of a
spare parts inventory and other expenditures associated with owning and
maintaining compressor units.
Natural Gas Industry Conditions
A significant factor in the growth of the gas compression equipment market
is the increasing consumption of natural gas, both domestically and
internationally. In other words, it is the demand for natural gas, rather than
the more cyclical oil and gas exploration activities, that drives the demand for
compression services. As a result, our financial performance historically has
been less affected by the short-term market cycles and volatile commodity prices
of oil and natural gas than that of companies operating in other sectors of the
energy industry.
In the United States, natural gas is the second leading fuel in terms of
total consumption and is the fuel of choice for power generation and industrial
use. The closure of nuclear power plants and the current economic expansion have
contributed to the increased consumption of natural gas. In recent years,
natural gas has increased its market share of total domestic energy consumption.
Domestic consumption of natural gas increased by 13% from 1990 through 1998 to
approximately 22 trillion cubic feet, and industry sources
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forecast the domestic consumption of natural gas to increase approximately 25%
to 27 to 30 trillion cubic feet by 2010.
At the end of 1998, there was approximately 14.8 million horsepower of
field compression equipment in the United States, of which approximately 4.1
million horsepower was outsourced. From 1993 to 1998, the compression services
industry grew at a rate of approximately 15.4% per year in the United States in
terms of horsepower, with the percentage of outsourced horsepower increasing
from 13% to 28%. We believe the domestic gas compression market will continue to
grow due to the following factors:
- higher natural gas consumption, which is increasing in the United States
at an average rate of 2.0% to 2.5% per year,
- the aging of producing natural gas fields in the United States, which
will require more compression to continue producing the same volume of
natural gas, and
- increasing outsourcing by companies of compression needs in order to
reduce operating costs, improve production and efficiency and reallocate
capital to core business activities.
The international gas compression services market is currently
substantially smaller than the domestic market. However, we estimate significant
growth opportunities for international demand for compressor products and
services due to the following factors:
- higher natural gas consumption, which is increasing internationally at an
average rate of 3.0% to 4.0% per year,
- implementation of international environmental and conservation laws
preventing the prior practice of "flaring" of natural gas and recognition
of natural gas as a clean alternative to carbon fuels,
- a desire by a number of oil exporting nations to replace oil with natural
gas as a fuel source in local markets to allow greater exportation of
oil,
- increasing development of pipeline infrastructure, particularly in South
America, necessary to transport gas to local markets,
- growing demand for electrical power generation, for which the fuel of
choice tends to be natural gas, and
- privatization of state-owned international energy producers, resulting in
increased outsourcing due to the focus on reducing capital expenditures
and enhancing cash flow and profitability.
As contrasted to the domestic market, the current international rental
compression market is substantially comprised of large horsepower compressors
that are maintained and operated by compression service providers. A significant
portion of this market involves comprehensive installation projects, which
include the design, fabrication, delivery, installation, operation and
maintenance of the compressors and the related gas treatment equipment by the
rental company. In these comprehensive projects, the customer's only
responsibility is to provide fuel gas within specifications. As a result of the
full service nature of these projects and the fact that these compressors
generally remain on-site for three to seven years, we are able to achieve higher
revenues and margins on these projects.
We believe we are well positioned to participate in a disproportionate
share of the future growth in this industry as we are one of the few compression
service providers with sufficient fleet size, operating infrastructure and
geographic scope to meet the diverse, full service needs of our customers.
Companies in our industry can achieve significant advantages through increased
size and geographic scope. As the number of rental units in a rental fleet
increases, the number of sales, engineering, administrative and maintenance
personnel required does not increase proportionately. As a result, companies
such as us with larger rental fleets have relatively lower operating costs and
higher margins due to economies of scale than smaller companies.
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OPERATIONS
Rental Compressor Fleet
In recent years, there has been substantial growth in customer demand in
the over 600 horsepower category. As a result, we have focused, and will
continue to focus, future growth on this segment of the market. We have
increased the overall size and average horsepower of our fleet and have
increased our fabrication of upper range units (generally over 600 horsepower)
to meet this demand and better serve the needs of our customers at wellheads,
gathering systems, processing plants and pipelines. Since March 31, 1998, the
total horsepower of our fleet has increased by 64.5%. For the six months ended
September 30, 2000, the average horsepower utilization rate for our fleet was
approximately 85.3%, which reflects average horsepower utilization based upon
our total average fleet horsepower. For the quarter ended September 30, 2000,
this average rate was approximately 86.2%.
As of September 30, 2000, we owned 3,477 natural gas compressors ranging in
size from 15 horsepower to 3,000 horsepower, with an average of 233 horsepower,
as reflected in the following table:
<TABLE>
<CAPTION>
HORSEPOWER RANGE NUMBER OF UNITS TOTAL HORSEPOWER % OF HORSEPOWER
---------------- --------------- ---------------- ---------------
<S> <C> <C> <C>
0- 99................................... 1,284 81,632 10.1%
100-299................................... 1,409 238,356 29.4%
300-599................................... 447 170,123 21.0%
600 and over.............................. 337 320,268 39.5%
----- ------- -----
Total........................... 3,477 810,379 100.0%
===== ======= =====
</TABLE>
We have standardized our rental fleet around three gas compressor
platforms: Gemini for smaller horsepower applications (less than 150
horsepower), Ajax for mid-range applications (100-600 horsepower) and Ariel for
larger horsepower applications (over 600 horsepower). These three compressor
platforms represent over 90% of our horsepower. This high level of fleet
standardization and durability:
- enables us to minimize our fleet maintenance capital requirements,
- enables us to minimize inventory costs,
- facilitates low-cost compressor resizing, and
- allows us to develop strong technical proficiency in our maintenance and
overhauling operations, which enables us to achieve high run-time rates
while maintaining low operating costs, a benefit both to us and our
customers.
In addition to being dependable, our smaller Gemini compressors are
lightweight and highly portable. Our Ajax compressors are a strong choice for
mid-range compression projects because of their high reliability and
versatility. Due to their design, the Ajax compressors burn the broadest variety
of fuel gas, including "sour" gas, which is produced in a number of domestic and
international regions. Our larger horsepower units are generally Ariel
compressors powered by Caterpillar or Waukesha engines. These compressors
operate at higher speeds and, although larger than the lower horsepower
compressors, are transportable. The combination of these larger horsepower units
and the lower horsepower Ajax and Gemini units enable us to offer our customers
gas compressors for use in most segments of the production, gathering and
transportation process.
We believe our rental fleet is in excellent condition as we provide full
maintenance on virtually all of our operating units.
Domestic Operations
We own one of the largest domestic rental fleets of natural gas
compressors, comprising approximately 755,000 horsepower and approximately 3,400
units as of September 30, 2000. We have compressor services operations in 12
states and operate out of 38 sales and service locations, eight of which were
added as a
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result of our acquisition of GCSI. We operate in every natural gas producing
region of the United States. Our geographic diversity and nationwide operations
enable us to:
- provide responsive and cost effective service to our rental customers, as
well as for units owned by others,
- increase our revenues with relatively little incremental overhead
expense, and
- offer our customers the ability to deal with one nationwide provider for
all of their compression equipment and service needs.
Our marketing and client service functions are performed on a coordinated
basis by our sales and field service personnel. Our salespersons regularly visit
their customers to ensure customer satisfaction and determine customer needs as
to services currently being provided and also to ascertain potential future
compressor requirements of these customers, which provides us with significant
competitive advantages. Our salespersons also communicate regularly with our
field service and sales employees who, in many cases, have day-to-day
relationships with key customer personnel and may have advance notice of
customer planning. This ongoing communication between our sales and field
service personnel allows us to quickly identify and respond to customer requests
in this relationship driven, service intensive industry.
When a salesperson is advised of a new compression service opportunity,
that salesperson obtains relevant information concerning the project including
gas flow, pressure and gas composition. The salesperson will then search a
computerized data base to determine the availability of an appropriate
compressor unit in our fleet for that project. If an appropriate compressor is
available, it is immediately deployed. If a unit requires maintenance or
reconfiguration, our maintenance personnel will service it as quickly as
possible to meet the needs of the customer. If providing the appropriate unit
would entail significant overhaul cost, the salesperson will communicate with
the customer, engineer and field service personnel and contact a supervisor to
determine the timing of the required maintenance or overhaul to develop a
competitive rental proposal.
Rental rates generally are determined by compressor category based on our
standardized rental rates with variations as necessary to secure the service
contract and assure profitability of each contract. Our service contracts
usually are variations of a standard service contract associated with a master
service agreement. The standard rental contract covers the technical
specifications, equipment selection and performance, site location and pricing
for the individual project. To ensure the proper pricing and service
arrangements on larger horsepower installations and new compression
opportunities, our engineers and financial personnel are highly involved in the
early stages of the proposal process.
The majority of our service agreements provide for full maintenance.
Optional items such as oil, antifreeze, freight, insurance and other items may
be either itemized or included in the basic monthly rental rate. Initial rental
terms are usually six months, with some projects committed for as long as five
years. At the end of the initial term, rentals continue at the option of the
lessee on a month-to-month basis. After that time, the compressor may be
returned or replaced with a different compressor. This constant need for varying
the size and/or configuration of compressor packages in the same location over
time is a significant advantage of outsourced compressors over owned
compressors. Our standardized fleet and efficient operations allow us to provide
different compressors and reconfigure our units to meet these changing needs
quickly and profitably.
International Operations
In recent years, we have expanded our presence in select international
markets, including Argentina, Colombia, Venezuela and Australia. Our presence in
these international markets, which dates back over five years, usually generates
higher margins for us and produces longer-term contracts than our domestic
business. As of September 30, 2000, we had 51 units aggregating approximately
54,000 horsepower operating under contract in these markets. In addition, we
have been awarded significant contract compression service projects in Mexico
and Argentina which will increase the amount of horsepower we
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operate internationally by at least 33% during the last six months of our
current fiscal year. We are also pursuing opportunities in other strategic
international areas, including other South American countries and Southeast
Asia. For the six months ended September 30, 2000, approximately 15.3% of our
rental revenue was generated internationally.
Our international operations are focused on large horsepower compressor
markets and frequently involve long-term comprehensive service projects. These
projects require us to provide complete engineering and design in the proposal
process. Our extensive engineering and design capabilities and reputation of
high quality fabrication give us a competitive advantage in these markets. In
addition, our new high bay fabrication facility positions us to be able to meet
increasing demand for these services and products in the future. Commercial
negotiations proceed only after the acceptance of proposed engineering designs
and concepts. International service agreements differ significantly from
domestic service agreements as individual contracts are negotiated for each
project.
Operations, Maintenance and Overhaul Services
We provide a comprehensive contract compression service, which includes
rental, operation and maintenance services, for most of our larger horsepower
units, including our international units, and also on units owned by our
customers. When providing these full contract compression services, we work
closely with a customer's field service personnel so that the compressor can be
adjusted to efficiently match changing characteristics of the gas produced. We
generally operate the large horsepower compressors, and include the operations
fee as part of our rental rate. Large horsepower units are more complex, and by
operating the equipment ourselves we reduce our maintenance and overhaul
expenses. While we do not require our customers to retain us to operate smaller
horsepower units, we generally train our customers' personnel in fundamental
compressor operations.
We maintain major overhaul and repackaging facilities in Mineral Wells,
Houston and Schulenberg, Texas, Grand Junction, Colorado and Traverse City,
Michigan. Each of these overhaul facilities is equipped with in-house engine
rebuild and test equipment, full machine shops, environmentally-approved
painting facilities and high capacity cranes. We also maintain 27 field service
facilities. We provide maintenance services on substantially all of our rental
fleet and contract compression for most of our larger horsepower units.
Maintenance services include the scheduled preventative maintenance repair and
general up-keep of compressor equipment. As a complement to our maintenance
business, we offer, at additional cost, supplies and services such as
antifreeze, lubricants, property damage insurance on the equipment, and prepaid
freight to the job site. We also may provide for installation, which for our
typical lower, mid-range and smaller horsepower units involves significantly
less engineering and cost than the comprehensive service concept prevalent in
the international markets. We also routinely repackage or reconfigure some of
our existing fleet to adapt to our customers' needs.
We have over 450 trained and equipped field service representatives and
mechanics located throughout the United States and 60 such representatives in
international locations. The field service representatives are responsible for
preventive maintenance, repair, preparation and installation of rental units.
The mechanics perform major overhaul and unit rework in the major overhaul
facilities. On average, each of our units undergoes a major overhaul once every
six to eight years. A major overhaul involves the rebuilding of the unit in
order to materially extend its useful life or to enhance the unit's ability to
fulfill broader or different rental applications. One of our overhaul facilities
operates a unit test loop and also functions as a full-time training center for
our personnel.
Our field gas compressors are maintained in accordance with daily, weekly,
monthly and annual maintenance schedules that have been developed and refined
over our long history of maintaining and operating compressors. These procedures
are constantly updated as technology changes and our operations group develops
new techniques and procedures. In addition, because our field technicians
provide maintenance on virtually all of our installed compression equipment,
they are familiar with the condition of our equipment and can readily identify
potential problems. In our experience, these rigorous procedures maximize
component life and unit availability and minimize avoidable downtime.
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We also have a technical service group which is involved in our
comprehensive service proposals and monitors our larger horsepower units. This
group utilizes technologically advanced diagnostic equipment that permits
sophisticated field and remote diagnostic analyses of engines and compressors,
as well as emission analyses to insure compliance with regulatory requirements.
Fabrication and Sales
As a complement to our compressor rental service operations, we design,
engineer, assemble and sell natural gas and air compressors for engineering and
construction firms, as well as for exploration and production companies both
domestically and internationally. We also fabricate compressors for our own
fleet. Our fabrication facilities are located in Houston and Schulenberg, Texas
and Traverse City, Michigan. In April 1999, we completed construction of a new
20,000 square foot heavy capacity fabrication shop and paint booth in Houston.
This facility enhances our ability to expand our fleet of higher horsepower
compressors.
When servicing our equipment sale customers, we provide compressors that
are built in accordance with specific criteria of the customer as well as
compressors that are prepackaged. We act as a distributor for Ariel gas
compressors and as an original equipment manufacturer for Atlas Copco air
compressors. Some of the compressors manufactured by these entities are used by
us in our engineered products operations. For the six months ended September 30,
2000, 22% of our total revenues were generated from our fabrication and sales
operations.
BACKLOG
As of September 30, 2000, we had a compressor unit fabrication backlog for
sale to third parties of approximately $26.8 million, compared to $5.2 million
as of September 30, 1999. A majority of the backlog is expected to be produced
within a 180-day period. Generally, units to be sold to third parties are
assembled according to each customer's specifications and sold on a turnkey
basis. We purchase components for such compressor units from third party
suppliers.
GEOGRAPHIC SEGMENTS
We have 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 specifications. The International Rental and
Maintenance Segment represents substantially all of our foreign based
operations.
EMPLOYEES
As of September 30, 2000, we had approximately 725 employees. None of our
employees are covered by a collective bargaining agreement. We believe that our
relationship with our employees is satisfactory.
COMPETITION
The natural gas compressor rental, maintenance, service and fabrication
business is highly competitive. We face competition from large national and
multinational companies with greater financial resources and, on a regional
basis, from several smaller companies.
Other than Weatherford Global, our main competitors are Hanover Compression
Company, Production Operators, Inc. (a subsidiary of Schlumberger Limited),
Compressor Systems, Inc. and J-W Operating Company. Immediately following the
proposed merger, Weatherford and its subsidiaries will continue to compete with
us in some geographic areas such as the Middle East and Asia-Pacific, including
Australia and Thailand. In addition, there are no restrictions on Weatherford's
ability to compete with us in other regions. We believe that we compete
effectively on the basis of customer service, including the
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availability of our personnel in remote locations, price, flexibility in meeting
customer needs and quality and reliability of our compressors and related
services.
Our engineered products division competes with other fabricators of
compressor units. The compressor fabrication business is dominated by a few
major competitors, several of which also compete with us in the compressor
rental business.
GOVERNMENTAL REGULATION
We are subject to stringent and complex federal, state and local laws and
regulations regarding the protection of the environment. Compliance with these
laws and regulations may affect the costs of our operations. Moreover, failure
to comply with these environmental laws and regulations may result in the
imposition of administrative, civil, and criminal penalties. Not all of our
properties may be in full compliance with all applicable environmental
requirements. However, as part of the regular evaluation of our operations, we
are updating the environmental condition of our existing and acquired properties
as necessary and, overall, we believe that we are in substantial compliance with
applicable environmental laws and regulations and that the phasing in of
emission controls and other known regulatory requirements at the rate currently
contemplated by such laws and regulations will not have a material adverse
effect on our financial condition or results of operations.
Under the Comprehensive Environmental Response, Compensation and Liability
Act, referred to as "CERCLA," and related state laws and regulations, joint and
several liability can be imposed without regard to fault or the legality of the
original conduct on certain classes of persons that contributed to the release
of a "hazardous substance" into the environment. These persons include the owner
and operator of a contaminated site where a hazardous substance release occurred
and any company that transported, disposed of, or arranged for the transport or
disposal of hazardous substances released at the site. Under CERCLA, we may be
liable for the costs of cleaning up the hazardous substances that have been
released into the environment and for damages to natural resources. In addition,
it is not uncommon for the neighboring land owners and other third parties to
file claims for personal injury, property damage and recovery of response costs.
As part of our operations, we generate wastes, including hazardous wastes
such as used paints and solvents. The management and disposal of hazardous
wastes are subject to the Resource Conservation and Recovery Act, referred to as
RCRA, and comparable state laws. These laws and the regulations implemented
thereunder govern the generation, storage, transfer and disposal of hazardous
wastes. The U.S. Environmental Protection Agency and various state agencies have
limited the approved methods of disposal for certain hazardous and nonhazardous
wastes.
We currently own or lease, and have in the past owned or leased, a number
of properties that have been used, some for many years by third parties over
whom we have no control, in support of natural gas compression services or other
industrial operations. As with any owner or operator of property, we may be
subject to clean-up costs and liability under CERCLA, RCRA or other
environmental laws for hazardous waste, asbestos or any other toxic or hazardous
substance that may exist on or under any of our properties, including waste
disposed or groundwater contaminated by prior owners or operators. We have
performed in the past, and may perform in the future, certain remediation
activities governed by environmental laws. The cost of this remediation has not
been material to date. We are currently undertaking groundwater monitoring at
certain of our facilities, which may further define remedial obligations.
Certain of our acquired properties may also warrant groundwater monitoring and
other remedial activities. We believe that former owners and operators of many
of these properties, including Tidewater, Inc., are responsible under
environmental laws and contractual agreements to pay for or perform such
remediation, or to indemnify us for our remedial costs. There can be no
assurance that these other entities will fulfill their legal or contractual
obligations, and their failure to do so could result in material costs to us.
In most cases, our customers contractually assume all environmental
compliance and permitting obligations and environmental risks related to
compressor operations, even in cases where we operate and maintain the
compressors on their behalf. Under most of our rental service agreements, our
customers
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must indemnify us for any loss or liability we may suffer as a result of the
failure to comply with applicable environmental laws, including requirements
pertaining to necessary permits such as air permits.
Air pollutant emissions from natural gas compressor engines are a
substantial environmental concern for the natural gas transportation industry.
Federal regulations are expected to impose or increase obligations of operators
to reduce emissions of nitrogen oxides from internal combustion engines in
transmission service.
Stricter standards in environmental legislation or regulations that may
affect us may be imposed in the future, such as proposals to make hazardous
wastes subject to more stringent and costly handling, disposal and clean-up
requirements. Accordingly, new laws or regulations or amendments to existing
laws or regulations (including, but not limited to, regulations concerning
ambient air quality standards, waste water and storm water discharge and global
climate change) could require us to undertake significant capital expenditures
and could otherwise have a material adverse effect on our business, results of
operations and financial condition.
Since 1992, there have been various proposals to impose taxes with respect
to the energy industry, none of which have been enacted and all of which have
received significant scrutiny from various industry lobbyists. At the present
time, given the uncertainties regarding the proposed taxes, including the
uncertainties regarding the terms which the proposed taxes might ultimately
contain and the industries and persons who may ultimately be the subject of such
taxes, it is not possible to determine whether any such tax will have a material
adverse effect on us.
Our international operations are potentially subject to similar
governmental controls and restrictions relating to the environment. We believe
that we are in substantial compliance with any such foreign requirements
pertaining to the environment.
MARKETS AND CUSTOMERS
Our current customer base consists of over 750 domestic and international
companies engaged in all aspects of the oil and gas industry, including major
integrated oil and gas companies, international state owned oil and gas
companies, large and small independent producers, natural gas processors,
gatherers and pipelines. We have entered into strategic alliances with some of
our key customers. These alliances are essentially preferred vendor arrangements
and give us preferential consideration for the compression needs of these
customers. In exchange, we provide these customers with enhanced product
availability, product support and favorable pricing. In fiscal year 2000, no
single customer accounted for as much as 10% of our total revenues. Our top 20
customers accounted for approximately 54% of our rental revenues in fiscal year
2000.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. As of the date
of this proxy statement, we are not a party to any legal proceedings which, if
determined adversely to us, individually or in the aggregate, our management
expects would have a material adverse effect on our results of operations or
financial position.
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BUSINESS OF WEATHERFORD GLOBAL
BACKGROUND
Prior to February 1999, Weatherford conducted its compression services
operations through Enterra Compression Company and several domestic and foreign
entities. In February 1999, Weatherford and GE Capital formed a joint venture.
In connection with the formation, Weatherford and GE Capital each contributed
their respective gas compression services businesses to the joint venture, which
is operated through Weatherford Global Compression Services, L.P., its direct
and indirect subsidiaries, and two Canadian subsidiaries of Enterra. In exchange
for the contributions to Weatherford Global, Weatherford received a 64%
ownership interest and GE Capital received a 36% ownership interest.
Enterra Compression Company, a wholly owned subsidiary of WEUS Holding,
Inc., which is a wholly owned subsidiary of Weatherford International, Inc.,
currently holds Weatherford's 64% ownership interest in Weatherford Global. In
connection with the merger, Enterra will purchase GE Capital's 36% ownership
interest, which is currently held by Global Compression Services, Inc., a
subsidiary of GE Capital.
The following description of the business of Weatherford Global assumes
that the pre-closing transfers described under "The Merger Agreement -- Certain
Pre-Closing Transfers," in particular the distribution of GSI and related assets
(excluding those operations in Australia and Thailand) to Weatherford and the
acquisition of GE Capital's 36% ownership interest in Weatherford Global, have
been completed.
OVERVIEW
Weatherford Global is the world's second largest provider of natural gas
compression products and services for the oil and gas industry. Weatherford
Global offers a complete range of products and services, including:
- rental of natural gas compression equipment;
- packaging and sales of natural gas compression equipment;
- custom-designed compression systems;
- full service turnkey compression management;
- maintenance and reconditioning services;
- select services such as repair services, offshore platform installation
and management of compression equipment; and
- distribution of replacement parts.
Weatherford Global's compression services are provided primarily to
producers of natural gas and to pipeline companies and are used by customers to
compensate for diminished pressure at the wellhead, as well as gathering gas
from multiple wells in both onshore and offshore applications. Weatherford
Global either sells or rents compression equipment to clients for terms that may
range from a number of months to years.
Weatherford Global also offers field management services that may be
charged on both a fixed and turnkey basis. The compressors marketed by
Weatherford Global were historically manufactured by Weatherford Global at its
facility located in Corpus Christi, Texas or purchased from third parties. In
December 1999, Weatherford Global sold its Gemini compressor manufacturing
operations in Corpus Christi to GE Packaged Power. Under the terms of that sale,
Weatherford Global agreed to purchase from GE Packaged Power $38.0 million of
compressor components over five years and $3.0 million of parts over three
years, and GE Packaged Power agreed to provide compressors to Weatherford Global
during that time period at negotiated prices.
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<PAGE> 93
Since its formation, Weatherford Global has grown primarily through
acquisitions, including the acquisition of the Canadian compression parts and
services business of Cooper Cameron Limited in July 2000.
OPERATIONS
Compressor Fleet
As of September 30, 2000, Weatherford Global had a fleet of approximately
4,000 compression units with horsepowers ranging from 10 to 3,400. The average
horsepower of the compression fleet is approximately 243. The following table
sets forth a summary of Weatherford Global's compression fleet as of September
30, 2000 based on the manufacturers' rated horsepower:
<TABLE>
<CAPTION>
TOTAL % OF
HORSEPOWER RANGE NUMBER OF UNITS HORSEPOWER HORSEPOWER
---------------- --------------- ---------- ---------------
<S> <C> <C> <C>
0 - 100......................................... 1,935 119,302 12.5%
101 - 200.......................................... 864 126,703 13.3%
201 - 500.......................................... 676 202,555 21.2%
501 - 800.......................................... 189 121,692 12.8%
801 - 1,100........................................ 180 178,995 18.8%
1,101 and over...................................... 134 204,257 21.4%
----- ------- -----
Total..................................... 3,978 953,504 100.0%
===== ======= =====
</TABLE>
In addition, Weatherford Global manages approximately 220 compression units
owned by its clients having an aggregate horsepower of approximately 16,000.
Service and Repair Operations
Weatherford Global provides its customers with comprehensive service and
repair capabilities that include preventive maintenance, predictive maintenance,
engine and compressor packaging reconditioning, compressor resizing, cooler
maintenance, total package overhaul, compressor and engine parts and used
compression equipment.
Fabrication and Sales
Weatherford Global also designs, fabricates and sells natural gas
compression units to third parties and for use in its own rental fleet.
FACILITIES
The following table describes the material facilities currently owned or
leased by Weatherford Global:
<TABLE>
<CAPTION>
FACILITY SIZE
(SQUARE PROPERTY SIZE
LOCATION FEET) (ACRES) STATUS UTILIZATION
-------- -------------- ------------- ------ ------------------------
<S> <C> <C> <C> <C>
Calgary, Alberta, Canada.......... 105,700 9.2 Owned Rental, sales and
service
Corpus Christi, Texas............. 90,000 24.3 Owned Rental, sales, service
and packaging
Yukon, Oklahoma................... 72,000 14.7 Owned Rental, sales and
service
Broussard, Louisiana.............. 26,700 9.5 Leased Rental, sales and
service
Midland, Texas.................... 24,200 22.0 Owned Rental, sales and
service
</TABLE>
CAPITAL EXPENDITURES
Weatherford Global's compression operations are capital intensive and
require substantial investments in additional compressor units as the business
grows. Weatherford Global's capital investments have historically been financed
through debt, sale and leaseback arrangements and other similar financing
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structures that are repaid from the cash flows generated from the compressor
units over the projected term of rental of the equipment. Where possible,
Weatherford Global attempts to secure financing on a non-recourse basis. During
1999, Weatherford Global entered into lease arrangements under which a number of
its compressor units were sold to a third party and were then rented back to it
over a five-year period. This arrangement will be refinanced in connection with
the merger. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Enterra -- Liquidity and Capital
Resources."
MARKETS AND CUSTOMERS
Weatherford Global's current customer base consists of over 2,500 domestic
and international companies engaged in all aspects of the oil and gas industry,
including major integrated oil and gas companies, international state-owned oil
and gas companies, large and small independent producers, natural gas
processors, gatherers and pipelines. Weatherford Global has entered into
strategic alliances with some of its key customers. These alliances are
essentially preferred vendor arrangements and give Weatherford Global
preferential consideration for the compression needs of these customers. In
exchange, Weatherford Global provides these customers with enhanced product
availability, product support and favorable pricing.
In May 1999, Weatherford Global entered into a total compression management
contract with YPF S.A. in Argentina. The contract is expected to provide
approximately $95 million in revenues to Weatherford Global over its term. Under
the contract, Weatherford Global will provide YPF with a natural gas compression
processing program that simplifies compression acquisition, reduces operating
expenses and optimizes horsepower for YPF. The contract includes Weatherford
Global's ownership of the natural gas compression and related processing
equipment and complete maintenance and daily operations on compressor stations
totaling approximately 78,000 horsepower.
During 1999, no single customer accounted for as much as 10% of Weatherford
Global's total revenues. Weatherford Global's top 15 customers accounted for
approximately 15.7% of rental revenues in fiscal 1999.
BACKLOG
As of September 30, 2000, Weatherford Global had a North American
compressor unit fabrication backlog of units for sale and rental to third
parties of approximately $14.6 million, compared to $21.1 million as of
September 30, 1999. All backlog is expected to be produced within a 180-day
period. Generally, units to be sold to third parties are assembled according to
each customer's specifications and sold on a turnkey basis. Weatherford Global
purchases components for such compressor units from third party suppliers,
including GE Packaged Power.
COMPETITION
Weatherford Global's principal competitors in the compression services
business are Hanover Compression Company, Production Operators Corp., a
subsidiary of Schlumberger, Universal and other smaller regional compression
companies. Weatherford Global also competes with the operations of its customers
for the management of their own compressors who control approximately 70%-75% of
the compressor services market. Weatherford Global believes that it is the
second largest provider of natural gas compression services in the world.
Following the merger, Weatherford will continue to compete in the compression
equipment fabrication, sales, service and rental business in Asia-Pacific and
the Middle East and will not be prohibited from competing in other regions
around the world.
EMPLOYEES
As of September 30, 2000, Weatherford Global and its subsidiaries had
approximately 1,300 employees. Of these employees, approximately 150 will be
retained by Weatherford in the merger.
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Employees of Weatherford Global's Canadian operations are covered by a
collective bargaining agreement. Weatherford Global and its subsidiaries believe
their relationship with their employees is satisfactory.
FEDERAL REGULATION AND ENVIRONMENTAL MATTERS
Weatherford Global's operations are subject to federal, state and local
laws and regulations relating to the energy industry in general and the
environment in particular. Environmental laws have in recent years become more
stringent and have generally sought to impose greater liability on a larger
number of potentially responsible parties. While Weatherford Global is not
currently aware of any situation involving an environmental claim that would
likely have a material adverse effect on its business, it is always possible
that an environmental claim with respect to its compression services business or
a property that one of its predecessors owned or used could arise that could
have a material adverse effect.
Weatherford Global's expenditures during 1999 to comply with environmental
laws and regulations were not material, and it currently expects that the cost
of compliance with environmental laws and regulations for 2000 also will not be
material.
LEGAL PROCEEDINGS
From time to time, Weatherford Global may be involved in litigation
relating to claims arising out of its operations in the normal course of
business. As of the date of this proxy statement, neither Weatherford Global nor
any of its subsidiaries is a party to any legal proceedings that, if determined
adversely to it or them, individually or in the aggregate, would be expected to
have a material adverse effect on Weatherford Global's results of operations or
financial position.
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AMENDMENT TO UNIVERSAL'S INCENTIVE STOCK OPTION PLAN
PROPOSED AMENDMENT
Following the merger, we anticipate we will more than double the number of
employees that we currently have. In order to permit us to have sufficient stock
options available for future grants to employees and directors in connection
with and following the merger, we are asking our shareholders to approve an
amendment to our Incentive Stock Option Plan to increase the number of shares
available for grant from 1,912,421 shares to 3,012,421 shares. A copy of our
Plan has been filed as an exhibit to Amendment No. 2 to our Registration
Statement on Form S-1 (Reg. No. 333-34090).
Our Incentive Stock Option Plan authorizes us, through our board of
directors or the compensation committee of our board of directors, to grant
stock options to our employees, consultants and directors. Currently, our Plan
permits us to issue 1,912,421 shares of our common stock under the Plan, of
which 6,060 shares have already been issued and options to purchase 1,279,939
shares are currently outstanding.
DESCRIPTION OF AMENDMENT
Our reserve of shares of common stock under our Incentive Stock Option Plan
has been reduced as a result of our growth. We have granted options to new
employees we have gained through acquisitions, in the ordinary course of
providing incentives to current employees and as inducements for the hiring of
new employees. As of the date of this proxy statement, 626,422 shares of our
common stock reserved for issuance under our Incentive Stock Option Plan were
available for future option grants. We are obligated under the merger agreement
to issue options to purchase up to 318,000 shares of our common stock to certain
Weatherford Global employees. In addition, we expect to issue options to
purchase additional shares of our common stock to other employees following the
merger. The retention of these employees is an important aspect of our
integration process.
If this amendment is approved by our shareholders at the special meeting,
we expect to have sufficient shares of common stock available for issuance under
the plan for the near term.
BOARD RECOMMENDATION
Our board of directors unanimously recommends a vote "FOR" approval of the
amendment to our Incentive Stock Option Plan.
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EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation for
fiscal 2000, 1999 and 1998 for our Chief Executive Officer and our other four
highest paid officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
FISCAL SALARY BONUS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($)
--------------------------- ------ ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Stephen A. Snider...................... 2000 170,000 35,000 6,619 15,000(1)
President & Chief Executive Officer 1999 170,000 43,890 6,619 41,965(1)
1998 170,000 172,500 6,619 1,128,976(1)
Richard W. FitzGerald(2)............... 2000 146,049 20,000 2,206 34,132(3)
Senior Vice President & 1999 -- -- -- --
Chief Financial Officer 1998 -- -- -- --
Newton H. Schnoor...................... 2000 100,000 15,000 2,206 8,191(4)
Senior Vice President & Controller 1999 95,000 26,058 2,206 6,851(4)
1998 78,354 48,600 2,206 106,245(4)
Kirk E. Townsend....................... 2000 229,521(5) 15,000 1,550 21,878(6)
Vice President of Sales of 1999 154,436(5) -- 400 9,331(6)
Universal Compression, Inc. 1998 235,041(5) -- 400 12,722(6)
Jack B. Hilburn, Jr. .................. 2000 110,000 15,000 2,206 4,843(7)
Senior Vice President of Operations 1999 91,250 17,310 900 7,774(7)
of Universal Compression, Inc. 1998 85,000 34,500 900 91,985(7)
</TABLE>
---------------
(1) Includes (a) matching contributions made by Tidewater and Universal to Mr.
Snider's 401(k) account of $5,100 during fiscal 2000 and fiscal 1999 and
$2,069 during fiscal 1998, (b) $3,876 in health premiums paid by Tidewater
and Universal on behalf of Mr. Snider under its executive medical plans
during each of fiscal 1998, 1999 and 2000, (c) payments made by Tidewater
and Universal on behalf of Mr. Snider pursuant to their Supplemental Savings
Plans of $3,187 during fiscal 2000 and fiscal 1999 and $3,031 during fiscal
1998, (d) $29,800 paid by Universal to Mr. Snider for moving expenses during
fiscal 1999 and (e) $1,120,000 paid to Mr. Snider in fiscal 1998 as
incentive compensation pursuant to the completion of the Tidewater
Compression acquisition.
(2) Mr. FitzGerald joined Universal in April 1999.
(3) Includes (a) matching contributions made to Mr. FitzGerald's 401(k) account
of $3,750, (b) health care premiums paid on behalf of Mr. FitzGerald under
our Executive Medical Plan of $3,553, (c) payment made on behalf of Mr.
FitzGerald pursuant to our Supplemental Savings Plan of $750 and (d) $25,886
paid to Mr. FitzGerald for moving expenses.
(4) Includes (a) matching contributions made to Mr. Schnoor's 401(k) account of
$3,000 during fiscal 2000, $2,850 during fiscal 1999 and $2,350 during
fiscal 1998, (b) $3,876 in health care premiums paid on behalf of Mr.
Schnoor under our Executive Medical Plan during each of fiscal 2000 and
1999, (c) payment made on behalf of Mr. Schnoor pursuant to our Supplemental
Savings Plan of $1,000 during fiscal 2000 and $125 during fiscal 1999 and
(d) $103,500 paid to Mr. Schnoor during fiscal 1998 as incentive
compensation pursuant to the completion of the Tidewater Compression
acquisition.
(5) Includes sales commissions.
(6) Includes (a) matching contributions made to Mr. Townsend's 401(k) account of
$6,886 during fiscal 2000, $7,051 during fiscal 1999 and $4,449 during
fiscal 1998, (b) $3,876 in health care premiums paid on behalf of Mr.
Townsend under our Executive Medical Plan during fiscal 2000, (c) payment
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made on behalf of Mr. Townsend to our Supplemental Savings Plan of $2,543
during fiscal 2000, (d) an automobile allowance paid to Mr. Townsend of
$4,281 during fiscal 2000, $4,068 during fiscal 1999 and $5,412 during
fiscal 1998 and (e) $4,200 paid to Mr. Townsend for club dues during fiscal
2000.
(7) Includes (a) matching contributions made to Mr. Hilburn's 401(k) account of
$2,225 during fiscal 1999 and $1,381 during fiscal 1998, (b) health care
premiums paid on behalf of Mr. Hilburn of $3,876 in each of fiscal 2000 and
fiscal 1999 and $162 in fiscal 1998, (c) an automobile allowance paid to Mr.
Hilburn of $720 in fiscal 2000, $1,341 in fiscal 1999 and $2,631 in fiscal
1998 and (d) $87,500 paid to Mr. Hilburn during fiscal 1998 as incentive
compensation pursuant to the completion of the Tidewater Compression
acquisition.
The following table sets forth grants of options to purchase shares of
common stock during fiscal 2000:
OPTION/SAR GRANTS IN LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(2)
OPTIONS EMPLOYEES BASE PRICE EXPIRATION --------------------
GRANTED IN 2000 ($/SHARE) DATE 5% 10%
---------- ------------- ----------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Stephen A. Snider................ -- -- -- -- -- --
Richard W. FitzGerald............ 16,379 30.8% $6.73 4/09 $69,324 $175,679
Newton H. Schnoor................ -- -- -- -- -- --
Kirk E. Townsend................. 4,826 9.1 6.73 11/09 20,426 51,763
3,712 7.0 6.73 4/09 15,711 39,814
Jack B. Hilburn.................. 9,697 18.3 6.73 4/09 41,042 104,009
</TABLE>
---------------
(1) All outstanding options are fully vested as a result of our initial public
offering in May 2000.
(2) The hypothetical potential appreciation shown in these columns reflects the
required calculations at annual assumed appreciation rates of 5% and 10%, as
set by the SEC, and therefore is not intended to represent either historical
appreciation or anticipated future appreciation of our common stock.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING
UNEXERCISED OPTIONS AS OF VALUE OF OPTIONS
MARCH 31, 2000(1)(2) AS OF MARCH 31, 2000(3)
--------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Stephen A. Snider............................. 32,763 16,382 $500,291 $250,153
Richard W. FitzGerald......................... -- 16,379 -- 250,107
Newton H. Schnoor............................. 10,919 5,460 166,733 83,374
Kirk E. Townsend.............................. 2,554 8,954 39,000 136,728
Jack Hilburn.................................. 4,455 11,924 68,028 182,079
</TABLE>
---------------
(1) No options were exercised by any named executive officer during fiscal year
2000.
(2) All unexercisable options vested in full upon completion of our initial
public offering in May 2000.
(3) Calculated using the initial public offering price of $22.00 per share as
the assumed fair market value per share of common stock on March 31, 2000.
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EMPLOYMENT AGREEMENTS
We have entered into employment agreements with the following officers:
- Stephen Snider on February 20, 1998 pursuant to which Mr. Snider serves
as our President for a current annual base salary of $220,000, plus a
target bonus of up to 70% of such base salary;
- Ernie Danner on February 20, 1998 pursuant to which Mr. Danner serves as
our Executive Vice President for a current annual base salary of $24,000,
plus a discretionary bonus;
- Richard FitzGerald effective April 12, 1999 pursuant to which Mr.
FitzGerald serves as Senior Vice President and Chief Financial Officer
for a current annual base salary of $175,000, plus a target bonus of up
to 50% of such base salary; and
- Newton Schnoor on February 20, 1998 pursuant to which Mr. Schnoor serves
as our Senior Vice President and Controller for a current annual base
salary of $112,500, plus a target bonus of up to 50% of such base salary.
Each employment agreement has an initial term of three years. If during the
stated duration or any extension of duration, a "change of control" occurs, each
agreement automatically extends to a date that is the second anniversary of the
change of control. In addition, each employment agreement provides that if the
officer is terminated without cause during the initial term, the officer will be
paid for the remainder of the term, plus a bonus amount based on previously paid
bonuses. Pursuant to the employment agreements and our officers' incentive plan,
bonuses are payable based on our safety record and financial performance, plus a
discretionary component. These agreements also place restrictions on the ability
of these individuals to disclose confidential information, to compete against us
and to hire or solicit certain of our employees if the individual's employment
with us is terminated.
We also had an employment agreement with Valerie Banner, who served as our
Senior Vice President and General Counsel, which provided most recently for an
annual base salary of $135,000, plus a target bonus of up to 50% of her base
salary. We terminated this agreement without cause effective December 8, 2000.
Pursuant to the terms of the agreement, we will pay to Ms. Banner a lump sum
severance payment equal to the sum of her annual base salary as of the time of
termination of the agreement and the average of the annual bonuses she has
received. Ms. Banner also will be entitled to receive a target bonus pro rated
through December 8, 2000. Ms. Banner will continue to assist us as needed with
our new financing arrangements and other legal matters for a reasonable hourly
fee.
CHANGE OF CONTROL AGREEMENTS
In addition to the change of control provisions described above, we have
entered into change of control agreements with Messrs. Townsend and Hilburn.
Pursuant to those agreements, in the event that the executive's employment with
us is terminated within one year after a "change in control" of us, then the
executive is entitled to severance pay and other benefits. The severance payment
is based upon the executive's annual base salary and bonus target amount at the
time of termination. The agreements define a "change in control" to mean the
beneficial ownership by any person or entity other than Castle Harlan of more
than 50% of our outstanding capital stock or, in specified circumstances, the
failure to re-elect a majority of the members of our board of directors. These
agreements also restrict the ability of Messrs. Townsend and Hilburn to compete
against us.
INCENTIVE STOCK OPTION PLAN
In February 1998, we adopted our Incentive Stock Option Plan to advance the
interests of our company and to improve shareholder value by providing
additional incentives to motivate and retain key employees. Our Incentive Stock
Option Plan was amended on April 20, 2000 and on May 15, 2000 to increase the
number of shares subject to the plan, expand the eligible participants, revise
the plan provisions addressing adjustment of options upon changes in our
capitalization, and modify the provisions addressing exercise of options upon
termination of employment, payment of option exercise price and
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certain other matters. Our board of directors or the compensation committee of
our board of directors administers our Incentive Stock Option Plan. A copy of
our Plan has been filed as an exhibit to Amendment No. 2 to our Registration
Statement on Form S-1 (Reg. No. 333-34090).
The proposed amendment, which is attached as Annex F to this proxy
statement, would increase the number of shares issuable under the plan from
1,912,421 to 3,012,421, which includes shares sufficient to cover new employees
that we will receive as a result of the merger.
Shares Subject to the Plan: General Terms
Under our Incentive Stock Option Plan, we can currently grant options
totaling 1,912,421 shares of our common stock, of which 6,060 shares have
already been issued. The proposed amendment described in this proxy statement,
which is subject to shareholder approval, would increase the number to 3,012,421
shares. That number will be adjusted automatically if there shall be any future
change in our capitalization from a stock dividend or split and may be adjusted
to reflect a change in our capitalization resulting from a merger,
consolidation, acquisition, separation (including a spin-off or spin-out),
reorganization or liquidation. As of March 31, 2000, we had options outstanding
under our Incentive Stock Option Plan to acquire 273,207 shares of our common
stock at an exercise price of $6.73 per share. On April 20, 2000, we granted
options to purchase an additional 339,192 shares of our common stock at an
exercise price of $21.50 per share. These options were accelerated and became
fully vested upon the closing of our initial public offering in May 2000. In
connection with the initial public offering, we authorized the grant of options
to purchase an aggregate of 250,600 shares of our common stock at an exercise
price equal to the initial public offering price of $22.00 per share that vest
over a three-year period. From May 30, 2000 through the date of this proxy
statement, we have granted additional options to purchase 423,000 shares of our
common stock.
Eligibility
Our key employees, non-employee directors and consultants, including those
of our subsidiaries, are eligible to be selected by our board of directors or
compensation committee to receive options under our Incentive Stock Option Plan.
Our board of directors or compensation committee, as administrator of our
Incentive Stock Option Plan, determines, subject to the terms of the plan, the
exercise prices, vesting schedules, expiration dates and other material
conditions under which recipients may exercise their options.
Types of Stock Options
Options granted under our Incentive Stock Option Plan may be either options
that are intended to qualify for treatment as "incentive stock options" under
Section 422 of the Internal Revenue Code or options that are not so intended,
which are non-qualified stock options. The exercise price of options under our
Incentive Stock Option Plan must be at least the fair market value of a share of
our common stock on the date of grant, and not less than 110% of such fair
market value in the case of an incentive stock option granted to a participant
owning 10% or more of our common stock. Our Incentive Stock Option Plan limits
the number of shares covered by incentive stock options exercisable by an
individual for the first time in a calendar year to an aggregate fair market
value of $100,000, as measured on the date of the grant. In addition, no one
participant may be granted options to purchase more than 742,480 shares of our
common stock in any calendar year.
Our board of directors or compensation committee may condition the exercise
of any option upon any factors the board of directors or compensation committee
may determine. No option granted under our Incentive Stock Option Plan is
transferable by an optionee other than by will or by the laws of descent and
distribution.
Termination of Awards
The term of an option may not exceed ten years (or five years in the case
of an incentive stock option granted to a participant owning 10% or more of our
common stock). In addition, an optionee who leaves our employment will generally
have no more than 30 days to exercise an option to the extent exercisable,
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reduced to no days if employment is terminated for cause or voluntary
resignation, and increased to three months if termination is due to death,
disability or retirement after age 65.
Amendments to the Plan
Our board of directors may amend, suspend or terminate our Incentive Stock
Option Plan, as long as no amendment or termination adversely affects options
previously granted. Our board of directors recommends you vote FOR the proposal
to amend our Incentive Stock Option Plan to increase the number of shares
available for issuance under the Plan.
Federal Income Tax Consequences
The following is a brief summary of federal income tax consequences of
certain transactions under our Incentive Stock Option Plan, based on federal
income tax laws and regulations in effect on May 1, 2000 applicable to
participants who are both citizens and residents of the United States. This
summary is not intended to be exhaustive and does not describe tax consequences
other than federal income taxes, such as foreign, state and local taxes and
estate or inheritance taxes. Additional or different federal income tax
consequences to a participant or to us may result depending on individual
circumstances and considerations not described below.
Incentive stock options. In general, a participant will not recognize
taxable income upon the grant or the exercise of an incentive stock option. For
purposes of the alternative minimum tax, however, the participant will be
required to treat an amount equal to the difference between the fair market
value of the common stock on the date of exercise over the exercise price as an
item of adjustment in computing the participant's alternative minimum taxable
income. If the participant does not dispose of the common stock received
pursuant to the exercise of the incentive stock option within either (1) two
years after the date of the grant of the incentive stock option or (2) one year
after the date of exercise of the incentive stock option, a subsequent
disposition of the common stock will generally result in long-term capital gain
or loss to such individual with respect to the difference between the amount
realized on the disposition and the exercise price. We will not be entitled to
any income tax deduction as a result of such disposition. We also normally will
not be entitled to take an income tax deduction at either the grant or the
exercise of an incentive stock option. If the participant disposes of the common
stock acquired upon exercise of the incentive stock option within either of the
above-mentioned time periods, then in the year of such disposition, the
participant generally will recognize ordinary income, and we generally will be
entitled to an income tax deduction (provided we satisfy applicable federal
income tax reporting requirements), in an amount equal to the lesser of (1) the
excess of the fair market value of the common stock on the date of exercise over
the exercise price or (2) the amount realized upon disposition over the exercise
price. Any gain in excess of such amount recognized by the participant as
ordinary income would be taxed to the individual as short-term or long-term
capital gain (depending on the applicable holding period).
Non-qualified stock options. A participant will not recognize any taxable
income upon the grant of a non-qualified stock option, and we will not be
entitled to take an income tax deduction at the time of such grant. Upon the
exercise of a non-qualified stock option, the participant generally will
recognize ordinary income and we generally will be entitled to take an income
tax deduction (provided we satisfy applicable federal income tax reporting
requirements) in an amount equal to the excess of the fair market value of the
common stock on the date of exercise over the exercise price. Upon a subsequent
sale of the common stock by the participant, the participant will recognize
short-term or long-term capital gain or loss (depending on the applicable
holding period).
The preceding summary does not discuss special rules that will apply to a
participant who exercises an option by paying the exercise price, in whole or in
part, by the transfer of our common stock.
EMPLOYEE STOCK OWNERSHIP
In connection with the Tidewater Compression acquisition, we issued to each
of our employees at the time (other than management) ten shares of our
non-voting common stock as a bonus, which shares
95
<PAGE> 102
converted into an aggregate of 23,754 shares of common stock upon completion of
our initial public offering.
Under our Non-Qualified Stock Purchase Plan, all of our employees and
directors were offered the opportunity to purchase shares of our stock, and 44
employees and two directors purchased at $50 per share in March 1999, a total of
1,996 shares of common stock and 7,984 shares of Series A preferred stock (which
shares of common stock and preferred stock converted into 33,387 shares of
common stock concurrently with the closing of our initial public offering in May
2000). There will be no additional shares offered under this Stock Purchase
Plan, which plan was terminated.
COMPENSATION OF DIRECTORS
Directors who are not officers of Universal, are not affiliated with Castle
Harlan and are not otherwise being paid, directly or indirectly, by us receive
an annual director fee of $20,000, $750 per board of directors or committee
meeting attended and reasonable out-of-pocket expenses. C. Kent May, Samuel
Urcis, Thomas C. Case and Edmund P. Segner III are entitled to this
compensation. Directors are not otherwise compensated for their services.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our by-laws provide that our directors and officers are indemnified to the
fullest extent permitted by law. In addition, we have entered into
indemnification agreements with our officers and directors that, among other
things, require us to indemnify our officers and directors to the fullest extent
permitted by law, and to advance to the officers and directors all related
expenses, subject to repayment if it is subsequently determined that
indemnification is not permitted. We are also required to indemnify and advance
all expenses incurred by our officers and directors seeking to enforce their
rights under the indemnification agreements, and cover officers and directors
under our directors' and officers' liability insurance.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors pursuant to the foregoing
provision, we have been informed that, in the opinion of the SEC, such
indemnification of directors and officers is against public policy as expressed
in the Securities Act and is therefore unenforceable.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
John K. Castle, William M. Pruellage and Samuel Urcis are the sole members
of our compensation committee. None of our executive officers serve as a member
of the board of directors or the compensation committee of another entity which
has an executive officer serving on our board of directors or compensation
committee.
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<PAGE> 103
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
Set forth below is information as of December 8, 2000 regarding the
beneficial ownership of our common stock by (1) any person who was known by us
to own more than five percent of our voting securities, (2) all directors, (3)
each of the executive officers identified in the Summary Compensation Table, and
(4) all current directors and executive officers as a group. Also set forth
below is the percentage of outstanding shares beneficially owned after
consummation of the merger with Enterra, and the issuance of 13,750,000 shares
of our common stock to WEUS in the merger.
Beneficial ownership is determined in accordance with the rules of the SEC.
Except as indicated in the footnotes to this table, each stockholder named in
the table has sole voting and investment power with respect to the shares set
forth opposite the stockholder's name. Except as otherwise set forth below,
shares of common stock not outstanding but deemed beneficially owned by virtue
of a person or group having the right to acquire them within 60 days, which
include outstanding stock options, are treated as outstanding only for purposes
of determining the percentage owned by such person or group, but are not treated
as outstanding for the purpose of computing the percentage ownership of any
other person. Except as otherwise set forth below, each named owner has sole
voting power and investment power of the shares set forth. The address for each
executive officer and director set forth below is c/o Universal Compression
Holdings, Inc., 4440 Brittmoore Road, Houston, Texas 77041.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE BENEFICIALLY OWNED(1)
SHARES OF ------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER COMMON STOCK BEFORE THE MERGER AFTER THE MERGER
------------------------------------ ------------ ----------------- ----------------
<S> <C> <C> <C>
WEUS Holding, Inc. ............................ --(2) -- 48.4%
515 Post Oak Park, Suite 600
Houston, Texas 77027-3415
Castle Harlan Partners III, L.P.(3)(4)......... 5,594,009 37.9% 19.6%
150 East 58th Street
New York, New York 10155
DB Capital Partners SBIC, L.P.(5).............. 535,269 3.7% 1.9%
130 Liberty Street, 25th Floor
New York, New York 10006
First Union Capital Partners, Inc.(5).......... 535,269 3.7% 1.9%
301 S. College Street, 5th Floor
One First Union Center
Charlotte, North Carolina 28288
Mellon Bank N.A., as Trustee for the
Bell Atlantic Master Trust(5)................ 535,269 3.7% 1.9%
245 Park Avenue, 40th Floor
New York, New York 10166
State Street Bank, as Trustee of
Du Pont Pension Trust(5)..................... 535,269 3.7% 1.9%
Delaware Corporate Center
1 Righter Parkway
Wilmington, Delaware 19803
The Reuben James Helton Trust(6)............... 1,278,580 8.7% 4.5%
Dated January 24, 2000
James Overholt, Trustee
1660 Barlow Street
Traverse City, Michigan 49686
Thomas C. Case................................. 334 * *
John K. Castle(4)(7)(8)........................ 5,594,009 37.9% 19.6%
Samuel Urcis(9)................................ 219,698 1.5% *
C. Kent May.................................... 334 * *
William M. Pruellage........................... 167 * *
Edmund P. Segner III(10)....................... -- * *
Stephen A. Snider(11).......................... 143,605 1.0% *
</TABLE>
97
<PAGE> 104
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE BENEFICIALLY OWNED(1)
SHARES OF ------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER COMMON STOCK BEFORE THE MERGER AFTER THE MERGER
------------------------------------ ------------ ----------------- ----------------
<S> <C> <C> <C>
Ernie L. Danner(12)............................ 160,092 1.1% *
Richard FitzGerald(13)......................... 38,049 * *
Newton Schnoor(14)............................. 43,401 * *
Jack R. Hilburn, Jr.(15)....................... 36,778 * *
Kirk E. Townsend(16)........................... 41,591 * *
All directors and executive officers as a group
(14 persons)(3)(4)(7)(9)..................... 6,024,739 41.1% 21.2%
</TABLE>
---------------
* Indicates less than 1% of the outstanding stock.
(1) Based upon 14,664,038 shares and 28,414,038 shares of common stock
outstanding before and after the merger, respectively. There are presently
13,242 treasury shares issued that are not counted as outstanding in
calculating the beneficial ownership percentage.
(2) 13,750,000 shares of our common stock will be owned by WEUS upon
consummation of the merger.
(3) Includes 2,936,718 shares of common stock directly held by Castle Harlan
Partners III, L.P., 2,174,529 shares of common stock held by certain
entities for which Castle Harlan Partners III, L.P. may direct the voting
pursuant to a voting agreement, 90,909 shares of common stock directly held
by John K. Castle, and 391,853 shares of common stock held by certain other
entities and individuals (which includes 99,153 shares subject to options
held by Samuel Urcis which are fully vested) for which Mr. Castle may
direct the voting pursuant to unrelated voting trust agreements under which
Mr. Castle acts as voting trustee. All such shares may be deemed to be
beneficially owned by Castle Harlan Partners III, L.P. Castle Harlan
Partners III, L.P. disclaims beneficial ownership of the shares not
directly held by it.
(4) John K. Castle and Leonard M. Harlan are the controlling stockholders of
Castle Harlan Partners III, G.P., Inc., the general partner of the general
partner of Castle Harlan Partners III, L.P., and as such, each of them may
be deemed to be a beneficial owner of the shares owned by Castle Harlan
Partners III, L.P. Both Mr. Castle and Mr. Harlan disclaim beneficial
ownership of the shares in excess of their respective pro rata partnership
interests in Castle Harlan Partners III, L.P. and its affiliates.
(5) All shares subject to the voting agreement referred to in notes (3) and
(7).
(6) Includes 122,299 shares of common stock being held in escrow pursuant to
the terms of an escrow agreement to indemnify and reimburse us against
certain losses and expenses we may incur in connection with our acquisition
of Gas Compression Services, Inc. We have been advised that subsequent to
December 8, 2000, the Trust had sold 450,000 of its shares of our common
stock.
(7) Includes 90,909 shares of common stock directly held by John K. Castle, and
391,853 shares of common stock held by certain entities and individuals
(which includes 99,153 shares subject to options held by Samuel Urcis which
are fully vested) for which Mr. Castle may direct the voting pursuant to
unrelated voting trust agreements under which Mr. Castle acts as voting
trustee. All such shares may be deemed to be beneficially owned by Mr.
Castle. Mr. Castle disclaims beneficial ownership of the shares subject to
the voting trust agreements, other than 19,449 shares of common stock owned
by Branford Castle Holdings, Inc. subject to the voting trust.
(8) Includes 2,936,718 shares of common stock directly held by Castle Harlan
Partners III, L.P. and 2,174,529 shares of common stock held by certain
entities, the voting of which Castle Harlan Partners III, L.P. may control
pursuant to a voting agreement. All such shares may be deemed to be
beneficially owned by Mr. Castle. Mr. Castle disclaims beneficial ownership
of these shares.
(9) Includes 99,135 shares subject to options which are fully vested. Also
includes 40,145 shares of common stock owned by Castle Harlan Partners,
which shares Mr. Urcis has the option to purchase. All of Mr. Urcis's
shares are subject to a voting trust agreement with Castle Harlan.
(10) Mr. Segner joined our board of directors effective October 1, 2000.
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<PAGE> 105
(11) Includes 110,152 shares of common stock subject to options granted by
Universal to Mr. Snider which are fully vested.
(12) Includes 79,548 shares of common stock subject to options granted by
Universal to Mr. Danner, all of which are fully vested. Also includes
33,455 shares of common stock owned by Castle Harlan Partners, which shares
Mr. Danner has an option to purchase.
(13) Includes 36,712 shares of common stock subject to options granted by
Universal to Mr. FitzGerald which are fully vested.
(14) Includes 36,712 shares of common stock subject to options granted by
Universal to Mr. Schnoor which are fully vested.
(15) Includes 36,712 shares of common stock subject to options granted by
Universal to Mr. Hilburn which are fully vested.
(16) Includes 25,794 shares of common stock subject to options granted by
Universal to Mr. Townsend which are fully vested.
SHAREHOLDER PROPOSALS
We expect to hold our 2001 Annual Meeting of Shareholders on August 16,
2001. Rule 14a-8 under the Exchange Act governs the submission of proposals by
shareholders to a company to be considered for inclusion in the company's proxy
statement. Rule 14a-8(e)(2) provides that, if a company, such as us, did not
hold an annual meeting for the previous fiscal year since we were not publicly
traded, the deadline for submission of a shareholder proposal is a reasonable
time before the company begins to print and mail its proxy materials. In
accordance with our bylaws, any shareholder desiring to timely submit a proposal
for action at our 2001 Annual Meeting of Shareholders should deliver the
proposal to the attention of the Secretary of Universal at our principal place
of business no later than May 18, 2001. Matters pertaining to proposals,
including the number and length thereof, eligibility of persons entitled to have
such proposals included and other aspects are regulated by the Securities
Exchange Act of 1934, rules and regulations of the SEC and other laws and
regulations to which interested persons should refer.
On May 21, 1998, the SEC adopted an amendment to Rule 14a-4 under the
Exchange Act. The amendment governs our use of our discretionary proxy voting
authority with respect to a shareholder proposal that is not addressed in the
proxy statement. The amendment provides that if a proponent of a proposal fails
to notify us within a reasonable time before we mail our proxy materials for our
next annual meeting, then we will be allowed to use our discretionary voting
authority when the proposal is raised at the meeting, without any discussion of
the matter in the proxy statement. If we do not receive any shareholder
proposals for the 2001 Annual Meeting within a reasonable time before we mail
our proxy materials, we will be able to use our discretionary voting authority
as outlined above.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and copy
any document we file with the SEC at its public reference facilities at 450
Fifth Street, N.W., Washington, D.C. 20549. You can also obtain copies of the
documents at prescribed rates by writing to the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
facilities. Our SEC filings are also available at the office of the New York
Stock Exchange, Inc., 11 Wall Street, New York, New York 10005.
The SEC allows us to incorporate by reference the information that we file
with the SEC into this proxy statement, which means that we can disclose
important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is deemed to
be part of this proxy statement, except for any information superseded by
information contained directly in
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<PAGE> 106
this proxy statement. This proxy statement incorporates by reference the
documents set forth below that we have previously filed with the SEC. These
documents contain important information about Universal and its operations.
- Annual Report on Form 10-K for the fiscal year ended March 31, 2000, as
amended;
- Quarterly Report on Form 10-Q for the quarters ended June 30, 2000 and
September 30, 2000;
- Current Reports on Form 8-K filed on June 2, 2000, June 8, 2000, August
9, 2000, September 29, 2000, October 26, 2000, November 9, 2000 and
December 1, 2000; and
- The description of the common stock included in our Registration
Statement on Form 8-A dated April 20, 2000, as amended on May 15, 2000.
We are also incorporating by reference additional documents we file with
the SEC under Section 13(a), 13(c), 14 or 15 of the Securities Exchange Act of
1934 from the date of this proxy statement to the date of the special meeting.
Any statement in this document or in a document incorporated or deemed to be
incorporated in this document shall be deemed to be modified or superseded for
purposes of this document to the extent that a statement contained in this
document or in any other subsequently filed document which also is or is deemed
to be incorporated by reference in this document modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed to
constitute a part of this document, except as so modified or superseded.
If you are a shareholder, we may have already sent you some of the
documents incorporated by reference, but you may request a copy of these filings
(other than an exhibit to a filing unless that exhibit is specifically
incorporated by reference into that filing) at no cost, by writing to or
telephoning us at Universal Compression Holdings, Inc., 4440 Brittmoore Road,
Houston, Texas 77041, (713) 335-7000.
If you would like to request documents from us, please do so at least
fourteen days prior to the special meeting in order to receive them before the
special meeting.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED AND THE APPENDICES
INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT TO VOTE ON THE ISSUANCE OF OUR
COMMON STOCK IN THE MERGER. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT.
THIS PROXY STATEMENT IS DATED DECEMBER 27, 2000. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN THIS PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER
THAN SUCH DATE, AND NEITHER THE MAILING OF THIS PROXY STATEMENT TO SHAREHOLDERS
NOR THE ISSUANCE OF OUR COMMON STOCK IN THE MERGER SHALL CREATE ANY IMPLICATION
TO THE CONTRARY.
100
<PAGE> 107
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNIVERSAL COMPRESSION HOLDINGS, INC.
Independent Auditors' Report of Deloitte & Touche LLP....... 103
Consolidated Financial Statements:
Consolidated Balance Sheets at March 31, 1999 and March
31, 2000............................................... 104
Consolidated Statements of Operations for the period from
December 12, 1997
(inception) through March 31, 1998 and for the years
ended March 31, 1999 and 2000......................... 105
Consolidated Statements of Stockholders' Equity for the
period December 12, 1997
(inception) through March 31, 1998 and for the period
April 1, 1998 through
March 31, 2000....................................... 106
Consolidated Statements of Cash Flows for the period from
December 12, 1997 (inception) through March 31, 1998
and for the years ended March 31, 1999 and 2000........ 107
Notes to Consolidated Financial Statements................ 108
TIDEWATER COMPRESSION SERVICE, INC.
Independent Auditors' Report of Deloitte & Touche LLP....... 121
Financial Statements:
Statement of Operations for the period from April 1, 1997
through February 20, 1998.............................. 122
Statement of Stockholders' Equity for the period from
April 1, 1997 through February 20, 1998................ 123
Statement of Cash Flows for the period from April 1, 1997
through February 20, 1998.............................. 124
Notes to Financial Statements............................. 125
UNIVERSAL COMPRESSION HOLDINGS, INC.
Consolidated Balance Sheets at September 30, 2000
(unaudited) and at March 31, 2000......................... 128
Unaudited Consolidated Statements of Operations for the
three and six months ended September 30, 2000 and 1999.... 129
Unaudited Consolidated Statements of Cash Flows for the six
months ended September 30, 2000 and 1999.................. 130
Notes to Unaudited Consolidated Financial Statements........ 131
ENTERRA COMPRESSION COMPANY
Report of Independent Public Accountants -- Arthur Andersen
LLP....................................................... 137
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1999 and
September 30, 2000 (unaudited)......................... 138
Consolidated Statements of Operations for the year ended
December 31, 1999 and for the nine months ended
September 30, 2000 and 1999 (unaudited)................ 139
Consolidated Statements of Stockholders' Equity for the
year ended December 31, 1999 and for the nine months
ended September 30, 2000 and 1999 (unaudited).......... 140
Consolidated Statements of Cash Flows for the year ended
December 31, 1999 and for the nine months ended
September 30, 2000 and 1999 (unaudited)................ 141
Notes to Consolidated Financial Statements................ 142
</TABLE>
101
<PAGE> 108
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WEATHERFORD COMPRESSION
Report of Independent Public Accountants -- Arthur Andersen
LLP....................................................... 154
Combined Financial Statements:
Combined Balance Sheet at December 31, 1998............... 155
Combined Statement of Operations for the year ended
December 31, 1998...................................... 156
Combined Statement of Equity for the year ended December
31, 1998............................................... 157
Combined Statement of Cash Flows for the year ended
December 31, 1998...................................... 158
Notes to Combined Financial Statements.................... 159
Report of Independent Public Accountants -- Arthur Andersen
LLP....................................................... 168
Combined Financial Statements:
Combined Balance Sheet at December 31, 1997............... 169
Combined Statement of Operations for the year ended
December 31, 1997...................................... 170
Combined Statement of Equity.............................. 171
Combined Statement of Cash Flows for the year ended
December 31, 1997...................................... 172
Notes to Combined Financial Statements.................... 173
GLOBAL COMPRESSION HOLDINGS, INC.
Independent Auditors' Report of KPMG LLP.................... 182
Consolidated Financial Statements:
Consolidated Balance Sheets at February 2, 1999 and at
December 31, 1998 and 1997............................. 183
Consolidated Statements of Operations for the period from
January 1, 1999 through February 2, 1999 and for the
years ended December 31, 1998 and 1997................. 184
Consolidated Statements of Stockholder's Equity for the
years ended December 31, 1997 and 1998 and for the
period from January 1, 1999 through February 2, 1999... 185
Consolidated Statements of Cash Flows for the period from
January 1, 1999 through February 2, 1999 and for the
years ended December 31, 1998 and 1997................. 186
Notes to Consolidated Financial Statements................ 187
</TABLE>
102
<PAGE> 109
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Universal Compression Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Universal
Compression Holdings, Inc. and subsidiary (the "Company") as of March 31, 1999
and 2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for the period from December 12, 1997 (inception) through
March 31, 1998 and for the years ended March 31, 1999 and 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of March 31,
1999 and 2000, and the results of its operations and its cash flows for the
period from December 12, 1997 (inception) through March 31, 1998 and for the
years ended March 31, 1999 and 2000, in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Houston, Texas
April 28, 2000
(October 24, 2000 as to
Notes 1, 7, 9 and 13)
103
<PAGE> 110
UNIVERSAL COMPRESSION HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 2000
---------- ----------
(IN THOUSANDS, EXCEPT
FOR SHARE AND PER SHARE
AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,927 $ 1,403
Receivables, net of allowance for bad debts of $123 and
$227 as of March 31, 1999 and 2000, respectively........ 22,469 17,267
Inventories............................................... 10,272 8,727
Current deferred tax asset................................ 426 227
Other..................................................... 938 1,571
-------- --------
Total current assets............................... 37,032 29,195
-------- --------
Property and equipment:
Rental equipment.......................................... 296,049 349,198
Other..................................................... 17,122 19,617
Accumulated depreciation.................................. (17,647) (38,466)
-------- --------
Total property and equipment....................... 295,524 330,349
-------- --------
Goodwill, net of accumulated amortization of $2,564 and
$5,202 as of March 31, 1999, and 2000, respectively....... 96,345 99,250
Other assets, net........................................... 8,632 7,570
Long-term deferred tax asset................................ 458 3,578
-------- --------
Total assets....................................... $437,991 $469,942
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligation............... $ -- $ 3,456
Current portion of long-term debt......................... 750 750
Accounts payable.......................................... 8,591 10,911
Accrued expenses.......................................... 3,949 6,869
-------- --------
Total current liabilities.......................... 13,290 21,986
Capital lease obligation.................................... -- 10,243
Long-term debt.............................................. 343,927 363,036
-------- --------
Total liabilities.................................. 357,217 395,265
-------- --------
Commitments and contingencies (Note 10)
Stockholders' equity:
Series A preferred stock, $.01 par value, 5,000,0000
shares authorized, 1,320,144 and 1,320,128 shares
issued, 1,320,144 and 1,318,896 shares outstanding at
March 31, 1999 and 2000, respectively, $50 per share
liquidation value (which were converted as described in
note 7)................................................. 13 13
Common stock, $.01 par value, 200,000,000 shares
authorized, 5,551,318 and 5,550,956 shares issued,
5,550,353 and 5,539,344 shares outstanding at March 31,
1999 and 2000, respectively............................. 3 3
Class A non-voting common stock, $.01 par value, 6,000
shares authorized, 4,120 shares issued, 4,080 and 3,210
shares outstanding at March 31, 1999 and 2000,
respectively (which were converted as described in note
7)...................................................... -- --
Additional paid-in capital................................ 82,698 82,697
Retained deficit.......................................... (1,931) (7,913)
Treasury stock, 170 and 4,429 shares at cost at March 31,
1999 and 2000, respectively............................. (9) (123)
-------- --------
Total stockholders' equity......................... 80,774 74,677
-------- --------
Total liabilities and stockholders' equity......... $437,991 $469,942
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
104
<PAGE> 111
UNIVERSAL COMPRESSION HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
DECEMBER 12, 1997 FOR THE FOR THE
(INCEPTION) THROUGH YEAR ENDED YEAR ENDED
MARCH 31, 1998 MARCH 31, 1999 MARCH 31, 2000
-------------------- --------------- ---------------
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Rentals....................................... $ 9,060 $ 85,599 $ 98,295
Sales......................................... 4,037 43,588 38,000
Other......................................... 22 311 154
---------- ---------- ----------
Total revenues........................ 13,119 129,498 136,449
---------- ---------- ----------
Costs and expenses:
Rentals, exclusive of depreciation and
amortization............................... 2,804 31,010 35,352
Cost of sales, exclusive of depreciation and
amortization............................... 3,408 36,390 31,943
Depreciation and amortization................. 1,560 19,314 26,006
Selling, general and administrative........... 1,305 16,863 16,797
Interest expense.............................. 3,203 29,313 34,327
---------- ---------- ----------
Total costs and expenses.............. 12,280 132,890 144,425
---------- ---------- ----------
Income (loss) before income taxes............... 839 (3,392) (7,976)
Income taxes (benefit).......................... 409 (1,031) (1,994)
---------- ---------- ----------
Net income (loss)........................ $ 430 $ (2,361) $ (5,982)
========== ========== ==========
Earnings per share:
Basic......................................... $ 0.18 $ (0.97) $ (2.42)
========== ========== ==========
Diluted....................................... $ 0.18 $ (0.97) $ (2.42)
========== ========== ==========
Weighted average shares outstanding (See note
7):
Shares of common stock........................ 2,413,127 2,446,487 2,476,386
Dilutive potential shares of common stock..... -- -- --
---------- ---------- ----------
Total weighted average shares of
common stock outstanding............ 2,413,127 2,446,487 2,476,386
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
105
<PAGE> 112
UNIVERSAL COMPRESSION HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD DECEMBER 12, 1997 (INCEPTION) THROUGH MARCH 31, 1998 AND
FOR THE PERIOD APRIL 1, 1998 THROUGH MARCH 31, 2000
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON PREFERRED PAID-IN EARNINGS TREASURY
STOCK STOCK CAPITAL (DEFICIT) STOCK TOTAL
------ --------- ---------- --------- -------- -------
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 12, 1997 (Inception)
Common stock issuance (2,413,127 shares,
at $.01 per share par value)........... $ 3 $ $16,247 $ -- $ -- $16,250
Series A Preferred stock issuance
(1,300,000 shares, at $.01 per share
par value)............................. -- 13 64,987 -- -- 65,000
Net income for period from December 12,
1997 (inception) through March 31,
1998................................... -- -- -- 430 -- 430
--- --- ------- ------- ----- -------
Balance, March 31, 1998.................... $ 3 $13 $81,234 $ 430 $ -- $81,680
Common stock issuance (68,048 shares, at
$.01 per share par value).............. -- -- 458 -- -- 458
Series A Preferred stock issuance (20,144
shares, at $.01 per share par value)... -- -- 1,006 -- -- 1,006
Treasury stock purchase (4,970 shares at
$50 per share)......................... -- -- -- -- (249) (249)
Sale of treasury stock (4,800 shares at
$50 per share)......................... -- -- -- -- 240 240
Net loss for the year ended March 31,
1999................................... -- -- -- (2,361) -- (2,361)
--- --- ------- ------- ----- -------
Balance, March 31, 1999.................... $ 3 $13 $82,698 $(1,931) $ (9) $80,774
Common stock cancellation (30 shares, at
$.01 per share par value).............. -- -- -- -- -- --
Series A Preferred stock cancellation (16
shares, at $.01 per share par value)... -- -- (1) -- -- (1)
Treasury stock purchase (5,630 shares at
$50 per share)......................... -- -- -- -- (144) (144)
Sale of treasury stock (1,371 shares at
$50 per share)......................... -- -- -- -- 30 30
Net loss for the year ended March 31,
2000................................... -- -- -- (5,982) -- (5,982)
--- --- ------- ------- ----- -------
Balance, March 31, 2000.................... $ 3 $13 $82,697 $(7,913) $(123) $74,677
=== === ======= ======= ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
106
<PAGE> 113
UNIVERSAL COMPRESSION HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
DECEMBER 12, 1997
(INCEPTION) FOR THE FOR THE
THROUGH YEAR ENDED YEAR ENDED
MARCH 31, 1998 MARCH 31, 1999 MARCH 31, 2000
----------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $ 430 $ (2,361) $ (5,982)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization...................... 1,560 19,314 26,006
Gain on asset sales................................ (13) (192) (124)
Deferred income taxes.............................. 339 (1,223) (2,921)
Amortization of debt issuance costs................ 121 1,162 1,162
(Increase) Decrease in receivables................. (1,263) (10,807) 5,202
(Increase) Decrease in inventories................. (223) (2,594) 1,545
(Increase) Decrease in other current assets........ (2,951) 2,183 (633)
Increase (Decrease) in accounts payable............ (1,472) 2,537 2,320
Increase (Decrease) in accrued expenses............ 587 (3,569) 411
Deferred interest on notes payable................. 1,880 18,316 20,258
(Increase) Decrease in non-current assets.......... -- 27 (100)
--------- -------- --------
Net cash provided by (used in) operating
activities.................................. (1,005) 22,793 47,144
--------- -------- --------
Cash flows from investing activities:
Proceeds from asset sales............................ 765 8,038 4,442
Additions to property and equipment.................. (2,038) (68,081) (60,002)
Acquisition of Tidewater Compression Service, Inc.... (351,872) -- --
Other acquisitions................................... -- (2,953) (5,543)
--------- -------- --------
Net cash used in investing activities......... (353,145) (62,996) (61,103)
--------- -------- --------
Cash flows from financing activities:
Net borrowings (repayments) under revolving line of
credit............................................. 285,018 40,249 (400)
Repayments of long-term debt......................... (36) (750) (750)
Common stock issuance................................ 16,200 252 --
Preferred stock issuance (cancellation).............. 64,800 1,006 (1)
Debt issuance costs.................................. (9,450) -- --
Net proceeds from sale-leaseback of vehicles......... -- -- 3,119
Net proceeds from financing lease.................... -- -- 10,581
Purchase of treasury stock........................... -- (249) (144)
Sale of treasury stock............................... -- 240 30
--------- -------- --------
Net cash provided by financing activities..... 356,532 40,748 12,435
--------- -------- --------
Net increase (decrease) in cash and cash equivalents... 2,382 545 (1,524)
--------- -------- --------
Cash and cash equivalents at beginning of period..... -- 2,382 2,927
--------- -------- --------
Cash and cash equivalents at end of period........... $ 2,382 $ 2,927 $ 1,403
========= ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest............................... $ 1,202 $ 9,653 $ 10,471
========= ======== ========
Cash paid for income taxes........................... $ -- $ 697 $ 772
========= ======== ========
Supplemental schedule of non-cash investing and
financing activities:
Class A non-voting common stock (4,120 shares, given
to employees....................................... $ -- $ 206 $ --
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
107
<PAGE> 114
UNIVERSAL COMPRESSION HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM DECEMBER 12, 1997 (INCEPTION) THROUGH MARCH 31, 1998
AND FOR THE YEARS ENDED MARCH 31, 1999 AND 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
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"). The Company formed an acquisition
subsidiary, TW Acquisition Corporation ("Acquisition Corp.") which acquired 100%
of the voting securities of TCS (the "Acquisition"). See Note 2. Immediately
following the Acquisition, Acquisition Corp. was merged with and into TCS, which
changed its name to Universal Compression, Inc. ("Universal"). 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.
Nature of Operations
The Company operates one of the largest rental fleets of natural gas
compressors in the United States and provides related maintenance services on
such compressors. The compressors are rented to oil and gas producers and
processors and pipeline companies and are used primarily to boost the pressure
of natural gas from the wellhead into gas-gathering systems, gas-processing
plants or into and through high-pressure pipelines. The Company also designs and
fabricates compressor packages for its own fleet as well as for sale to
customers.
Principles of Consolidation
The accompanying consolidated financial statements include the Company and
its wholly owned subsidiary, Universal. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to the prior year amounts to
conform to the current year classification.
Use of Estimates
In preparing the Company's financial statements, management makes estimates
and assumptions that affect the amounts reported in the financial statements and
related disclosures. Actual results may differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Revenue Recognition
Revenue from equipment rentals is recorded when earned over the period of
rental and maintenance contracts which generally range from one month to several
years. Parts and service revenue is recorded as products are delivered or
services are performed for the customer.
108
<PAGE> 115
UNIVERSAL COMPRESSION HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Compressor fabrication revenue is recognized using the completed-contract
method which recognizes revenue upon completion of the contract. This method is
used because the typical contract is completed within two to three months and
financial position and results of operations do not vary significantly from
those which would result from use of the percentage-of-completion method.
Concentration of Credit Risk
Trade accounts receivable are due from companies of varying size engaged
principally in oil and gas activities in the United States and in certain
international locations such as South America, Southeast Asia, Europe and
Canada. The Company reviews the financial condition of customers prior to
extending credit and periodically updates customer credit information. Payment
terms are on a short-term basis and in accordance with industry standards. No
single customer accounts for 10% or more of the Company's revenues. For the
period from December 12, 1997 (inception) through March 31, 1998 and the years
ended March 31, 1999 and 2000 the Company wrote off bad debts totaling $80,000,
$330,000 and $116,000, respectively.
Inventories
Inventories are recorded at the lower of cost (first in first out FIFO
method) or market (net realizable value). Some items of compression equipment
are acquired and placed in inventories for subsequent sale or rental to others.
Acquisitions of these assets are considered operating activities in the
statement of cash flows.
Properties and Equipment
Properties and equipment are carried at cost. Depreciation for financial
reporting purposes is computed on the straight-line basis beginning with the
first rental, with salvage values of 20% for compression equipment, using
estimated useful lives of:
<TABLE>
<S> <C>
Compression equipment................................... 15 years
Other properties and equipment.......................... 2-25 years
</TABLE>
Maintenance and repairs are charged to expenses as incurred. Overhauls and
major improvements that benefit future periods are capitalized and depreciated
over the estimated period of benefits, generally three years. Depreciation
expense for the period from December 12, 1997 (inception) through March 31, 1998
and the years ended March 31, 1999 and 2000 was $1,366,226, $16,942,554 and
$23,368,262, respectively.
Goodwill and Other Assets
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis primarily over 40
years. At the balance sheet date, the Company evaluated the recoverability of
goodwill based on expectations of undiscounted cash flows from operations and
determined that no impairment had occurred. Included in other assets are debt
issuance costs, net of accumulated amortization, totaling approximately
$8,287,000 and $7,125,000 at March 31, 1999 and 2000, respectively. Such costs
are amortized over the period of the respective debt agreements on a
straight-line method which approximates the effective interest method.
Stock-Based Compensation
Under Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," the Company elected to measure
compensation cost using the intrinsic value-based method as prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
109
<PAGE> 116
UNIVERSAL COMPRESSION HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employees." As such, the Company is required to make pro forma disclosures of
net income and, if presented, earnings per share as if the fair value based
method of accounting defined by SFAS No. 123 had been applied. See Note 7.
Income Taxes
The Company accounts for income taxes using an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, all expected future events are considered other than enactments of
changes in the tax law or rates.
Foreign Currency Transactions
Activities outside the United States are measured using the local currency
as the functional currency. Assets and liabilities of these subsidiaries are
translated at the rates of exchange at the balance sheet date. Income and
expense items are translated at average monthly rates of exchange. The resultant
translation adjustments for the period from December 12, 1997 (inception)
through March 31, 1998 and the years ended March 31, 1999 and 2000 were not
significant.
Fair Value of Financial Instruments
The Company's financial instruments consist of trade receivables and
payables (which have carrying values that approximate fair value) and long-term
debt. The fair values of the Company's term loan and revolving credit facility
(see Note 4) are representative of their carrying values based upon variable
rate terms. The fair value of the senior discount notes was approximately $172.0
million and $181.6 million, as compared to a carrying amount of $195.2 million
and $215.5 million at March 31, 1999 and 2000, respectively. The estimated fair
value amounts have been determined by the Company using appropriate valuation
methodologies and information available to management as of March 31, 2000 based
on the quoted market price from brokers of these notes.
Environmental Liabilities
The costs to remediate and monitor environmental matters are accrued when
such liabilities are considered probable and a reasonable estimate of such costs
is determinable.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 2000, the FASB issued
SFAS 138, which amends certain provisions of SFAS 133 to clarify four areas
causing difficulties in implementation. The amendment included expanding the
normal purchase and sale exemption for supply contracts, permitting the
offsetting of certain intercompany foreign currency derivatives and thus
reducing the number of third party derivatives, permitting hedge accounting for
foreign-currency denominated assets and liabilities, and redefining interest
rate risk to reduce sources of ineffectiveness. SFAS 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 (1) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (2) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (3) 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
110
<PAGE> 117
UNIVERSAL COMPRESSION HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
depends on the intended use of the derivative and the resulting designation. The
Company will adopt SFAS 133 and the corresponding amendments under SFAS 138 on
April 1, 2001. The Company is currently determining the impact of SFAS 133 on
its consolidated results of operations and financial position. This statement
should have no impact on consolidated cash flows.
Earnings per Share
The Company has disclosed earnings per share data; however, such amounts
are not meaningful because the Company is beneficially owned by a single
stockholder under the terms of voting agreements.
2. TCS ACQUISITION
On February 20, 1998, Acquisition Corp. acquired 100% of the voting
securities of TCS for approximately $350 million. The Acquisition was recorded
using the purchase method of accounting and the purchase price was allocated to
the assets and liabilities acquired based on their fair values. The excess cost
of the Acquisition was recorded as goodwill which is being amortized on a
straight-line basis over its 40 year useful life. The operations of TCS are
included in the financial statements presented herein beginning February 20,
1998.
The following table presents the unaudited pro forma revenue, gross profit
and net income amounts as if the Acquisition occurred on December 12, 1997
(inception) (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 12, 1997
(INCEPTION) THROUGH
MARCH 31, 1998
-------------------
(UNAUDITED)
<S> <C>
Revenues............................................ $32,630
-------
Gross profit........................................ $15,992
-------
Net loss............................................ $(1,427)
</TABLE>
3. INVENTORIES
Inventories at March 31 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1999 2000
------- ------
<S> <C> <C>
Finished goods.............................................. $ 5,279 $5,551
Work-in-progress............................................ 4,993 3,176
------- ------
Total............................................. $10,272 $8,727
======= ======
</TABLE>
111
<PAGE> 118
UNIVERSAL COMPRESSION HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT
The Company's debt at March 31 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Term loan, bearing interest of LIBOR + 2.5%, due February
2005 and collateralized by property of Universal.......... $ 74,063 $ 73,313
Revolving credit facility, bearing interest of LIBOR +
2.25%, due February 2003 and collateralized by property of
Universal................................................. 75,400 75,000
Senior discount notes, bearing interest of 9 7/8% per annum,
due 2008, net of discount of $75,615 and $58,680 at March
31, 1999 and 2000, respectively, unsecured................ 166,885 183,820
Senior discount notes, bearing interest of 11 3/8% per
annum, due 2009, net of discount of $15,171 and $11,847 at
March 31, 1999 and 2000, respectively, unsecured.......... 28,329 31,653
-------- --------
Total debt........................................ 344,677 363,786
Less current maturities..................................... 750 750
-------- --------
Total long-term debt.............................. $343,927 $363,036
======== ========
</TABLE>
The Company's senior secured credit agreement ("Credit Agreement") provides
for $75 million under the term loan and $85 million under the revolving credit
facility, which includes a sublimit for letters of credit. The available
capacity on the revolving credit facility at March 31, 1999 and 2000 was
approximately $8,143,000 and $7,701,000, respectively, after giving effect to
outstanding letters of credit. The interest rates on the term loan and the
revolving credit facility at March 31, 1999 were 7.44% and 7.19%, respectively.
The interest rates on the term loan and the revolving credit facility at March
31, 2000 were 8.69% and 8.36%, respectively. Under the revolving credit
facility, a commitment fee of 0.50% per annum on the average available
commitment is payable quarterly.
The Credit Agreement contains certain financial covenants and limitations
on, among other things, acquisitions, sales, indebtedness and liens. The Credit
Agreement also limits the payment of cash dividends related to Universal paying
up to $1 million to the Company in any given fiscal year. In addition, the
Company has substantial dividend payment restrictions under the indenture
related to the senior discount notes. The Company was in compliance with all
such covenants and limitations at March 31, 2000. As defined by the Credit
Agreement, any "change of control" would result in an "Event of Default" and all
amounts outstanding under the Credit Agreement would become due and payable. All
principal amounts and accrued interest would become due without further notice.
Interest related to both the 9 7/8% senior discount notes and the 11 3/8%
senior discount notes is payable semi-annually on August 15 and February 15,
commencing August 15, 2003.
Maturities of long-term debt as of March 31, 2000, in thousands, are 2001
-- $750; 2002 -- $750; 2003 -- $82,125; 2004 -- $30,938; 2005 -- $33,750; and
$215,473 thereafter.
5. CAPITAL LEASES
On July 21, 1999, a wholly owned subsidiary of the Company entered into a
financing lease with Societe Generale Financial Corporation regarding certain
compression equipment. The financing lease has a term of 5 years and bears
interest at a rate of LIBOR plus 4.25%. The financing lease is related to the
Colombian operations of the Company's subsidiary.
112
<PAGE> 119
UNIVERSAL COMPRESSION HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On June 17, 1999, Universal signed a master lease agreement with GE Capital
Fleet Services completing a sale and lease back of the majority of its service
vehicle fleet. Under the agreement, the vehicles were sold and leased back by
Universal at lease terms ranging from 20 months to 56 months and will continue
to be deployed by Universal under its normal operating procedures.
Principal amortization associated with both leases is recorded in the
Consolidated Statements of Cash Flows. Property and equipment at March 31, 2000
include the following amounts for capitalized leases (in thousands):
<TABLE>
<S> <C>
Compression equipment...................................... $11,925
Service vehicles........................................... 4,363
-------
16,288
Less accumulated depreciation.............................. (2,365)
-------
Net assets under capital leases.................. $13,923
=======
</TABLE>
Future minimum lease payments under non-cancelable capital leases as of
March 31, 2000 are as follows (in thousands):
<TABLE>
<S> <C>
2001....................................................... $ 3,456
2002....................................................... 3,302
2003....................................................... 3,171
2004....................................................... 2,774
2005....................................................... 996
Thereafter.................................................
-------
Total............................................ $13,699
=======
</TABLE>
6. INCOME TAXES
For the period from December 12, 1997 (inception) through March 31, 1998
and the years ended March 31, 1999 and 2000, substantially all of the Company's
income and losses before income taxes were derived from its U.S. operations.
Income tax expense (benefit) for the period from December 12, 1997
(inception) through March 31, 1998 and the years ended March 31, 1999 and 2000
consisted of the following (in thousands):
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
DECEMBER 12, 1997
(INCEPTION) THROUGH
MARCH 31, 1998 1999 2000
------------------- ------- -------
<S> <C> <C> <C>
Current:
Foreign......................................... $ 71 $ 145 $ 889
Deferred:
Federal......................................... 303 (1,055) (2,655)
State........................................... 35 (121) (228)
---- ------- -------
Total................................... $409 $(1,031) $(1,994)
==== ======= =======
</TABLE>
113
<PAGE> 120
UNIVERSAL COMPRESSION HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the provision (benefit) for income taxes and the amount
computed by applying the federal statutory income tax rate to income before
taxes for the period from December 12, 1997 (inception) through March 31, 1998
and the years ended March 31, 1999 and 2000 is as follows (in thousands):
<TABLE>
<CAPTION>
FOR THEPERIOD
FROM
DECEMBER 12, 1997
(INCEPTION) THROUGH
MARCH 31, 1998 1999 2000
------------------- ------- -------
<S> <C> <C> <C>
Benefit for income taxes at statutory rate........ $294 $(1,187) $(2,791)
State taxes....................................... 30 (121) (228)
Foreign taxes..................................... 71 145 889
Non-deductible expenses and other................. 14 132 136
---- ------- -------
Total................................... $409 $(1,031) $(1,994)
==== ======= =======
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at March 31 are (in thousands):
<TABLE>
<CAPTION>
1999 2000
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $24,235 $35,217
Other..................................................... 630 1,172
------- -------
Total............................................. 24,865 36,389
Valuation allowance......................................... (145) (889)
------- -------
Total............................................. 24,720 35,500
------- -------
Deferred tax liabilities:
Depreciation differences on property and equipment........ (21,905) (28,319)
Other..................................................... (1,931) (3,376)
------- -------
Total............................................. (23,836) (31,695)
------- -------
Net deferred tax asset............................ $ 884 $ 3,805
======= =======
</TABLE>
A valuation allowance has been established against the Company's deferred
tax assets related to foreign tax credits. The Company believes that it is
probable that all other deferred tax assets will be realized on future tax
returns, primarily from the generation of future taxable income through both
profitable operations and future reversals of existing taxable temporary
differences.
As a result of the activity for the period from December 12, 1997
(inception) through March 31, 1998 and the years ended March 31, 1999 and 2000,
the Company has net operating loss ("NOL") carryforwards available to offset
future taxable income. The Company has NOL carryforwards of approximately
$91,752,000 at March 31, 2000 which will expire, if not utilized, as follows:
2018 -- $4,185,000; 2019 -- $30,939,000 and 2020 -- $56,628,000. Utilization of
the carryforwards could be limited by Section 382 of the Internal Revenue Code
of 1986, as amended, depending on future changes in ownership. See Note 13 for
further information.
114
<PAGE> 121
UNIVERSAL COMPRESSION HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. STOCKHOLDERS' EQUITY
Common Stock
During March 1999, under the Employee Stock Purchase Plan, 46 employees of
the Company purchased a total of 14,820 shares of common stock and 7,984 shares
of Series A preferred stock (which preferred stock was subsequently split and
converted into 18,567 shares of common stock at $21.50 per share on May 30, 2000
in connection with the Company's initial public offering). The Company received
the cash proceeds from the stock purchase during April 1999. At March 31, 1999,
a receivable of $499,000 has been recorded related to the employee stock
purchases.
Redeemable Preferred Stock
At March 31, 2000, the Company had issued 1,320,128 shares of Series A
preferred stock ("Preferred Stock"), which were converted into 3,070,174 shares
of common stock issued and 3,067,309 shares outstanding. At March 31, 1999 the
Company had issued 1,320,144 shares of Preferred Stock which were converted into
3,070,210 shares of common stock issued and 3,070,210 shares outstanding. These
conversions were effective May 30, 2000, in connection with the Company's
initial public offering.
Class A non-voting Stock
At March 31, 2000 the Company had issued 4,120 shares of Class A non-voting
common stock ("Class A Stock"), which were converted into 30,590 shares of
common stock issued and 23,833 outstanding. At March 31, 1999 the Company had
issued 4,120 shares of Class A Stock were converted to 30,590 shares of common
stock issued and 30,293 shares outstanding. These conversions were effective May
30, 2000, in connection with the Company's initial public offering.
Stock Options
In order to motivate and retain key employees, the Company established an
incentive stock option plan. The Company measures compensation cost for this
plan using the intrinsic value method of accounting prescribed by APB No. 25
"Accounting for Stock Issued to Employees." Given the terms of the plan, no
compensation cost has been recognized for stock options granted under the plan.
The incentive stock plan became effective on February 20, 1998, and on that date
certain key employees were granted stock options. The options are exercisable
over a ten-year period and generally vest over the following time period:
<TABLE>
<S> <C>
Year 1...................................................... 33 1/3%
Year 2...................................................... 33 1/3%
Year 3...................................................... 33 1/3%
</TABLE>
115
<PAGE> 122
UNIVERSAL COMPRESSION HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of stock option activity for the period from
December 12, 1997 (inception) through March 31, 1998 and the years ended March
31, 1999 and 2000:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE PRICE
SHARES PER SHARE
------- -------------
<S> <C> <C>
Options outstanding, December 12, 1997 (inception).......... -- --
Options granted........................................... 223,821 $6.73
-------
Options outstanding, March 31, 1998......................... 223,821 6.73
=======
Options granted........................................... 86,238 6.73
Options cancelled......................................... (46,697) 6.73
-------
Options outstanding, March 31, 1999......................... 263,362 6.73
=======
Options granted........................................... 53,097 6.73
Options cancelled......................................... (43,252) 6.73
-------
Options outstanding, March 31, 2000......................... 273,207 6.73
=======
</TABLE>
As of March 31, 2000, under the incentive stock option plan the Company had
44,084 stock options available for grant.
The fair value of options at the date of grant was estimated using the
Black-Scholes model with the following weighted-average assumptions:
<TABLE>
<S> <C>
Expected life.............................................. 3 years
Interest rate.............................................. 6.4%
Dividend yield............................................. 0%
Expected volatility of the Company's stock price........... 0%
</TABLE>
On a pro forma basis after giving effect to the fair value based method of
accounting for employee stock compensation required by SFAS 123, compensation
expense would have been approximately $8,000, $76,000 and $109,000 for the
period from December 12, 1997 (inception) through March 31, 1998 and the years
ended March 31, 1999 and 2000, respectively.
8. EMPLOYEE BENEFITS
The Company has a defined contribution 401(k) plan covering substantially
all employees. The Company makes matching contributions under this plan equal to
50% of each participant's contribution of up to 6% of the participant's
compensation. Company contributions to the plan were approximately $159,000,
$493,000 and $473,000 for the period from December 12, 1997 (inception) through
March 31, 1998 and the years ended March 31, 1999 and 2000, respectively.
9. RELATED-PARTY TRANSACTIONS
Management Agreement
Castle Harlan Inc., an affiliate of a major stockholder of the Company,
entered into an agreement whereby, in exchange for certain management services
rendered, the Company agreed to pay a fee to Castle Harlan Inc. totaling $3
million per year. The amount was paid in advance for the first year and
quarterly in advance thereafter. The agreement is for a term of five years,
renewable automatically from year to year thereafter unless Castle Harlan Inc.
or its affiliates beneficially own less than 20% of the then outstanding stock
of the Company. The Company paid Castle Harlan Inc. $3,000,000, $750,000 and
$3,000,000 during the period from December 12, 1997 (inception) through March
31, 1998 and the years
116
<PAGE> 123
UNIVERSAL COMPRESSION HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ended March 31, 1999 and 2000, respectively. The fee is recorded at the rate of
$750,000 per quarter in selling, general and administrative expenses.
As of March 31, 2000, 33,560 shares of common stock and 18,080 shares of
preferred stock (which shares of preferred stock were subsequently split and
converted to 42,046 shares of common stock on May 30, 2000 in connection with
the Company's initial public offering) held by certain officers of the Company
were subject to certain repurchase requirements by the Company in the event of
termination of the officer by the Company without "cause," disability or death
as specified in the Stock Repurchase Agreement. The Company maintains an
insurance policy to fund substantially all of its obligations in the event of
disability or death.
Finder's Fee/Consulting Arrangement
The Company paid a member of its Board of Directors (the "Director")
$1,750,000 (a "finders fee") related to services provided by the Director for
the Acquisition. Upon consummation of the Acquisition, $1,100,000 of the finders
fee was issued to the Director as capital stock of the Company at $50 per share
par value. The Company paid the remaining $650,000 of the finders fee in cash to
the Director on March 4, 1998. In addition, the Company will pay the Director an
annual consulting fee of $150,000 for consulting services for a stated term of
five years. The agreement will automatically extend for one-year periods unless
the parties elect to terminate the agreement. The Company paid the Director
$12,500, $165,523 and $140,264 during the period from December 12, 1997
(inception) through March 31, 1998 and the years ended March 31, 1999 and 2000,
respectively.
The Company also paid a closing bonus to an officer of the Company
consisting of 7,424 shares of the Company's common stock, 4,000 shares of the
Company's preferred stock, (which shares of preferred stock were subsequently
split and converted into 9,302 shares of common stock on May 30, 2000 in
connection with the Company's initial public offering) both valued at $21.50 per
share, and $100,000 cash for services performed in conjunction with the
Acquisition prior to his employment.
10. COMMITMENTS AND CONTINGENCIES
Rent expense for the period from December 12, 1997 (inception) through
March 31, 1998 and the years ended March 31, 1999 and 2000 was approximately
$43,000, $427,000 and $415,000, respectively. Commitments for future lease
payments were not significant at March 31, 2000.
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.
An environmental assessment (the "Assessment") of the operations, physical
premises and assets of the Company was completed in connection with the
Acquisition. In the event that remediation is undertaken by the Company, then
pursuant to the stock purchase agreement, costs of such remediation shall be
paid as follows: Tidewater, Inc. shall pay 75% of the first $4 million, 83.33%
of the next $6 million, and 100% of the costs in excess of $10 million, although
not to exceed the upper limit of the range in the Assessment. Tidewater, Inc.
has disputed certain aspects of the Assessment, but has not disputed its
obligation to reimburse the Company for actual costs incurred in remediating
environmental conditions identified in the Assessment. The Company has recorded
a provision of approximately $1,100,000 at March 31, 2000 for environmental
remediation costs. The Company continues to further evaluate the Company's
remediation requirements under existing laws, rules and regulations. Considering
Tidewater's obligations pursuant to the stock purchase agreement, the Company
continues to believe that any unrecorded remediation obligations will not have a
material impact on its financial condition, results of
117
<PAGE> 124
UNIVERSAL COMPRESSION HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operations and cash flows. Should the Company incur remediation costs, a
receivable from Tidewater, Inc. for the expected reimbursement based on the
terms of the stock purchase agreement will be recorded. The unreimbursed portion
of any such remediation costs will be charged against the Company's
environmental remediation liability.
At the time of the Acquisition, the Company entered into a Purchase Price
Adjustment Agreement with Tidewater, Inc. The agreement provides for potential
additional amounts to be paid to Tidewater, Inc. upon a liquidity event, as
defined in the agreement. The potential amount is based upon a formula related
to accreted growth on Castle Harlan's initial investment above a certain growth
rate which is compounded quarterly.
The Company has no other commitments or contingent liabilities which, in
the judgment of management, would result in losses that would materially affect
the Company's consolidated financial position or operating results.
11. INDUSTRY SEGMENTS AND GEOGRAPHIC INFORMATION
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 specifications. The International
Rental and Maintenance Segment represents substantially all of the Company's
foreign based operations.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on profit or loss from operations before interest expense and
income taxes.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately since each business
requires different marketing strategies due to customer specifications. The
business was acquired as a unit (see Note 1 -- Organization).
The following table presents sales and other financial information by
industry segment for the year ended March 31, 2000 (in thousands):
<TABLE>
<CAPTION>
DOMESTIC INTERNATIONAL CORPORATE
RENTAL AND RENTAL AND ENGINEERED AND
MAINTENANCE MAINTENANCE PRODUCTS OTHER(A) TOTAL
----------- ------------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Revenues.............................. $ 83,577 $14,718 $25,258 $12,896 $136,449
Operating income (loss)............... 22,262 3,974 971 (1,049) 26,158
Depreciation and amortization......... 19,104 3,947 196 2,759 26,006
Capital expenditures.................. 50,980 8,079 899 44 60,002
Identifiable assets................... 310,563 49,204 10,205 99,970 469,942
</TABLE>
118
<PAGE> 125
UNIVERSAL COMPRESSION HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents sales and other financial information by
industry segment for the year ended March 31, 1999 (in thousands):
<TABLE>
<CAPTION>
DOMESTIC INTERNATIONAL CORPORATE
RENTAL AND RENTAL AND ENGINEERED AND
MAINTENANCE MAINTENANCE PRODUCTS OTHER(A) TOTAL
----------- ------------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Revenues.............................. $ 78,821 $ 6,778 $22,429 $21,470 $129,498
Operating income (loss)............... 22,394 2,483 949 (116) 25,710
Depreciation and amortization......... 15,626 1,020 161 2,507 19,314
Capital expenditures.................. 48,428 17,293 2,123 237 68,081
Identifiable assets................... 311,490 16,093 11,421 98,987 437,991
</TABLE>
The following table presents sales and other financial information by
industry segment for the period from December 12, 1997 (inception) through March
31, 1998 (in thousands):
<TABLE>
<CAPTION>
DOMESTIC INTERNATIONAL CORPORATE
RENTAL AND RENTAL AND ENGINEERED AND
MAINTENANCE MAINTENANCE PRODUCTS OTHER(A) TOTAL
----------- ------------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Revenues.............................. $ 8,407 $ 652 $ 3,165 $ 895 $ 13,119
Operating income...................... 3,373 298 189 166 4,026
Depreciation and amortization......... 1,461 83 10 6 1,560
Capital expenditures.................. 1,465 529 -- 44 2,038
Identifiable assets................... 262,218 14,752 7,865 95,391 380,226
</TABLE>
---------------
(a) 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 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 the Company provides to customers'
natural gas compression units.
Revenues include sales to unaffiliated customers. Operating income is
defined as income before income taxes less gain on asset sales and interest
income plus interest expense. Identifiable assets are those tangible and
intangible assets that are identified with the operations of a particular
industry segment. Capital expenditures include fixed asset purchases.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for the year ended March 31, 2000 is as
follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
------- ------------ ----------- --------
<S> <C> <C> <C> <C>
Revenues................................. $33,808 $34,988 $33,729 $33,924
Operating income......................... 5,966 6,632 6,697 6,863
Net loss................................. (1,238) (1,578) (1,276) (1,890)
</TABLE>
13. SUBSEQUENT EVENT
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
preferred and common stock were converted and split into common stock.
Accordingly, all of the Company's common stock other than Class A non-voting
have been restated in the
119
<PAGE> 126
UNIVERSAL COMPRESSION HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
historical financial statements to give effect to such split. 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.
On September 15, 2000, the Company completed the merger of Gas Compression
Services, Inc. ("GCSI"), a supplier of natural gas compression equipment and
services with fabrication and overhaul facilities in Michigan and Texas, into
Universal for a combination of approximately $12 million in cash, 1,400,726
shares of the Company's common stock, the assumption of approximately $57
million in debt and operating leases of GCSI, and $6 million of debt related to
GCSI customer equipment financing and associated customer notes receivable. All
of the assumed debt and operating leases, except for approximately $10 million,
were paid off concurrent with the merger using proceeds received under the
operating lease facility. The acquisition was accounted for under the purchase
method of accounting and resulted in the recognition of approximately $33
million in goodwill. Results of operations for GCSI are included in the
accompanying consolidated financial statements for the 15 days from the date of
the merger.
On October 24, 2000, the Company and Universal announced the signing of a
definitive merger agreement to acquire Weatherford Global Compression Services
("WGC"), a supplier of natural gas compression equipment and services and a
division of Weatherford International, Inc. Under the terms of the agreement, a
subsidiary of Weatherford International will merge into Universal in exchange
for 13.75 million shares of the Company's common stock, which will represent 48%
of the outstanding shares of the combined company, and the assumption of
approximately $300 million in debt and operating leases of WGC. The transaction
will be accounted for under the purchase method of accounting. Weatherford
International will acquire the interest of its minority partner in WGC as a
condition to the closing of the transaction. Also, Weatherford International
will retain approximately $40 million of WGC's assets, including its
Singapore-based operations. The transaction is subject to various conditions,
including approval of the Company's stockholders, the refinancing of the
Company's and WGC's debt and leasing obligations, regulatory approvals and other
customary conditions. Concurrent with the execution and delivery of the merger
agreement, Weatherford, the Company and Castle Harlan and certain of its
affiliates entered into a stockholders agreement that obligates the Castle
Harlan parties to, among other things, vote in favor of the merger, which
through their ownership and various voting agreements and voting trusts with
several stockholders currently gives the Castle Harlan parties voting control of
up to approximately 38% of the Company's voting stock. Although there can be no
assurance the transaction will close, it is expected to be consummated in the
first quarter of 2001.
120
<PAGE> 127
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
121
<PAGE> 128
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.
122
<PAGE> 129
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.
123
<PAGE> 130
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.
124
<PAGE> 131
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.
125
<PAGE> 132
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
126
<PAGE> 133
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.
127
<PAGE> 134
UNIVERSAL COMPRESSION HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
2000 2000
------------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,535 $ 1,403
Accounts receivable, net.................................. 23,760 14,615
Current portion of notes receivable....................... 3,087 1,535
Inventories............................................... 14,722 8,727
Current deferred tax asset................................ 227 227
Other..................................................... 1,396 1,571
-------- --------
Total current assets............................... 44,727 28,078
Property, plant and equipment
Rental equipment.......................................... 359,993 349,198
Other..................................................... 26,525 19,617
Accumulated depreciation.................................. (44,391) (38,466)
-------- --------
Net property, plant and equipment.................. 342,127 330,349
Goodwill, net of accumulated amortization................... 131,557 99,250
Notes receivable............................................ 4,929 1,117
Other non-current assets, net............................... 8,611 7,570
Non-current deferred tax asset.............................. 7,509 3,578
-------- --------
Total assets....................................... $539,460 $469,942
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade................................... $ 15,694 $ 10,911
Accrued liabilities....................................... 15,718 6,869
Current portion of long-term debt and capital lease
obligation.............................................. 1,991 4,206
-------- --------
Total current liabilities.......................... 33,403 21,986
Capital lease obligation.................................... 5,952 10,243
Long-term debt.............................................. 196,429 363,036
Non-current deferred tax liability.......................... 2,806 --
Other liabilities........................................... 39,192 --
-------- --------
Total liabilities.................................. 277,782 395,265
Commitments and Contingencies
Stockholders' equity:
Series A preferred stock, $.01 par value, 50,000,000 and
5,000,000 shares authorized,
0 and 1,320,128 shares issued, 0 and 1,318,396 shares
outstanding at September 30, 2000 and March 31, 2000,
respectively (which were subsequently converted to
3,070,174 shares of common stock issued and 3,067,309
shares outstanding on May 30, 2000 in connection with
the Company's initial public offering).................. -- 13
Common stock, $.01 par value, 200,000,000 shares
authorized, 14,674,741 and 5,550,956 shares issued,
14,661,579 and 5,539,344 shares outstanding at September
30, 2000 and March 31, 2000, respectively............... 147 3
Class A non-voting common stock, $.01 par value, 0 and
6,000 shares authorized, 0 and 4,120 shares issued, 0
and 4,080 shares outstanding at September 30, 2000 and
March 31, 2000, respectively (which were subsequently
converted to 30,590 shares of common stock issued and
23,833 shares outstanding on May 30, 2000 in connection
with the Company's initial public offering)............. -- --
Treasury stock, 13,162 and 11,908 shares at cost at
September 30, 2000 and March 31, 2000, respectively..... (132) (123)
Additional paid-in capital................................ 278,751 82,697
Retained deficit.......................................... (17,088) (7,913)
-------- --------
Total stockholders' equity......................... 261,678 74,677
-------- --------
Total liabilities and stockholders' equity......... $539,460 $469,942
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
128
<PAGE> 135
UNIVERSAL COMPRESSION HOLDINGS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -------------------
2000 1999 2000 1999
--------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Rentals.............................................. $28,681 $23,675 $54,955 $46,863
Sales................................................ 10,131 11,255 18,401 21,874
Other................................................ 41 58 257 59
------- ------- ------- -------
Total revenues............................... 38,853 34,988 73,613 68,796
Costs and expenses:
Rentals, exclusive of depreciation and
amortization...................................... 9,903 8,502 18,873 17,104
Cost of sales, exclusive of depreciation and
amortization...................................... 8,480 9,648 15,028 18,750
Depreciation and amortization........................ 6,679 6,061 14,177 11,678
Selling, general and administrative.................. 3,769 4,116 7,224 8,654
Operating lease...................................... 1,995 -- 2,684 --
Interest expense..................................... 5,221 8,500 13,225 16,446
Non-recurring charges................................ -- -- 7,059 --
------- ------- ------- -------
Total costs and expenses..................... 36,047 36,827 78,270 72,632
------- ------- ------- -------
Income (loss) before income taxes and extraordinary
items................................................ 2,806 (1,839) (4,657) (3,836)
Income taxes (benefit)................................. 1,053 (261) (1,746) (1,020)
------- ------- ------- -------
Income (loss) before extraordinary items............. $ 1,753 $(1,578) $(2,911) $(2,816)
======= ======= ======= =======
Extraordinary loss, net of $3,759 income tax
benefit........................................... -- -- (6,264) --
------- ------- ------- -------
Net income (loss).................................... $ 1,753 $(1,578) $(9,175) $(2,816)
======= ======= ======= =======
Weighted average common and common equivalent shares
outstanding:
Basic................................................ 13,504 -- 11,173 --
------- ------- ------- -------
Diluted.............................................. 13,881 -- 11,173 --
------- ------- ------- -------
Earnings per share -- basic:
Income (loss) before extraordinary items............. $ 0.13 $ -- $ (0.26) $ --
Extraordinary loss................................... -- -- (0.56) --
------- ------- ------- -------
Net income (loss).................................... $ 0.13 $ -- $ (0.82) $ --
======= ======= ======= =======
Earnings per share -- diluted:
Income (loss) before extraordinary items............. $ 0.13 $ -- $ (0.26) $ --
Extraordinary loss................................... -- -- (0.56) --
------- ------- ------- -------
Net income (loss).................................... $ 0.13 $ -- $ (0.82) $ --
======= ======= ======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
129
<PAGE> 136
UNIVERSAL COMPRESSION HOLDINGS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
--------------------
2000 1999
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (9,175) $ (2,816)
Adjustments to reconcile net loss to cash provided from
operating activities:
Depreciation and amortization.......................... 14,177 11,678
Gain on asset sales.................................... (102) (6)
Amortization of debt issuance costs.................... 732 581
Accretion of discount notes............................ 9,697 9,882
Deferred income taxes.................................. (1,125) --
(Increase) decrease in receivables..................... (14,509) 3,912
(Increase) decrease in inventories..................... (5,995) 1,774
Increase (decrease) in accounts payable................ 4,783 (1,032)
Increase in accrued expenses........................... 6,578 3,631
Other.................................................. 3,722 (1,599)
--------- --------
Net cash provided by operating activities......... 8,783 26,005
Cash flows from investing activities:
Additions to property, plant and equipment, net........... (30,779) (33,125)
Capital leaseback of vehicles............................. (713) (4,062)
Acquisitions.............................................. (124,852) --
Proceeds from sale of fixed assets........................ 139,647 --
--------- --------
Net cash used in investing activities............. (16,697) (37,187)
Cash flows from financing activities:
Principal repayments of long-term debt.................... (107,091) (376)
Net repayment under revolving line of credit.............. (75,000) (1,100)
Net proceeds (repayment) on sale-leaseback of vehicles.... (79) 3,689
Net proceeds (repayment) of financing lease............... (10,580) 7,406
Common stock issuance..................................... 196,185 --
Debt issuance costs....................................... (5,320) --
Treasury stock............................................ (9) (17)
Debt assumed in acquisitions.............................. 9,940 --
--------- --------
Net cash provided by financing activities......... 8,046 9,602
Net increase (decrease) in cash and cash equivalents........ 132 (1,580)
Cash and cash equivalents at beginning of period............ 1,403 2,927
--------- --------
Cash and cash equivalents at end of period.................. $ 1,535 $ 1,347
========= ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
130
<PAGE> 137
UNIVERSAL COMPRESSION HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. BASIS OF PRESENTATION
Universal Compression Holdings, Inc. (the "Company") was formed on December
12, 1997 for the purpose of acquiring Tidewater Compression Service, Inc.
("TCS") from Tidewater Inc. ("Tidewater"). Upon completion of the acquisition on
February 20, 1998 (the "Tidewater Acquisition"), TCS became the Company's
wholly-owned subsidiary and changed its name to Universal Compression, Inc.
("Universal"). Through this subsidiary, the Company's gas compression service
operations date back to 1954. The Company is a holding company which conducts
its operations through its wholly-owned subsidiary, Universal. Accordingly, the
Company is dependent upon the distribution of earnings from Universal, whether
in the form of dividends, advances or payments on account of intercompany
obligations, to service its debt obligations. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements presented in the Company's Annual Report on Form 10-K for the year
ended March 31, 2000. That report contains a more comprehensive summary of the
Company's major accounting policies. In the opinion of management, the
accompanying unaudited consolidated financial statements contain all appropriate
adjustments, all of which are normally recurring adjustments unless otherwise
noted, considered necessary to present fairly the financial position of the
Company and its consolidated subsidiaries and the results of operations and cash
flows for the respective periods. Operating results for the three and six-month
periods ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the fiscal year ending March 31, 2001.
The Company is a leading provider of natural gas compressor rental, sales,
operations, maintenance and fabrication services to the natural gas industry,
with one of the largest gas compressor fleets in the United States, and has a
growing presence in key international markets. As of September 30, 2000, the
Company had a broad base of over 750 customers and maintained a fleet of over
3,400 compression rental units. In addition, the Company owns or services under
contract a total of approximately 977,000 horsepower. The Company operates in
every significant natural gas producing region in the United States through its
38 compression sales and service locations. As a complement to its rental
operations, the Company designs and fabricates compression units for its own
fleet as well as for its global customer base.
During the quarter ended June 30, 2000, the Company completed an initial
public offering of 7,275,000 shares of its common stock (which includes 275,000
shares of common stock issued pursuant to an over-allotment option granted to
the underwriters), which provided the Company with net proceeds (after deducting
underwriting discounts and commissions) of approximately $149.2 million.
Concurrently with the initial public offering, the Company implemented a
recapitalization pursuant to which all existing classes of the Company's stock
were converted into common stock. Also concurrently with the initial public
offering, the Company entered into a new $50 million revolving credit facility
and $200 million operating lease facility. The proceeds of the offering and the
$62.6 million in initial proceeds from the new operating lease facility were
used to repay $192.7 million of indebtedness, and the remaining proceeds were
used for working capital and to pay expenses associated with the offering and
concurrent financing transactions.
The Company completed the merger of Gas Compression Services, Inc. ("GCSI")
into Universal on September 15, 2000. In the merger, the GCSI shareholders
received cash and 1,400,726 shares of the Company's common stock and the Company
assumed certain debt.
Earnings Per Share
Basic earnings per share is computed using the weighted average number of
shares outstanding for the period. Diluted earnings per share is computed using
the weighted average number of shares outstanding adjusted for the incremental
shares attributed to outstanding options to purchase common stock. Included in
diluted shares for the three-month period ended September 30, 2000 are common
stock equivalents
131
<PAGE> 138
UNIVERSAL COMPRESSION HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
relating to options of 377,000. Common stock equivalents are calculated using
the treasury stock method. Diluted earnings per share for the six-month period
ended September 30, 2000 is not adjusted for the incremental shares attributed
to outstanding options to purchase common stock due to the anti-dilutive effect
of such options. The Company completed its initial public offering of 7,000,000
shares of common stock on May 30, 2000, with an additional 275,000 shares issued
on June 7, 2000 pursuant to the underwriters' over-allotment option. The Company
completed the merger of GCSI into Universal on September 15, 2000 in exchange
for the Company's issuance of 1,400,726 shares of its common stock to GCSI
shareholders. Earnings per share information is not presented for the three and
six-month periods ended September 30, 1999 as such information would not be
meaningful because the Company was beneficially owned by a single stockholder
under the terms of voting agreements during such period.
Reclassifications
Certain reclassifications have been made to the prior year amounts to
conform to the current year classification.
2. RECENT ACCOUNTING PRONOUNCEMENTS
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." In June 2000, the FASB issued
SFAS 138, which amends certain provisions of SFAS 133 to clarify four areas
causing difficulties in implementation. The amendment included expanding the
normal purchase and sale exemption for supply contracts, permitting the
offsetting of certain intercompany foreign currency derivatives and thus
reducing the number of third party derivatives, permitting hedge accounting for
foreign-currency denominated assets and liabilities, and redefining interest
rate risk to reduce sources of ineffectiveness. SFAS 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 (1) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (2) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (3) 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. We
will adopt SFAS 133 and the corresponding amendments under SFAS 138 on April 1,
2001. We are currently determining the impact of SFAS 133 on our consolidated
results of operations and financial position. This statement should have no
impact on consolidated cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
On June 26, 2000, the SEC issued an amendment to SAB 101, effectively delaying
its implementation until the fourth quarter of fiscal years beginning after
December 15, 1999. After careful study of SAB 101 and its amendment, management
believes that its revenue recognition policy is appropriate and that any
possible effects of SAB 101 and its amendment will be immaterial to the
Company's results of operations.
3. BUSINESS COMBINATION
On September 15, 2000, the Company completed the merger of Gas Compression
Services, Inc. ("GCSI"), a supplier of natural gas compression equipment and
services with fabrication and overhaul facilities in Michigan and Texas, into
Universal for a combination of approximately $12 million in cash,
132
<PAGE> 139
UNIVERSAL COMPRESSION HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1,400,726 shares of the Company's common stock valued at approximately $39
million, the assumption of approximately $57 million in debt and operating
leases of GCSI, and $6 million of debt related to GCSI customer equipment
financing and associated customer notes receivable. All of the assumed debt and
operating leases, except for approximately $10 million, were paid off concurrent
with the merger using proceeds received under the operating lease facility. The
acquisition was accounted for under the purchase method of accounting and
resulted in the recognition of approximately $33 million in goodwill. Results of
operations for GCSI are included in the accompanying consolidated financial
statements for the 15 days from the date of the merger.
4. INVENTORIES
Inventories consisted of (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
2000 2000
------------- ---------
<S> <C> <C>
Finished goods.............................................. $ 7,930 $5,551
Work-in-progress............................................ 6,792 3,176
------- ------
Total............................................. $14,722 $8,727
======= ======
</TABLE>
5. OPERATING LEASE FACILITY
In May 2000, the Company and Universal entered into a $200 million
operating lease facility pursuant to which the Company may sell and lease back
certain compression equipment from a Delaware business trust for a five-year
term. The rental payments under the lease facility include an amount based on
LIBOR plus a variable amount depending on the Company's operating results,
applied to the funded amount of the lease. Under the lease facility, the Company
has received an aggregate of approximately $140 million in proceeds from the
sale of compression equipment in May 2000 and, in connection with the GCSI
acquisition, in September 2000, and may sell up to an additional $60 million of
compression equipment through November 2001. The equipment was sold and leased
back by the Company for a five-year period and will continue to be deployed by
the Company under its normal operating procedures. At any time, the Company has
the option to repurchase the equipment. The equipment sold had a book value of
approximately $97 million and the equipment sale resulted in a gain of
approximately $43 million that is being deferred until the end of the lease. The
Company has residual value guarantees on the equipment under the operating lease
facility of approximately 85% of the funded amount that are due upon termination
of the lease and which may be satisfied by a cash payment or the exercise of the
purchase option. Pursuant to the facility, the Company is restricted by certain
covenants relating to its operations, including its ability to enter into
acquisition and sales transactions, incur additional indebtedness, permit
additional liens on its assets and pay dividends. The Company's obligations
under this facility are secured by liens on its compression equipment that is
subject to the lease and certain related rights. Under the operating lease
facility, Universal is the lessee and the Company guarantees certain of
Universal's obligations thereunder.
6. EXTRAORDINARY LOSSES
During the quarter ended June 30, 2000, the Company incurred extraordinary
losses of $6.3 million, net of income taxes of $3.7 million, related to its debt
restructuring that occurred concurrently with the Company's initial public
offering of its common stock.
133
<PAGE> 140
UNIVERSAL COMPRESSION HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. NON-RECURRING CHARGES
During the quarter ended June 30, 2000, the Company incurred non-recurring
charges of $4.4 million, net of income taxes of $2.7 million, related to the
early termination of a management agreement and a consulting agreement and other
related fees in connection with the Company's initial public offering and
concurrent financing transactions.
8. RELATED PARTY TRANSACTIONS
In connection with the initial public offering in the quarter ended June
30, 2000, the Company terminated its Management Agreement with Castle Harlan,
Inc. and its Finders and Consulting Agreement with Samuel Urcis, a director of
the Company. In exchange for such terminations, the Company paid $3 million in
cash and issued 136,364 shares of its common stock to Castle Harlan, and paid
$150,000 in cash and issued 6,818 shares of common stock to Mr. Urcis.
9. INDUSTRY SEGMENTS
The Company has three principal industry segments: Domestic Rental and
Maintenance, International Rental and Maintenance and Engineered Products. The
two Rental and Maintenance segments provide natural gas compression rental and
maintenance services to meet specific customer requirements. The Engineered
Products segment involves the design, fabrication and sale of natural gas and
air compression packages to meet customer and the Company's own specifications.
The International Rental and Maintenance segment represents substantially all of
the Company's foreign based operations.
The Company evaluates performance based on profit or loss from operations,
which is defined as income before income taxes less gain on asset sales and
interest income plus interest expense and operating lease expense. Revenues
include sales to unaffiliated customers. Gross margin is defined as total
revenue less rental expenses, cost of sales (exclusive of depreciation and
amortization), gain on asset sales and interest income. The Corporate and Other
segment, which represents primarily corporate activities, part sales and
services and all other items that could not be allocated to an identifiable
segment, principally serves the oil and gas market, including sales of parts and
equipment utilized in the extraction of natural gas and the services that the
Company provides to customers' natural gas compression units.
The following table presents sales and other financial information by
industry segment for the three months ended September 30, 2000 and 1999 (in
thousands):
<TABLE>
<CAPTION>
DOMESTIC INTERNATIONAL
RENTAL AND RENTAL AND ENGINEERED CORPORATE
MAINTENANCE MAINTENANCE PRODUCTS AND OTHER TOTAL
----------- ------------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
September 30, 2000:
Revenues..................... $24,396 $4,286 $8,318 $1,853 $38,853
Gross margin................. $15,525 $3,254 $1,363 $ 253 $20,395
Operating income............. $ 7,678 $1,290 $ 796 $ 183 $ 9,947
September 30, 1999:
Revenues..................... $20,351 $3,324 $8,909 $2,404 $34,988
Gross margin................. $12,816 $2,358 $1,157 $ 479 $16,810
Operating income............. $ 5,080 $ 805 $ 563 $ 185 $ 6,633
</TABLE>
134
<PAGE> 141
UNIVERSAL COMPRESSION HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents sales and other financial information by
industry segment for the six months ended September 30, 2000 and 1999 (in
thousands):
<TABLE>
<CAPTION>
DOMESTIC INTERNATIONAL
RENTAL AND RENTAL AND ENGINEERED CORPORATE
MAINTENANCE MAINTENANCE PRODUCTS AND OTHER TOTAL
----------- ------------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
September 30, 2000:
Revenues..................... $46,571 $8,385 $15,979 $2,678 $73,613
Gross margin................. $29,770 $6,313 $ 2,885 $ 513 $39,481
Operating income............. $13,381 $2,598 $ 1,717 $ 384 $18,080
September 30, 1999:
Revenues..................... $40,112 $6,751 $14,897 $7,036 $68,796
Gross margin................. $24,834 $4,926 $ 1,733 $1,437 $32,930
Operating income............. $ 9,326 $2,004 $ 464 $ 804 $12,598
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
In February 1998, in connection with the Tidewater Acquisition, the Company
entered into a Purchase Price Adjustment Agreement with Tidewater. The agreement
provides for potential additional amounts to be paid to Tidewater upon a
liquidity event, as defined in the agreement. If a liquidity event occurs and
Castle Harlan Partners III and its affiliates receive an amount greater than its
accreted investment (defined as its initial investment increased at a compounded
rate of 6.25% each quarter, which equates to approximately 27.4% annually), the
Company must make a payment to Tidewater equal to 10% of the amount, if any,
that Castle Harlan receives in excess of its accreted investment. Any payment
pursuant to this agreement would result in an increase in goodwill in the year
of payment and a corresponding increase in goodwill and amortization expense in
subsequent years. As of September 30, 2000, Castle Harlan's accreted investment
was approximately $27.09 per share, which will continue to grow at a compounded
rate of 6.25% per quarter. As of September 30, 2000, no liquidity event , as
defined in the agreement, that required a payment had occurred.
In the ordinary course of business, the Company is involved in various
pending or threatened legal actions. In the opinion of management, the amount of
ultimate liability, if any, with respect to these actions will not have a
materially adverse effect on the Company's financial position, operating results
or cash flows.
11. SUBSEQUENT EVENTS
On October 24, 2000, the Company and Universal announced the signing of a
definitive merger agreement to acquire Weatherford Global Compression Services
("WGC"), a supplier of natural gas compression equipment and services and a
division of Weatherford International, Inc. Under the terms of the agreement, a
subsidiary of Weatherford International will merge into Universal in exchange
for 13.75 million shares of the Company's common stock, which will represent 48%
of the outstanding shares of the combined company, and the assumption of
approximately $300 million in debt and operating leases of WGC. The transaction
will be accounted for as a purchase. Weatherford International will acquire the
interest of its minority partner in WGC as a condition to the closing of the
transaction. Also, Weatherford International will retain approximately $40
million of WGC's assets, including its Singapore-based operations. The
transaction is subject to various conditions, including approval of the
Company's stockholders, the refinancing of the Company's and WGC's debt and
leasing obligations, regulatory approvals and other customary conditions.
Concurrent with the execution and delivery of the merger agreement, Weatherford,
the Company and Castle Harlan and certain of its affiliates entered into a
stockholders agreement that obligates the Castle Harlan parties to, among other
things, vote in favor of the merger, which through their ownership and various
voting agreements and voting trusts with several
135
<PAGE> 142
UNIVERSAL COMPRESSION HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stockholders currently gives the Castle Harlan parties voting control of up to
approximately 38% of the Company's voting stock. Although there can be no
assurance the transaction will close, it is expected to be consummated in the
first quarter of 2001.
136
<PAGE> 143
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
137
<PAGE> 144
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.
138
<PAGE> 145
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.
139
<PAGE> 146
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.
140
<PAGE> 147
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.
141
<PAGE> 148
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.
142
<PAGE> 149
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
143
<PAGE> 150
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.
144
<PAGE> 151
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,
145
<PAGE> 152
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
146
<PAGE> 153
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.
147
<PAGE> 154
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>
148
<PAGE> 155
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>
149
<PAGE> 156
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.
150
<PAGE> 157
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.
151
<PAGE> 158
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
152
<PAGE> 159
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 early in the first quarter of 2001.
153
<PAGE> 160
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Weatherford International, Inc.:
We have audited the accompanying combined balance sheet of Weatherford
Compression as of December 31, 1998, and the related combined statements of
operations, 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 combined 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Weatherford
Compression as of December 31, 1998, 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
154
<PAGE> 161
WEATHERFORD COMPRESSION
COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 36
Accounts Receivable, Net of Allowance for Uncollectible
Accounts of $207....................................... 22,514
Inventories, Net.......................................... 56,054
Lease Receivable.......................................... 19,608
Deferred Tax Asset........................................ 1,361
Other Current Assets...................................... 4,319
--------
103,892
--------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land...................................................... 2,284
Buildings and Leasehold Improvements...................... 11,245
Rental and Service Equipment.............................. 85,606
Machinery and Other Equipment............................. 46,178
--------
145,313
Less: Accumulated Depreciation.................... 39,539
--------
105,774
--------
GOODWILL, NET............................................... 178,553
OTHER ASSETS................................................ 943
--------
$389,162
========
LIABILITIES AND COMBINED EQUITY
CURRENT LIABILITIES:
Current Portion of Long-Term Debt......................... $ 764
Accounts Payable.......................................... 11,525
Accrued Liabilities....................................... 6,591
--------
18,880
--------
LONG-TERM DEBT.............................................. 1,831
UNEARNED INCOME............................................. 42,249
DEFERRED INCOME TAXES....................................... 27,457
LONG-TERM PAYABLE DUE TO PARENT COMPANY..................... 105,765
COMMITMENTS AND CONTINGENCIES
COMBINED EQUITY, Includes Accumulated Other Comprehensive
Loss of $3,337............................................ 192,980
--------
$389,162
========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
155
<PAGE> 162
WEATHERFORD COMPRESSION
COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
------------
<S> <C>
REVENUES:
Products.................................................. $ 86,982
Services and Rentals...................................... 94,344
--------
181,326
--------
COSTS AND EXPENSES:
Cost of Products.......................................... 83,305
Cost of Services and Rentals.............................. 56,338
Selling, General and Administrative....................... 22,208
Non-Recurring Charge...................................... 1,500
--------
163,351
--------
OPERATING INCOME............................................ 17,975
--------
OTHER INCOME (EXPENSE):
Interest Expense from Parent Company...................... (13,276)
Interest Expense.......................................... (76)
Other, Net................................................ (750)
--------
INCOME BEFORE INCOME TAXES.................................. 3,873
INCOME TAX PROVISION........................................ 2,289
--------
NET INCOME.................................................. $ 1,584
========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
156
<PAGE> 163
WEATHERFORD COMPRESSION
COMBINED STATEMENT OF EQUITY
(IN THOUSANDS)
<TABLE>
<S> <C>
Balance at December 31, 1997................................ $185,010
Comprehensive Income (Loss):
Net Income................................................ 1,584
Cumulative Translation Adjustment......................... (1,468)
--------
Total Comprehensive Income................................ 116
Contribution From Parent Company (see Note 3)............... 7,854
--------
Balance at December 31, 1998................................ $192,980
========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
157
<PAGE> 164
WEATHERFORD COMPRESSION
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income................................................ $ 1,584
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation and Amortization.......................... 23,256
Deferred Income Tax Provision.......................... 3,403
Gain on Sale of Property, Plant and Equipment.......... (478)
Provision for Uncollectible Accounts Receivable........ 11
Change in Assets and Liabilities:
Accounts Receivable.................................. 6,244
Inventories.......................................... 3,275
Other Current Assets................................. (2,596)
Accounts Payable..................................... (2,558)
Other Current Liabilities............................ (4,298)
Other Assets......................................... (2,780)
--------
Net Cash Provided by Operating Activities......... 25,063
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures for Property, Plant and Equipment.... (30,780)
Proceeds from Sales of Property, Plant and Equipment...... 2,019
Proceeds from Sale and Leaseback of Equipment............. 100,000
--------
Net Cash Provided by Investing Activities......... 71,239
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on Debt........................................ (1,054)
Repayments to Parent Company, Net......................... (95,212)
--------
Net Cash Used by Financing Activities............. (96,266)
--------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 36
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. --
--------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 36
========
INTEREST PAID............................................... $ 150
INCOME TAXES PAID........................................... $ 1,348
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
158
<PAGE> 165
WEATHERFORD COMPRESSION
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
The accompanying combined financial statements of Weatherford Compression
(the "Company") include the accounts of Enterra Compression Company, Weatherford
Compression Canada Ltd., as well as accounts related to compression product
lines of Weatherford Canada Ltd., EVI Oil Tools Canada, Weatherford Venezuela
S.A., Weatherford Australia Pty Ltd. and Weatherford Enterra S.A. These seven
companies are wholly owned subsidiaries of Weatherford International, Inc. (the
"Parent Company").
The Company is engaged in the business of renting, fabricating, selling and
servicing natural gas compressor packages used in the oil and gas industry. The
Company is headquartered in Corpus Christi, Texas, and maintains approximately
15 service and sales offices in the surrounding four-state area. U.S.
manufacturing is completed primarily in Texas. The Company also has fabrication,
service, and rental operations in Canada, and rental operations in Argentina,
Australia, and Venezuela. Compression equipment is utilized in the production
and transportation of natural gas. Factors influencing compressor rental
operations include the number and age of producing gas wells, the ownership of
these properties and natural gas prices.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The financial statements are presented on a combined basis because their
business activities are performed as one entity. All significant intercompany
accounts and transactions have been eliminated in combination.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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
expense during the reporting period. Actual results could differ from those
estimates.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined
using the moving average method for parts inventories or by using standards
which approximates moving average.
Inventories at December 31, 1998, are summarized as follows (in thousands):
<TABLE>
<S> <C>
Raw materials.............................................. $20,332
Work in process............................................ 10,497
Finished goods............................................. 25,225
-------
$56,054
=======
</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
159
<PAGE> 166
WEATHERFORD COMPRESSION
NOTES TO COMBINED 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>
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 combined statement of operations, with the exception of
gains related to the sale and leaseback arrangements (see Note 8). The
depreciation expense for the year ended December 31, 1998 was $17.9 million.
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 and other intangible assets, net of accumulated
amortization, for impairment based on the undiscounted cash flows associated
with the asset compared to the carrying amount 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 twelve months ended December 31, 1998
was $5.3 million. Accumulated amortization related to goodwill was $20.2 million
at December 31, 1998.
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
The Company also leases equipment under agreements with noncancelable lease
terms of less than 18 months and those which do not include a purchase option.
These types of leases are accounted for as operating leases and included in
property, plant and equipment. This equipment has a net book value of $81.7
million at December 31, 1998. Rental fleet depreciation expense totaled $15.0
million in 1998.
Accounting for Income Taxes
Under Statement of Financial Accounting Standards No. 109 ("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.
The Parent Company filed consolidated federal tax returns for the years
through December 31, 1998 and separate and consolidated state returns depending
on the state in question for the Parent Company and each of its subsidiaries.
The accompanying financial statements have been prepared in accordance with
160
<PAGE> 167
WEATHERFORD COMPRESSION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the separate return methods of SFAS No. 109, whereby the allocation of tax
expense is based on what the Company's current and deferred tax expense would
have been had the Company filed a federal income tax return outside its
consolidated group.
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 functional currencies are the applicable foreign currency 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 in accumulated other comprehensive income (loss), a
separate component of combined 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 also bills for progress payments from time to time on
large dollar, long-term construction projects. The Company maintains reserves
for potential losses, and credit losses have 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 Company provides management services under various gas compressor
system fleet rental agency agreements with four limited partnerships and two
Subchapter S corporations. During the year ended December 31, 1998, management
fee income of $0.6 million was recognized under the agency agreements.
New Reporting Requirements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), Reporting
Comprehensive Income. SFAS No. 130 establishes standards for the reporting of
comprehensive income and its components in a full set of general-purpose
financial statements and is effective for years beginning after December 15,
1997. The Company presents total comprehensive income in the accompanying
Combined Statement of Stockholder's Equity. Comprehensive income as defined by
SFAS No. 130 is net income plus direct adjustments to stockholder's equity. The
cumulative translation adjustment of certain foreign entities is the only such
direct adjustment applicable to the Company.
3. ACQUISITIONS
In January 1998, the Parent Company acquired Taro Industries Limited
("Taro"). Taro was a Canadian provider of well automation, gas compression, and
drilling equipment distribution. The compression division of Taro was
contributed to the Company and the results of operations included in the
accompanying Combined Statement of Operations from the date of acquisition.
161
<PAGE> 168
WEATHERFORD COMPRESSION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The acquisition discussed above was accounted for using the purchase method
of accounting. Results of operations for acquisitions accounted for as purchases
are included in the accompanying combined 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.
4. ACCRUED LIABILITIES
Accrued liabilities as of December 31, 1998 are summarized as follows (in
thousands):
<TABLE>
<S> <C>
Other taxes................................................ $1,127
Customer deposits.......................................... 1,262
Wages and benefits......................................... 2,043
Accrued warranty........................................... 580
Other...................................................... 1,579
------
$6,591
======
</TABLE>
5. DEBT
The components of debt as of December 31, 1998 are summarized as follows
(in thousands):
<TABLE>
<S> <C>
Bonds...................................................... $2,595
------
2,595
Less: amounts due in one year.............................. (764)
------
Long-term debt............................................. $1,831
======
</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 a letter of credit. Interest is variable and determined to be the
lowest rate which will permit the Bonds to be sold at par. The rate was 4.1% at
December 31, 1998. Accordingly, the estimated fair value of the Bonds
approximates book value.
Maturities of the Company's long-term debt at December 31, 1998 are as
follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $ 764
2000........................................................ 646
2001........................................................ 575
2002........................................................ 610
------
$2,595
======
</TABLE>
6. COMBINED EQUITY
Combined equity caption on the accompanying financial statements represents
the Parent Company's interest in the Company. Changes represent net income
(loss) of the Company, net contributions from/to the Parent Company and
accumulated other comprehensive income (loss). During 1998, the Parent Company
contributed the compression division of Taro (see Note 3).
162
<PAGE> 169
WEATHERFORD COMPRESSION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
The domestic and foreign components of Income before Income Taxes consisted
of the following for the year ended December 31, 1998 (in thousands):
<TABLE>
<S> <C>
Domestic.................................................... $ 890
Foreign..................................................... 2,983
------
$3,873
======
</TABLE>
The Company's provision (benefit) for income taxes for the year ended
December 31, 1998, consisted of (in thousands):
<TABLE>
<S> <C>
Current
U.S. Federal and State................................... $(1,814)
Foreign.................................................. 700
-------
(1,114)
-------
Deferred
U.S. Federal and State................................... 2,831
Foreign.................................................. 572
-------
3,403
-------
$ 2,289
=======
</TABLE>
The actual income tax provision for the year ended December 31, 1998,
differed from the income tax provision calculated using the statutory federal
income rate of 35%, as follows (in thousands):
<TABLE>
<S> <C>
Tax provision at statutory rate............................. $1,356
Increase (reduction) in taxes resulting from:
Nondeductible goodwill.................................... 1,188
Other..................................................... (255)
------
$2,289
======
</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.
163
<PAGE> 170
WEATHERFORD COMPRESSION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Generally, 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 as of December 31, 1998 (in thousands):
<TABLE>
<S> <C>
Net Current Deferred Tax Asset:
Inventories............................................. $ (801)
Other................................................... (560)
-------
$(1,361)
=======
Net Noncurrent Deferred Tax Liability (Asset):
Property, plant and equipment........................... $21,842
Goodwill................................................ 5,627
Other................................................... (12)
-------
$27,457
=======
</TABLE>
8. 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>
<S> <C>
1999........................................................ $302
2000........................................................ 165
----
$467
====
</TABLE>
Sale and Leaseback of Equipment
The Company entered into a sale and leaseback arrangement in December 1998
where it was provided with the right to sell up to $200.0 million of compression
units through December 1999 and lease them back over a five year period under an
operating lease. Payments under the lease are calculated based on a rate of
return on the purchase price and an agreed valuation of the leased compressors.
Under the terms of the lease, the Company may repurchase the equipment for fair
market value at any time. The Parent Company has provided for a residual value
guarantee at the end of the term of the lease equal to approximately 85.5% of
the appraised value of the compression units under lease.
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, which is due on demand. The
net book value of the equipment sold was approximately $77.4 million, resulting
in a pre-tax gain of $42.2 million, which may be deferred until the end of the
lease.
This arrangement 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>
<S> <C>
1999...................................................... $ 7,491
2000...................................................... 7,491
2001...................................................... 7,491
2002...................................................... 7,491
2003...................................................... 6,867
-------
$36,831
=======
</TABLE>
164
<PAGE> 171
WEATHERFORD COMPRESSION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 as of
December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $277
2000........................................................ 252
2001........................................................ 193
2002........................................................ 151
2003........................................................ 92
----
$965
====
</TABLE>
Rental expenses for operating leases were $0.4 million for the year ended
December 31, 1998.
Savings and Retirement Plan
Weatherford Enterra Compression Company, L.P. Savings and Retirement Plan
is a defined contribution benefit plan. Effective October 16, 1995, the plan was
frozen and no additional contributions were made. When the plan was frozen
participants had the option to cash out their accounts and receive payment over
five years. As of December 31, 1998 all payments had been made.
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.
9. RELATED PARTY TRANSACTIONS
Overhead Allocation
The Parent Company provides certain administrative services for the
Company, primarily including 1) state, federal and property tax preparation and
management, 2) legal services, 3) administration of employee benefit plans and
risk management programs and 4) marketing services. The Parent Company
determines the overhead allocation by multiplying the consolidated direct and
indirect costs of providing these services to its subsidiaries by each
subsidiary's percentage of consolidated revenues. For the year ended December
31, 1998, the Company expensed approximately $0.7 million related to these
overhead charges.
Insurance
The Company participates with the Parent Company for the partial
self-insurance of its general, product, property, and workers' compensation
liabilities. During the year ended December 31, 1998, the Company expensed
approximately $1.5 million related to such self-insurance.
Benefit Plans
The Company participates in the Parent Company's 401(k) and partial
self-insured health and welfare plan. The Company expensed $0.5 million and $2.2
million related to the 401(k) and health and welfare plans, respectively, in
1998.
165
<PAGE> 172
WEATHERFORD COMPRESSION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Due to Parent Company
The Parent Company provides funding of certain activities of the Company.
Payment of the resulting liability occurs only when surplus cash is available.
The balance accrues interest, based on average balances, at a variable rate
based on prime, approximately 6% at December 31, 1998.
10. NON-RECURRING CHARGE
The 1998 non-recurring charge of $1.5 million, caused by a downturn in
market conditions, relates to the write-down of specific assets which are held
for sale.
11. SEGMENT INFORMATION
Foreign Operations
Financial information by geographic segment for the year ended December 31,
1998 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.......................... $132,897 $46,225 $2,141 $ 63 $181,326
Long-lived Assets.................... 251,358 23,125 7,531 3,256 285,270
</TABLE>
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following sets forth unaudited quarterly financial data for 1998.
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Revenues........................ $45,894 $47,948 $42,641 $44,843 $181,326
Gross Profit.................... 11,577 10,280 10,232 9,594 41,683
Net Income (Loss)............... 1,148 378 307 (249) 1,584
</TABLE>
13. SUBSEQUENT EVENTS (UNAUDITED)
In February 1999, the Parent Company formed a joint venture with GE Capital
Corporation ("GE Capital") in which the Company's compression services
operations were combined with GE Capital's Global Compression's Services
operations. The joint venture is known as Weatherford Global Compression. The
Parent Company owns 64% of the joint venture and GE Capital owns 36%. The
Company has the right to acquire GE Capital's interest at anytime at a price
equal to the greater of a market determined third party valuation or book value.
GE Capital also has the right to require the Company to purchase its interest
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 Parent
Company has not purchased its interest by that date.
On October 24, 2000, the Parent Company 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 Company into a subsidiary of Universal. The Parent
Company will retain approximately $40 million of the assets of the Company,
including Singapore-based GSI and its Asia-Pacific compressor rental operations,
other than those in Thailand and Australia. The Parent Company will, however,
continue to operate compressor rentals in those regions either alone or in
conjunction with Universal. The Parent Company 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
166
<PAGE> 173
WEATHERFORD COMPRESSION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 the Parent Company has entered into an
agreement to purchase GE Capital's 36% interest in the joint venture in which
the Company operates 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, the Parent Company anticipates that the transactions will
be consummated early in the first quarter of 2001.
167
<PAGE> 174
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Weatherford International, Inc.:
We have audited the accompanying combined balance sheet of Weatherford
Compression as of December 31, 1997 and the related combined statements of
operations, 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 combined 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Weatherford
Compression as of December 31, 1997, 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
168
<PAGE> 175
WEATHERFORD COMPRESSION
COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ --
Accounts Receivable, Net of Allowance for Uncollectible
Accounts of $88........................................ 28,970
Inventories............................................... 57,983
Other Current Assets...................................... 1,933
--------
88,886
--------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land...................................................... 2,182
Buildings and Leasehold Improvements...................... 11,498
Rental and Service Equipment.............................. 192,140
Machinery and Other Equipment............................. 12,221
--------
218,041
Less: Accumulated Depreciation.................... 46,898
--------
171,143
--------
GOODWILL, NET............................................... 179,845
OTHER ASSETS................................................ 1,153
--------
$441,027
========
LIABILITIES AND COMBINED EQUITY
CURRENT LIABILITIES:
Current Portion of Long-Term Debt......................... $ 1,433
Accounts Payable.......................................... 13,696
Accrued Liabilities....................................... 6,685
--------
21,814
--------
LONG-TERM DEBT.............................................. 2,216
DEFERRED INCOME TAXES....................................... 23,393
LONG-TERM PAYABLE DUE TO PARENT............................. 208,594
COMMITMENTS AND CONTINGENCIES
COMBINED EQUITY, Includes Accumulated Other Comprehensive
Loss of $1,869............................................ 185,010
--------
$441,027
========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
169
<PAGE> 176
WEATHERFORD COMPRESSION
COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
REVENUES:
Products.................................................. $ 78,225
Services and Rentals...................................... 100,671
--------
178,896
--------
COSTS AND EXPENSES:
Cost of Products.......................................... 72,808
Cost of Services and Rentals.............................. 67,079
Selling, General and Administrative....................... 26,351
Asset Impairment.......................................... 470
--------
166,708
--------
OPERATING INCOME............................................ 12,188
--------
OTHER INCOME (EXPENSE):
Interest Expense from Parent Company...................... (9,183)
Interest Expense.......................................... (754)
Interest Income........................................... 624
Other Income, Net......................................... 228
--------
INCOME BEFORE INCOME TAXES.................................. 3,103
INCOME TAX PROVISION........................................ 2,351
--------
NET INCOME.................................................. $ 752
========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
170
<PAGE> 177
WEATHERFORD COMPRESSION
COMBINED STATEMENT OF EQUITY
(IN THOUSANDS)
<TABLE>
<S> <C>
Balance at December 31, 1996................................ $184,710
Comprehensive Income (Loss):
Net Income................................................ 752
Cumulative Translation Adjustment......................... (452)
--------
Total Comprehensive Income................................ 300
--------
Balance at December 31, 1997................................ $185,010
========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
171
<PAGE> 178
WEATHERFORD COMPRESSION
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income................................................ $ 752
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation and Amortization.......................... 21,666
Gain on Sale of Property, Plant and Equipment.......... (631)
Asset Impairment....................................... 470
Deferred Income Tax Provision.......................... 3,449
Provision for Uncollectible Accounts Receivable........ 142
Change in Assets and Liabilities:
Accounts Receivable.................................. (4,681)
Inventories.......................................... (16,606)
Other Current Assets................................. 1,098
Accounts Payable..................................... 1,997
Other Current Liabilities............................ (2,949)
Other Assets......................................... 671
--------
Net Cash Provided by Operating Activities......... 5,378
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures for Property, Plant and Equipment.... (35,611)
Proceeds from Sales of Property, Plant and Equipment...... 4,828
--------
Net Cash Used by Investing Activities............. (30,783)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on Debt........................................ 120
Repayments on Debt........................................ (3,463)
Borrowings from Parent Company, Net....................... 28,748
--------
Net Cash Provided by Financing Activities......... 25,405
--------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... --
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. --
--------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ --
========
INTEREST PAID............................................... $ 22
INCOME TAX REFUNDS, NET OF TAXES PAID....................... $ (106)
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
172
<PAGE> 179
WEATHERFORD COMPRESSION
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
The accompanying financial statements of Weatherford Compression (the
"Company") include the accounts of Enterra Compression Company, as well as
accounts related to compression product lines of Weatherford Canada Ltd. and
Weatherford Enterra S.A. These three companies are wholly owned subsidiaries of
Weatherford International, Inc. (the "Parent Company").
The Company is engaged in the business of renting, fabricating, selling,
and servicing natural gas compressor packages used in the oil and gas industry.
The Company is headquartered in Corpus Christi, Texas, and maintains
approximately 15 service and sales offices in the surrounding four-state area.
U.S. manufacturing is completed primarily in Texas. The Company also has
fabrication, service, and rental operations in Calgary, Canada, and rental
operations in Buenos Aires, Argentina. Compression equipment is utilized in the
production and transportation of natural gas. Factors influencing compressor
rental operations include the number and age of producing gas wells, the
ownership of these properties and natural gas prices.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The financial statements are presented on a combined basis because their
business activities are performed as one entity. All significant intercompany
accounts and transactions have been eliminated in combination.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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
expense during the reporting period. Actual results could differ from those
estimates.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined
using the moving average method for parts inventories or by using standards
which approximates moving average.
Inventories at December 31, 1997 are summarized as follows (in thousands):
<TABLE>
<S> <C>
Raw materials........................................... $37,493
Work in process......................................... 12,696
Finished goods.......................................... 7,794
-------
$57,983
=======
</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
173
<PAGE> 180
WEATHERFORD COMPRESSION
NOTES TO COMBINED 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>
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 combined statement of operations. The depreciation
expense for the year ended December 31, 1997 was $16.7 million.
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 40 years. The Company periodically evaluates goodwill and other
intangible assets, net of accumulated amortization, for impairment based on the
undiscounted cash flows associated with the asset compared to the carrying
amount 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 the year ended
December 31, 1997 was $4.5 million. Accumulated amortization as of December 31,
1997 was $15.0 million.
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
The Company also leases equipment under agreements with noncancelable lease
terms of less than 18 months and those which do not include a purchase option.
These types of leases are accounted for as operating leases and included in
property, plant and equipment. This equipment has a net book value of $152.5
million at December 31, 1997. Rental fleet depreciation expense totaled $14.2
million in 1997.
In 1997, the Company identified certain idle compression rental units and,
in accordance with Statement of Financial Accounting Standards No. 121
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, wrote the units down to their estimated fair market value and
recognized an expense of $0.5 million. Fair market value was determined based on
the Company's recent sales history.
Accounting for Income Taxes
Under Statement of Financial Accounting Standards No. 109 ("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.
174
<PAGE> 181
WEATHERFORD COMPRESSION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Parent Company filed consolidated federal tax returns for the years
through December 31, 1997 and separate and consolidated state returns depending
on the state in question for the company and each of its subsidiaries. The
accompanying financial statements have been prepared in accordance with the
separate return methods of SFAS No. 109, whereby the allocation of tax expense
is based on what the Company's current and deferred tax expense would have been
had the Company filed a federal income tax return outside its consolidated
group.
Foreign Currency Translation
Results of operations for foreign subsidiaries with functional currencies
other than the U.S. dollar 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 a separate component of combined 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 also bills for progress payments from time
to time on large dollar, long-term construction projects. 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 Company provides management services under various gas compressor
system fleet rental agency agreements with four limited partnerships and two
Subchapter S corporations. An employee of the Company owns an interest in one of
the limited partnerships and also serves as an officer in two of the Subchapter
S Corporations. During the year ended December 31, 1997, management fee income
of $0.7 million was recognized under the agency agreements.
New Reporting Requirements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), Reporting
Comprehensive Income. SFAS No. 130 establishes standards for the reporting of
comprehensive income and its components in a full set of general-purpose
financial statements and is effective for years beginning after December 15,
1997. Comprehensive income as defined by SFAS No. 130 is net income plus direct
adjustments to stockholder's equity. The cumulative translation adjustment of
certain foreign entities is the only such direct adjustment applicable to the
Company.
175
<PAGE> 182
WEATHERFORD COMPRESSION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCRUED LIABILITIES
Accrued liabilities as of December 31, 1997 are summarized as follows (in
thousands):
<TABLE>
<S> <C>
Income taxes............................................... $(2,052)
Other taxes................................................ 1,524
Customer deposits.......................................... 2,114
Accrued freight............................................ 174
Wages and benefits......................................... 3,042
Accrued warranty........................................... 1,208
Other accrued liabilities.................................. 675
-------
$ 6,685
=======
</TABLE>
4. DEBT
The components of debt as of December 31, 1997 are summarized as follows
(in thousands):
<TABLE>
<S> <C>
Bonds....................................................... $2,485
Promissory notes with Caterpillar Financial Services
Corporation, interest ranging from 8.5% to 9.25%.......... 986
Savings and Retirement Plan promissory notes, interest
ranging from 4.65% through 7.55%.......................... 178
------
3,649
Less: amounts due in one year............................... (1,433)
------
Long-term debt.............................................. $2,216
======
</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 a letter of credit. Interest is variable and determined to be the
lowest rate which will permit the Bonds to be sold at par. The rate was 3.5% at
December 31, 1997. Accordingly, the estimated fair value of the Bonds
approximates book value.
Maturities of the Company's long-term debt at December 31, 1997 are as
follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $1,433
1999........................................................ 531
2000........................................................ 500
2001........................................................ 575
2002........................................................ 610
------
$3,649
======
</TABLE>
5. COMBINED EQUITY
Combined equity caption on the accompanying financial statements represents
the Parent Company's interest in the Company. Changes represent net income
(loss) of the Company, net contributions from/to the Parent Company and
accumulated other comprehensive income (loss).
176
<PAGE> 183
WEATHERFORD COMPRESSION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
The domestic and foreign components of Income before Income Taxes consisted
of the following for the year ended December 31, 1997 (in thousands):
<TABLE>
<S> <C>
Domestic.................................................... $ 943
Foreign..................................................... 2,160
------
$3,103
======
</TABLE>
The Company's provision for income taxes for the year ended December 31,
1997, consisted of (in thousands):
<TABLE>
<S> <C>
Current
U.S. Federal and State................................... $(1,448)
Foreign.................................................. 350
-------
(1,098)
-------
Deferred
U.S. Federal and State................................... 3,010
Foreign.................................................. 439
-------
3,449
-------
$ 2,351
=======
</TABLE>
The actual income tax provision for the year ended December 31, 1997,
differed from the income tax provision calculated using the statutory federal
income rate of 35%, as follows (in thousands):
<TABLE>
<S> <C>
Tax provision at statutory rate............................. $1,086
Increase (reduction) in taxes resulting from:
Nondeductible goodwill.................................... 1,189
Other..................................................... 76
------
$2,351
======
</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.
177
<PAGE> 184
WEATHERFORD COMPRESSION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Generally, 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 as of December 31, 1997 (in thousands):
<TABLE>
<S> <C>
Net Current Deferred Tax Asset:
Inventories.............................................. $ (31)
Other.................................................... (334)
-------
$ (365)
=======
Net Noncurrent Deferred Tax Liability:
Property, plant and equipment............................ $18,877
Goodwill................................................. 1,306
Other.................................................... 3,004
-------
$23,187
=======
</TABLE>
7. 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>
<S> <C>
1998........................................................ $ 894
1999........................................................ 558
2000........................................................ 165
------
$1,617
======
</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 as of
December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $251
1999........................................................ 176
2000........................................................ 70
2001........................................................ 36
----
$533
====
</TABLE>
Rental expenses for operating leases were $1.4 million for the year ended
December 31, 1997.
Savings and Retirement Plan
Weatherford Enterra Compression Company, L.P. Savings and Retirement Plan
is a defined contribution benefit plan. Effective October 16, 1995 the plan was
frozen and no additional contributions were made. When the plan was frozen
participants had the option to cash out their accounts and receive payment over
five years. The liability due to participants is recorded as debt in the
accompanying balance sheet (See Note 4).
178
<PAGE> 185
WEATHERFORD COMPRESSION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
8. RELATED PARTY TRANSACTIONS
Overhead Allocation
The Parent Company provides certain administrative services for the
Company, primarily including 1) state, federal and property tax preparation and
management 2) legal services 3) administration of employee benefit plans and
risk management programs and 4) marketing services. The Parent Company
determines the overhead allocation by multiplying the consolidated direct and
indirect costs of providing these services to its subsidiaries by each
subsidiary's percentage of consolidated revenues. For the year ended December
31, 1997, the Company expensed approximately $3.6 million related to these
overhead charges.
Insurance
The Company participates with the Parent Company for the partial
self-insurance of its general, product, property, and workers' compensation
liabilities. During the year ended December 31, 1997 the Company expensed
approximately $1.6 million related to such self-insurance.
Benefit Plans
The Company participates in the Parent Company's 401(k) and partial
self-insured health and welfare plan. The Company expensed $0.5 million and $2.9
million related to the 401(k) and health and welfare plans, respectively, in
1997.
Due to Parent Company
The Parent Company provides funding of certain activities of the Company.
Payment of the resulting liability occurs only when surplus cash is available.
The balance accrues interest at a variable rate based on prime, approximately
6.5% at December 31, 1997.
9. SEGMENT INFORMATION
Foreign Operation
Financial information by geographic segment for the year ended December 31,
1997 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 excluding deferred tax assets of $0.2
million.
<TABLE>
<CAPTION>
UNITED
STATES CANADA TOTAL
-------- ------- --------
<S> <C> <C> <C>
Revenues from Unaffiliated Customers.................. $137,017 $41,879 $178,896
Long-lived Assets..................................... 336,199 15,735 351,934
</TABLE>
179
<PAGE> 186
WEATHERFORD COMPRESSION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following sets forth unaudited quarterly financial data for 1997.
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Revenues......................... $44,836 $37,992 $46,571 $49,497 $178,896
Gross Profit..................... 9,617 9,116 9,816 10,460 39,009
Net Income (Loss)................ 317 275 516 (356) 752
</TABLE>
11. SUBSEQUENT EVENTS (UNAUDITED)
Sale and Lease Back of Equipment
The Company entered into a sale and leaseback arrangement in December 1998
where it was provided with the right to sell up to $200.0 million of compression
units through December 1999 and lease them back over a five year period under an
operating lease. Payments under the lease are calculated based on a rate of
return on the purchase price and an agreed valuation of the leased compressors.
Under the terms of the lease, the Company may repurchase the equipment for fair
market value at any time. The Parent Company has provided for a residual value
guarantee at the end of the term of the lease equal to approximately 85.5% of
the appraised value of the compression units under lease.
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, which is due on demand. The
net book value of the equipment sold was approximately $77.4 million, resulting
in a pre-tax gain of $42.2 million, which may be deferred until the end of the
lease.
This arrangement 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>
<S> <C>
1999...................................................... $ 7,491
2000...................................................... 7,491
2001...................................................... 7,491
2002...................................................... 7,491
2003...................................................... 6,867
-------
$36,831
=======
</TABLE>
Partnership Formation
In February 1999, the Parent Company completed a joint venture with GE
Capital Corporation ("GE Capital") in which the Company's compression services
operations were combined with GE Capital's Global Compression's Services
operations. The joint venture is known as Weatherford Global Compression. The
Parent Company owns 64% of the joint venture and GE Capital owns 36%. The
Company has the right to acquire GE Capital's interest at anytime at a price
equal to the greater of a market determined third party valuation or book value.
GE Capital also has the right to require the Company to purchase its interest
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 Parent
Company has not purchased its interest by that date.
Universal Compression
On October 24, 2000, the Parent Company 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
180
<PAGE> 187
WEATHERFORD COMPRESSION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Universal. The Parent Company 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. The Parent Company will, however, continue to operate compressor
rentals in those regions either alone or in conjunction with Universal. The
Parent Company 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 the Parent Company 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, the Parent Company anticipates that the
transactions will be consummated early in the first quarter of 2001.
181
<PAGE> 188
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Global Compression Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Global
Compression Holdings, Inc. and subsidiaries as of February 2, 1999, and December
31, 1998 and 1997 and the related consolidated statements of operations,
stockholder's equity and cash flows for the period January 1, 1999 through
February 2, 1999 and years ended December 31, 1998 and 1997. These consolidated
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 audits.
We conducted our audits in accordance with auditing standards generally
accepted 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Global
Compression Holdings, Inc. and subsidiaries as of February 2, 1999, and December
31, 1998 and 1997 and the results of their operations and their cash flows for
the period January 1, 1999 through February 2, 1999 and years ended December 31,
1998 and 1997 in conformity with accounting principles generally accepted in the
United States of America.
/s/ KPMG LLP
Dallas, Texas
April 2, 1999
182
<PAGE> 189
GLOBAL COMPRESSION HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FEBRUARY 2, 1999, AND DECEMBER 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 1,538 $ 578 $ 256
Trade accounts receivable, net of allowance of $3,810 in
1999, $4,194 in 1998 and $2,526 in 1997................ 12,363 16,581 11,732
Other current assets...................................... 1,261 1,161 1,323
-------- -------- --------
Total current assets.............................. 15,162 18,320 13,311
Property, plant and equipment, net (note 5)................. 228,787 227,417 219,156
Goodwill and other intangibles, net......................... 30,426 30,581 33,459
Other assets................................................ 3,608 3,604 2,093
-------- -------- --------
$277,983 $279,922 $268,019
======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Trade accounts payable.................................... $ 4,262 $ 3,565 $ 9,555
Accrued liabilities....................................... 6,025 5,109 5,624
Deferred revenue.......................................... 4,866 4,907 4,059
-------- -------- --------
Total current liabilities......................... 15,153 13,581 19,238
Due to Parent (note 6)...................................... 201,525 204,309 191,362
Deferred income taxes (note 7).............................. 25,797 25,444 20,647
-------- -------- --------
Total liabilities................................. 242,475 243,334 231,247
-------- -------- --------
Stockholder's equity:
Common stock: $.01 par value. Authorized, issued and
outstanding, 1,000 shares.............................. -- -- --
Additional paid-in capital................................ 70,518 69,871 62,020
Accumulated other comprehensive income.................... 286 299 --
Accumulated deficit....................................... (35,296) (33,582) (25,248)
-------- -------- --------
Total stockholder's equity........................ 35,508 36,588 36,772
Commitments (note 8)........................................
-------- -------- --------
$277,983 $279,922 $268,019
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
183
<PAGE> 190
GLOBAL COMPRESSION HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
PERIOD JANUARY 1, DECEMBER 31,
1999 THROUGH -------------------
FEBRUARY 2, 1999 1998 1997
----------------- -------- --------
<S> <C> <C> <C>
Revenues:
Equipment rentals and services......................... $ 4,491 $ 61,008 $ 46,168
Unit sales............................................. 1,606 12,490 10,531
------- -------- --------
Total revenues................................. 6,097 73,498 56,699
------- -------- --------
Costs and expenses:
Cost of equipment rentals and services................. 2,060 27,378 21,813
Cost of unit sales..................................... 1,220 10,909 11,005
Depreciation and amortization.......................... 1,686 19,916 15,910
Selling, general and administrative expenses (note
10)................................................. 2,852 16,058 15,292
------- -------- --------
Total costs and expenses....................... 7,818 74,261 64,020
------- -------- --------
Loss from operations........................... (1,721) (763) (7,321)
Interest expense (note 6)................................ (1,072) (12,424) (10,817)
------- -------- --------
Loss before income taxes....................... (2,793) (13,187) (18,138)
Income tax benefit (note 7).............................. 1,079 4,853 6,737
------- -------- --------
Net loss....................................... $(1,714) $ (8,334) $(11,401)
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
184
<PAGE> 191
GLOBAL COMPRESSION HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1998
AND PERIOD FROM JANUARY 1, 1999 THROUGH FEBRUARY 2, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
--------------- PAID-IN COMPREHENSIVE ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT TOTAL INCOME (LOSS)
------ ------ ---------- ------------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997...... 1,000 $ -- $55,494 $ -- $(13,847) $ 41,647 $ --
Capital
contribution -- forgiveness
of accrued interest, net of
tax benefit ($4,291)(note
6).......................... -- -- 6,526 -- -- 6,526 --
Net loss...................... -- -- -- -- (11,401) (11,401) (11,401)
----- ---- ------- ---- -------- -------- --------
Balance, December 31, 1997.... 1,000 -- 62,020 -- (25,248) 36,772 (11,401)
========
Capital
contribution -- forgiveness
of accrued interest, net of
tax benefit ($4,989)(note
6).......................... -- -- 7,435 -- -- 7,435 --
Capital contribution -- GECC
payment of certain employee
severance costs, net of tax
benefit ($273)(note 9)...... -- -- 416 -- -- 416 --
Net loss...................... -- -- -- -- (8,334) (8,334) (8,334)
Foreign currency translation
adjustment.................. -- -- -- 299 -- 299 299
----- ---- ------- ---- -------- -------- --------
Balance, December 31, 1998.... 1,000 -- 69,871 299 (33,582) 36,588 (8,035)
========
Capital
contribution -- forgiveness
of accrued interest, net of
tax benefit ($425)(note
6).......................... -- -- 647 -- -- 647 --
Net loss...................... -- -- -- -- (1,714) (1,714) (1,714)
Foreign currency translation
adjustment.................. -- -- -- (13) -- (13) (13)
----- ---- ------- ---- -------- -------- --------
Balance, February 2, 1999..... 1,000 $ -- $70,518 $286 $(35,296) $ 35,508 $ (1,727)
===== ==== ======= ==== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
185
<PAGE> 192
GLOBAL COMPRESSION HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD JANUARY 1, YEARS ENDED
1999 THROUGH DECEMBER 31,
FEBRUARY 2, -------------------
1999 1998 1997
----------------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................... $(1,714) $ (8,334) $(11,401)
Adjustments to reconcile net loss to cash provided by
operating activities:
Depreciation and amortization....................... 1,686 19,916 15,910
Deferred income taxes............................... 353 4,797 9,857
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable........ 4,218 (4,849) (2,882)
(Increase) decrease in other assets............... (104) (1,349) (2,267)
Increase (decrease) in accounts payable and
accrued liabilities............................ 1,613 (6,505) 5,676
Increase (decrease) in deferred revenue........... (41) 848 430
------- -------- --------
Net cash provided by operating activities...... 6,011 4,524 15,323
Cash flows from investing activities -- net additions to
property, plant and equipment.......................... (2,901) (25,299) (84,410)
Cash flows from financing activities -- net change in due
to parent.............................................. (2,150) 21,097 69,094
------- -------- --------
Net increase in cash..................................... 960 322 7
Cash at beginning of period.............................. 578 256 249
------- -------- --------
Cash at end of period.................................... $ 1,538 $ 578 $ 256
======= ======== ========
Supplemental disclosure of noncash activities:
Forgiveness of accrued interest (net of tax benefit)
reflected as capital contribution................... $ 647 $ 7,435 $ 6,526
======= ======== ========
Payment of severance costs (net of tax benefit)
reflected as capital contribution................... $ -- $ 416 $ --
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
186
<PAGE> 193
GLOBAL COMPRESSION HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 2, 1999, AND DECEMBER 31, 1998 AND 1997
(ALL DOLLAR AMOUNTS IN THOUSANDS)
(1) GENERAL INFORMATION
Global Compression Holdings, Inc. (the "Company") is a wholly owned
subsidiary of General Electric Capital Corporation ("GECC" or "Parent"). The
Company's primary business is the purchase, fabrication, sale, lease and
maintenance of natural gas compressor units and related oil field equipment.
Natural gas compressor units are leased at fixed monthly rentals over varying
periods (see notes 5 and 8). The Company is headquartered in Dallas, Texas and
primarily operates in North America, Argentina and Thailand.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Global
Compression Holdings, Inc., its wholly-owned subsidiaries and the related
compression business of GE Capital Thailand Ltd., a wholly-owned subsidiary of
GECC. All significant intercompany balances and transactions have been
eliminated in consolidation.
(b) Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. At February 2,
1999, and December 31, 1998 and 1997, the Company had no cash equivalents.
(c) Property, Plant, and Equipment
Property, plant, and equipment is depreciated on a straight-line basis over
the estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
------------
<S> <C>
Buildings and improvements................................ 5-40
Rental equipment.......................................... 5-15
Machinery and equipment................................... 3-10
Office equipment.......................................... 3-10
Vehicles.................................................. 3
</TABLE>
Expenditures for major additions and improvements are capitalized while
minor replacements, maintenance and repairs are charged to expense as incurred.
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 operations.
(d) Goodwill and Other Intangibles
Goodwill represents the excess of the aggregate price paid by the Company
for acquisitions accounted for as purchases over the fair value of the net
assets acquired. Goodwill is amortized on a straight-line basis over a period of
20 years.
Amortization of goodwill and other intangible assets totaled $155, $2,877
and $2,541 for the period January 1, 1999 through February 2, 1999 and years
ended December 31, 1998 and 1997, respectively.
187
<PAGE> 194
GLOBAL COMPRESSION HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 2, 1999, AND DECEMBER 31, 1998 AND 1997
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Accumulated amortization was $9,390, $9,235, and $6,358 at February 2, 1999, and
December 31, 1998, and December 31, 1997, respectively.
(e) Impairment of Long-Lived Assets
The Company evaluates potential impairment of property, plant and equipment
and goodwill on an ongoing basis as necessary whenever events or changes in
circumstances indicate that the carrying amounts may not be recoverable.
Recoverability of these assets is measured by a comparison of the carrying
amount of the assets to future net cash flows expected to be generated by the
assets or acquired business. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
In April 1998, the Company closed a manufacturing and warehouse facility in
Houston, Texas. The facility ($1,900 carrying value at February 2, 1999) is for
sale and is currently being used for storage of certain inventory items. Based
on a recent appraisal of the facility, the Company does not consider the
facility to be impaired.
(f) Income Taxes
The Company is included in the consolidated federal income tax return of
GECC. Under the tax sharing arrangement, GECC pays the Company for net operating
losses utilized by GECC. The benefit is computed using enacted tax rates and is
reflected as a reduction in due to Parent.
The Company applies the asset and liability method of accounting for income
taxes. Accordingly, 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. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
operations in the period that includes the enactment date.
(g) Revenue Recognition
Lease billings in advance of services are recorded as deferred revenue in
the accompanying consolidated balance sheets. Unit sales are recognized when the
compressor is shipped to the customer.
(h) Comprehensive Income
On January 1, 1998, the Company adopted the provisions of SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting
and presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive income consists of net loss and foreign
currency translation adjustments and is presented in the consolidated statements
of stockholder's equity.
(i) Foreign Currency Translation
The functional currency for the Company's international operations in
Argentina and Thailand is the applicable local currency. Results of these
foreign operations are translated from the functional currency to the U.S.
Dollar 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 dates, and the resulting
188
<PAGE> 195
GLOBAL COMPRESSION HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 2, 1999, AND DECEMBER 31, 1998 AND 1997
(ALL DOLLAR AMOUNTS IN THOUSANDS)
translation adjustments are included in accumulated other comprehensive income
(loss), a component of stockholder's equity.
(j) Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosures of contingent assets and liabilities at the balance sheet dates and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from these estimates.
(3) CONCENTRATION OF CREDIT RISK
The Company grants credit to its customers, which are primarily in the oil
and gas industry. Credit risk with respect to trade accounts receivable is
generally diversified due to the large number of entities comprising the
Company's customer base. During the period January 1, 1999 through February 2,
1999, one customer accounted for approximately 25% of total revenues. During
1998, two customers in the aggregate accounted for approximately 11% of total
revenues, and during 1997 three customers in the aggregate accounted for
approximately 14% of total revenues. At February 2, 1999, four customers in the
aggregate accounted for approximately 18% of gross trade receivables. At both
December 31, 1998 and 1997, four customers in the aggregate accounted for
approximately 31% of gross trade receivables.
The accompanying consolidated statements of operations include $-0-,
$1,785, and $1,945 for bad debt expenses for the period January 1, 1999 through
February 2, 1999 and years ended December 31, 1998 and 1997, respectively.
(4) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of due to Parent cannot be determined without incurring
excessive costs due to the related party nature of the instrument.
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
FEBRUARY 2, -------------------
1999 1998 1997
----------- -------- --------
<S> <C> <C> <C>
Land................................................. $ 425 $ 425 $ 425
Buildings and improvements........................... 4,837 4,837 4,650
Rental equipment..................................... 224,446 223,171 195,285
Machinery and equipment.............................. 775 775 1,190
Office equipment..................................... 6,024 6,028 5,679
Vehicles............................................. 524 549 946
Equipment and parts inventory........................ 41,475 39,260 43,138
Reserve for obsolescence............................. (4,738) (4,319) (3,802)
-------- -------- --------
273,768 270,726 247,511
Accumulated depreciation............................. (44,981) (43,309) (28,355)
-------- -------- --------
$228,787 $227,417 $219,156
======== ======== ========
</TABLE>
189
<PAGE> 196
GLOBAL COMPRESSION HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 2, 1999, AND DECEMBER 31, 1998 AND 1997
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Rental equipment consists of natural gas compressor units which are
generally leased under short-term operating leases ranging over periods from 6
to 60 months (see note 8). Equipment and parts inventory is primarily used in
the construction and refurbishment of rental equipment.
(6) DUE TO PARENT
Due to Parent represents advances from GECC. Advances bear interest at
varying rates based on current market rates and GECC's cost of capital (5.24%,
5.41%, and 5.88% at February 2, 1999, and December 31, 1998 and December 31,
1997, respectively). Repayments are made only to the extent of excess operating
cash flows (as defined) and no payments are required through February 2, 2000.
Accordingly, amounts Due to Parent are reflected as a noncurrent liability in
the accompanying consolidated balance sheets. Interest expense related to
advances from GECC totaled $1,072, $12,424 and $10,817 for the period January 1,
1999 through February 2, 1999 and years ended December 31, 1998 and 1997,
respectively. Accrued interest resulting from this liability is forgiven on an
annual basis by GECC and reflected as capital contributions, net of related tax
benefits, in the accompanying consolidated statements of stockholder's equity.
(7) INCOME TAXES
Income tax expense (benefit) consists of the following for the period
January 1, 1999 through February 2, 1999 and years ended December 31, 1998 and
1997:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- -------- -------
<S> <C> <C> <C>
1999
U.S. federal............................................. $ (1,263) $ 311 $ (952)
State and local.......................................... (169) 42 (127)
-------- ------ -------
$ (1,432) $ 353 $(1,079)
======== ====== =======
1998
U.S. federal............................................. $ (8,514) $4,232 $(4,282)
State and local.......................................... (1,136) 565 (571)
-------- ------ -------
$ (9,650) $4,797 $(4,853)
======== ====== =======
1997
U.S. federal............................................. $(14,641) $8,697 $(5,944)
State and local.......................................... (1,953) 1,160 (793)
-------- ------ -------
$(16,594) $9,857 $(6,737)
======== ====== =======
</TABLE>
190
<PAGE> 197
GLOBAL COMPRESSION HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 2, 1999, AND DECEMBER 31, 1998 AND 1997
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Income tax benefit differed from the amount computed by applying the U.S.
federal income tax rate of 35 percent to loss before income taxes as a result of
the following:
<TABLE>
<CAPTION>
PERIOD
JANUARY 1, YEARS ENDED
1999 THROUGH DECEMBER 31,
FEBRUARY 2, -----------------
1999 1998 1997
------------ ------- -------
<S> <C> <C> <C>
Computed "expected" tax benefit....................... $ (977) $(4,615) $(6,348)
State tax benefit..................................... (82) (371) (515)
Other................................................. (20) 133 126
------- ------- -------
$(1,079) $(4,853) $(6,737)
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
FEBRUARY 2, -----------------
1999 1998 1997
----------- ------- -------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts...................... $ 1,824 $ 1,976 $ 1,002
Noncompete agreement................................. 813 799 619
Other................................................ 1,026 859 492
------- ------- -------
Gross deferred tax assets.................... 3,663 3,634 2,113
------- ------- -------
Deferred tax liabilities:
Property, plant and equipment........................ 27,832 27,461 22,338
Other................................................ 1,628 1,617 422
------- ------- -------
Gross deferred tax liabilities............... 29,460 29,078 22,760
------- ------- -------
Net deferred tax liability................... $25,797 $25,444 $20,647
======= ======= =======
</TABLE>
(8) RENTAL COMMITMENTS
As Lessee:
The Company has noncancelable operating leases, primarily for warehouse and
office space, that expire over the next 5 years. These leases generally contain
renewal options for periods ranging from one to five years. Future minimum lease
payments under noncancelable operating leases (with initial or remaining lease
terms in excess of one year) as of February 2, 1999 are as follows:
<TABLE>
<S> <C>
Period from February 3, 1999 through December 31, 1999...... $1,275
Year ending December 31:
2000...................................................... 1,027
2001...................................................... 459
2002...................................................... 30
------
$2,791
======
</TABLE>
Operating lease expense for the period January 1, 1999 through February 2,
1999 and years ended December 31, 1998 and 1997 was $328, $2,080 and $1,773,
respectively.
191
<PAGE> 198
GLOBAL COMPRESSION HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 2, 1999, AND DECEMBER 31, 1998 AND 1997
(ALL DOLLAR AMOUNTS IN THOUSANDS)
As Lessor:
The Company leases compressor units to customers under agreements with
varying terms. Typically, such leases are accounted for as operating leases. The
lessee pays taxes, licenses, and insurance on such equipment. Future minimum
lease rentals under noncancelable operating leases (with initial or remaining
lease terms in excess of one year) as of February 2, 1999 are as follows:
<TABLE>
<S> <C>
Period from February 3, 1999 through December 31, 1999..... $26,457
Year ending December 31:
2000..................................................... 12,249
2001..................................................... 8,152
2002..................................................... 5,558
2003..................................................... 1,236
2004 and thereafter...................................... 1,053
-------
$54,705
=======
</TABLE>
(9) RELATED PARTY TRANSACTIONS
Certain administrative services are provided to the Company by GECC. The
accompanying consolidated statements of operations include $231, $2,169 and
$1,452 for administrative services provided by GECC for the period January 1,
1999 through February 2, 1999 and years ended December 31, 1998 and 1997,
respectively.
The Company closed its Houston facility in April 1998. The accompanying
1998 consolidated statement of operations includes $1,195 for closing costs that
were charged to operations and paid during 1998. Of this amount, GECC paid $416
(increase to additional paid in capital, net of tax benefit) on behalf of the
Company related to severance costs associated with termination of 48 employees
at the Houston facility.
(10) JOINT VENTURE AGREEMENT
On February 2, 1999, GECC and the Company formed a joint venture with
Weatherford International, Inc., in which the Company's compression services
operations were combined with Weatherford's International Inc.'s compression
services operations. The joint venture is known as Weatherford Global
Compression. GECC owns 36% of the joint venture and Weatherford International,
Inc. owns 64%. Weatherford International, Inc., has the right to acquire GECC's
interest at any time at a price equal to the greater of a market value
determined by a third party valuation or book value. GECC also has the right to
require Weatherford International, Inc. to purchase its interest at any time
after February 2001 based on a third party valuation or can request a public
offering of its interest after that date, if Weatherford International, Inc. has
not purchased the Company's interest by that date.
Accrued liabilities on the accompanying consolidated balance sheet at
February 2, 1999 includes a provision of $2,414 for transaction costs including
investment banking fees, legal, accounting and other costs related to formation
of the joint venture. The Company charged $1,750 and $880 of transaction costs
to selling, general and administrative expenses for the period January 1, 1999
through February 2, 1999 and the year ended December 31, 1998, respectively.
192
<PAGE> 199
ANNEX A
AGREEMENT AND PLAN OF MERGER
dated as of
October 23, 2000
among
WEATHERFORD INTERNATIONAL, INC.,
WEUS HOLDING, INC.,
ENTERRA COMPRESSION COMPANY,
UNIVERSAL COMPRESSION HOLDINGS, INC.,
AND
UNIVERSAL COMPRESSION, INC.
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TABLE OF CONTENTS
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ARTICLE I The Merger.............................................................................2
SECTION 1.1 MERGER.........................................................................2
SECTION 1.2 CONVERSION OF SHARES...........................................................2
SECTION 1.3 TREATMENT OF OPTIONS...........................................................2
SECTION 1.4 SURRENDER AND PAYMENT..........................................................2
SECTION 1.5 LOST CERTIFICATES..............................................................3
SECTION 1.6 ADJUSTMENTS....................................................................3
ARTICLE II The Surviving Corporation.............................................................3
SECTION 2.1 ARTICLES OF INCORPORATION......................................................3
SECTION 2.2 BYLAWS.........................................................................3
SECTION 2.3 DIRECTORS AND OFFICERS.........................................................3
ARTICLE III Representations and Warranties of Weatherford, WEUS and the Company..................4
SECTION 3.1 ORGANIZATION AND QUALIFICATION.................................................4
SECTION 3.2 CAPITALIZATION.................................................................4
SECTION 3.3 AUTHORIZATION..................................................................5
SECTION 3.4 CONSENTS AND APPROVALS; NO VIOLATION...........................................6
SECTION 3.5 FINANCIAL STATEMENTS...........................................................7
SECTION 3.6 UNDISCLOSED LIABILITIES........................................................7
SECTION 3.7 CONDUCT OF THE BUSINESS SINCE PARTNERSHIP UNAUDITED BALANCE SHEET DATE.........7
SECTION 3.8 LITIGATION; ORDERS.............................................................8
SECTION 3.9 LICENSES; APPROVALS............................................................8
SECTION 3.10 LABOR MATTERS..................................................................9
SECTION 3.11 COMPLIANCE WITH LAWS...........................................................9
SECTION 3.12 INSURANCE......................................................................9
SECTION 3.13 MATERIAL CONTRACTS.............................................................9
SECTION 3.14 ENVIRONMENTAL MATTERS.........................................................11
SECTION 3.15 TAXES.........................................................................12
SECTION 3.16 EMPLOYEE BENEFIT PLANS........................................................14
SECTION 3.17 BROKERAGE FEES AND COMMISSIONS................................................16
SECTION 3.18 TAX TREATMENT.................................................................16
SECTION 3.19 PROXY STATEMENT...............................................................16
SECTION 3.20 NO EXCESS PARACHUTE PAYMENTS..................................................16
SECTION 3.21 CERTAIN BUSINESS RELATIONSHIPS WITH AFFILIATES................................16
SECTION 3.22 TITLE; ASSETS.................................................................16
SECTION 3.23 OWNERSHIP OF PARENT COMMON STOCK..............................................17
ARTICLE IV Representations and Warranties of Parent and Merger Subsidiary.......................17
SECTION 4.1 ORGANIZATION AND QUALIFICATION................................................17
SECTION 4.2 CAPITALIZATION................................................................17
SECTION 4.3 AUTHORIZATION.................................................................19
SECTION 4.4 CONSENTS AND APPROVAL; NO VIOLATION...........................................19
SECTION 4.5 SEC FILINGS...................................................................20
SECTION 4.6 FINANCIAL STATEMENTS..........................................................20
SECTION 4.7 UNDISCLOSED LIABILITIES.......................................................21
SECTION 4.8 CONDUCT OF THE BUSINESS SINCE PARENT UNAUDITED BALANCE SHEET DATE.............21
SECTION 4.9 LITIGATION; ORDERS............................................................21
SECTION 4.10 LICENSES; APPROVALS...........................................................21
SECTION 4.11 LABOR MATTERS.................................................................22
SECTION 4.12 COMPLIANCE WITH LAWS..........................................................22
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SECTION 4.13 MATERIAL CONTRACTS............................................................22
SECTION 4.14 ENVIRONMENTAL MATTERS.........................................................24
SECTION 4.15 TAXES.........................................................................25
SECTION 4.16 EMPLOYEE BENEFIT PLANS........................................................26
SECTION 4.17 TAX TREATMENT.................................................................27
SECTION 4.18 PROXY STATEMENT...............................................................27
SECTION 4.19 PARENT STOCKHOLDERS' APPROVAL.................................................28
SECTION 4.20 OPINION OF FINANCIAL ADVISOR; BOARD FINDINGS AND RECOMMENDATIONS..............28
SECTION 4.21 BROKERAGE FEES AND COMMISSIONS................................................28
SECTION 4.22 INAPPLICABILITY OF DGCL SECTION 203...........................................28
SECTION 4.23 NO EXCESS PARACHUTE PAYMENTS..................................................29
SECTION 4.24 CERTAIN BUSINESS RELATIONSHIPS WITH AFFILIATES................................29
SECTION 4.25 TITLE; ASSETS.................................................................29
ARTICLE V Covenants of Weatherford, WEUS, and the Company.......................................29
SECTION 5.1 CONDUCT OF BUSINESS...........................................................29
SECTION 5.2 COMPRESSOR UNITS..............................................................32
SECTION 5.3 PRE-CLOSING TRANSFERS AND RESIGNATIONS........................................32
SECTION 5.4 RESTRICTED STOCK..............................................................33
ARTICLE VI Covenants of Parent and Merger Subsidiary............................................33
SECTION 6.1 CONDUCT OF BUSINESS...........................................................33
SECTION 6.2 PROXY STATEMENT...............................................................35
SECTION 6.3 PARENT STOCKHOLDERS' APPROVALS................................................35
SECTION 6.4 STOCK EXCHANGE LISTING........................................................35
SECTION 6.5 EMPLOYEE BENEFITS.............................................................35
SECTION 6.6 CORPORATE NAME; TRADEMARK RIGHTS..............................................38
SECTION 6.7 REGISTRATION RIGHTS AGREEMENT.................................................38
SECTION 6.8 TRANSITIONAL SERVICES AGREEMENT AND VOTING AGREEMENT..........................38
SECTION 6.9 REPRESENTATION ON PARENT'S BOARD OF DIRECTORS.................................39
SECTION 6.10 RETENTION BY WEUS.............................................................39
SECTION 6.11 RECORD PRESERVATION BY PARENT AND SURVIVING CORPORATION.......................39
SECTION 6.12 MERGER SUBSIDIARY.............................................................40
SECTION 6.13 NO SOLICITATION...............................................................40
SECTION 6.14 PARENT FINANCIAL STATEMENTS...................................................42
ARTICLE VII Covenants of Parent and the Company.................................................42
SECTION 7.1 REASONABLE BEST EFFORTS.......................................................42
SECTION 7.2 CERTAIN FILINGS...............................................................42
SECTION 7.3 PUBLIC ANNOUNCEMENTS..........................................................43
SECTION 7.4 FURTHER ASSURANCES............................................................43
SECTION 7.5 NOTICES OF CERTAIN EVENTS.....................................................44
SECTION 7.6 TAX-FREE REORGANIZATION.......................................................44
SECTION 7.7 ACCESS TO INFORMATION; CONFIDENTIALITY........................................44
SECTION 7.8 PROXY STATEMENT...............................................................46
SECTION 7.9 COOPERATION AFTER THE EFFECTIVE TIME..........................................46
SECTION 7.10 NON-SOLICITATION OF EMPLOYEES.................................................46
ARTICLE VIII Conditions to the Merger...........................................................47
SECTION 8.1 CONDITIONS TO THE OBLIGATIONS OF EACH PARTY...................................47
SECTION 8.2 CONDITIONS TO THE OBLIGATIONS OF PARENT AND MERGER SUBSIDIARY.................48
SECTION 8.3 CONDITIONS TO THE OBLIGATIONS OF WEATHERFORD, WEUS, AND THE COMPANY...........49
ARTICLE IX Termination..........................................................................50
SECTION 9.1 TERMINATION...................................................................50
SECTION 9.2 EFFECT OF TERMINATION.........................................................51
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ARTICLE X Indemnification.......................................................................51
SECTION 10.1 INDEMNIFICATION...............................................................51
SECTION 10.2 DEFENSE OF CLAIMS.............................................................53
ARTICLE XI Tax Matters..........................................................................55
SECTION 11.1 TAX RETURN PREPARATION........................................................55
SECTION 11.2 TRANSFER TAXES................................................................56
SECTION 11.3 USE OF CONSISTENT TAX PRACTICES...............................................56
SECTION 11.4 REFUNDS OR CREDITS............................................................56
SECTION 11.5 FILING OF AMENDED RETURNS.....................................................56
SECTION 11.6 ASSISTANCE AND COOPERATION....................................................57
SECTION 11.7 CLOSING TAX CERTIFICATE.......................................................57
SECTION 11.8 TAX ALLOCATION - WEUS'S OBLIGATIONS...........................................57
SECTION 11.9 TAXES OF OTHER PERSONS........................................................58
SECTION 11.10 TAX ALLOCATION - PARENT'S OBLIGATIONS.........................................58
SECTION 11.11 TAX CLAIM NOTICES.............................................................58
SECTION 11.12 PRE-CLOSING TAX PERIOD TAX CLAIMS.............................................58
SECTION 11.13 SURVIVAL AND TIME LIMITATION..................................................58
SECTION 11.14 SOLE AND EXCLUSIVE REMEDY.....................................................59
ARTICLE XII Miscellaneous.......................................................................59
SECTION 12.1 REPRESENTATIONS, WARRANTIES AND AGREEMENTS....................................59
SECTION 12.2 GOVERNING LAW.................................................................59
SECTION 12.3 ENTIRE AGREEMENT..............................................................59
SECTION 12.4 EXPENSES AND FEES.............................................................59
SECTION 12.5 NOTICES.......................................................................60
SECTION 12.6 SUCCESSORS AND ASSIGNS........................................................61
SECTION 12.7 HEADINGS; DEFINITIONS.........................................................61
SECTION 12.8 AMENDMENTS AND WAIVERS........................................................61
SECTION 12.9 CONSTRUCTION OF CERTAIN PROVISIONS............................................61
SECTION 12.10 AGREEMENT FOR THE PARTIES' BENEFIT............................................62
SECTION 12.11 SEVERABILITY..................................................................62
SECTION 12.12 JURISDICTION..................................................................62
SECTION 12.13 WAIVER OF JURY TRIAL..........................................................62
SECTION 12.14 SPECIFIC PERFORMANCE..........................................................62
SECTION 12.15 PAYMENTS CONSTITUTE LIQUIDATED DAMAGES........................................62
SECTION 12.16 COUNTERPARTS; EFFECTIVENESS...................................................63
SECTION 12.17 DEFINITIONS AND USAGE.........................................................63
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EXHIBITS AND SCHEDULES
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Exhibit A Form of Stockholders' Agreement
Exhibit B Form of Registration Rights Agreement
Exhibit C Form of Transitional Services Agreement
Exhibit D Representations of Officers of Parent
Exhibit E Representations of Officers of the Company
Exhibit F Acknowledgment
Exhibit G Form of Voting Agreement
COMPANY DISCLOSURE LETTER
Schedule I Permitted Encumbrances
Schedule 1.3 Employee Options
Schedule 3.2(a) Liens on Company Shares
Schedule 3.2(b) Ownership Structure; Encumbrances and Limitations on Non-Assessability
Schedule 3.4 Company Consents and Approvals; No Violation
Schedule 3.5 Company Financial Statements
Schedule 3.6 Company Undisclosed Liabilities
Schedule 3.7 Conduct of Business
Schedule 3.8 Company Litigation; Orders
Schedule 3.9 Licenses; Approvals
Schedule 3.10 Labor Matters
Schedule 3.11 Compliance with Laws
Schedule 3.12 Company Insurance
Schedule 3.13 Company Material Contracts
Schedule 3.14 Environmental Matters
Schedule 3.15 Company Taxes
Schedule 3.16 Company Employee Benefit Plans
Schedule 3.20 Excess Parachute Payments
Schedule 3.21 Business Relationships With Affiliates
Schedule 3.22 Title; Assets
Schedule 5.1 Conduct of Business
Schedule 5.3 Pre-Closing Transfers
PARENT DISCLOSURE LETTER
Schedule 4.2(a) Capitalization and Parent Benefit Plans
Schedule 4.2(b) Subsidiaries of Parent
Schedule 4.2(c) Parent Options
Schedule 4.4 Parent Consents and Approvals; No Violation
Schedule 4.8 Conduct of Business
Schedule 4.9 Parent Litigation; Orders
Schedule 4.10 Licenses; Approvals
Schedule 4.12 Compliance with Laws
Schedule 4.13 Parent Material Contracts
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Schedule 4.14 Parent Environmental Matters
Schedule 4.15 Parent Taxes
Schedule 4.16 Parent Employee Benefit Plans
Schedule 4.24 Certain Business Relationships with Affiliates
Schedule 4.25 Title; Assets
Schedule 6.1 Conduct of Business
Schedule 7.11 (in definition of "Adjusted Payment")
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER ("Agreement") dated as of October
23, 2000 among Enterra Compression Company, a Delaware corporation (the
"Company"), WEUS Holding, Inc., a Delaware corporation and a stockholder of the
Company ("WEUS"), Weatherford International, Inc., a Delaware corporation and
the parent of WEUS ("Weatherford"), Universal Compression Holdings, Inc., a
Delaware corporation ("Parent"), and Universal Compression, Inc., a Texas
corporation and a direct wholly owned subsidiary of Parent ("Merger
Subsidiary").
RECITALS:
WHEREAS, concurrently with the execution of this Agreement,
the Company has entered into a Purchase Agreement (the "GC Agreement"), a copy
of which has been delivered to Parent, pursuant to which, on the terms and
subject to the conditions set forth therein, the Company will acquire from
Global Compression Services, Inc., a Delaware corporation ("GC"), the common
shares owned by GC in Weatherford Global Compression Services Ltd., a
corporation organized under the laws of Alberta, Canada ("Canada"), and the
partnership and membership interests owned by GC in the Partnership (as defined
in Section 12.17) and the General Partner (as defined in Section 12.17);
WHEREAS, the Boards of Directors of WEUS, the Company, Parent,
and Merger Subsidiary have determined that the merger of the Company with and
into Merger Subsidiary is in the best interests of their respective
stockholders;
WHEREAS, the consideration to be paid in the Merger (as
defined herein) will consist of shares of common stock, par value $0.01 per
share, of Parent ("Parent Common Stock");
WHEREAS, by consummation of the transactions contemplated by
the Merger, the Partnership (as defined in Section 12.17) will become an
indirect wholly owned subsidiary of Parent;
WHEREAS, as a condition to Weatherford's, WEUS's, and the
Company's willingness to enter into this Agreement, Weatherford, WEUS, and the
Company have required that certain stockholders of Parent enter into a
Stockholder Agreement substantially in the form of Exhibit A hereto (the
"Stockholders' Agreement"); and
WHEREAS, Weatherford, WEUS, and Parent intend the Merger to
qualify as a tax-free reorganization under the provisions of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
thereunder.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein, the parties hereto agree as follows:
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ARTICLE I
The Merger
Section 1.1 Merger. (a) Upon the terms and subject to the conditions
hereof, at the Effective Time (as hereinafter defined), the Company shall be
merged (the "Merger") with and into Merger Subsidiary in accordance with the
General Corporation Law of the State of Delaware (the "DGCL") and the Texas
Business Corporation Act (the "TBCA"), whereupon the separate existence of the
Company shall cease, and Merger Subsidiary shall be the surviving corporation
(the "Surviving Corporation").
(b) As soon as practicable after satisfaction or, to the extent
permitted hereunder, waiver of all conditions to the Merger set forth herein,
the Company and Merger Subsidiary will file a certificate of merger (the
"Certificate of Merger") with the Delaware Secretary of State and articles of
merger with the Texas Secretary of State and make all other filings or
recordings required by the DGCL and the TBCA in connection with the Merger. The
Merger shall become effective at such time (the "Effective Time") as the
Certificate of Merger is duly filed with the Delaware Secretary of State (or at
such later time as may be agreed in writing by the parties hereto and specified
in the Certificate of Merger).
(c) From and after the Effective Time, the Surviving Corporation
shall possess all the rights, assets, powers, privileges, and franchises and,
except as otherwise provided herein, be subject to all of the obligations,
liabilities, restrictions, and disabilities of the Company and Merger
Subsidiary, all as provided under the DGCL.
Section 1.2 Conversion of Shares. At the Effective Time:
(a) the shares of common stock, par value $1.00 per share, of the
Company ("Company Common Stock") outstanding immediately prior to the Effective
Time shall be converted into the right to receive, without interest, a total of
13,750,000 shares of Parent Common Stock, subject to adjustment as provided in
Section 1.5 (the "Merger Consideration"); and
(b) each share of common stock of Merger Subsidiary outstanding
immediately prior to the Effective Time shall be converted into and become one
share of common stock of the Surviving Corporation with the same rights, powers,
and privileges as the shares so converted and shall constitute the only
outstanding shares of capital stock of the Surviving Corporation.
Section 1.3 Surrender and Payment. At the Effective Time, WEUS, as the
sole stockholder of the Company, will deliver to Parent certificates (the
"Certificates") representing all of the outstanding shares of Company Common
Stock, and Parent will deliver, in exchange therefor, certificates representing
the Merger Consideration.
Section 1.4 Lost Certificates. If any Certificate shall have been lost,
stolen, or destroyed, upon the making of an affidavit of that fact by WEUS
claiming such Certificate to be lost, stolen, or destroyed and, if required by
the Surviving Corporation, the posting by WEUS of
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a bond, in such reasonable amount as the Surviving Corporation may direct, as
indemnity against any claim that may be made against it with respect to such
Certificate, Parent will issue in exchange for such lost, stolen, or destroyed
Certificate the Merger Consideration to be paid in respect of the shares of
Company Stock represented by such Certificates as contemplated by this Article
I.
Section 1.5 Adjustments. If at any time during the period between the
date of this Agreement and the Effective Time, any change in the outstanding
shares of capital stock of Parent shall occur by reason of any reclassification,
recapitalization, stock split or combination, exchange or readjustment of
shares, or any stock dividend thereon with a record date during such period, the
Merger Consideration shall be adjusted appropriately.
Section 1.6 Amendment of Agreement. Notwithstanding any other provision
of this Agreement, Parent agrees with Weatherford, WEUS, and the Company that,
at the request of Weatherford at any time prior to the printing of the Proxy
Statement for mailing to Parent's stockholders, this Agreement may be amended to
reflect the purchase by an affiliate of Weatherford (other than the Company or
one of its subsidiaries) of an interest in the capital stock of the Company, or
such other structure that would reduce the transaction costs of the Merger to
Weatherford, WEUS, or the Company; provided, however, that such amendment shall
not adversely affect Parent or Merger Subsidiary or their transaction costs. If
a revised structure is substituted, the parties shall execute an appropriate
amendment to this Agreement in a form mutually acceptable to Parent and Merger
Subsidiary, on the one hand, and Weatherford, WEUS, and the Company, on the
other hand, to reflect the revised structure.
ARTICLE II
The Surviving Corporation
Section 2.1 Articles of Incorporation. The articles of incorporation of
Merger Subsidiary in effect at the Effective Time shall be the articles of
incorporation of the Surviving Corporation.
Section 2.2 Bylaws. The bylaws of Merger Subsidiary in effect at the
Effective Time shall be the bylaws of the Surviving Corporation until amended in
accordance with applicable law.
Section 2.3 Directors and Officers. From and after the Effective Time,
until successors are duly elected or appointed and qualified in accordance with
applicable law, (i) the officers and directors of the Company shall resign, (ii)
the directors of Merger Subsidiary at the Effective Time shall be the directors
of the Surviving Corporation, and (iii) the officers of Merger Subsidiary at the
Effective Time shall be the officers of the Surviving Corporation.
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ARTICLE III
Representations and Warranties of Weatherford, WEUS, and the Company
Weatherford, WEUS, and the Company represent and warrant to
Parent and the Merger Subsidiary as follows:
Section 3.1 Organization and Qualification. (a) The Company and each
subsidiary of the Company that is a corporation have been duly incorporated, are
validly existing as corporations in good standing under the laws of the
jurisdictions of their incorporation, with full corporate power and authority to
own, lease, and operate their assets and properties and to conduct their
businesses as they are now being conducted, and are duly registered or qualified
to transact business and in good standing in each jurisdiction, domestic or
foreign, in which the conduct of their businesses or their ownership or leasing
of property requires such registration or qualification, except to the extent
that the failure to be so qualified or to be in good standing is not reasonably
expected to have, individually or in the aggregate, a Company Material Adverse
Effect (as defined in Section 12.17). As used in this Agreement, the term
"subsidiary" or "subsidiaries," when used in connection with or reference to the
Company, shall mean the Persons (as defined in Section 12.17) in which the
Company directly or indirectly holds an ownership interest (other than Gas
Services International Limited, a British Virgin Islands corporation ("GSI"),
and its subsidiaries and their respective branches (together with GSI, the "GSI
Companies")), each of which is set forth in Schedule 3.2(b) of the Company
Disclosure Letter (as defined in Section 12.17).
(b) Each subsidiary of the Company that is not a corporation is
duly organized, is validly existing in good standing in the jurisdiction of its
organization, with full authority to own, lease, and operate its assets and
properties and to conduct its business as it is now being conducted, and is duly
registered or qualified to do business and is in good standing in each
jurisdiction, domestic or foreign, in which such registration or qualification
or good standing is required to conduct its business (whether by reason of the
ownership or leasing of property, the conduct of its business or otherwise),
except where the failure so to register or qualify or be in good standing would
not have a Company Material Adverse Effect.
(c) Weatherford, WEUS, or the Company has furnished to Parent
true and correct copies of the certificates of incorporation, bylaws, charters,
membership agreements, partnership agreements, operating agreements, joint
venture agreements, and other organizational documents of the Company and each
of its subsidiaries (the "Weatherford Organizational Documents").
Section 3.2 Capitalization. (a) The authorized capital stock of the
Company consists of 2,000 shares of Company Common Stock and no shares of
preferred stock, of which 2,000 shares of Company Common Stock and no shares of
preferred stock are issued and outstanding (the "Company Shares"). The Company
Shares are all of the issued and outstanding shares of capital stock of the
Company and have been duly authorized and validly issued and are fully paid and
non-assessable and free of preemptive rights. There are not any outstanding or
authorized subscriptions, options, warrants, calls, rights, commitments, phantom
stock plans, stock appreciation rights, or any other agreements of any character
(any of the foregoing, a
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"Commitment") relating to the issued or unissued capital stock of the Company
obligating the Company or any of its subsidiaries to issue or sell any
additional shares of capital stock of the Company or any other securities
convertible into or evidencing the right to subscribe for any shares of capital
stock of the Company. There are no outstanding contractual obligations of the
Company or any of its subsidiaries to repurchase, redeem, or otherwise acquire
any equity interests in the Company or to pay any dividend or make any other
distribution in respect thereof. Except as set forth on Schedule 3.2(a) of the
Company Disclosure Letter, WEUS owns all of the Company Shares free and clear of
any Lien (as defined in Section 12.17), option, right of first refusal, or
limitation on voting rights.
(b) Except as disclosed in Schedule 3.2(b) of the Company
Disclosure Letter, all of the issued and outstanding shares of capital stock or
ownership interests of each wholly owned subsidiary of the Company, and all of
the issued and outstanding shares of capital stock or ownership interests held
or owned by the Company of each subsidiary of the Company that is not a wholly
owned subsidiary (including those shares and ownership interests that will be
acquired by the Company prior to the Effective Time pursuant to the GC Agreement
or pursuant to Section 5.3), have been duly authorized and validly issued, are
fully paid and non-assessable (except as non-assessability may be affected by
the Delaware Revised Uniform Limited Partnership Act, as amended, or the
Delaware Limited Liability Company Act, as amended), and are owned by the
Company as of the date hereof (or will be owned by the Company prior to the
Effective Time pursuant to the GC Agreement or pursuant to Section 5.3), or
indirectly through one of its subsidiaries, free and clear of any Lien, option,
right of first refusal, and limitation on voting rights, except as may be
provided in the Weatherford Organizational Documents and except for Liens,
options, rights of first refusal, and limitations on voting rights, individually
or in the aggregate that do not and would not have a Company Material Adverse
Effect. Included in Schedule 3.2(b) of the Company Disclosure Letter is a list
of each subsidiary of the Company and the ownership interest of the Company and
each of its subsidiaries therein and, with respect to each subsidiary that is
not wholly owned, of any other Person as of the date hereof and as of the
Effective Time. There are not any Commitments relating to the issued or unissued
capital stock or other equity interests of any of the Company's subsidiaries
obligating the Company or any of its subsidiaries to issue or sell any
additional shares of capital stock or other equity interests of any subsidiary
of the Company, or any other securities convertible into or evidencing the right
to subscribe for any shares of capital stock or other equity interests of any
subsidiary of the Company. There are no outstanding contractual obligations of
the Company or any of its subsidiaries to repurchase, redeem, or otherwise
acquire any equity interests in such subsidiary or to pay any dividend or make
any other distribution in respect thereof, except as may be provided in the
Weatherford Organizational Documents and pursuant to the GC Agreement. Other
than the subsidiaries of the Company included in Schedule 3.2(b) of the Company
Disclosure Letter, neither the Company nor any of its subsidiaries holds any
ownership interest in any other Person. As of the date hereof and immediately
prior to the Effective Time, record owners of all of the issued and outstanding
capital stock and other equity interests of all subsidiaries of the Company are
and will be set forth on Schedule 3.2(b) of the Company Disclosure Letter.
Section 3.3 Authorization. Weatherford, WEUS, and the Company have the
requisite corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated by this Agreement. WEUS, as the
sole stockholder of the Company,
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and the Board of Directors of the Company have by unanimous written consent (a)
determined that participating in the Merger is in the best interests of the
Company and its stockholder and (b) approved this Agreement and the Merger. No
other corporate, company, or partnership proceedings (as applicable) on the part
of Weatherford, WEUS, the Company, or any of its subsidiaries are necessary to
authorize the execution and delivery of this Agreement or the consummation by
Weatherford, WEUS, and the Company of the transactions contemplated hereby. This
Agreement has been duly authorized, executed, and delivered by Weatherford,
WEUS, and the Company and constitutes the valid and binding obligation of each
of them, enforceable against each of them in accordance with its terms, subject
to (x) applicable bankruptcy, insolvency, reorganization, moratorium, and other
similar laws of general application with respect to creditors, (y) general
principles of equity, and (z) the power of a court to deny enforcement of
remedies generally based upon public policy.
Section 3.4 Consents and Approvals; No Violation. Neither the execution
and delivery of this Agreement by Weatherford, WEUS, or the Company, nor the
consummation by Weatherford, WEUS, or the Company of the transactions
contemplated by this Agreement, will: (a) require any consent, approval,
authorization or permit of, or filing with or notification to, any Governmental
Authority (as defined in Section 12.17), except (i) the filing of a certificate
of merger in accordance with the DGCL and articles of merger in accordance with
the TBCA, (ii) in connection with the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), (iii) in connection with the filing of
premerger notification information with the Canadian Competition Bureau and the
expiration of the applicable waiting period(s) under Part IX of the Competition
Act (Canada) and the filing with Industry Canada under the Investment Canada
Act, (iv) any regulatory approvals or routine governmental consents normally
acquired after the consummation of transactions such as transactions of the
nature contemplated by this Agreement, or (v) where the failure to obtain such
consent, approval, authorization, or permit, or to make such filing or
notification, is not reasonably expected to have, individually or in the
aggregate, a Company Material Adverse Effect or prevent or delay, in any
material respect, the consummation of the transactions contemplated by this
Agreement; (b) conflict with or result in any violation of, or default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation, or acceleration of, or "put" right with respect to,
any obligation to or loss of a material benefit under, or result in the creation
of any Lien upon, any of the properties or assets of the Company or any of its
subsidiaries under or increase the amount or value of any payment under, any
provision of (i) any of the Weatherford Organizational Documents, (ii) any
material loan, credit agreement, bond, or indenture applicable to the Company or
any of its subsidiaries or any of their respective properties or assets, (iii)
any other note, mortgage, lease, agreement, instrument, permit, concession,
franchise, or license, in each case that is material to the Company and its
subsidiaries taken as a whole and that is applicable to the Company or any of
its subsidiaries or any of their respective properties or assets, or (iv)
subject to the governmental filings and other matters referenced by clause (a)
above, any law or arbitration award applicable to the Company or any of its
subsidiaries or any of their respective properties or assets, except for such
violations or defaults (or rights of termination, cancellation, or acceleration)
identified on Schedule 3.4 of the Company Disclosure Letter or (other than in
clause (b)(ii)) that are not reasonably expected to have, individually or in the
aggregate, a Company Material Adverse Effect or prevent or delay, in any
material respect, the consummation of the transactions contemplated by this
Agreement; or (c) assuming compliance with the matters referred to in clause (a)
above, violate any order, writ, injunction,
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decree, statute, rule, or regulation applicable to the Company, any of its
subsidiaries, or any of their respective properties or assets, except for
violations which are not reasonably expected to have, individually or in the
aggregate, a Company Material Adverse Effect or prevent or delay, in any
material respect, the consummation of the transactions contemplated by this
Agreement.
Section 3.5 Financial Statements. In Schedule 3.5 of the Company
Disclosure Letter are (a) the audited consolidated balance sheet, statement of
income, and statement of cash flows of the Partnership and its subsidiaries as
of and for the eleven months ended December 31, 1999 (the "Partnership Audited
Financial Statements") and (b) the unaudited consolidated balance sheet and
statement of income of the Partnership and its subsidiaries as of and for the
six months ended June 30, 2000 (the "Partnership Unaudited Financial
Statements"). The Partnership Audited Financial Statements, the audited balance
sheets, statements of income, and statements of cash flows of the Weatherford
Compression Business (as defined in the Formation Agreement (as defined in
Section 12.17)) as of and for the years ended December 31, 1997 and 1998 (the
"Weatherford Compression Business Historical Financial Statements"), and the
audited balance sheets, statements of income, and statements of cash flows of
the Global Compression Business (as defined in the Formation Agreement) as of
and for the years ended December 31, 1997 and 1998 (the "Global Compression
Business Historical Financial Statements") present fairly the consolidated
financial position, results of operations, and changes in financial position of
the Partnership, the Weatherford Compression Business, or the Global Compression
Business, as the case may be, and their respective subsidiaries as of the
respective dates or for the respective periods to which they apply in accordance
with United States generally accepted accounting principles, consistently
applied ("GAAP"), it being understood that such financial statements include the
ownership and results of operations of the Excluded Assets (as defined in
Section 5.2). The Company has provided Parent and Merger Subsidiary separate
financial information with respect to the GSI Companies, which was not prepared
in accordance with GAAP. The Partnership Unaudited Financial Statements have
been prepared in a manner consistent with the preparation of internal financial
statements of a subsidiary of Weatherford and are consistent with the books and
records of the Company and its subsidiaries. As of September 30, 2000, the total
consolidated indebtedness of the Company and its subsidiaries, was $294,900,000
under the Synthetic Leases, $13,000,000 under the line of credit with ABN Amro
and $1,915,000 under capital leases, aggregating $309,815,000.
Section 3.6 Undisclosed Liabilities. Except as reflected, reserved
against, or otherwise disclosed in the Partnership Unaudited Financial
Statements or as disclosed in Schedule 3.6 or any of the other Schedules of the
Company Disclosure Letter, neither the Company nor any of its subsidiaries had,
at the date of the unaudited balance sheet included in the Partnership Unaudited
Financial Statements (the "Partnership Unaudited Balance Sheet Date"), and,
except as have been incurred in the ordinary course of business since the
Partnership Unaudited Balance Sheet Date, none of them has, at the date hereof,
any liabilities or obligations, whether accrued, contingent, absolute,
determined, determinable, or otherwise, that are reasonably expected to have,
individually or in the aggregate, a Company Material Adverse Effect.
Section 3.7 Conduct of the Business Since Partnership Unaudited Balance
Sheet Date. Except as expressly contemplated by this Agreement and except as set
forth on Schedule 3.7 of the Company Disclosure Letter, since the Partnership
Unaudited Balance Sheet Date, (a) the
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business and operations of the Company and its subsidiaries have been conducted
in the ordinary and usual course in all material respects in accordance with
past practices; (b) neither the Company nor any of its subsidiaries has paid or
declared any dividend on, or made any distribution with respect to, or purchased
or redeemed any of its capital stock or ownership interests; (c) neither the
Company nor any of its subsidiaries has (i) granted to any employee, independent
contractor, or leased employee of the Company or any of its subsidiaries any
increase in compensation (including salaries, fees, commissions, bonuses, profit
sharing, incentive, pension, retirement, or other similar payments), except in
the ordinary course of business consistent with prior practices, (ii) granted to
any employee, independent contractor, or leased employee of the Company or any
of its subsidiaries any increase in severance or termination pay, except as was
required under employment, severance, or termination agreements in effect as of
the Partnership Unaudited Balance Sheet Date, or (iii) entered into any
employment, severance, or termination agreement with any such employee,
independent contractor, or leased employee; (d) there has been no damage,
destruction, or loss, whether or not covered by insurance, that has had or could
reasonably be expected to have a Company Material Adverse Effect; (e) there has
been no declaration, setting aside, or payment of any dividend or any other
distribution with respect to any of the capital stock or other equity interests
of the Company or any of its subsidiaries; and (f) there has been no
cancellation or waiver of any claims or rights of value that could reasonably be
expected to have a Company Material Adverse Effect.
Section 3.8 Litigation; Orders. Except as affects the oil and gas
industry generally, the compression sales and rental business generally, or as
set forth on Schedule 3.8 of the Company Disclosure Letter, as of the date
hereof there are no Actions (as defined in Section 12.17) pending of which
Weatherford, WEUS, the Company, or its subsidiaries have received actual notice
or, to the Knowledge (as defined in Section 12.17) of the Weatherford Entities
(as defined in Section 12.17), threatened against the Company or any of its
subsidiaries that are reasonably expected to have, individually or in the
aggregate, a Company Material Adverse Effect or that would prevent or delay, in
any material respect, the consummation of the transactions contemplated by this
Agreement. Except as affects the oil and gas industry generally, the compression
sales and rental business generally, or as set forth on Schedule 3.8 of the
Company Disclosure Letter, as of the date hereof there are, to the Knowledge of
the Weatherford Entities, no outstanding judgments, orders, injunctions,
decrees, stipulations, or awards (whether rendered by a court or administrative
agency or by arbitration) against the Company or any of its subsidiaries, other
than those that do not involve amounts in excess of $1,000,000 in the aggregate
or those for which adequate reserves have been established in the Partnership
Unaudited Financial Statements.
Section 3.9 Licenses; Approvals. Except as set forth on Schedule 3.9 of
the Company Disclosure Letter, the Company and each of its subsidiaries, as
applicable, possess, and have been and continue to be in compliance with, all
governmental licenses, permits, franchises, and other authorizations of any
Governmental Authority ("Licenses") that are necessary to the ownership or
operation of the Business (as defined in Section 12.17) as currently conducted,
and all such Licenses are in full force and effect, except where the failure to
possess any License or the failure to be in full force and effect is not
reasonably expected to have, individually or in the aggregate, a Company
Material Adverse Effect. No notice has been given, and no proceeding is pending
or, to the Knowledge of the Weatherford Entities, is threatened seeking the
revocation or
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limitation of any such License that is reasonably expected to have, individually
or in the aggregate, a Company Material Adverse Effect. No License shall be
modified, revoked, or shall lapse as a result of the Merger except where such
modification, revocation, or lapse would not reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect.
Section 3.10 Labor Matters. Except as set forth on Schedule 3.10 of the
Company Disclosure Letter, or as may be required by local laws, there are no
collective bargaining or similar agreements relating to the compensation or
working conditions of any employees of the Company or any of its subsidiaries to
which the Company or any of its subsidiaries is a party or by which any of them
is bound. Except as set forth on Schedule 3.10 of the Company Disclosure Letter,
there is no obligation under any agreement for the Company or any of its
subsidiaries to recognize or bargain with any labor organization or union on
behalf of its employees. Neither the Company nor any of its subsidiaries is
subject to any proceeding or, to the Knowledge of the Weatherford Entities, has
been charged or threatened with a charge asserting that it or any subsidiary has
committed an unfair labor practice, in any case that would reasonably be
expected to have, individually or in the aggregate, a Company Material Adverse
Effect. No representation election petition has been filed by the employees of
the Company or any of its subsidiaries, and no Weatherford Entity has any
Knowledge of any union organizational or representational activity involving any
of the employees. There are no picketing, strikes, or any material slowdowns,
work stoppages, disturbances, other "concerted actions," lockouts, arbitrations,
grievances, or other labor disputes involving the Company or any of its
subsidiaries, pending, or to the Knowledge of the Weatherford Entities,
threatened, in any case that would reasonably be expected to have, individually
or in the aggregate, a Company Material Adverse Effect. Neither the Company nor
any of its subsidiaries has taken any action that would constitute a "mass
layoff" or "plant closing" within the meaning of the Worker Adjustment and
Retraining Notification Act or otherwise trigger notice requirements under any
similar foreign, state, or local plant closing law.
Section 3.11 Compliance with Laws. Except as set forth on Schedule 3.11
of the Company Disclosure Letter, the Company and its subsidiaries have
conducted the Business in compliance with all arbitration awards, statutes,
laws, executive orders, regulations, ordinances, rules, judgments, orders, or
decrees applicable thereto (other than with respect to Environmental Laws (as
hereinafter defined), which are governed solely by Section 3.14, and with
respect to Tax matters, which are governed solely by Section 3.15), except for
violations or failures so to comply, if any, that are not reasonably expected to
have, individually or in the aggregate, a Company Material Adverse Effect.
Except as set forth on Schedule 3.11 of the Company Disclosure Letter, to the
Knowledge of the Weatherford Entities, no condition or state of facts exists
that would reasonably be expected to provide a valid basis for any assertion
that the Business has not been so conducted.
Section 3.12 Insurance. Schedule 3.12 of the Company Disclosure Letter
sets forth a list of all insurance policies issued in favor of the Company or
its subsidiaries which relate to the Business, and all of such policies are
currently in force and effect.
Section 3.13 Material Contracts. (a) Except as set forth on Schedule
3.13 of the Company Disclosure Letter, as of the date hereof neither the Company
nor any of its subsidiaries
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is a party to or bound by any lease, agreement, or other contract or legally
binding contractual right or obligation of a type described below (collectively,
"Company Material Contracts"):
(i) any written employment agreement with any employee of the
Company or any of its subsidiaries providing for annual base
compensation in excess of $100,000 per year;
(ii) any collective bargaining agreement with any labor union
covering the employees of the Company or any of its subsidiaries;
(iii) any contract that would be required to be filed by the
Company or any of its subsidiaries with the Securities and Exchange
Commission (the "SEC") as exhibits to an Annual Report on Form 10-K if
the Company or any of its subsidiaries had securities registered under
the 1934 Act;
(iv) any agreement for capital expenditures or the acquisition or
construction of fixed assets that requires aggregate future payments
outside the ordinary course of business in excess of $2,000,000,
excluding expenditures for inventory and raw materials relating to the
fabrication or sale of equipment and parts in the ordinary course of
business;
(v) any indenture, mortgage, loan, credit, sale-leaseback,
guarantee, or other agreement under which the Company or any of its
subsidiaries has borrowed money in excess of $2,500,000 or issued, or
otherwise become obligated in connection with, any note, bond,
indenture, security interest, or other evidence of indebtedness for
borrowed money, sold and leased back assets, or guaranteed
indebtedness for money in excess of $2,500,000 borrowed by others
(excluding hedge, swap, exchange, or similar agreements entered into
in the ordinary course of business);
(vi) any agreement that constitutes a lease under which the
Company or any of its subsidiaries is the lessor or lessee of real or
personal property, that (A) cannot be terminated by the Company or a
subsidiary, as the case may be, without penalty upon not more than 180
calendar day's notice and (B) involves an annual base rental in excess
of $500,000, excluding leases under the Synthetic Leases and leases of
compressors and related equipment to customers in the ordinary course
of business; or
(vii) any other agreement not referenced in subsections (i)
through (vi) of this Section 3.13(a) that creates or imposes
non-competition obligations on the Company or any of its subsidiaries.
(b) Except as set forth on Schedule 3.13 of the Company Disclosure
Letter, each Company Material Contract listed on Schedule 3.13 of the Company
Disclosure Letter is a valid and binding obligation of the Company or a
subsidiary, as the case may be, enforceable against the Company or the
subsidiary, as the case may be, in accordance with its terms, subject to (i)
applicable bankruptcy, insolvency, reorganization, moratorium, and other similar
laws of general application with respect to creditors, (ii) general principles
of equity, and (iii) the power of a court to deny enforcement of remedies
generally based upon public policy. Except as set forth on Schedule 3.13 of the
Company Disclosure Letter, the Company and its subsidiaries
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have, performed all obligations required to be performed by them through the
date hereof under the Company Material Contracts listed on Schedule 3.13 of the
Company Disclosure Letter, other than any such obligations the failure of which
to perform are not reasonably expected to have, individually or in the
aggregate, a Company Material Adverse Effect, and are not (with or without the
lapse of time or the giving of notice, or both) in breach or default in any
respect thereunder, except in any such case for such breaches or defaults that
are not reasonably expected to have, individually or in the aggregate, a Company
Material Adverse Effect.
Section 3.14 Environmental Matters. Except as set forth in Schedule
3.14 of the Company Disclosure Letter:
(a) The Company and its subsidiaries possess, and are in
compliance with, all permits (including air emission permits), licenses, and
government authorizations and have filed all notices and registrations that are
required under local, state, federal, and foreign laws relating to the
protection of the environment, ecology, pollution control, product registration,
workplace health and safety, and hazardous materials ("Environmental Laws")
applicable to the Company or any of its subsidiaries, its compressors and other
assets, and the Company and its subsidiaries are in compliance with, and the
Business is being operated in compliance with, all applicable limitations,
restrictions, conditions, standards, prohibitions, requirements, obligations,
schedules, and timetables contained in those laws or contained in any other law,
regulation, code, plan, order, decree, judgment, notice, permit, or demand
letter issued, entered, promulgated, or approved thereunder, except where the
failure to possess such licenses and authorizations or be or operate the
Business in compliance therewith or to make such filings would not reasonably be
expected to have, individually or in the aggregate, a Company Material Adverse
Effect;
(b) Neither the Company nor any of its subsidiaries has received
notice of actual or threatened liability under the Federal Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") or any similar
foreign, state, or local statute or ordinance from any Governmental Authority or
any third party, and no Weatherford Entity has any Knowledge of facts or
circumstances that would reasonably be expected to form the basis for the
assertion of any claim against the Company or any of its subsidiaries under any
Environmental Laws including, without limitation, CERCLA or any similar local,
state, or foreign law with respect to any on-site or off-site location, which
notice or claim would reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect;
(c) Neither the Company nor any of its subsidiaries has entered
into or agreed to or contemplates entering into any consent decree or order, and
none of such entities is subject to any judgment, decree, or judicial or
administrative order, relating to compliance with, or the cleanup of hazardous
materials under, or compliance with any applicable Environmental Laws compliance
with which would reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect;
(d) No Weatherford Entity has received notice that the Company or
any of its subsidiaries or any of its or their owned or leased properties is
subject to any claim, obligation, liability, loss, damage, or expense of
whatever kind or nature, contingent or otherwise (except for those matters the
consequences of which would not reasonably be expected to have, individually
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or in the aggregate, a Company Material Adverse Effect), incurred or imposed or
based upon any provision of any Environmental Law and arising out of any act or
omission of any of the Weatherford Entities, any of their employees, agents, or
representatives or, to the Knowledge of any of the Weatherford Entities, arising
out of the ownership, use, control, or operation by any of the Weatherford
Entities of any plant, facility, site, area, or property (including, without
limitation, any plant, facility, site, area, or property currently or previously
owned or leased by the Company, its subsidiaries, or their predecessors) from
which any Hazardous Materials were released into the environment, except where
the consequences of such release would not reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect (the term
"release" meaning any spilling, leaking, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, leaching, dumping, or disposing into the
environment, and the term "environment" meaning any surface or ground water,
drinking water supply, soil, surface or subsurface strata or medium, or the
ambient air);
(e) To the Knowledge of any of the Weatherford Entities, none of
the properties owned, leased, or used by the Company or any of its subsidiaries
contains any friable asbestos, regulated PCBs, or underground storage tanks,
except where the presence of such would not reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect; and
(f) None of the Company or its subsidiaries is, or to the
Knowledge of any of the Weatherford Entities, has been, subject to any
administrative or judicial proceeding pursuant to, and, to the Knowledge of any
of the Weatherford Entities, none has been alleged to be in violation of,
applicable Environmental Laws or regulations any time during the past five
years, except where the consequences of any such proceeding, allegation, or
violation would not reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect.
As used in this Section 3.14, the term "Hazardous Materials"
means any waste, pollutant, hazardous substance, toxic, ignitable, reactive or
corrosive substance, hazardous waste, special waste, industrial substance,
by-product, process intermediate product or waste, petroleum or
petroleum-derived substance or waste, chemical liquids or solids, liquid or
gaseous products, or any constituent of any such substance or waste, the use,
handling, disposal of, or exposure to which by the Company or any of its
subsidiaries or any of their respective agents, contractors, and employees is
governed by or subject to any applicable law, rule or regulation of any
Governmental Authority.
Section 3.15 Taxes. Except as set forth on Schedule 3.15 of the Company
Disclosure Letter, (a) (i) the Company and each of its subsidiaries have filed
or caused to be filed when due all material state, local, and foreign Tax
Returns (as defined in Section 12.17) in connection with and in respect of the
Business, and, except for Taxes (as defined herein) that are being contested in
good faith and for which the Company and its subsidiaries have made adequate
provision, the Company and each of its subsidiaries have timely paid and
discharged all Tax obligations shown thereon; (ii) such Tax Returns in all
material respects correctly and accurately reflect the facts regarding the
income, business, and assets, operations, activities, status, or other matters
of the Company and each of its subsidiaries, and any other information required
to be shown thereon, and are not subject to accuracy-related penalties under any
applicable state, local, or foreign Tax
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law or any predecessor provision of such law; (iii) neither the Company nor any
of its subsidiaries has received any notice of any state, local, or foreign Tax
deficiency outstanding, proposed, or assessed against or allocable to it, nor
has any of them executed any waiver of any statute of limitations on the
assessment or collection of any state, local, or foreign Tax, or executed or
filed with any state, local, or foreign governmental body any agreement now in
effect extending the period for assessment or collection of any state, local, or
foreign Taxes against the Company or any of its subsidiaries; (iv) there are no
liens for any state, local, or foreign Taxes payable upon the assets of the
Company or any of its subsidiaries, other than statutory liens for Taxes not yet
due and payable or being contested in good faith; (v) the Company and each of
its subsidiaries have made provision for all state, local, or foreign Taxes
payable by the Company and its subsidiaries for which no Tax Return has yet been
filed; and (vi) there is no action, suit, proceeding, audit, or claim now
proposed, pending or, to the Knowledge of the Weatherford Entities, threatened
against or with respect to the Company or any of its subsidiaries in respect of
any state, local, or foreign Tax where there is a reasonable possibility of an
adverse determination. For purposes of this Agreement, "Tax" or "Taxes" means
taxes of any kind, levies or other like assessments, customs, duties, imposts,
charges, or fees, including, without limitation, income, gross receipts, ad
valorem, value added, excise, real or personal property, asset, sales, use,
license, payroll, transaction, capital, net worth, and franchise taxes,
estimated taxes, withholding, employment, social security, workers compensation,
utility, severance, production, unemployment compensation, occupation, premium,
windfall profits, transfer, and gains taxes or other governmental taxes imposed
or payable to the United States, or any state, county, local, or foreign
government or subdivision or agency thereof, and in each instance such term
shall include any interest, penalties, or additions to tax attributable to any
such Tax, including penalties for the failure to file any Tax Return.
(b) None of the assets of the Company or any subsidiary is
property that the Company is required to treat as being owned by any other
Person pursuant to the "safe harbor lease" provisions of former Section
168(f)(8) of the Code.
(c) None of the assets of the Company or any subsidiary directly
or indirectly secures any debt the interest on which is tax exempt under Section
103(a) of the Code.
(d) None of the assets of the Company or any subsidiary is
"tax-exempt use property" within the meaning of Section 168(h) of the Code.
(e) Neither the Company nor any subsidiary has agreed to make,
nor is any of them required to make, any adjustment under Section 481(a) of the
Code by reason of a change in accounting method or otherwise.
(f) Neither the Company nor any subsidiary has participated in,
nor will any of them participate in, an international boycott within the meaning
of Section 999 of the Code.
(g) Neither the Company nor any subsidiary has filed a consent
pursuant to the collapsible corporation provisions of Section 341(f) of the Code
(or any corresponding provision of state, local, or foreign income tax law) or
agreed to have Section 341(f)(2) of the Code (or any corresponding provision of
state, local, or foreign income tax law) apply to any disposition of any asset
owned by any of them.
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Section 3.16 Employee Benefit Plans. (a) Schedule 3.16 of the Company
Disclosure Letter is a list of each of the following that is currently
sponsored, maintained, or contributed to by the Company or any of its
subsidiaries for the benefit of its or their employees:
(i) each "employee pension benefit plan" (as defined in Section
3(2) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA")) regardless of whether such plan is maintained
outside of the U.S. or primarily for the benefit of persons
substantially all of whom are non-resident aliens (sometimes
collectively referred to herein as "Company Pension Plans");
(ii) each "employee welfare benefit plan" (as defined in Section
3(l) of ERISA) regardless of whether such plan is maintained outside
of the U.S. or primarily for the benefit of persons substantially all
of whom are non-resident aliens (hereinafter a "Company Welfare
Plan");
(iii) each stock option, stock purchase, incentive, deferred
compensation plans or arrangements, vacation, change in control,
stay-on bonus plans or arrangements, and other material employee
compensation and fringe benefit plans or agreements, maintained,
contributed to, or pursuant to which the Company or any of its
subsidiaries have any current liability (all the foregoing in
subparagraphs (i), (ii) and (iii) being herein called "Company Benefit
Plans"), and each Company Benefit Plan currently enjoying any special
tax status is noted as such. The Company has made available to Parent
true, complete, and correct copies of (i) each Company Benefit Plan
and any subsequently adopted amendments thereto (or, in the case of
unwritten Company Benefit Plans, descriptions thereof), (ii) the most
recent annual report on Form 5500 filed with respect to each Company
Benefit Plan (if any such report was required), (iii) the most recent
summary plan description for each Company Benefit Plan for which such
a summary plan description is required (with all summaries of material
modifications provided after the most recent summary plan description
was distributed), (iv) each trust agreement and group annuity contract
relating to any Company Benefit Plan, and (v) each favorable
determination letter from the Internal Revenue Service with respect to
each Company Benefit Plan that is intended to be qualified under
Section 401(a) of the Code.
(b) All Company Benefit Plans are and have been administered in
compliance with their terms and all applicable laws, including, without
limitation, ERISA, the Code, and any other applicable law, except where the
failure to so administer the Company Benefit Plans or to comply with such laws
is not reasonably expected to have, individually or in the aggregate, a Company
Material Adverse Effect. Each Company Pension Plan intended to be qualified
under Section 401(a) of the Code has received a determination letter (or will
receive a determination letter within the applicable remedial amendment period)
or is a standard prototype plan and continues to satisfy the requirements for
such qualification. There are no pending or, to the Knowledge of the Weatherford
Entities, threatened investigations by any governmental entity, termination
proceedings, or other claims (except claims for benefits payable in the normal
operation of the Company Benefit Plans), suits or proceedings against or
involving any Company Benefit Plan or asserting any rights or claims to benefits
under any Company Benefit Plan that are reasonably expected to result in a
liability in excess of $200,000 individually or $1,000,000 in the aggregate.
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(c) All contributions to, and payments from, the Company Benefit
Plans required to be made in accordance with the Company Benefit Plans have been
timely made in accordance with the terms of the Company Benefit Plans and
applicable law, other than contributions or payments the failure of which to
make are not reasonably expected to have, individually or in the aggregate, a
Company Material Adverse Effect.
(d) No Company Benefit Plan is subject to Section 302 or Title
IV of ERISA or Section 412 of the Code or is a "multiemployer plan" within the
meaning of Section 4001(a)(3) of ERISA.
(e) (i) No "prohibited transaction" (under Section 4975 of the
Code or Section 406 of ERISA) has occurred with respect to any Company Benefit
Plan, (ii) there has been no breach of any fiduciary duty with respect to any
Company Benefit Plan, and (iii) neither the Company nor any of its subsidiaries
has incurred any excise taxes or penalties with respect to any violation of
applicable law with respect to any Company Benefit Plan, other than, in the case
of (i), (ii), and (iii) those that are not reasonably expected to have,
individually or in the aggregate, a Company Material Adverse Effect.
(f) Neither the Company nor any of its subsidiaries maintains or
contributes to any Company Welfare Plan that could not be terminated by the
Company or any of its subsidiaries without material liability, and neither the
Company nor any of its subsidiaries maintains or contributes to any plan or
arrangement which provides or has any liability to provide life insurance or
medical or other employee welfare benefits to any employee or former employee
upon his or her retirement or termination of employment, except to the extent
such benefits are required to satisfy the minimum requirements under Part 6 of
Subtitle B of Title 1 of ERISA or any similar state or foreign law.
(g) Except as set forth on Schedule 3.16 of the Company
Disclosure Letter, or as otherwise provided or contemplated by the terms of this
Agreement, the execution, delivery and performance of, and consummation of the
transactions contemplated by, this Agreement will not (i) entitle any current or
former employee, director, officer, independent contractor, or leased employee
of the Company or any of its subsidiaries to severance pay or any other payment,
or (ii) accelerate the time of payment or vesting of, or increase the amount of,
compensation due any such person.
(h) Schedule 3.16 of the Company Disclosure Letter contains a
list of the names of the employees (the "Employees") of the Company and its
subsidiaries who own options to purchase common stock, par value $1.00 per
share, of Weatherford ("Weatherford Common Stock"), the number of shares of
Weatherford Common Stock subject to such options, and the vesting schedule and
the exercise price applicable to such options. At the Effective Time, each then
unvested option to purchase Weatherford Common Stock that is held by an Employee
(the "Employee Options") shall be canceled. Except as set forth on Schedule 3.16
of the Company Disclosure Letter, the consummation of the transactions
contemplated by this Agreement and/or the Stockholders' Agreement will not
accelerate the vesting or exercise date of any Employee Options.
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Section 3.17 Brokerage Fees and Commissions. Except for Simmons &
Company International, no broker, finder, or financial adviser has acted
directly or indirectly as such for, or is entitled to any compensation from, any
Weatherford, Entity in connection with this Agreement or the transactions
contemplated hereby. Weatherford and WEUS will be solely responsible for the
payment of any and all fees to Simmons & Company International, and Parent and
the Company shall have no liability or responsibility therefor.
Section 3.18 Tax Treatment. Neither the Company nor, to the Knowledge
of the Weatherford Entities, any of its affiliates (as defined in Section 12.17)
has taken, has agreed or failed to take, or intends to take any action or has
any Knowledge of any fact or circumstance that would prevent the Merger from
qualifying as a reorganization within the meaning of Section 368 of the Code (a
"368 Reorganization") if consummated in accordance with this Agreement.
Section 3.19 Proxy Statement. None of the information to be supplied by
Weatherford, WEUS or the Company for inclusion in the proxy statement to be
distributed in connection with the Parent Stockholders' Meeting (as defined in
Section 12.17) to vote upon the issuance of the Parent Common Stock to WEUS
pursuant to this Agreement (the "Proxy Statement") will, at the time of the
mailing of the Proxy Statement and any amendments or supplements thereto and at
the time of the Parent Stockholders' Meeting, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. No representation is
made by any Weatherford Entity with respect to information supplied by Parent,
Merger Subsidiary or their representatives for inclusion therein.
Section 3.20 No Excess Parachute Payments. Except as disclosed in
Schedule 3.20 of the Company Disclosure Letter, no amount that could be received
(whether in cash or property or the vesting of property) as a result of any of
the transactions contemplated by this Agreement by any employee, officer, or
director of the Company or any of its subsidiaries who is a "disqualified
individual" (as such term is defined in proposed Treasury Regulation Section
1.280G-1) would be characterized as an "excess parachute payment" (as such term
is defined in Section 280G(b)(1) of the Code) or would be non-deductible by
reason of Code Section 162(m).
Section 3.21 Certain Business Relationships With Affiliates. Except as
set forth on Schedule 3.21 of the Company Disclosure Letter, no affiliate of the
Company or of any of its subsidiaries (a) owns any property or right, tangible
or intangible, which is used in the Business, (b) to the Knowledge of the
Weatherford Entities, has any claim or cause of action against the Company or
any of its subsidiaries, or (c) owes any money to, or is owed any money by, the
Company or any of its subsidiaries. Schedule 3.21 of the Company Disclosure
Letter describes any material transactions or relationships between the Company,
its subsidiaries, and any affiliate thereof which have occurred or existed since
December 31, 1999.
Section 3.22 Title; Assets. The Company and each of its subsidiaries
has good and indefeasible title to, or a valid interest in, all of its real
property, and good title to, or a valid interest in, all of its compressors and
other material personal property and assets reflected on the Partnership
Unaudited Financial Statements as owned or leased by it or otherwise used in the
Business, in each case free and clear of all Liens, except for Permitted
Encumbrances (as defined in Section 12.17) or as set forth on Schedule 3.22 of
the Company Disclosure Letter. Except as
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set forth in Schedule 3.22 of the Company Disclosure Letter and except for
obligations created after the date of this Agreement as permitted by this
Agreement, neither the Company nor any of its subsidiaries has any legal
obligation, absolute or contingent, to sell, lease, or otherwise dispose of any
of its real property, compressors, or other material personal property and
assets, other than pursuant to mortgages and security interests incurred in the
ordinary course of business, Permitted Encumbrances, or as disclosed on Schedule
3.22 of the Company Disclosure Letter.
Section 3.23 Ownership of Parent Common Stock. Immediately prior to the
execution of this Agreement, none of Weatherford or its "affiliates" (as defined
in Section 203 of the DGCL) or "associates" (as defined in Section 203 of the
DGCL) is an "interested stockholder" (as defined in Section 203 of the DGCL) of
Parent.
ARTICLE IV
Representations and Warranties of Parent and Merger Subsidiary
Parent and Merger Subsidiary represent and warrant to
Weatherford, WEUS, Benstar and the Company as follows:
Section 4.1 Organization and Qualification. Parent, Merger Subsidiary,
and each subsidiary of Parent are corporations duly incorporated and validly
existing as corporations in good standing under the laws of the jurisdictions of
their incorporation, with full corporate power and authority to own, lease, and
operate their assets and properties and to conduct their businesses as they are
now conducted. Parent and each of its subsidiaries are duly registered or
qualified to transact business and in good standing in each jurisdiction,
domestic or foreign, in which the conduct of their respective business or their
ownership or leasing of property requires such registration or qualification,
except to the extent that the failure to be so qualified or to be in good
standing is not reasonably expected to have, individually or in the aggregate, a
Parent Material Adverse Effect (as defined in Section 12.17). Parent has
heretofore furnished to the Company true and correct copies of the certificate
of incorporation, bylaws, and other organizational documents (the "Parent
Organizational Documents") of Parent and each of its subsidiaries as currently
in effect. The Parent Organizational Documents are in full force and effect, and
the Parent is not in violation thereof. As used in this Agreement, the terms,
"subsidiary" or "subsidiaries" when used in connection with or reference to the
Parent, shall mean the Persons in which the Parent directly or indirectly holds
an ownership interest, each of which is set forth in Schedule 4.2(b) of the
Parent Disclosure Letter (as defined in Section 12.17).
Section 4.2 Capitalization. (a) The authorized capital stock of Parent
consists of 200,000,000 shares of Parent Common Stock, and 50,000,000 shares of
preferred stock, par value $0.01 per share. As of October 20, 2000, there were
issued and outstanding 14,664,038 shares of Parent Common Stock (the "Parent
Shares"), 13,242 shares of treasury stock and options to purchase an aggregate
of 881,194 shares of Parent Common Stock, and a total of 1,906,361 shares
reserved for issuance under the Parent's Benefit Plans listed on Schedule
4.2(a). The Parent Shares are all of the issued and outstanding shares of
capital stock of Parent and have been duly authorized and validly issued and are
fully paid and non-assessable and free
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of preemptive rights. Except as set forth in this Section 4.2 and except for
changes since June 30, 2000 resulting from the exercise of stock options
outstanding as of June 30, 2000, or the grant of stock based compensation to
directors or employees, there are not any Commitments relating to the issued or
unissued capital stock of Parent obligating Parent or any of its subsidiaries to
issue or sell any additional shares of capital stock of Parent or any other
securities convertible into or evidencing the right to subscribe for any shares
of capital stock of Parent. There are no outstanding contractual obligations of
Parent or any of its subsidiaries to repurchase, redeem, or otherwise acquire
any equity interests in Parent or to pay any dividend or make any other
distribution in respect thereof.
(b) All of the issued and outstanding shares of capital stock of
each subsidiary of Parent have been duly authorized and validly issued, are
fully paid and non-assessable, and are owned by Parent, or indirectly through
one of its subsidiaries, free and clear of any Lien, option, right of first
refusal, and limitation on voting rights, except for Liens, options, rights of
first refusal, and limitations on voting rights, individually or in the
aggregate that do not and would not have a Parent Material Adverse Effect.
Included in Schedule 4.2(b) of the Parent Disclosure Letter is a list of each
subsidiary of Parent and the ownership interest of Parent and each of its
subsidiaries therein and, with respect to each subsidiary that is not wholly
owned, of any other Person. There are not any Commitments relating to the issued
or unissued capital stock of any of Parent's subsidiaries obligating Parent or
any of its subsidiaries to issue or sell any additional shares of capital stock
of any subsidiary of Parent, or any other securities convertible into or
evidencing the right to subscribe for any shares of capital stock of any
subsidiary of Parent. There are no outstanding contractual obligations of Parent
or any of its subsidiaries to repurchase, redeem, or otherwise acquire any
equity interests in such subsidiary or to pay any dividend or make any other
distribution in respect thereof. Other than the subsidiaries of Parent included
in Schedule 4.2(b) of the Parent Disclosure Letter, neither Parent nor any of
its subsidiaries holds any ownership interest in any other Person. As of the
date hereof and immediately prior to the Effective Time, record owners of all of
the issued and outstanding capital stock and other equity interests of all
subsidiaries of Parent are and will be set forth on Schedule 4.2(b) of the
Parent Disclosure Letter.
(c) Except as set forth on Schedule 4.2(c) of the Parent
Disclosure Letter, the consummation of the transactions contemplated by this
Agreement and/or the Stockholders' Agreement will not accelerate the vesting or
exercise date of any outstanding options issued by Parent or any of its
subsidiaries pursuant to any option plan or option agreement to purchase Parent
Common Stock, and no director, independent contractor, or employee of the
Company will be entitled to any additional benefits or any acceleration of the
time of payment or vesting of any benefits under any Parent Employee Plan (as
hereinafter defined) or employment or severance agreement with any employee,
director or officer of Parent or any of its subsidiaries as a result of the
consummation of the transactions contemplated by this Agreement or the
Stockholders' Agreement.
(d) The shares of Parent Common Stock to be issued as the Merger
Consideration and upon the exercise of any options granted pursuant to Section
1.3 have been duly authorized and reserved for issuance and, when issued and
delivered in accordance with the terms of this Agreement or the relevant option
agreements, as applicable, will have been validly issued and will be fully paid
and non-assessable (assuming, in the case of options, the payment
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of the exercise price), and the issuance thereof is not subject to any
preemptive or other similar right.
Section 4.3 Authorization. Parent and Merger Subsidiary have the
requisite corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated by this Agreement. Parent, as
sole stockholder of Merger Subsidiary, and the Board of Directors of Parent have
by unanimous written consent (a) determined that participating in the Merger is
in the best interests of Parent and Merger Subsidiary and their stockholders,
(b) approved this Agreement and the Merger, and (c) authorized the issuance of
the Parent Common Stock to be issued in connection with the Merger. Except for
the Parent Stockholders' Approval (as defined in Section 12.17), no other
corporate proceedings on the part of Parent, Merger Subsidiary, or any of
Parent's subsidiaries are necessary to authorize the execution and delivery of
this Agreement or the consummation by Parent and Merger Subsidiary of the
transactions contemplated hereby. This Agreement has been duly authorized,
executed, and delivered by Parent and Merger Subsidiary and constitutes the
valid and binding obligation of each of them, enforceable against each of them
in accordance with its terms, subject to (x) applicable bankruptcy, insolvency,
reorganization, moratorium, and other similar laws of general application with
respect to creditors, (y) general principles of equity and (z) the power of a
court to deny enforcement of remedies generally based upon public policy.
Section 4.4 Consents and Approval; No Violation. Except as set forth in
Schedule 4.4 of the Parent Disclosure Letter and except for the Parent
Stockholders' Approval, neither the execution and delivery of this Agreement by
Parent or Merger Subsidiary, nor the consummation by Parent or Merger Subsidiary
of the transactions contemplated by this Agreement, will: (a) require any
consent, approval, authorization, or permit of, or filing with or notification
to, any Governmental Authority, except (i) the filing of a certificate of merger
in accordance with the DGCL and articles of merger in accordance with the TBCA,
(ii) compliance with any applicable requirements of the Securities Act of 1933,
as amended (the "1933 Act"), the Securities Exchange Act of 1934, as amended
(the "1934 Act"), and foreign or state securities or Blue Sky laws, (iii) in
connection with the HSR Act, (iv) in connection with the filing of premerger
notification information with the Canadian Competition Bureau and the expiration
of the applicable waiting period(s) under Part IX of the Competition Act
(Canada) and the filing with Industry Canada under the Investment Canada Act,
(v) any regulatory approvals or routine governmental consents normally acquired
after the consummation of transactions such as transactions of the nature
contemplated by this Agreement, or (vi) where the failure to obtain such
consent, approval, authorization, or permit, or to make such filing or
notification, is not reasonably expected to have, individually or in the
aggregate, a Parent Material Adverse Effect or prevent or delay, in any material
respect, the consummation of the transactions contemplated by this Agreement;
(b) conflict with or result in any violation of, or default (with or without
notice or lapse of time, or both) under, or give rise to a right of termination,
cancellation, or acceleration of, or "put" right with respect to, any obligation
to or loss of a material benefit under, or result in the creation of any Lien,
upon any of the properties or assets of Parent or any of its subsidiaries under
any provision of (i) any of the Parent Organizational Documents, (ii) any
material loan, credit agreement, bond, or indenture applicable to Parent or any
of its subsidiaries or any of their respective properties or assets, (iii) any
other note, mortgage, lease, agreement, instrument, permit, concession,
franchise, or license, in each case that is material to Parent and its
subsidiaries taken as a whole and that is applicable to Parent or any of its
subsidiaries or any
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of their respective properties or assets, or (iv) subject to the governmental
filings and other matters referenced by clause (a) above, any law or arbitration
award applicable to Parent or any of its subsidiaries or any of their respective
properties or assets, except as identified in Schedule 4.4 of the Parent
Disclosure Letter and except for such violations or defaults (or rights of
termination, cancellation, or acceleration) as to which requisite waivers or
consents have been obtained or will be obtained prior to the Effective Time or
(other than in clause (b)(ii)) that are not reasonably expected to have,
individually or in the aggregate, a Parent Material Adverse Effect or prevent or
delay, in any material respect, the consummation of the transactions
contemplated by this Agreement; or (c) assuming compliance with the matters
referred to in clause (a) above and assuming Parent Stockholders' Approval is
obtained, violate any order, writ, injunction, decree, statute, rule, or
regulation applicable to Parent or any of its subsidiaries, or any of their
assets, except for violations which are not reasonably expected to have,
individually or in the aggregate, a Parent Material Adverse Effect or prevent or
delay, in any material respect, the consummation of the transactions
contemplated by this Agreement.
Section 4.5 SEC Filings. (a) Parent has furnished to the Company (i)
Parent's annual report on Form 10-K for the fiscal year ended March 31, 2000
("Parent 10-K"), (ii) its quarterly reports on Form 10-Q for its fiscal quarters
ended after March 31, 2000, (iii) its proxy or information statements relating
to meetings of or actions taken without a meeting by Parent's stockholders held
since March 31, 2000, and (iv) all of its other reports, statements, schedules,
and registration statements filed with the SEC since March 31, 2000 (the
documents referred to in this Section 4.5(a) being referred to collectively as
the "Parent SEC Filings"). The Parent's quarterly report on Form 10-Q for its
fiscal quarter ended June 30, 2000 is referred to herein as the "Parent 10-Q."
(b) As of its filing date, each Parent SEC Filing complied as
to form in all material respects with the applicable requirements of the 1933
Act and the 1934 Act.
(c) As of its filing date, each Parent SEC Filing filed pursuant
to the 1934 Act did not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading.
(d) Each such registration statement as amended or supplemented,
if applicable, filed pursuant to the 1933 Act did not, as of the date such
statement or amendment became effective, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading.
Section 4.6 Financial Statements. (a) The audited consolidated
financial statements and the unaudited interim consolidated financial statements
of Parent included in the Parent SEC Filings comply in all material respects
with applicable accounting requirements, present fairly the consolidated
financial position, results of operations, and changes in financial position of
Parent and its subsidiaries as of the respective dates or for the respective
periods to which they apply in accordance with GAAP, and are consistent with the
books and records of Parent and its subsidiaries. For purposes of this
Agreement, "Parent Unaudited Balance Sheet" means the consolidated balance sheet
of Parent as of June 30, 2000 set forth in the Parent 10-Q and "Parent Unaudited
Balance Sheet Date" means June 30, 2000.
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(b) Parent has heretofore furnished to Weatherford the audited
consolidated balance sheets of Gas Compression Services, Inc., a Michigan
corporation ("GCSI"), as of July 31, 1999 and July 31, 2000, and the related
consolidated statements of income, stockholders' equity and cash flow for the
years then ended, all certified by Follmer, Rudzewicz & Co., P.C., whose
unqualified reports thereon are included therewith. To Parent's Knowledge, such
financial statements (including the footnotes thereto) were prepared in
accordance with GAAP consistently applied, and present fairly, in all material
respects, GCSI's consolidated financial condition, results of the operations and
cash flows as of the dates and for the periods presented.
Section 4.7 Undisclosed Liabilities. Except as set forth in the Parent
SEC Filings or as reflected, reserved against, or otherwise disclosed in the
Parent Unaudited Balance Sheet, Parent did not have, at the Parent Unaudited
Balance Sheet Date, and, except as have been incurred in the ordinary course of
business since the Parent Unaudited Balance Sheet Date, does not have, at the
date hereof, any liabilities or obligations, whether accrued, contingent,
absolute, determined, determinable, or otherwise, that are reasonably expected
to have, individually or in the aggregate, a Parent Material Adverse Effect.
Section 4.8 Conduct of the Business Since Parent Unaudited Balance
Sheet Date. Except as expressly contemplated by this Agreement and except as set
forth on Schedule 4.8 of the Parent Disclosure Letter, since the Parent
Unaudited Balance Sheet Date, (a) the business and operations of Parent and its
subsidiaries have been conducted in the ordinary and usual course in all
material respects in accordance with past practices, (b) Parent has not paid or
declared any dividend on, or made any distribution with respect to, or purchased
or redeemed any of its capital stock, (c) there has been no damage, destruction,
or loss, whether or not covered by insurance, that has or reasonably could be
expected to have a Parent Material Adverse Effect; and (d) there has been no
cancellation or waiver of any claims or rights of value that could reasonably be
expected to have a Parent Material Adverse Effect.
Section 4.9 Litigation; Orders. Except as set forth in the Parent SEC
Filings, as affects the oil and gas industry generally, the compression sales
and rental business generally, or as set forth on Schedule 4.9 of the Parent
Disclosure Letter, as of the date hereof, there are no Actions pending of which
Parent or its subsidiaries have received actual notice or, to the Knowledge of
Parent or any of its subsidiaries, threatened against Parent or any of its
subsidiaries that are reasonably expected to have, individually or in the
aggregate, a Parent Material Adverse Effect or that would prevent or delay, in
any material respect, the consummation of the transactions contemplated by this
Agreement. Except as set forth in the Parent SEC Filings, as affects the oil and
gas industry generally, the compression sales and rental business generally, or
as set forth on Schedule 4.9 of the Parent Disclosure Letter, as of the date
hereof, there are, to the Knowledge of Parent or any of its subsidiaries, no
outstanding judgments, orders, injunctions, decrees, stipulations, or awards
(whether rendered by a court or administrative agency or by arbitration) against
Parent or any of its subsidiaries other than those that do not involve amounts
in excess of $1,000,000 in the aggregate or those for which reserves have been
established in the Parent Unaudited Financial Statements.
Section 4.10 Licenses; Approvals. Except as set forth in Schedule 4.10
of the Parent Disclosure Letter, Parent and its subsidiaries possess, and have
been and continue to be in compliance with, all Licenses that are necessary to
the ownership or operation of their business
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as currently conducted, and all such Licenses are in full force and effect,
except where the failure to possess any License or the failure to be in full
force and effect is not reasonably expected to have, individually or in the
aggregate, a Parent Material Adverse Effect. Except as set forth in Schedule
4.10 of the Parent Disclosure Letter, no notice has been given, and no
proceeding is pending or, to the Knowledge of Parent or any of its subsidiaries,
threatened seeking the revocation or limitation of any such License that is
reasonably expected to have, individually or in the aggregate, a Parent Material
Adverse Effect. Except as set forth in Schedule 4.10 of the Parent Disclosure
Letter, no License shall be modified, revoked, or shall lapse as a result of the
Merger except where such modification, revocation, or lapse would not reasonably
be expected to have, individually or in the aggregate, a Parent Material Adverse
Effect.
Section 4.11 Labor Matters. Except as set forth in the Parent SEC
Filings, or as may be required by local laws, there are no collective bargaining
or similar agreements relating to the compensation or working conditions of any
employees of Parent or any of its subsidiaries to which Parent or any of its
subsidiaries is a party or by which any of them is bound. Neither Parent nor any
of its subsidiaries is the subject of any proceeding or, to the Knowledge of
Parent or its subsidiaries, has been charged or threatened with a charge
asserting that it or any subsidiary has committed an unfair labor practice, in
any case that would reasonably be expected to have, individually or in the
aggregate, a Parent Material Adverse Effect. No material work stoppage against
Parent or any of its subsidiaries is pending or, to Parent's Knowledge,
threatened. Neither Parent nor any of its subsidiaries is involved in or, to
Parent's Knowledge, is threatened with any picketing, strikes, or any material
slowdowns, work stoppages, disturbances, other "concerted actions," lockouts,
arbitrations, grievances, labor dispute, arbitration, lawsuit, or administrative
proceeding relating to labor matters involving the employees of Parent or any of
its subsidiaries (excluding routine workers' compensation claims) that is
reasonably expected to have, individually or in the aggregate, a Parent Material
Adverse Effect.
Section 4.12 Compliance with Laws. Except as set forth on Schedule 4.12
of the Parent Disclosure Letter, Parent and its subsidiaries have conducted
their business in compliance with all arbitration awards, statutes, laws,
executive orders, regulations, ordinances, rules, judgments, orders, or decrees
applicable thereto (other than Environmental Laws which are governed solely by
Section 4.14 and with respect to Tax matters, which are governed solely by
Section 4.15), except as set forth in the Parent SEC Filings and except for
violations or failures so to comply, if any, that are not reasonably expected to
have, individually or in the aggregate, a Parent Material Adverse Effect. To the
Knowledge of Parent or any of its subsidiaries, no condition or state of facts
exists that would reasonably be expected to provide a valid basis for any
assertion that the business of Parent and its subsidiaries has not been so
conducted.
Section 4.13 Material Contracts. (a) Except as set forth on Schedule
4.13 of the Parent Disclosure Letter, or as filed as exhibits to its SEC
filings, as of the date hereof neither Parent nor any of its subsidiaries is a
party to or bound by any lease, agreement, or other contract or legally binding
contractual right or obligation of a type described below (collectively, "Parent
Material Contracts"):
(i) any written employment agreement with any employee of Parent
or any of its subsidiaries providing for annual base compensation in
excess of $100,000 per year;
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(ii) any collective bargaining agreement with any labor union
covering the employees of Parent or any of its subsidiaries;
(iii) any contract required to be filed by Parent or any of its
subsidiaries with the SEC as exhibits to its Annual Report on Form
10-K;
(iv) any agreement for capital expenditures or the acquisition or
construction of fixed assets that requires aggregate future payments
outside the ordinary course of business in excess of $2,000,000,
excluding expenditures for inventory and raw materials relating to the
fabrication or sale of equipment and parts in the ordinary course of
business;
(v) any indenture, mortgage, loan, credit, sale-leaseback,
guarantee, or other agreement under which Parent or any of its
subsidiaries has borrowed money in excess of $2,500,000 or issued, or
otherwise become obligated in connection with, any note, bond,
indenture, security interest, or other evidence of indebtedness for
borrowed money, sold and leased back assets, or guaranteed
indebtedness for money in excess of $2,500,000 borrowed by others
(excluding hedge, swap, exchange, or similar agreements entered into
in the ordinary course of business);
(vi) any agreement that constitutes a lease under which Parent or
any of its subsidiaries is the lessor or lessee of real or personal
property, that (A) cannot be terminated by Parent or a subsidiary, as
the case may be, without penalty upon not more than 180 calendar day's
notice and (B) involves an annual base rental in excess of $500,000,
excluding leases under the synthetic leases to which Parent or its
subsidiaries is a party and leases of compressors to customers in the
ordinary course of business; and
(vii) any other agreement not referenced in subsections (i)
through (vi) of this Section 4.13(a) that creates or imposes
non-competition obligations on Parent or any of its subsidiaries.
(b) Except as set forth on Schedule 4.13, each Parent Material
Contract is a valid and binding obligation of Parent or a subsidiary of Parent,
as the case may be, enforceable against Parent or the subsidiary, as the case
may be, in accordance with its terms, subject to (i) applicable bankruptcy,
insolvency, reorganization, moratorium, and other similar laws of general
application with respect to creditors, (ii) general principles of equity, and
(iii) the power of a court to deny enforcement of remedies generally based upon
public policy. Except as set forth on Schedule 4.13, Parent and its subsidiaries
have performed all obligations required to be performed by them through the date
hereof under the Parent Material Contracts, other than any such obligations the
failure of which to perform are not reasonably expected to have, individually or
in the aggregate, a Parent Material Adverse Effect, and are not (with or without
the lapse of time or the giving of notice, or both) in breach or default in any
respect thereunder, except in any such case for such breaches or defaults that
are not reasonably expected to have, individually or in the aggregate, a Parent
Material Adverse Effect.
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Section 4.14 Environmental Matters. Except as set forth in Schedule
4.14 of the Parent Disclosure Letter:
(a) Parent and its subsidiaries possess, and are in compliance
with, all permits (including air emission permits), licenses, and government
authorizations and have filed all notices and registrations that are required
under Environmental Laws applicable to Parent or any of its subsidiaries, its
compressors and other assets, and Parent and its subsidiaries are in compliance
with, and are operating their respective businesses in compliance with, all
applicable limitations, restrictions, conditions, standards, prohibitions,
requirements, obligations, schedules, and timetables contained in those laws or
contained in any other law, regulation, code, plan, order, decree, judgment,
notice, permit, or demand letter issued, entered, promulgated, or approved
thereunder, except where the failure to possess such licenses and authorizations
or be or operate in compliance therewith or to make such filings would not
reasonably be expected to have, individually or in the aggregate, a Parent
Material Adverse Effect;
(b) Neither Parent nor any of its subsidiaries has received
notice of actual or threatened liability under CERCLA or any similar foreign,
state, or local statute or ordinance from any Governmental Authority or any
third party, and neither Parent nor any of its subsidiaries has any Knowledge of
facts or circumstances that would reasonably be expected to form the basis for
the assertion of any claim against Parent or any of its subsidiaries under any
Environmental Laws including, without limitation, CERCLA or any similar local,
state, or foreign law with respect to any on-site or off-site location, which
notice or claim would reasonably be expected to have, individually or in the
aggregate, a Parent Material Adverse Effect;
(c) Neither Parent nor any of its subsidiaries has entered into
or agreed to or contemplates entering into any consent decree or order, and none
of such entities is subject to any judgment, decree, or judicial or
administrative order, relating to compliance with, or the cleanup of hazardous
materials under, or compliance with any applicable Environmental Laws compliance
with which would reasonably be expected to have, individually or in the
aggregate, a Parent Material Adverse Effect;
(d) Neither Parent nor any of its subsidiaries has received
notice that Parent or any of its subsidiaries or any of its or their owned or
leased properties is subject to any claim, obligation, liability, loss, damage,
or expense of whatever kind or nature, contingent or otherwise (except for those
matters the consequences of which would not reasonably be expected to have,
individually or in the aggregate, a Parent Material Adverse Effect), incurred or
imposed or based upon any provision of any Environmental Law and arising out of
any act or omission of Parent, any of its subsidiaries, any of their employees,
agents, or representatives or, to the Knowledge of Parent or any of its
subsidiaries, arising out of the ownership, use, control, or operation by Parent
or any of its subsidiaries of any plant, facility, site, area, or property
(including, without limitation, any plant, facility, site, area, or property
currently or previously owned or leased by Parent, its subsidiaries, or their
predecessors) from which any Hazardous Materials were released into the
environment, except where the consequences of such release would not reasonably
be expected to have, individually or in the aggregate, a Parent Material Adverse
Effect (the term "release" meaning any spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, dumping, or
disposing into the environment, and the term "environment" meaning any surface
or ground water, drinking water supply, soil, surface or subsurface strata or
medium, or the ambient air);
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(e) To the Knowledge of Parent or any of its subsidiaries, none
of the properties owned, leased, or used by Parent or any of its subsidiaries
contains any friable asbestos, regulated PCBs, or underground storage tanks,
except where the presence of such would not reasonably be expected to have,
individually or in the aggregate, a Parent Material Adverse Effect; and
(f) None of Parent or its subsidiaries is, or to the Knowledge of
Parent or any of its subsidiaries has been, subject to any administrative or
judicial proceeding pursuant to, and, to the Knowledge of Parent or any of its
subsidiaries, none has been alleged to be in violation of, applicable
Environmental Laws or regulations any time during the past five years, except
where the consequences of any such proceeding, allegation, or violation would
not reasonably be expected to have, individually or in the aggregate, a Parent
Material Adverse Effect.
As used in this Section 4.14, the term "Hazardous Materials"
means any waste, pollutant, hazardous substance, toxic, ignitable, reactive or
corrosive substance, hazardous waste, special waste, industrial substance,
by-product, process intermediate product or waste, petroleum or
petroleum-derived substance or waste, chemical liquids or solids, liquid or
gaseous products, or any constituent of any such substance or waste, the use,
handling, disposal of, or exposure to which by Parent or any of its subsidiaries
or any of their respective agents, contractors, and employees is governed by or
subject to any applicable law, rule or regulation of any Governmental Authority.
Section 4.15 Taxes. (a) (i) Except as set forth on Schedule 4.15 of the
Parent Disclosure Letter, Parent and its subsidiaries have filed when due all
material Parent Returns (as defined in Section 12.17) in connection with and in
respect of their business, and have, except for Taxes that are being contested
in good faith, that have corresponding reserves established on the Parent
Unaudited Financial Statements (as defined in Section 12.17), and that are set
forth on Schedule 4.15, timely paid and discharged all Tax obligations shown
thereon; (ii) the Parent Returns in all material respects correctly and
accurately reflect the facts regarding the income, business and assets,
operations, activities, status, or other matters of Parent and its subsidiaries,
and any other information required to be shown thereon, and are not subject to
penalties under Section 6662 of the Code, relating to accuracy-related
penalties, or any corresponding provision of applicable state, local, or foreign
Tax law or any predecessor provision of law; (iii) neither Parent nor any of its
subsidiaries has received any notice of any federal, state, local, or foreign
Tax deficiency outstanding, proposed, or assessed against or allocable to it,
nor has Parent nor any of its subsidiaries executed any waiver of any statute of
limitations on the assessment or collection of any federal, state, local, or
foreign Tax, or executed or filed with any federal, state, local, or foreign
governmental body any agreement now in effect extending the period for
assessment or collection of any federal, state, local, or foreign Taxes against
Parent; (iv) there are no liens for any federal, state, local, or foreign Taxes
payable upon the assets of Parent or any of its subsidiaries, other than
statutory liens for Taxes not yet due and payable or being contested in good
faith; (v) Parent and its subsidiaries have made provision for all Taxes payable
by Parent and its subsidiaries for which no Parent Return has yet been filed;
and (vi) there is no action, suit, proceeding, audit, or claim now proposed,
pending or, to the Knowledge of Parent, threatened against or with respect to
Parent or any of its subsidiaries in respect of any federal, state, local, or
foreign Tax where there is a reasonable possibility of an adverse determination.
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(b) Except for the "affiliated group" (within the meaning of
Section 1504(a) of the Code) of which Parent is currently the "common parent,"
neither Parent nor any of its subsidiaries has ever been a member of an
affiliated group of corporations.
Section 4.16 Employee Benefit Plans. (a) Set forth in Schedule 4.16 of
the Parent Disclosure Letter is a list of each of the following that is
currently sponsored, maintained, or contributed to by Parent or any of its
subsidiaries for the benefit of its or their employees: (i) each "employee
pension benefit plan" (as defined in Section 3(2) of ERISA) regardless of
whether such plan is maintained outside of the U.S. or primarily for the benefit
of persons substantially all of whom are non-resident aliens (sometimes
collectively referred to herein as "Parent Pension Plans"); (ii) each "employee
welfare benefit plan" (as defined in Section 3(l) of ERISA) regardless of
whether such plan is maintained outside of the U.S. or primarily for the benefit
of persons substantially all of whom are non-resident aliens (hereinafter a
"Parent Welfare Plan"); and (iii) each stock option, stock purchase, incentive,
deferred compensation plans or arrangements, vacation, change in control,
stay-on bonus plans or arrangements, and other material employee compensation
and fringe benefit plans or agreements, maintained, contributed to, or pursuant
to which Parent or any of its subsidiaries have any current liability (all the
foregoing in subparagraphs (i), (ii), and (iii) being herein called "Parent
Employee Plans"), and each Parent Employee Plan currently enjoying any special
tax status is noted as such. Parent has made available to WEUS true, complete,
and correct copies of (i) each Parent Employee Plan and any subsequently adopted
amendments thereto (or, in the case of unwritten Parent Employee Plans,
descriptions thereof), (ii) the most recent annual report on Form 5500 filed
with respect to each Parent Employee Plan (if any such report was required),
(iii) the most recent summary plan description for each Parent Employee Plan for
which such a summary plan description is required (with all summaries of
material modifications provided after the most recent summary plan description
was distributed), (iv) each trust agreement and group annuity contract relating
to any Parent Employee Plan and (v) each favorable determination letter from the
Internal Revenue Service with respect to each Parent Employee Plan that is
intended to be qualified under Section 401(a) of the Code.
(b) All Parent Employee Plans are and have been administered in
material compliance with their terms and all applicable laws, including, without
limitation, ERISA, the Code, and any other applicable law, except where the
failure to so administer the Parent Employee Plans or to comply with such laws
is not reasonably expected to have, individually or in the aggregate, a Parent
Material Adverse Effect. Except as set forth in Schedule 4.16 of the Parent
Disclosure Letter, each Parent Pension Plan intended to be qualified under
Section 401(a) of the Code has received a determination letter (or will receive
a determination letter within the applicable remedial amendment period) or is a
standard prototype plan and continues to satisfy the requirements for such
qualification. Except as set forth in Schedule 4.16 of the Parent Disclosure
Letter, there are no pending or, to Parent's Knowledge, threatened
investigations by any governmental entity, termination proceedings, or other
claims (except claims for benefits payable in the normal operation of the Parent
Employee Plans), suits or proceedings against or involving any Parent Employee
Plan or asserting any rights or claims to benefits under any Parent Employee
Plan that are reasonably expected to result in a liability in excess of $200,000
individually or $1,000,000 in the aggregate.
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(c) All contributions to, and payments from, the Parent Employee
Plans required to be made in accordance with the Parent Employee Plans have been
timely made in accordance with the terms of the Parent Employee Plans and
applicable law; other than contributions or payments the failure of which to
make are not reasonably expected to have, individually or in the aggregate, a
Parent Material Adverse Effect.
(d) No Parent Employee Plan is subject to Section 302 or Title
IV of ERISA or Section 412 of the Code or is a "multiemployer plan" within the
meaning of Section 4001(a)(3) of ERISA.
(e) (i) No "prohibited transaction" (under Section 4975 of the
Code or Section 406 of ERISA) has occurred with respect to any Parent Employee
Plan, (ii) there has been no breach of any fiduciary duty with respect to any
Parent Employee Plan, and (iii) neither Parent nor any of its subsidiaries has
incurred any excise taxes or penalties with respect to any violation of
applicable law with respect to any Parent Employee Plans, other than, in the
case of (i), (ii), and (iii) those that are not reasonably expected to have,
individually or in the aggregate, a Parent Material Adverse Effect.
(f) Neither Parent nor any of its subsidiaries maintains or
contributes to any Parent Employee Plan that could not be terminated by Parent
or any of its subsidiaries without material liability, and neither Parent nor
any of its subsidiaries maintains or contributes to any plan or arrangement
which provides or has any liability to provide life insurance or medical or
other employee welfare benefits to any employee or former employee upon his or
her retirement or termination of employment, except to the extent such benefits
are required to satisfy the minimum requirements under Part 6 of Subtitle B of
Title 1 of ERISA or any similar state law.
(g) Except as set forth on Schedule 4.16 of the Parent Disclosure
Letter or as otherwise provided or contemplated by the terms of this Agreement,
the execution, delivery and performance of, and consummation of the transactions
contemplated by, this Agreement will not (i) entitle any current or former
employee, director, officer, independent contractor, or leased employee of the
Company or any of its subsidiaries to severance pay or any other payment, or
(ii) accelerate the time of payment or vesting of, or increase the amount of,
compensation due any such person.
(h) The consummation of the transactions contemplated by this
Agreement and/or the Stockholders' Agreement will not accelerate the vesting or
exercise date of any options held by employees of Parent or its subsidiaries.
Section 4.17 Tax Treatment. Neither Parent nor, to Parent's Knowledge,
any of its affiliates has taken, has agreed or failed to take, or intends to
take any action or has any Knowledge of any fact or circumstance that would
prevent the Merger from qualifying as a 368 Reorganization if consummated in
accordance with this Agreement.
Section 4.18 Proxy Statement. None of the information to be supplied by
Parent for inclusion in the Proxy Statement or any amendments thereof or
supplements thereto will, at the time of the mailing of the Proxy Statement and
any amendments or supplements thereto, and at the time of the Parent
Stockholders' Meeting (as hereinafter defined), contain any untrue
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statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. The Proxy Statement
will, as of its mailing date, comply as to form in all material respects with
all applicable laws, including the provisions of the 1934 Act and the rules and
regulations promulgated thereunder, except that no representation is made by
Parent or Merger Subsidiary with respect to information supplied by Weatherford,
WEUS, the Company, or any of their representatives for inclusion therein.
Section 4.19 Parent Stockholders' Approval. The only vote of the
holders of any class or series of Parent's capital stock necessary to approve
and adopt this Agreement, the Merger, the issuance to WEUS of Parent Common
Stock at the Effective Time, and the other transactions contemplated by this
Agreement is (i) the approval of the issuance to WEUS and Venstar or their
affiliates of Parent Common Stock by the affirmative vote of a majority of the
votes cast at a meeting of such stockholders, provided that the total votes cast
on such proposals represents over 50% in interest of all securities entitled to
vote on such proposals, as required by the regulations of the NYSE and (ii)
approval of any amendments to Parent's stock option plan that may be required in
connection with the issuance of the New Options.
Section 4.20 Opinion of Financial Advisor; Board Findings and
Recommendations. The financial advisor of Parent, Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("Merrill Lynch"), has rendered a written opinion to Parent
to the effect that, as of the date of this Agreement, the consideration to be
received by Parent in the Merger is fair from a financial point of view to
Parent. A copy of such opinion has heretofore been delivered to WEUS. Parent has
been authorized by Merrill Lynch to include such opinion in its entirety in the
Proxy Statement, so long as such inclusion is in form and substance reasonably
satisfactory to Merrill Lynch and its counsel. Parent's Board of Directors (i)
has unanimously approved and adopted this Agreement and the transactions
contemplated hereby, including the Merger and the issuance of Parent Common
Stock contemplated hereby, (ii) has unanimously determined that this Agreement
and the transactions contemplated hereby, including the Merger and the issuance
of Parent Common Stock contemplated hereby, are advisable, fair to and in the
best interests of the stockholders of Parent and (iii) unanimously recommended
(subject to Section 6.13) that the stockholders of Parent approve the issuance
of Parent Common Stock contemplated hereby.
Section 4.21 Brokerage Fees and Commissions. Except for Merrill Lynch,
no broker, finder, or financial advisor has acted directly or indirectly as such
for, or is entitled to compensation from Parent or Merger Subsidiary in
connection with this Agreement or the transactions contemplated hereby. Parent
will be solely responsible for the payment of any and all fees to Merrill Lynch,
and Weatherford and WEUS shall have no liability or responsibility therefor.
Section 4.22 Inapplicability of DGCL Section 203. Parent's Board of
Directors has taken all actions necessary and appropriate to render the
limitations on business combinations contained in Section 203 of the DGCL
inapplicable, as of the date hereof and at all times hereafter, to this
Agreement, the Stockholders' Agreement, the consummation of the Merger, the
issuance to WEUS of Parent Common Stock at the Effective Time, and the other
transactions contemplated hereby and thereby.
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Section 4.23 No Excess Parachute Payments. No amount that could be
received (whether in cash or property or the vesting of property) as a result of
any of the transactions contemplated by this Agreement by any employee, officer,
or director of Parent or any of its subsidiaries who is a "disqualified
individual" (as such term is defined in proposed Treasury Regulation Section
1.280G-1) would be characterized as an "excess parachute payment" (as such term
is defined in Section 280G(b)(1) of the Code) or would be non-deductible by
reason of Code Section 162(m).
Section 4.24 Certain Business Relationships With Affiliates. No
affiliate of Parent or of any of its subsidiaries (a) owns any property or
right, tangible or intangible, which is used in the businesses of Parent or its
subsidiaries, (b) to the Knowledge of Parent or any of its subsidiaries, has any
claim or cause of action against Parent or any of its subsidiaries, or (c) owes
any money to, or is owed any money by, Parent or any of its subsidiaries.
Schedule 4.24 of the Parent Disclosure Letter describes any material
transactions or relationships between Parent, its subsidiaries, and any
affiliate thereof which have occurred or existed since December 31, 1999.
Section 4.25 Title; Assets. Parent and each of its subsidiaries has
good and indefeasible title to, or a valid interest in, all of its real
property, and good title to, or a valid interest in, all of its compressors and
other material personal property and assets reflected on the Parent Unaudited
Financial Statements as owned or leased by it or otherwise used in its business,
in each case free and clear of all Liens, except for Permitted Encumbrances or
as set forth on Schedule 4.25 of the Parent Disclosure Letter. Except as set
forth in Schedule 4.25 of the Parent Disclosure Letter and except for
obligations created after the date of this Agreement as permitted by this
Agreement, neither Parent nor any of its subsidiaries has any legal obligation,
absolute or contingent, to sell, lease, or otherwise dispose of any of its real
property, compressors, or other material personal property and assets, other
than pursuant to mortgages and security interests incurred in the ordinary
course of business, Permitted Encumbrances, or as disclosed on Schedule 4.25 of
the Parent Disclosure Letter.
ARTICLE V
Covenants of Weatherford, WEUS, and the Company
Section 5.1 Conduct of Business. From the date hereof until the
Effective Time, except as set forth on Schedule 5.1 and Schedule 5.3 of the
Company Disclosure Letter and except as expressly contemplated by this
Agreement, or, except as consented to or approved by Parent in writing (which
consent or approval will not be unreasonably withheld), the Company (and
Weatherford and WEUS solely with respect to paragraph (g)) covenants and agrees
that it will and will cause each of its subsidiaries to:
(a) operate the Business (including the making of capital
expenditures) in the ordinary and usual course of business in all material
respects in accordance with its current business plan and budget delivered to
Parent, including, but not limited to, using its reasonable best efforts to
preserve intact its current business organization, keep its physical assets in
good working condition, and preserve its relationships with customers,
suppliers, and others having business dealings with it to attempt to retain its
goodwill and ongoing business in all material respects;
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(b) not make any change or amendment in the certificate of
incorporation or bylaws of the Company or any of its subsidiaries (or similar
constituent documents of any non-corporate subsidiary including, without
limitation, the Partnership) that would have a material adverse effect on Parent
or Merger Subsidiary;
(c) not issue, sell, or agree to issue or sell (i) any shares of
its capital stock or other ownership interests or (ii) any securities
convertible into, or options with respect to, or warrants to purchase or rights
to subscribe for, any shares of its capital stock or other ownership interests;
(d) except in the ordinary course of business and consistent with
past practices, or as required by this Agreement, by law or contractual
obligations, agreements, or arrangements existing on the date hereof, not (i)
increase in any manner the compensation of, or enter into any new bonus or
incentive agreement or arrangement with, any of its directors, managers,
officers, or other employees, independent contractors, or temporary or leased
employees; (ii) pay or agree to pay any pension, retirement allowance, or other
employee benefit to any such director, manager, officer, employee, independent
contractor, or temporary or leased employee, whether past or present; (iii)
enter into any new, or amend any existing, employment, severance, consulting, or
other compensation agreement with any existing director, manager, officer,
employee, independent contractor, or temporary or leased employee; (iv) commit
itself to any additional pension, profit-sharing, deferred compensation, group
insurance, severance pay, equity compensation, bonus, incentive, retirement, or
other employee benefit plan, fund, or similar arrangement or amend or commit
itself to amend any of such plans, funds, or similar arrangements in existence
on the date hereof; or (v) except (A) as permitted in Section 5.3 or (B) at the
express written request of an employee after providing a copy of such written
request to Parent, transfer the employment of any employees to any employer that
is not the Company or one of its subsidiaries;
(e) except as provided in Section 5.3, not (i) sell, transfer, or
otherwise dispose of any of its material assets (other than pursuant to purchase
options existing on the date hereof), (ii) create or permit to exist any new
material Lien on its assets, other than Permitted Encumbrances, (iii) enter into
any material joint venture, partnership, or other similar arrangement, or form
any other new material arrangement for the conduct of the Business, (iv)
purchase, or agree to purchase, any material assets or securities of any Person,
or (v) enter into any other material agreement (excluding inventory held for
sale and assets manufactured or packaged for sale pursuant to purchase orders or
contracts);
(f) except as provided in Section 5.3, not pay or declare any
dividend on, or make any distribution with respect to, or purchase or redeem any
of, its capital stock or other ownership interests or split, combine, or
reclassify any shares of its capital stock or other ownership interests, other
than dividends or distributions to Weatherford or its subsidiaries in an amount
equal to (i) the undistributed earnings of the GSI Companies prior to the
Effective Time and (ii) the amount of expenses of the Company and its
subsidiaries paid by Weatherford or its subsidiaries (other than the Company or
its subsidiaries), consistent with past practices as previously disclosed to
Parent;
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(g) not take any action that would cause any of the conditions
set forth in Section 8.2(a)(i) not to be satisfied at, or as of any time prior
to, the Effective Time;
(h) not change in any material respect its accounting methods,
principles, or practices, except insofar as may be required by a generally
applicable change in GAAP;
(i) not institute or settle any material claim, suit, or action
involving an amount in excess of $2,000,000 in each case; provided, however,
that this clause shall in no way limit or be deemed to restrict the right of any
Weatherford Entity to institute a claim, suit, or action against Parent or
Merger Subsidiary relating to or arising out of this Agreement or the
transactions contemplated hereby;
(j) not make any payments to, transfer any assets to, or
otherwise enter into any material arrangements with, any affiliate that is not
consistent with past practices;
(k) not amend or terminate the GC Agreement, the Formation
Agreement or the Limited Partnership Agreement or modify or waive any material
condition therein without the prior written consent of Parent, which consent
will not be unreasonably withheld;
(l) (i) incur any indebtedness for borrowed money or guarantee
any such indebtedness of another person, issue or sell any debt securities or
warrants or other rights to acquire any debt securities of the Company or any of
its subsidiaries, guarantee any debt securities of another person, enter into
any "keep well" or other agreement to maintain any financial statement condition
of another person or enter into any arrangement having the economic effect of
any of the foregoing, except for (A) borrowings under the Partnership's existing
working capital facility, (B) short-term borrowings or trade obligations
incurred in the ordinary course of business consistent with past practice, or
(C) sale leaseback transactions under the Synthetic Leases as long as the total
principal equivalent obligations under the Synthetic Leases is not more than
$320 million at any time and the proceeds from any future sale leaseback
transaction is used for the purchase, improvements, or acquisition of a capital
asset to be used in the Business that result in a net increase in compression
horsepower of the Company and its subsidiaries or (ii) make any loans, advances
or capital contributions to, or investments in, any other person, other than to
or in the Company or any direct or indirect wholly owned subsidiary of the
Company;
(m) make or agree to make any new capital expenditure or
expenditures in excess of $20,000,000 in the aggregate;
(n) (A) pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the ordinary
course of business consistent with past practice or in accordance with their
terms or the terms of this Agreement, of liabilities reflected or reserved
against in, or contemplated by, the most recent consolidated financial
statements (or the notes thereto) of the Company delivered to Parent or incurred
in the ordinary course of business consistent with past practice, (B) cancel any
material (individually or in the aggregate) indebtedness owed to the Company or
any of its subsidiaries or waive any claims or rights of substantial value; and
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(o) not agree or commit, in writing or otherwise, to take any of
the actions set forth in (b) through (n) above;
provided, however, that nothing in this Section 5.1 shall
prohibit the Company or any of its subsidiaries from consummating, or entering
into any agreements to consummate, (i) acquisitions of assets or businesses of
less than $20,000,000 in the aggregate and (ii) sale leaseback transactions of
less than $20,000,000 in the aggregate.
Section 5.2 Compressor Units. Within seven days from the date hereof,
WEUS shall deliver to Parent a true and complete list as of a recent date of all
compressor units owned or leased by the Company or any of its subsidiaries,
indicating the type of each such compressor and its current location.
Section 5.3 Pre-Closing Transfers and Resignations. (a) Prior to the
Effective Time, (i) the capital stock of the GSI Companies, and all debt of the
GSI Companies owed to the Company and its subsidiaries, the amount of which is
set forth on Schedule 5.3 of the Company Disclosure as of September 30, 2000,
including, without limitation, the assets, business and related employees
associated with the GSI Companies' and the Company and its subsidiaries'
compression sales and rental operations in Malaysia, Vietnam, Oman, Dubai, Ivory
Coast, and Indonesia (excluding, with respect to Australia and Thailand, the
assets physically located in such countries, the contracts related specifically
to work performed in such countries, any accounts receivables for such
contracts, and the employees who are located in such countries or whose
dedicated job is for performance under such contracts, all of which will be
transferred to entities directed by Parent), (ii) all intercompany or other debt
owed by the GSI Companies or by any of the GSI Companies to the Company or any
of its subsidiaries that is in an amount less than $15.9 million (the long-term
intercompany and interdivision balance at September 30, 2000) in the aggregate,
and (iii) such assets as the parties shall mutually agree as described in
Schedule 5.3 of the Company Disclosure Letter ((i), (ii), and (iii) collectively
the "Excluded Assets") shall be transferred or distributed to WEUS or one or
more of its affiliates (other than the Company or its subsidiaries, such
transfers being referred to collectively as the "Transferee") in a manner
reasonably satisfactory to WEUS and Parent, including by purchase at or below
current book value with any cash purchase consideration paid by the Transferee
to be distributed to WEUS. For purposes of this Agreement, any reference to the
Company, the Partnership, the Business or any subsidiaries of the Company shall
not apply to the Excluded Assets. All costs in effecting the above transfers of
the Excluded Assets shall be paid in accordance with Section 12.4(c).
(b) Weatherford shall, at its sole cost and expense:
(i) cause Weatherford Canada Ltd., to transfer 1,100 shares
of Class A capital stock of Weatherford Global Compression Services,
Ltd., to Enterra Compression Investment Company, a Delaware
corporation and a wholly-owned subsidiary of the Company
("Investment");
(ii) transfer one share of Weatherford Global Compression
(Thailand) Ltd. as directed by Parent;
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(iii) cause PhlipCo, Inc. to transfer one share of
Weatherford Global Compression (Thailand) Ltd. as directed by Parent;
(iv) cause Ron Lawrence to transfer one share of Weatherford
Global Compression Services de Venezuela, C.A. as directed by Parent;
(v) cause the other transfers set forth on Schedule 5.1 of
the Company Disclosure Letter to occur; and
(vi) cause all officers and directors of the Company and its
subsidiaries to submit their resignations from such positions
effective as of the Effective Time.
Section 5.4 Restricted Stock. WEUS understands and acknowledges that
the shares of Parent Common Stock to be issued as the Merger Consideration have
not been registered under the 1933 Act, or any similar state laws, and that the
certificate or certificates representing such shares will bear a legend
substantially as follows, as well as any appropriate state "blue sky" legends:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE SECURITIES MAY NOT
BE SOLD, MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNLESS SUCH SALE OR TRANSFER
IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF
SUCH ACT.
ARTICLE VI
Covenants of Parent and Merger Subsidiary
Section 6.1 Conduct of Business. From the date hereof until the
Effective Time, except as set forth in Schedule 6.1 of the Parent Disclosure
Letter and except as provided for in, or contemplated by, this Agreement, or,
except as consented to or approved by Weatherford in writing (which consent or
approval will not be unreasonably withheld), Parent covenants and agrees that it
will and will cause each of its subsidiaries to:
(a) operate their businesses (including the making of capital
expenditures) in the ordinary and usual course of business in all material
respects in accordance with its current business plan and budget delivered to
WEUS, including, but not limited to, using its reasonable best efforts to
preserve intact its current business organization, keep its physical assets in
good working condition, and preserve its relationships with customers,
suppliers, and others having business dealings with it to attempt to retain its
goodwill and ongoing business in all material respects;
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(b) not make any change or amendment in their respective
certificate of incorporation or articles of incorporation, as the case may be,
or bylaws that would have a material adverse effect on WEUS;
(c) not issue, sell, or agree to issue or sell (i) any shares of
their capital stock or (ii) any securities convertible into, or options with
respect to, or warrants to purchase or rights to subscribe for, any shares of
their capital stock, except that (A) Parent may issue shares upon conversion of
presently outstanding convertible securities and exercise of presently
outstanding options and as otherwise described in Section 4.2 and (B) Parent may
issue options with an exercise price per share of Parent Common Stock no less
than the fair market value of a share of Parent Common Stock on the effective
date of the grant thereof (and issue shares upon exercise of such options)
pursuant to its employee stock option plans in effect on the date hereof;
provided that the effective date of any option grant shall not be a date prior
to the date of this Agreement;
(d) not (i) sell, transfer, or otherwise dispose of any material
assets (other than pursuant to ordinary course purchase options existing on the
date hereof), (ii) create or permit to exist any new material Lien on its
assets, other than Permitted Encumbrances, (iii) enter into any material joint
venture, partnership, or other similar arrangement, or form any other new
material arrangement for the conduct of their businesses, (iv) purchase, or
agree to purchase, any material assets or securities of any Person, or (v) enter
into any other material agreement, in each case in excess of $20 million
(excluding for purposes of clauses (i) and (iv) only inventory held for sale and
assets manufactured or packaged for sale pursuant to purchase orders or
contracts);
(e) not pay or declare any dividend on, or make any distribution
with respect to, or purchase or redeem any of their capital stock or split,
combine, or reclassify any shares of their capital stock or adopt any rights
plan;
(f) not take any action that would cause any of the conditions
set forth in Section 8.3(a)(i) not to be satisfied at, or as of any time prior
to, the Effective Time;
(g) not change in any material respect its accounting methods,
principles, or practices, except insofar as may be required by a generally
applicable change in GAAP;
(h) not institute or settle any material claim, suit, or action
involving an amount in excess of $2,000,000 in each case; provided, however,
that this clause shall in no way limit or be deemed to restrict the right of
Parent, Merger Subsidiary, or any of their subsidiaries to institute a claim,
suit, or action against Weatherford, WEUS, the Company, or any of its
subsidiaries relating to or arising out of this Agreement or the transactions
contemplated hereby; and
(i) not agree or commit, in writing or otherwise, to take any of
the actions set forth in (b) through (h) above;
provided, however, that nothing in this Section 6.1 shall prohibit Parent or any
of its subsidiaries from consummating, or entering into any agreements to
consummate, (i) acquisitions of assets or businesses of less than $20,000,000 in
the aggregate and (ii) sale leaseback transactions of less than $20,000,000 in
the aggregate.
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Section 6.2 Proxy Statement. Parent shall promptly prepare and file
with the SEC the Proxy Statement. Parent shall promptly take any action required
to be taken under foreign or state securities or Blue Sky laws in connection
with the issuance of Parent Common Stock in the Merger.
Section 6.3 Parent Stockholders' Approvals. Parent shall, as promptly
as practicable, taking into consideration, if applicable, Section 15 of the
Stockholders' Agreement, submit the issuance of Parent Common Stock in the
Merger as required by the NYSE for the approval of its stockholders at a meeting
of its stockholders (the "Parent Stockholders' Meeting") and shall, subject to
Section 6.13, use its reasonable best efforts to obtain stockholder approval
thereof (the "Parent Stockholders' Approval"), it being understood that Parent's
obligations hereunder shall remain unless and until this Agreement has been
terminated and, if required by the terms hereof, the amounts, if any, payable by
Parent pursuant to Section 12.4(c) have been paid to Weatherford or WEUS. Parent
shall, through its Board of Directors subject to Section 6.13, recommend to its
stockholders approval of the issuance of Parent Common Stock in the Merger as
required by the NYSE and shall take all additional actions as the sole
stockholder of the Merger Subsidiary necessary to approve and adopt this
Agreement and the transactions contemplated hereby.
Section 6.4 Stock Exchange Listing. Parent shall use its reasonable
best efforts to cause the shares of Parent Common Stock to be issued in
connection with the Merger and pursuant to the New Options to be listed on the
NYSE, subject to official notice of issuance.
Section 6.5 Employee Benefits. (a) As of the Effective Time, Parent and
Merger Subsidiary shall (or shall cause the Surviving Corporation to) provide to
each individual who was an employee of the Company or its subsidiaries
immediately before the Effective Time (other than the President of the Company
and employees associated with the Excluded Assets (but including employees
wholly associated with the GSI Companies' assets and operations in Australia and
Thailand)) and who becomes an employee of the Surviving Corporation or its
subsidiaries as of the Effective Time (a "Transferred Employee") with a level of
employee benefits that is substantially comparable in the aggregate (i) to the
benefits provided to employees of Parent and its subsidiaries in comparable
positions or (ii) to the benefits provided to such Transferred Employees
immediately prior to the Effective Time.
(b) From and after the Effective Time and for all purposes
(including without limitation, eligibility, vesting, and benefit accrual) under
all Parent Employee Plans (including without limitation the Company Benefit
Plans that become Parent Employee Plans at the Effective Time), each Transferred
Employee shall receive full credit from Parent, Merger Subsidiary, in which the
Transferred Employee is eligible to participate, the Surviving Corporation, and
any other affiliates of Parent for all prior service properly credited under the
Company Benefit Plans; provided, however, that Parent, Merger Subsidiary, the
Surviving Corporation, and any other affiliates of Parent shall not be required
to credit any Transferred Employee with prior service for purposes of benefit
accrual or contributions under any Parent Employee Plan that is a defined
benefit pension plan.
(c) The Company and its subsidiaries shall cease to participate
in the Weatherford International, Inc. 401(k) Savings Plan (the "Weatherford
401(k) Plan")
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immediately prior to the Effective Time. If WEUS determines (in its sole
discretion) that a distribution is permissible from the Weatherford 401(k) Plan
under Section 401(k) of the Code in connection with the transactions
contemplated by this Agreement, Parent and Merger Subsidiary shall cause a
Parent Employee Plan that is a tax-qualified defined contribution plan that is a
Parent Employee Plan or that is maintained by the Surviving Corporation or a
subsidiary thereof (the "Parent 401(k) Plan") to accept a direct rollover of the
portion of a Transferred Employee's distribution which Parent determines (in its
sole discretion) constitutes an eligible rollover distribution, including
without limitation, an in-kind rollover of any outstanding loans and related
promissory notes. If WEUS determines in accordance with the foregoing that a
distribution is not permissible under Section 401(k) of the Code, then WEUS and
Parent agree to effect a plan-to-plan transfer of the account balances and
related liabilities of the Transferred Employees from the Weatherford 401(k)
Plan to the Parent 401(k) Plan, except to the extent permitted by Treasury
Regulation Section 1.411(d)-4, Q&A-3(b), Transferred Employees are eligible to
choose to retain their account balances in the Weatherford 401(k) Plan (and to
the extent Transferred Employees elect to so retain their account balances).
Such a transfer (if any) shall occur, on or as soon as reasonably practicable
after the Effective Time. To implement such a transfer (if any), WEUS shall
direct the trustee of the Weatherford 401(k) Plan to transfer to the trustee or
funding agent of the Parent 401(k) Plan an amount in cash equal in value to the
account balances of the Transferred Employees as of the date of the transfer
(other than any such employees who are permitted in accordance with the
foregoing by WEUS to elect, and who so elect, to retain such account balances in
the Weatherford 401(k) Plan); provided that to the extent the account balances
to be transferred consist in whole or in part of outstanding participant loans,
WEUS shall direct the trustee of the Weatherford 401(k) Plan to transfer to the
trustee or funding agent of the Parent 401(k) Plan, in lieu of cash, the
promissory notes and related documents evidencing such loans. Such plan-to-plan
transfers shall be conditioned upon the receipt by each party of customary
representations and warranties as to the tax-qualified status of each relevant
plan and trust. In connection with such transfers, WEUS and Parent shall take
all action reasonably necessary to effect any required governmental filings.
(d) Subject to the following sentence, Parent shall amend or
cause to be amended each Parent Welfare Plan (including without limitation the
Partnership Benefit Plans that become Parent Welfare Plans at the Effective
Time) so that from and after the Effective Time (i) no such plan contains any
restrictions for pre-existing conditions or requirements for evidence of
insurability with respect to the Transferred Employees and (ii) for purposes of
determining satisfaction of deductibles, out-of-pocket maximums, and similar
limitations under such Parent Welfare Plans, Transferred Employees shall receive
credit under each such plan for payments under a deductible limit made by them
and for out-of-pocket maximums and similar limits applicable to them for the
relevant plan year in which the Effective Time occurs under the applicable
Company Welfare Plans in which they participated immediately prior to the
Effective Time. Parent shall not be required to amend or cause to be amended a
Parent Welfare Plan with respect to (i) above to remove restrictions for
pre-existing conditions or requirements for evidence of insurability with
respect to Transferred Employees not provided such coverage under Company
Benefit Plans due to restrictions for pre-existing conditions or requirements
for evidence of insurability under Company Benefit Plans; in addition, in the
case of an insured Parent Welfare Plan, Parent shall have met its obligation
under (i) above with respect to such plan if Parent uses its reasonable best
efforts to (x) amend or cause to be amended such plan accordingly, (y) obtain a
waiver of such restrictions for pre-existing conditions or requirements
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for evidence of insurability, or (z) retain such coverage under a Company
Benefit Plan that becomes a Parent Welfare Plan, regardless of whether such
amendment, waiver or coverage is obtained.
(e) To the extent a Transferred Employee becomes eligible for
severance benefits under an existing written plan or agreement on or after the
Effective Time or as a result of the transactions contemplated by this Agreement
(whether under a Company Benefit Plan or a Parent Employee Plan), such benefits
shall be paid by Parent, an affiliate of Parent, or a Parent Employee Plan, and
WEUS and its affiliates shall have no liability for any such severance benefits.
(f) The shares of Parent Common Stock to be issued pursuant to
the options issued pursuant to Section 6.5(k) shall be covered by an effective
registration statement on Form S-8 or Form S-4 as of the date of issuance.
(g) In the event Parent or Merger Subsidiary or any successors
and assigns of either (i) consolidates with or merges into any other Person and
shall not be the continuing or surviving corporation or entity in such
consolidation or merger or (ii) transfers all or substantially all of its
properties and assets relating to the Surviving Corporation to any Person, then,
and in each case, proper provision shall be made so that such successors and
assigns of Parent or Merger Subsidiary honor the obligations of Parent and
Merger Subsidiary set forth in this Section 6.5.
(h) Nothing in this Agreement, express or implied, shall confer
upon any Transferred Employee or any other employee of the Company or an
affiliate thereof or upon any representative of such employee, or upon any
person claiming through such employee, or upon any collective bargaining agent,
any rights or remedies, including any right to employment or continued
employment for any specified period, of any nature or kind whatsoever. Nothing
in this Agreement, express or implied, shall be deemed to confer upon any
individual (or any beneficiary thereof) any rights under or with respect to any
plan, program, or arrangement described in or contemplated by this Agreement,
and each individual (and any beneficiary thereof) shall be entitled to look only
to the express terms of any such plan, program, or arrangement for his or her
rights thereunder. Nothing in this Agreement, express or implied, shall create a
third party beneficiary relationship or otherwise confer any benefit,
entitlement, or right upon any person or entity other than the parties hereto.
Nothing in this Agreement shall cause duplicate benefits to be paid or provided
to or with respect to a Transferred Employee under any employee benefit
policies, plans, arrangements, programs, practices, or agreements (including any
Company Benefit Plan).
(i) References herein to a benefit with respect to a Transferred
Employee shall include, where applicable, benefits with respect to any eligible
dependents and beneficiaries of such Transferred Employee under the same
employee benefit policy, plan, arrangement, program, practice, or agreement.
(j) Weatherford, WEUS, the Company, and Parent shall provide each
other with such information, notices, and schedules as may be reasonably
requested to effect the
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matters set forth in this Section 6.5. All such information and notices and
schedules to be provided hereunder shall be true, correct and complete as of the
date provided.
(k) As of the Effective Time, Parent shall grant stock options
for shares of Parent Common Stock pursuant to Parent's Incentive Stock Option
Plan to each individual listed on Schedule 3.16 of the Company Disclosure Letter
who is a Transferred Employee in an amount equal to the number of unvested
Employee Options as of the Effective Time based upon the information set forth
opposite such Transferred Employee's name on Schedule 3.16 of the Company
Disclosure Letter, at an option price per share equal to Fair Market Value (as
determined under Parent's Incentive Stock Option Plan) and subject to such other
standard option terms called for under Parent's Incentive Stock Option Plan and
otherwise generally applicable to stock option grants pursuant to Parent's
Incentive Stock Option Plan. If an individual is listed on Schedule 3.16 of the
Company Disclosure Letter but is not a Transferred Employee, such individual
will not be entitled to any stock option grant pursuant to the preceding
sentence.
Section 6.6 Corporate Name; Trademark Rights. (a) Within 30 days
following the Effective Time, Parent will use its best efforts to cause the
Surviving Corporation and each of its subsidiaries to cease to use the name
"WEUS" or "Weatherford" or any similar names (except as permitted under the
Transitional Services Agreement), and Parent will take all action, including
causing the Surviving Corporation and each of its subsidiaries to file all
documents, necessary to change the name of the Surviving Corporation and each of
its subsidiaries to a name that does not use the name "WEUS" or "Weatherford."
(b) Parent understands and agrees that nothing in this Agreement
confers upon Parent or the Surviving Corporation any rights to or under any
trademarks, service marks, logos, or trade names of the Weatherford Entities, or
any of their affiliates ("Marks"). Parent agrees that, upon the Effective Time,
Parent will cause the Surviving Corporation and each of its subsidiaries to
cease all use of the Marks, including, without limitation, any name including
the word "WEUS" or "Weatherford," the "WEUS logo" or the "Weatherford logo," and
all marks, names, and trade styles confusingly similar to such word and symbol.
Parent further agrees that it will, as promptly as practicable and in any event
within 180 calendar days following the Effective Time, cause the Surviving
Corporation and its subsidiaries to remove all references to and representations
of any of the Marks from the properties of the Surviving Corporation and its
subsidiaries.
Section 6.7 Registration Rights Agreement. Parent will enter into a
Registration Rights Agreement with WEUS at the Effective Time in the form
attached hereto as Exhibit B (the "Registration Rights Agreement").
Section 6.8 Transitional Services Agreement and Voting Agreement. The
Partnership will enter into a Transitional Services Agreement with Weatherford
at the Effective Time substantially in a form attached hereto as Exhibit C,
which will include such reasonable services and fees as shall be mutually agreed
by Parent and Weatherford, and WEUS will enter into a Voting Agreement with
Parent at the Effective Time in the form attached hereto as Exhibit G (the
"Voting Agreement").
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Section 6.9 Representation on Parent's Board of Directors. (a) The
Board of Directors of Parent shall take such action as may be necessary to
increase the size of Parent's Board of Directors immediately following the
Effective Time from eight members to eleven members and shall cause to be
appointed to the Board of Directors of Parent immediately after the Effective
Time three nominees (together, the "Weatherford Nominees") selected by WEUS. One
Weatherford Nominee shall be appointed as a Class A director with a term of
office expiring in 2001, one Weatherford Nominee shall be appointed as a Class B
director with a term of office expiring in 2002, and one Weatherford Nominee
shall be appointed as a Class C director with a term of office expiring in 2003.
After such appointments, the Board of Directors shall cause the Weatherford
Nominees, or any other Persons nominated by WEUS in place of the Weatherford
Nominees, to stand for election to the Board of Directors of Parent at Parent's
next succeeding Annual Meeting of Stockholders following the expiration of their
respective terms of office. At each Annual Meeting of Stockholders of Parent,
the Board of Directors shall nominate the Weatherford Nominees whose term of
office is then expiring (or such other Weatherford Nominees as are nominated by
WEUS) to stand for election to the Board of Directors of Parent, and Parent
shall support the election of such Person.
(b) Notwithstanding anything to the contrary contained herein,
if WEUS ever directly or indirectly beneficially owns (including ownership by
any affiliate of WEUS) in the aggregate less than 20% of the shares of
outstanding Parent Common Stock, Parent's obligations under this Section 6.9
shall only apply with respect to two nominees selected by WEUS for Parent's
Board of Directors.
(c) Notwithstanding anything to the contrary contained herein,
if WEUS ever directly or indirectly beneficially owns (including ownership by
any affiliate of WEUS) in the aggregate less than 10% of the shares of
outstanding Parent Common Stock, the obligations of Parent and the rights of
WEUS under this Section 6.9 shall terminate.
Section 6.10 Retention by WEUS. Parent agrees that WEUS and its
affiliates may retain (a) copies of all consolidating and consolidated financial
information and all other accounting books and records prepared or used in
connection with the preparation of financial statements of the Company, its
subsidiaries or any of their affiliates; provided that WEUS and its affiliates
shall keep all of such information strictly confidential but only to the extent
required to be kept confidential under Section 7.7, and (b) all Retained E-mail
(as defined in Section 12.17).
Section 6.11 Record Preservation by Parent and Surviving Corporation.
Parent agrees that it shall, and shall cause the Surviving Corporation to,
preserve and keep all books and records relating to the Business and operations
of the Company and its subsidiaries on or before the Effective Time in Parent's
or the Surviving Corporation's possession for a period of at least six years
from the Effective Time. After such six-year period, before Parent or the
Surviving Corporation may dispose of any such books and records, at least 30
calendar days' prior notice to such effect shall be given by Parent or the
Surviving Corporation to WEUS or any other affiliate designated by WEUS, and
WEUS or its designee shall be given an opportunity, at its cost and expense, to
remove and retain all or any part of such books and records of which Parent or
the Surviving Corporation elects to dispose. Notwithstanding the foregoing,
Parent agrees that it shall, and shall cause the Surviving Corporation to,
preserve and keep all books and records of the Company and its subsidiaries
relating to any Action of which Parent has Knowledge if it is
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reasonably likely that such Action may relate to matters occurring prior to the
Effective Time, without regard to the six-year period set forth in this Section
6.11.
Section 6.12 Merger Subsidiary. Parent has provided the Company with
separate financial information regarding Merger Subsidiary.
Section 6.13 No Solicitation. (a) From the date hereof until the
Effective Time, Parent shall not, nor shall it permit any of its subsidiaries
to, nor shall it authorize or permit any of its directors, officers, or
employees, or any investment banker, financial advisor, attorney, accountant, or
other representative retained by it or any of its subsidiaries (the
"Representatives") to, directly or indirectly through another Person, (i)
solicit or initiate (including by way of furnishing information), or take any
other action designed and intended to facilitate or encourage, any inquiries or
the making of any proposal that constitutes any Takeover Proposal (as defined
below), (ii) participate or engage in any discussions or negotiations regarding
any Takeover Proposal, or (iii) disclose any nonpublic information relating to
Parent or any of its subsidiaries to any Person in connection with any Takeover
Proposal; provided, however, that in the case of (ii) and (iii) only, if, at any
time prior to obtaining the Parent Stockholders' Approval, the Board of
Directors of Parent determines in good faith, (i) after consulting with and
receiving the advice of outside counsel, that it is necessary to do so in order
to comply with its fiduciary duties to Parent's stockholders under applicable
law and (ii) based on the advice of Parent's financial advisors, that a Takeover
Proposal is a Superior Proposal (as defined below), then Parent may, in response
to a bona fide written Takeover Proposal that was not solicited by it, and
subject to compliance with Section 6.13(c), (x) furnish information with respect
to Parent and its subsidiaries to any Person submitting such Takeover Proposal,
provided such information is furnished pursuant to an existing confidentiality
agreement or a confidentiality agreement with terms no less favorable to Parent
than those contained in the Confidentiality Agreement (as hereinafter defined)
(which agreement Parent is hereby permitted to enter into) and (y) participate
in discussions or negotiations regarding such Takeover Proposal. For purposes of
this Agreement, "Takeover Proposal" means any inquiry, proposal, or offer from
any Person relating to any direct or indirect acquisition or purchase of 15% or
more of the assets of Parent and its subsidiaries or 15% or more of any class of
equity securities of Parent or any of its subsidiaries, any tender offer or
exchange offer that if consummated would result in any Person beneficially
owning 15% or more of any class of equity securities of Parent or any of its
subsidiaries, or any merger, consolidation, business combination,
recapitalization, liquidation, dissolution, or similar transaction involving
Parent or any of its subsidiaries, in all cases other than the transactions
contemplated by this Agreement.
(b) Except as expressly permitted by this Section 6.13, neither
the Board of Directors of Parent nor any committee thereof shall (i) withdraw or
modify, or propose publicly to withdraw or modify, in a manner adverse to
Weatherford, WEUS, or the Company, the approval or recommendation by such Board
of Directors or such committee of this Agreement, the Merger, the issuance of
the shares of Parent Common Stock called for hereby, or the other transactions
contemplated hereby, (ii) approve or recommend, or propose publicly to approve
or recommend, any Takeover Proposal, or (iii) cause Parent or any of its
subsidiaries to enter into any letter of intent, agreement in principle,
acquisition agreement, or other similar agreement, or fee arrangement, or other
agreement (each, an "Acquisition Agreement") related to any Takeover Proposal.
Notwithstanding the foregoing, if prior to receiving the Parent Stockholders'
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Approval, the Board of Directors of Parent receives an unsolicited Takeover
Proposal and the Board of Directors determines in good faith (i) after receiving
the advice of Parent's financial advisors, that such Takeover Proposal
constitutes a Superior Proposal, and (ii) after consulting with and receiving
the advice of outside counsel, that it is consistent with its fiduciary duties
to Parent's stockholders under applicable law to do so, the Board of Directors
of Parent may (x) withdraw or modify its approval or recommendation of the
issuance of the shares of Parent Common Stock called for hereby, (y) approve or
recommend such Superior Proposal, or (z) terminate this Agreement and
concurrently with or after such termination, if it so chooses, cause Parent to
enter into any Acquisition Agreement with respect to any Superior Proposal
subject to payment of the amounts set forth in Section 12.4(c) prior to or
concurrently with the termination hereof, but only (as to (x), (y), and (z)) (i)
if Parent has complied with all of the provisions of this Section 6.13 and (ii)
if such action is taken at a time that is after the third Business Day following
Weatherford's receipt of written notice from Parent advising Weatherford that
the Board of Directors of Parent has received a Superior Proposal, specifying
the material terms and conditions of such Superior Proposal and identifying the
Person making such Superior Proposal. For purposes of this Agreement, a
"Superior Proposal" means any bona fide written Takeover Proposal (provided that
for purposes of this definition the references to 15% in the definition of the
term "Takeover Proposal" shall be deemed to be references to "50%") made by a
Third Party on terms that, taking into account all the terms and conditions of
such proposal (including price and expected timing of consummation), would, if
consummated, result in a transaction that is more favorable to Parent's
stockholders (in their capacity as stockholders) from a financial point of view,
than the transactions contemplated by this Agreement and for which financing, to
the extent required, is then committed or reasonably likely to be committed.
(c) In addition to the obligations of Parent set forth in
paragraphs (a) and (b) of this Section 6.13, Parent shall immediately (within 24
hours) advise Weatherford of any Takeover Proposal, including the material terms
and conditions known to Parent of such Takeover Proposal, a copy of any offer or
other written communications, and the identity of the Person making such request
or Takeover Proposal. Parent shall keep Weatherford reasonably informed of the
status of any such request or proposal and of any discussions and negotiations
in relation thereto.
(d) Nothing contained in this Section 6.13 shall prohibit Parent
from taking and disclosing to its stockholders a position contemplated by Rule
14e-2(a) promulgated under the Exchange Act or from making any disclosure to
Parent's stockholders if, in the good faith judgment of the Board of Directors
of Parent, based upon the advice of outside counsel, failure to make such
disclosure would be a breach of its fiduciary duties to Parent's stockholders
under applicable law.
Without the prior consent of Weatherford, Parent shall not,
except to the extent contemplated by this Agreement, release any Person from any
confidentiality or standstill agreement to which Parent is a party if such
action would have the purpose or effect of permitting or facilitating the
submission of a Takeover Proposal by such Person. Immediately upon the execution
of this Agreement, Parent shall, and Parent shall cause its subsidiaries and
Representatives to, cease and cause to be terminated all activities,
discussions, and negotiations, if any, with any Person conducted prior to the
date hereof with respect to, or seeking to obtain, any Takeover Proposal.
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(e) Notwithstanding anything in this Agreement to the contrary,
Parent's Board of Directors shall be permitted, at any time prior to obtaining
the Parent Stockholders' Approval, to withdraw, modify, or change, or propose to
withdraw, modify, or change, the recommendation by the Board of Directors of the
issuance of Parent Common Stock in the Merger if, after consulting with and
receiving the advice of outside counsel, Parent's Board of Directors concludes
in good faith that failure to take such action would result in a breach by
Parent's Board of Directors of its fiduciary obligations under applicable law.
Section 6.14 Parent Financial Statements. (a) Until the earlier of (i)
that date that Weatherford is no longer required to include Parent's financial
results in Weatherford's consolidated financial statements or SEC filings or
(ii) such time as Weatherford agrees otherwise, Parent covenants and agrees to
annually provide to Weatherford the audited financial statements of Parent on or
before 75 days after Parent's fiscal year end.
(b) Parent covenants and agrees for so long as Weatherford is
required to include Parent's financial results in Weatherford's consolidated
financial statements or SEC filings to cause its independent public accountants
to provide Weatherford with any and all assistance reasonably requested by
Weatherford in connection with the inclusion of Parent's financial statements in
any of Weatherford's filings with the SEC, including, without limitation,
providing of written consents, opinion letters, and comfort letters.
ARTICLE VII
Covenants of Parent and the Company
Section 7.1 Reasonable Best Efforts. Subject to the terms and
conditions of this Agreement, each party will use its reasonable best efforts to
take, or cause to be taken, all actions and to do, or cause to be done, all
things necessary, proper, or advisable under applicable laws and regulations to
consummate the transactions contemplated by this Agreement.
Section 7.2 Certain Filings. (a) The Company and Parent shall cooperate
with one another (i) in connection with the preparation of the Proxy Statement,
(ii) in determining whether any action by or in respect of, or filing with, any
Governmental Authority is required, or any actions, consents, approvals, or
waivers are required to be obtained from parties to any material agreements, in
connection with the consummation of the transactions contemplated by this
Agreement, and (iii) in taking such actions or making such filings, furnishing
information required in connection therewith and seeking timely to obtain such
actions, consents, approvals, or waivers.
(b) If not previously filed by Parent and the Company, within ten
Business Days after the date hereof Parent and the Company will make such
filings as may be required by the HSR Act with respect to the consummation of
the transactions contemplated by this Agreement, will request early termination
of any waiting period under the HSR Act, and will use all reasonable efforts to
obtain early termination of any such waiting period. Parent and the Company will
file or cause to be filed as promptly as practicable with the United States
Federal Trade Commission ("FTC") and the United States Department of Justice
("Justice Department") any supplemental information which may be requested
pursuant to the HSR Act. All filings
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referred to in this Section 7.2(b) will comply in all material respects with the
requirements of the respective laws pursuant to which they are made. Each party
shall pay its own fees in connection with the filing(s) by such party under the
HSR Act.
(c) Without limiting the generality or effect of Section 7.2(b),
and notwithstanding any provision herein to the contrary, each of the parties
will (i) use reasonable commercial efforts to comply as expeditiously as
possible with all lawful requests of Governmental Authorities for additional
information and documents pursuant to the HSR Act, (ii) not (A) extend any
waiting period under the HSR Act or (B) enter into any voluntary agreement with
any Governmental Authorities not to consummate the transactions contemplated by
this Agreement, except with the prior consent of the other, and (iii) cooperate
with each other and use reasonable efforts to obtain the requisite approval of
the FTC and Justice Department, including, without limitation, (A) entering into
negotiations, providing information, making proposals, entering into reasonable
agreements and performing such agreements to divest of assets or properties,
hold separate (through the establishment of a trust or otherwise) particular
assets, categories of assets, or businesses, or agreeing to dispose of one or
more assets or properties, in each case as may be necessary to secure the
expiration or termination of the applicable waiting periods under the HSR Act,
(B) use commercially reasonable efforts, but not beyond complying with a second
request for information from the Department of Justice (including taking the
steps contemplated under clause (A)) to prevent the entry in a judicial or
administrative proceeding brought under any antitrust law by any Governmental
Authority or any other party for a permanent or preliminary injunction or other
order that would make consummation of the transactions contemplated by this
Agreement unlawful or that would prevent or delay such consummation, (C) take
promptly any and all commercially reasonable steps, including filing an appeal,
the posting of a bond, or the steps contemplated by clause (A), necessary to
obtain the removal, dissolution, stay, or dismissal of any temporary restraining
order, preliminary injunction, or other judicial or administrative order which
prevents the consummation of the transactions contemplated by this Agreement or
requires as a condition thereto that all or any part of the Business be held
separate, or (D) pursuing any necessary litigation or administrative proceedings
(including, if necessary, participation in proceedings through the trial court
level).
Section 7.3 Public Announcements. Without the prior consent of the
other, which consent shall not be unreasonably withheld, neither Parent nor the
Company nor their affiliates will issue, or permit any agent or affiliate to
issue, any press releases or otherwise make or permit any agent or affiliate to
make, any public statements with respect to this Agreement or the transactions
contemplated by this Agreement, in each case except as maybe required by law.
Section 7.4 Further Assurances. (a) At and after the Effective Time,
the officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of the Company or Merger
Subsidiary, any deeds, bills of sale, assignments, or assurances and to take and
do, in the name and on behalf of the Company or Merger Subsidiary, any other
actions and things to vest, perfect, or confirm of record or otherwise (i) in
the Surviving Corporation any and all right, title, and interest in, to, and
under any of the rights, properties, or assets of the Company acquired or to be
acquired by the Surviving Corporation as a result of, or in connection with, the
Merger and (ii) in WEUS or its affiliates any and all right, title, and interest
in, to, and under any of the Excluded Assets.
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(b) In case at any time after the Effective Time any further
action is necessary to carry out the purposes and intent of this Agreement and
the transactions contemplated hereby, or to transfer to the Surviving
Corporation any assets of the Business (excluding the Excluded Assets, and the
assets that have been transferred as disclosed on Schedule 3.7 and Schedule 5.1
of the Company Disclosure Letter) that are both (i) either (A) reflected on the
balance sheet included in the Partnership Unaudited Financial Statements or (B)
paid for by the Company or its subsidiaries since the Partnership Unaudited
Balance Sheet Date and (ii) held in the name and control of Weatherford, WEUS,
or their affiliates after the Effective Time, WEUS and Parent each agree, on
behalf of itself and its affiliates, to take or cause to be taken such further
action (including the execution and delivery of such further instruments and
documents) as the other reasonable may request.
Section 7.5 Notices of Certain Events. Each of the Company and Parent
shall promptly notify the other party hereto of:
(a) any notice or other communication from any Person alleging
that the consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement;
(b) any notice or other communication from any Governmental
Authority in connection with the transactions contemplated by this Agreement;
(c) any actions, suits, claims, investigations, or proceedings
commenced or, to its Knowledge, threatened against, relating to, or involving,
or otherwise affecting such party that, if pending on the date of this
Agreement, would have been required to have been disclosed pursuant to Sections
3.8, 3.11, 3.14, 3.15, 4.9, 4.12, 4.14, or 4.15 (as the case may be) or that
relate to the consummation of the transactions contemplated by this Agreement;
and
(d) (i) the discovery by such party that any representation or
warranty contained in this Agreement is untrue or inaccurate in any material
respect, (ii) the occurrence or failure to occur of any event which occurrence
or failure to occur would be reasonably likely to cause any of the
representations or warranties in this Agreement to be untrue or incorrect in any
material respect at the Effective Time, except for representations and
warranties that speak as of a specified date, which need only be true and
correct as of the specified date, and (iii) any material failure on its part to
comply with or satisfy any covenant, condition, or agreement to be complied with
or satisfied by it hereunder; provided, however, that the delivery of any notice
pursuant to this Section 7.5(d) shall not limit or otherwise affect the remedies
available hereunder to the party receiving such notice.
Section 7.6 Tax-Free Reorganization. Prior to, through, and subsequent
to the Effective Time, each party shall use its reasonable best efforts to cause
the Merger to qualify as a 368 Reorganization and will not take or fail to take
any action reasonably likely to cause the Merger not to so qualify.
Section 7.7 Access to Information; Confidentiality. (a) From the date
hereof until the Effective Time, the Company and its subsidiaries, on the one
hand, and Parent, on the other hand, (i) will give to the other party, its
counsel, financial advisors, auditors, and other
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authorized representatives reasonable access, during regular business hours and
upon reasonable advance notice, to the employees, offices, properties, books,
and records of such party, in each case as the other party may reasonably
request and (ii) furnish to the other party and its representatives such
financial and other data and information as the other party and its
representatives may reasonably request. The foregoing shall not include
information that is not germane to the transactions contemplated hereby,
information regarding any sale or merger or combination of WEUS, the Company, or
any of its subsidiaries (whether as a sale of assets or ownership interests) to
or with any Person other than Parent or Merger Subsidiary, or information
prepared by Weatherford, WEUS, the Company or any of its subsidiaries (or any of
their respective representatives) relating to this Agreement or the transactions
contemplated hereby. A party shall have the right to have a representative
present at all times of any inspections, interviews, or examinations conducted
at the offices or facilities or on the properties of such party. The Company and
its subsidiaries, on the one hand, and Parent, on the other hand, will instruct
their respective employees and representatives to cooperate with the other party
in its investigations; provided, however, that any access or disclosure of the
type contemplated in this Section 7.7 which, in the reasonable judgment of the
party asserting such denial, would operate to cause the waiver of any
attorney-client, work product, or other privilege or result in the violation of
an obligation or agreement of confidentiality may be denied. Each party further
agrees that if the other party inadvertently furnishes such party with
information or access not required in accordance with the preceding sentence,
such party will, upon the other party's request, promptly return same to the
other party together with any and all extracts therefrom or notes pertaining
thereto (whether in electronic or other format). In addition, Parent shall only
have access to, and the Company and its subsidiaries shall only be required to
provide Parent with access to, Retained E-mail to the extent set forth in
Section 7.9. Any investigation pursuant to this Section 7.7 shall be conducted
in such manner as not to interfere unreasonably with the conduct of the business
of the Company and its subsidiaries, on the one hand, and Parent, on the other
hand, as the case may be, and no investigation pursuant to this Section 7.7
shall affect any representation or warranty made by any party hereunder. Each
party shall indemnify, defend, and hold harmless the other (including its
affiliates) from and against any losses asserted against or suffered by the
other party relating to, resulting from, or arising out of examinations or
inspections made by such party or its authorized representatives pursuant to
this Section 7.7.
(b) All information obtained by Parent, on the one hand, or the
Company and its subsidiaries, on the other hand, pursuant to this Section 7.7
shall be kept confidential in accordance with, and shall otherwise be subject to
the terms of, the Confidentiality Agreement dated June 15, 2000 between Parent
and Weatherford (the "Confidentiality Agreement"). In addition, Parent agrees
that if the information (whether in electronic mail format, on computer hard
drives, or otherwise) held by the Company and its subsidiaries at the Effective
Time includes information that relates to the business operations or other
strategic matters of WEUS or its affiliates (other than the Company or its
subsidiaries), such information shall be held in confidence on the terms and
subject to the conditions contained in the Confidentiality Agreement, but the
term of the restriction on the disclosure and use of such information shall
continue in effect as to such information for a period of two years from the
Effective Time; provided, however, this sentence shall not apply to information
relating solely to the business operations or strategic matters of the Company
and its subsidiaries.
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Section 7.8 Proxy Statement. Parent and the Company shall promptly
furnish to each other all information, and take such other actions, as may
reasonably be requested in connection with any action by any of them in
connection with the preparation and filing of the Proxy Statement. The
information provided and to be provided by Parent and the Company, respectively,
for use in the Proxy Statement shall be true and correct in all material
respects without omission of any material fact which is required to make such
information not false or misleading as of the date thereof and in light of the
circumstances under which given or made.
Section 7.9 Cooperation After the Effective Time. WEUS and Parent each
agree that it will cooperate with and make available to the other, during normal
business hours, all books and records, information, and employees (without
substantial disruption of employment) retained and remaining in existence after
the Effective Time which are necessary or useful in connection with (a) any Tax
inquiry, audit, investigation or dispute, (b) any litigation or investigation,
or (c) any other matter requiring any such books and records, information, or
employees for any reasonable business purpose, provided that (i) with respect to
providing Parent access to Retained E-Mail, WEUS shall provide access to Parent
upon Parent's request and shall furnish Parent with copies of only those
portions of the Retained E-Mail that pertain or relate to the Company and its
subsidiaries and the Business and (ii) neither party shall be required by this
Section 7.9 to make available to the other any information referred to in the
third sentence of Section 7.7(a). The party requesting any such books and
records, information, or employees shall bear all of the out-of-pocket costs and
expenses (including attorneys' fees) reasonably incurred in connection with
providing such books and records, information, or employees. WEUS may require
certain financial information relating to the Company and its subsidiaries or
the Business for periods prior to the Effective Time for the purpose of filing
federal, state, local, and foreign Tax Returns, and other governmental reports,
and Parent agrees to furnish, and to cause the Surviving Corporation to furnish,
such information to WEUS at WEUS's request and expense.
Section 7.10 Non-Solicitation of Employees.
(a) For a period of 12 months after the Effective Time,
Weatherford, WEUS and their affiliates shall not, without the prior written
consent of Parent, directly or indirectly, solicit (other than pursuant to
general solicitations of employees not directed specifically at an employee of
Parent or its subsidiaries), encourage, induce, or permit any employee of Parent
or its subsidiaries to become an employee, contractor, or consultant of
Weatherford, WEUS or any of their affiliates; provided, however, that the
foregoing shall not prohibit Weatherford, WEUS, and their affiliates from
employing or contracting with any employee of Parent or its subsidiaries who
contacts Weatherford, WEUS, or their affiliates for employment.
(b) For a period of 12 months after the Effective Time, Parent
and its subsidiaries shall not, without the prior written consent of
Weatherford, directly or indirectly, solicit (other than pursuant to general
solicitations of employees not directed specifically at an employee of
Weatherford, WEUS or their affiliates), encourage, induce, or permit any
employee of Weatherford, WEUS or their affiliates to become an employee,
contractor, or consultant of Parent or any of its subsidiaries; provided,
however, that the foregoing shall not prohibit Parent and its subsidiaries from
employing or contracting with any employee of Weatherford, WEUS, or their
affiliates who contacts Parent or its subsidiaries for employment.
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Section 7.11 Adjustment Payments. Parent and the Company agree that as
of the Effective Time, they shall prepare a schedule of the individuals listed
on Schedule 3.16 of the Company Disclosure Letter who are Transferred Employees.
Promptly after the special retention date for each Transferred Employee
specified opposite his or her name on Schedule 3.16, Weatherford will pay each
Transferred Employee his or her applicable Adjustment Payment. For each
Transferred Employee who remains continuously employed with the Parent or one of
its subsidiaries through his or her applicable special retention date, Parent
shall make an Adjustment Payment to Weatherford within 10 days after such
special retention date. For any such Transferred Employee whose employment with
Parent or one of its subsidiaries is terminated by Parent or one of its
subsidiaries prior to his or her applicable special retention date other than
for cause, Parent shall make a payment to Weatherford equal to 50% of the
applicable Adjustment Payment for such Transferred Employee. There shall be no
Adjustment Payment with respect to a special retention date for any Transferred
Employee who voluntarily terminates his or her employment with Parent or one of
its subsidiaries prior to such special retention date.
ARTICLE VIII
Conditions to the Merger
Section 8.1 Conditions to the Obligations of Each Party. The
obligations of WEUS, the Company, Parent, and Merger Subsidiary to consummate
the Merger are subject to the satisfaction of the following conditions:
(a) the Parent Stockholders' Approval of the issuance of the
shares of Parent Common Stock as contemplated hereby shall have been received in
accordance with applicable NYSE listing requirements and all applicable legal
requirements;
(b) any applicable waiting periods under the HSR Act and the
Competition Act (Canada) relating to this Agreement, the Merger, and the other
transactions contemplated hereby shall have expired or been terminated;
(c) no provision of any applicable law or regulation and no
judgment, injunction, order, or decree shall prohibit the consummation of the
Merger;
(d) the shares of Parent Common Stock to be issued in the Merger
shall have been approved for listing on the NYSE, subject to official notice of
issuance;
(e) all conditions to the GC Acquisition, as set forth in the GC
Agreement, shall have been satisfied or waived, and such transaction shall close
contemporaneously with the Merger;
(f) the issuance of the Parent Common Stock in the Merger shall
be exempt from the registration requirements of the 1933 Act, it being
understood and acknowledged by WEUS that the certificates representing such
stock shall bear a restrictive legend stating that such stock was not received
in a transaction registered under the 1933 Act;
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(g) Parent shall have consummated financing reasonably acceptable
to both Parent and Weatherford sufficient to amend or refinance (i) Parent's and
Merger Subsidiary's 9 7/8% Senior Discount Notes, revolving credit facility and
operating lease facility, (ii) the Partnership's current working capital
facility and Master Letter of Credit Agreement with ABN Amro and the Synthetic
Leases and (iii) such other indebtedness as Parent and Weatherford shall
reasonably agree;
(h) the Services Agreement (as defined in Section 12.17) shall
have been terminated and replaced by the Transitional Services Agreement, in a
form to be mutually agreed upon by WEUS and Parent; and
(i) the Parent Average Price shall not be less than $25.00.
Section 8.2 Conditions to the Obligations of Parent and Merger
Subsidiary. The obligations of Parent and Merger Subsidiary to consummate the
Merger are subject to the satisfaction of the following further conditions:
(a) (i) all representations and warranties of Weatherford, WEUS,
and the Company contained in Article III and in any agreement, instrument, or
document delivered pursuant hereto or in connection herewith on or prior to the
Effective Time, in each case that are qualified as to materiality or make
reference to Company Material Adverse Effect, shall be true and correct as of
date hereof and as of the Effective Time as if made on such date, and each of
the representations and warranties of Weatherford, WEUS, and the Company herein
and therein that is not so qualified as to materiality or as to Company Material
Adverse Effect shall be true and correct in all material respects on and as of
the date hereof and on and as of the Effective Time as if made on and as of such
date, except for representations and warranties that speak as of a specified
date, which need only be true and correct as set forth above as of the specified
date, and (ii) all covenants and agreements of the Company contained in this
Agreement to be performed on or before the Effective Time in accordance with
this Agreement shall have been duly performed in all material respects;
provided, however, that the conditions of this Section 8.2(a) shall be deemed to
have been satisfied as long as (x) the failure of any representation and
warranty to be true and correct (without giving effect for these purposes to any
Company Material Adverse Effect qualifiers) and (y) the failure to perform any
covenant or agreement as provided in (ii) would not, aggregating clauses (x) and
(y), result in, or reasonably be expected to result in, a Company Material
Adverse Effect; and Parent shall have received at the Effective Time a
certificate(s), dated the day of the Effective Time and validly executed by or
on behalf of Weatherford, WEUS, and the Company, to the effect that the
conditions set forth in clauses (i) and (ii) above have been so satisfied;
(b) Parent shall have received an opinion of King & Spalding in
form and substance reasonably satisfactory to Parent, on the basis of certain
facts, representations, and assumptions set forth in such opinion, dated the
Effective Time, to the effect that the Merger will be treated for federal income
tax purposes as a reorganization qualifying under the provisions of Section
368(a) of the Code. In rendering such opinion, such counsel shall be entitled to
rely upon representations of the officers of the Parent, Merger Subsidiary, and
the Company substantially in the form of Exhibits D and E hereto;
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(c) the Limited Partnership (as defined in Section 12.17) shall
have been released from any indemnification obligations under the Formation
Agreement (as defined in Section 12.17) only in respect of any Excluded
Liability (as defined in Section 12.17), and WEUS shall have executed an
acknowledgment substantially in the form of Exhibit F hereto to that effect and
to the change of ownership of the Partnership effected by the Merger and
(d) WEUS shall have entered into the Voting Agreement.
Section 8.3 Conditions to the Obligations of Weatherford, WEUS, and the
Company. The obligations of Weatherford, WEUS, and the Company to consummate the
Merger are subject to the satisfaction of the following further conditions:
(a) (i) all representations and warranties of Parent and Merger
Subsidiary contained in Article IV, and in any agreement, instrument, or
document delivered pursuant hereto or in connection herewith on or prior to the
Effective Time, in each case that are qualified as to materiality or makes
reference to Parent Material Adverse Effect, shall be true and correct as of the
date hereof and as of the Effective Time as if made on such date, and each of
the representations and warranties of Parent and Merger Subsidiary herein and
therein that is not so qualified as to materiality or as to Parent Material
Adverse Effect shall be true and correct in all material respects on and as of
the date hereof and on and as of the Effective Time as if made on and as of such
date, except for representations and warranties that speak as of a specified
date, which need only be true and correct as of the specified date, and (ii) all
covenants and agreements of Parent and Merger Subsidiary contained in this
Agreement to be performed on or before the Effective Time in accordance with
this Agreement shall have been duly performed in all material respects;
provided, however, that the conditions of this Section 8.3(a) shall be deemed to
have been satisfied as long as (x) the failure of any representation and
warranty to be true and correct (without giving effect for these purposes to any
Parent Material Adverse Effect qualifiers) and (y) the failure to perform any
covenant or agreement as provided in (ii) would not, aggregating clauses (x) and
(y), result in, or reasonably be expected to result in, a Parent Material
Adverse Effect; and Parent shall have received at the Effective Time a
certificate(s), dated the day of the Effective Time and validly executed by or
on behalf of Parent and Merger Subsidiary, to the effect that the conditions set
forth in clauses (i) and (ii) above have been so satisfied; and
(b) the Company shall have received an opinion of Andrews & Kurth
L.L.P., in form and substance reasonably satisfactory to the Company, on the
basis of certain facts, representations, and assumptions set forth in such
opinion, dated the Effective Time, to the effect that the Merger will be treated
for federal income tax purposes as a reorganization qualifying under the
provisions of Section 368(a) of the Code. In rendering such opinion, such
counsel shall be entitled to rely upon representations of the officers of
Parent, Merger Subsidiary, and the Company substantially in the form of Exhibits
D and E hereto; and
(c) Parent shall have entered into the Registration Rights
Agreement.
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ARTICLE IX
Termination
Section 9.1 Termination. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time (notwithstanding
any approval of this Agreement by the Board of Directors of the Company or
Parent or the stockholders of the Company or Parent):
(a) by mutual written agreement of the Company and Parent;
(b) by either the Company or Parent, if
(i) the Merger has not been consummated on or before
March 31, 2001; provided that the right to terminate this Agreement
pursuant to this Section 9.1(b)(i) shall not be available to any party
whose breach of any covenant, agreement, or other obligation contained
in this Agreement results in the failure of the Merger to be
consummated by such time;
(ii) there shall be any law or regulation that makes
consummation of the Merger illegal or otherwise prohibited or if any
judgment, injunction, order, or decree enjoining any party from
consummating the Merger is entered and such judgment, injunction,
order, or decree shall have become final and non-appealable;
(iii) the Parent Stockholders' Meeting has been duly
convened but the Parent Stockholders' Approval shall not have been
obtained at such Parent Stockholders' Meeting (or any adjournment
thereof); or
(iv) the other party breaches any representation, warranty,
covenant or other agreement contained in this Agreement that (A) would
give rise to the failure of such party to satisfy any condition set
forth in Section 8.2(a) or Section 8.3(a), as applicable, and (B)
cannot be or has not been cured within 45 days after the giving of
written notice to the breaching party of such breach (a "Material
Breach") (provided that the terminating party is not then in breach in
any material respect of any obligation, covenant or other agreement
contained in this Agreement or in Material Breach of any
representation or warranty contained in this Agreement);
(c) by Parent in accordance with Section 6.13(b), provided that
it has complied with all provisions thereof and that it complies with the
requirements, if then applicable, of Section 12.4;
(d) by the Company if (i) the Board of Directors of Parent or any
committee thereof shall have failed to recommend, withdrawn, or modified in a
manner adverse to the Company, its approval or recommendation of the issuance of
Parent Common Stock as contemplated hereby, or approved or recommended any
Superior Proposal, (ii) the Board of Directors of Parent or any committee
thereof shall have resolved to take any of the foregoing actions, or (iii) the
Board of Directors of Parent or any committee thereof shall have failed to
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affirm its recommendation of the issuance of Parent Common Stock as contemplated
hereby within six (6) Business Days of a request to do so by the Company;
(e) by the Company, if Parent shall have entered into, or
publicly announced its intention to enter into, an Acquisition Agreement with
respect to a Takeover Proposal or a Superior Proposal; or
(f) by Parent or the Company if the GC Agreement is terminated;
provided that the Company shall not be entitled to terminate this Agreement
pursuant to this Section 9.1(f) if the GC Agreement is terminated as a result of
the breach by the Company of any material covenant, agreement or other
obligation contained in the GC Agreement.
The party desiring to terminate this Agreement pursuant to this Section 9.1
(other than pursuant to Section 9.1(a)) shall give notice of such termination to
the other party.
Section 9.2 Effect of Termination. If this Agreement is terminated
pursuant to Section 9.1, this Agreement shall forthwith become void and of no
effect with no liability on the part of any party hereto, except that (i) the
agreements contained in Sections 7.7(b), 12.2, 12.4, 12.9 12.12, 12.13, and
12.15 shall survive the termination of this Agreement and (ii) such termination
shall not relieve any party hereto of any liability for any breach by that party
of its covenants, agreements, or other obligations under this Agreement
occurring prior to such termination.
ARTICLE X
Indemnification
Section 10.1 Indemnification.
(a) Weatherford and WEUS's Indemnity. From and after the
Effective Time, subject to the other terms and limitations in this Article X,
Weatherford and WEUS shall, jointly and severally indemnify, defend, reimburse,
and hold harmless the Parent Indemnitees (as defined in Section 12.17) from and
against any and all Losses (as defined in Section 12.17) actually incurred by
any of the Parent Indemnitees or asserted by a Third Party (as defined in
Section 12.17) against any of the Parent Indemnitees for or arising out of (i)
any breach of the representations or warranties of Weatherford, WEUS, or the
Company contained in Section 3.2 hereof, (ii) any breach of the covenants or
obligations of Weatherford, WEUS, or the Company under this Agreement (other
than a breach of any covenant or obligation in Article XI), (iii) the Retained
Liabilities (as defined in Section 12.17), or (iv) any Third Party Claim in
which it is ultimately determined by a final and non-appealable judgment (or
settled with Weatherford's consent, which consent will not be unreasonably
withheld) that the written information supplied to Parent or its representatives
by Weatherford, WEUS, or the Company, specifically for inclusion in the Proxy
Statement contained a material misstatement.
(b) Parent's Indemnity. From and after the Effective Time,
subject to the other terms and limitations in this Article X, Parent shall
indemnify, defend, reimburse, and hold harmless the Company Indemnitees (as
defined in Section 12.17) from and against any and all
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Losses actually incurred by any of the Company Indemnitees or asserted by a
Third Party against any of the Company Indemnitees for or arising out of (i) any
breach of the representations or warranties of Parent or Merger Subsidiary
contained in Section 4.2 hereof, (ii) any breach of the covenants or obligations
of Parent or Merger Subsidiary under this Agreement (other than a breach of any
covenant or obligation in Article XI), (iii) any agreement (other than the
Formation Agreement (except to the extent the Partnership shall have expressly
assumed liabilities and obligations under the Formation Agreement), the GC
Agreement and agreements entered into in violation of Article V of this
Agreement) to which any Weatherford Entity or their affiliates (other than the
Company and its subsidiaries) is a party (and to which the Company or any of its
subsidiaries may also be a party) and which relates to the Business (other than
the Retained Liabilities), (iv) any Third Party Claim alleging that the proxy
statement used in connection with the Parent Stockholders' Meeting contains a
material misstatement or omits to state a material fact necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading (other than information provided to Parent in writing by
Weatherford, WEUS, or the Company specifically for inclusion in such proxy
statement), or (v) the use of the name "WEUS" or "Weatherford" or the Marks
following the Effective Time. Parent acknowledges and agrees that the Losses
described in clause (iii) of the preceding sentence shall be retained by and
transfer with the Company and its subsidiaries and shall continue to be the
responsibility of the Surviving Corporation.
(c) Parent's Waiver. Notwithstanding anything to the contrary in
this Agreement, Parent shall not be liable to the Company's Indemnitees for any
exemplary, punitive, special, indirect, consequential, remote, or speculative
damages, except to the extent any such damages are included in any action by a
Third Party against a Company Indemnitee for which such Company Indemnitee is
entitled to indemnification under this Agreement.
(d) Weatherford and WEUS's Waiver. Notwithstanding anything to
the contrary in this Agreement, neither Weatherford nor WEUS shall be liable to
Parent Indemnitees for any exemplary, punitive, special, indirect,
consequential, remote, or speculative damages, except to the extent any such
damages are included in any action by a Third Party against a Parent Indemnitee
for which such Parent Indemnitee is entitled to indemnification under this
Agreement.
(e) Limitations on Indemnity.
(i) No Parent Indemnitees shall be entitled to assert any
right to indemnification under Section 10.1(a)(i) or Section 10.1(a)(iv)
until the aggregate amount of all Losses actually suffered by Parent
Indemnitees for matters covered thereby exceeds $2,500,000, and then only
to the extent such Losses exceed, in the aggregate, such amount; provided,
however, in no event shall Parent Indemnitees be entitled to recover in the
aggregate in excess of the market value as of the Effective Time of the
Merger Consideration for all Losses actually suffered by Parent Indemnitees
related to matters covered by Section 10.1(a)(i) and Section 10.1(a)(iv).
(ii) No Company Indemnitees shall be entitled to assert any
right to indemnification under Section 10.1(b)(i) or Section 10.1(b)(iv)
until the aggregate amount of all Losses actually suffered by Company
Indemnitees for matters covered
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thereby exceeds $2,500,000, and then only to the extent such Losses exceed,
in the aggregate, such amount; provided, however, in no event shall Company
Indemnitees be entitled to recover in the aggregate in excess of the market
value as of the Effective Time of the Merger Consideration for all Losses
actually suffered by Company Indemnitees related to matters covered by
Section 10.1(b)(i) and Section 10.1(b)(iv).
(f) Survival and Time Limitation. The representations and
warranties set forth in Sections 3.2 and 4.2 and all of the covenants,
obligations, and agreements of the parties set forth in this Agreement,
(including, but not limited to, those obligations set forth in Article VII, this
Article X and Article XI), shall survive the Effective Time. Notwithstanding the
foregoing sentence, except as provided in Section 11.13, after the Effective
Time, any assertion by a party or an Indemnitee that an Indemnifying Party is
liable to such party or Indemnitee for indemnification under the terms of
Section 10.1(a)(i), (ii) or (iv) or Section 10.1(b)(i), (ii) or (iv) of this
Agreement must be made in writing and must be given to the Indemnifying Party on
or prior to the date that is 12 months after the Effective Time (or not at all).
Nothing contained in this Section 10.1(f) or elsewhere in this Agreement shall
be construed to limit or restrict any rights to indemnity or other rights that
the Company, Weatherford, WEUS or the Partnership (or their successors) may have
under the Formation Agreement.
(g) COMPLIANCE WITH EXPRESS NEGLIGENCE RULE. ALL RELEASES,
DISCLAIMERS, LIMITATIONS ON LIABILITY, AND INDEMNITIES IN THIS AGREEMENT,
INCLUDING THOSE IN THIS SECTION 10.1, SHALL APPLY EVEN IN THE EVENT OF THE SOLE,
JOINT AND/OR CONCURRENT NEGLIGENCE, STRICT LIABILITY, OR OTHER FAULT OF THE
PARTY WHOSE LIABILITY IS RELEASED, DISCLAIMED, LIMITED, OR INDEMNIFIED.
(h) Further Indemnity Limitations. The amount of any Loss shall
be reduced (i) to the extent any Person entitled to receive indemnification
under this Agreement receives any insurance proceeds with respect to a Loss and
(ii) to take into account any payment or payments actually received by a Person
entitled to receive indemnification under this Article X with respect to a Loss.
(i) Sole and Exclusive Remedy. From and after the Effective Time,
except as provided in Section 11.8 and Section 11.10, the indemnification
provisions of this Article X and the provisions of Section 12.4(c) shall be the
sole and exclusive remedies of each party (including the Company Indemnitees and
Parent Indemnitees) (i) for any breach of the other party's representations and
warranties contained in this Agreement and (ii) otherwise with respect to this
Agreement and the transactions contemplated hereby or thereby (including the
Company and its subsidiaries).
Section 10.2 Defense of Claims.
(a) Notice. If an Indemnitee (as defined in Section 12.17)
receives notice of the assertion of any claim or of the commencement of any
Third Party Claim (as defined in Section 12.17) with respect to which
indemnification is to be sought from the Indemnifying Party (as defined in
Section 12.17), the Indemnitee will give such Indemnifying Party reasonably
prompt notice thereof, but in any event not later than seven Business Days after
the Indemnitee's receipt of notice of such Third Party Claim, but the failure to
give timely notice will not affect
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the rights of the Indemnitee or the obligations of the Indemnifying Party except
and only to the extent that, as a result of such failure, the Indemnifying Party
was substantially disadvantaged. Such notice shall describe the nature of the
Third Party Claim in reasonable detail and will indicate the estimated amount,
if practicable, of the Loss that has been or may be sustained by the Indemnitee.
(b) Defense. The Indemnifying Party will have the right to
participate in or, by giving notice to the Indemnitee within seven Business Days
after receipt of notice of the Third Party Claim, jointly with any other
Indemnifying Party similarly notified, to elect to assume the defense of, any
Third Party Claim at such Indemnifying Party's own expense and by such
Indemnifying Party's own counsel (which counsel shall be reasonably acceptable
to Indemnitee), and assume the defense of the action and after notice from the
Indemnifying Party to the Indemnitee of its election to assume the defense, the
Indemnifying Party will not be liable to the Indemnitee for any legal or other
expenses except as provided below and except for the reasonable costs of
investigation subsequently incurred by the Indemnitee in connection with the
defense. The Indemnitee will have the right to employ its own counsel in any
such action, but the fees, expenses and other charges of such counsel will be at
the expense of such Indemnitee unless (1) the employment of counsel by the
Indemnitee has been authorized in writing by the Indemnifying Party, (2) the
Indemnitee has reasonably concluded (based on advice of counsel) that there may
be legal defenses available to it or other Indemnitees that are different from
or in addition to those available to the Indemnifying Party, (3) a conflict or
potential conflict exists (based on advice of counsel to the Indemnitee) between
the Indemnitee and the Indemnifying Party (in which case the Indemnifying Party
will not have the right to direct the defense of such action on behalf of the
Indemnitee) or (4) the Indemnifying Party has not in fact employed counsel to
assume the defense of such action within a reasonable time after receiving
notice of the commencement of the action, in each of which cases the reasonable
fees, disbursements and other charges of counsel will be at the expense of the
Indemnifying Party or Parties. It is understood that the Indemnifying Party or
Parties shall not, in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for the reasonable fees, disbursements and
other charges of more than one separate firm (in addition to local counsel)
admitted to practice in such jurisdiction at any one time for all such
indemnified party or parties. All such fees, disbursements and other charges
will be reimbursed by the Indemnifying Party promptly as they are incurred. An
Indemnifying Party will not be liable for any settlement of any action or claim
effected without its written consent (which consent will not be unreasonably
withheld). No Indemnifying Party shall, without the prior written consent of
each Indemnitee, settle or compromise or consent to the entry of any judgment in
any pending or threatened claim, action or proceedings (whether or not any
Indemnified Party is a party thereto), unless such settlement, compromise or
consent includes an unconditional release of each Indemnitee from all liability
arising or that may arise out of such claim, action or proceeding.
(c) Direct Claim. Any Direct Claim (as defined in Section 12.17)
will be asserted by giving the Indemnifying Party reasonably prompt written
notice thereof, stating the nature of such claim in reasonable detail and
indicating the estimated amount, if practicable, but in any event not later than
20 calendar days after the Indemnitee becomes aware of such Direct Claim (but
the obligations of the Indemnifying Party and the rights of the Indemnitee shall
not be affected by the failure to give such notice, except and only to the
extent that, as a result of such failure, the Indemnifying Party is
substantially disadvantaged). The Indemnifying Party will
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have a period of 30 calendar days within which to respond to such Direct Claim.
If the Indemnifying Party does not respond within such 30-day period, the
Indemnifying Party will be deemed to have accepted such Direct Claim. If the
Indemnifying Party rejects such Direct Claim, the Indemnitee will be free to
seek enforcement of its rights to indemnification under this Agreement.
(d) Subrogation. If the amount of any Loss, at any time
subsequent to the making of an indemnity payment in respect thereof, is reduced
by recovery, settlement, or otherwise under or pursuant to any insurance
coverage, or pursuant to any claim, recovery, settlement, or payment by or
against any other entity, the amount of such reduction, less any costs,
expenses, or premiums incurred in connection therewith, will promptly be repaid
by the Indemnitee to the Indemnifying Party. Upon making any indemnity payment,
the Indemnifying Party will, to the extent of such indemnity payment, be
subrogated to all rights of the Indemnitee against any Third Party in respect of
the Loss to which the indemnity payment relates; provided, however, that (i) the
Indemnifying Party is in compliance with its obligations under this Agreement in
respect of such Loss, (ii) until the Indemnitee recovers full payment of its
Loss, any and all claims of the Indemnifying Party against any such Third Party
on account of said indemnity payment are hereby made expressly subordinated and
subjected in right of payment to the Indemnitee's rights against such Third
Party and (iii) under no circumstance shall Parent or its affiliates (including
the Surviving Corporation and its subsidiaries) have any right to pursue
recovery under the Company Insurance Policies (as defined in Section 12.17).
Without limiting the generality or effect of any other provision hereof, each
such Indemnitee and Indemnifying Party will execute upon request all instruments
reasonably necessary to evidence and perfect the above-described subrogation and
subordination rights. Nothing in this Section 10.2(d) shall be construed to
require a party to obtain or maintain any insurance coverage.
ARTICLE XI
Tax Matters
Section 11.1 Tax Return Preparation. Each Pre-Closing Tax Return (as
defined in Section 12.17) shall be prepared by WEUS and delivered to and filed
by (or shall be the responsibility of) WEUS, with respect only to any US federal
income Tax Returns for all Pre-Closing Tax Periods, or by Parent, with respect
to all other Tax Returns. All such Pre-Closing Tax Returns shall be filed on a
basis consistent with prior Tax Returns (as defined in Section 12.17) filed with
respect to the Company and its subsidiaries. Parent shall cause the Company to
furnish Tax information to Weatherford for inclusion in the federal and state
consolidated or combined income or franchise Tax Returns in accordance with the
past custom and practice of the Company. All Post-Closing Tax Returns (as
defined in Section 12.17), which are required to be filed by or with respect to
the Company and its subsidiaries shall be prepared and filed by Parent.
Weatherford will include the income of the Company and its subsidiaries on the
Weatherford Group consolidated US federal income Tax Returns for all Pre-Closing
Tax Periods and shall pay and be responsible for, and be entitled to all Tax
benefits with respect to, all US federal income taxes of the Company and its
subsidiaries for only the Pre-Closing Tax Periods. Except as provided in the
immediately preceding sentence, Parent shall timely pay or cause to be paid all
Taxes shown on all Pre-Closing and Post-Closing Tax Returns.
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Section 11.2 Transfer Taxes. All sales, transfer, filing, recordation,
registration, and similar Taxes and fees arising from or associated with the
transactions contemplated hereunder, whether levied on Parent, WEUS, the
Company, any of its subsidiaries, or the Surviving Corporation, shall be borne
by Parent, and Parent shall file all necessary documentation with respect to,
and make all payments of, such Taxes and fees on a timely basis and, if required
by applicable law, WEUS shall and shall cause its affiliates to join the
execution of any such documentation.
Section 11.3 Use of Consistent Tax Practices. Any Tax Return which
includes or is based on the operations, ownership, assets or activities of the
Company and its subsidiaries for any Pre-Closing Tax Period (as defined in
Section 12.17), and any Tax Return which includes or is based on the operations,
ownership, assets, or activities of the Company or any of its subsidiaries for
any Post-Closing Tax Period (as defined in Section 12.17) to the extent the
items reported on such Tax Return might reasonably be expected to increase any
Tax liability of the Company, WEUS, or Weatherford for any Pre-Closing Tax
Period, shall be prepared in accordance with past Tax accounting practices used
by the Company, WEUS, or Weatherford with respect to the Tax Returns in question
(unless such past practices are no longer permissible under applicable Tax law),
and to the extent any items are not covered by past practices (or in the event
such past practices are no longer permissible under applicable Tax law), in
accordance with reasonable Tax accounting practices selected by the party
responsible for filing such Tax Return hereunder with the consent, not to be
unreasonably withheld or delayed, of the other party.
Section 11.4 Refunds or Credits. Except as otherwise set forth in this
Agreement, (i) to the extent any refunds or credits with respect to Taxes paid
by or on behalf of the Company and its subsidiaries are attributable to a
Pre-Closing Tax Period, such refunds or credits shall be for the account of
WEUS, and (ii) to the extent that any refunds or credits with respect to Taxes
paid by or on behalf of the Company and its subsidiaries are attributable to a
Post-Closing Tax Period, such refunds or credits shall be for the account of
Parent. Parent shall cause the Company to forward to WEUS or to reimburse WEUS
for any such refunds or credits for the account of WEUS within 10 business days
from receipt thereof by any of Parent, any of its affiliates or the Company.
WEUS shall forward to Parent or reimburse Parent for any refunds or credits for
the account of Parent within 10 business days from receipt thereof by WEUS. Any
refunds or reimbursements not made within the 10 business day period specified
above shall bear interest from the date received by the refunding or reimbursing
party at the prime interest rate published in the Wall Street Journal on the
tenth business day of the period specified above.
Section 11.5 Filing of Amended Returns. Any amended Tax Return or claim
for Tax refund for any Pre-Closing Tax Period shall be filed, or caused to be
filed, by WEUS or Weatherford, with respect only to any US federal income Tax
Returns for all Pre-Closing Tax Periods, or by Parent, with respect to all other
Tax Returns. Neither party shall, without the prior written consent of the other
party, make or cause to be made, any such filing, to the extent such filing, if
accepted, reasonably might be expected to increase by more than an immaterial
amount the Tax liability of the non-filing party for any Tax period. Any amended
Tax Return or claim for Tax refund for any Post-Closing Tax Period shall be
filed, or caused to be filed, only by Parent. Parent shall not, without the
prior written consent of WEUS, file, or cause to be filed, any amended Tax
Return or claim for Tax refund for any Post-Closing Tax Period to the extent
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that such filing, if accepted, reasonably might be expected to increase by more
than an immaterial amount the Tax liability of Weatherford, WEUS, or any
affiliate for any Pre-Closing Tax Period.
Section 11.6 Assistance and Cooperation. WEUS, Parent, their respective
affiliates, and the Company shall cooperate (and cause their affiliates to
cooperate) with each other and with each other's agents, including accounting
firms and legal counsel, in connection with Tax matters relating to the Company,
including (i) preparation and filing of Tax Returns, (ii) determining the
liability and amount of any Taxes due and the right to and amount of any refund
of Taxes, (iii) examinations of Tax Returns, and (iv) any administrative or
judicial proceeding in respect of Taxes assessed or proposed to be assessed.
Each party shall (i) retain all Tax Returns, schedules and work papers, and all
material records and other documents relating thereto, until the expiration of
the applicable statute of limitations (including, to the extent notified by any
party, any extensions thereof) of the Tax period to which such Tax Returns and
other documents and information relate or until the final determination of any
controversy with respect to such Tax period and until the final determination of
any payments that may be required with respect to such Tax period under this
Agreement, and (ii) give the other party reasonable written notice prior to
transferring, destroying or discarding any such Tax Returns, records, and
documents and, if the other party so requests, the Parent or WEUS, as the case
may be, shall allow the other party to take possession of such Tax Returns,
records and documents. Each of the parties shall also make available to the
other parties, as reasonably requested and available, personnel (including
officers, directors, employees, and agents) responsible for preparing,
maintaining, and interpreting information and providing information or documents
in connection with any administrative or judicial proceedings relating to Taxes.
Section 11.7 Closing Tax Certificate. At the Closing, WEUS shall
deliver to Parent a certificate signed under penalties of perjury (i) stating
that it is not a foreign corporation, foreign partnership, foreign trust or
foreign estate, (ii) providing its U.S. Employer Identification Number, and
(iii) providing its address, all pursuant to Section 1445 of the Code.
Section 11.8 Tax Allocation - WEUS's Obligations. WEUS shall be solely
liable for, shall pay, and shall indemnify the Parent Indemnitees against, (i)
all United States federal income Taxes of the Company and its subsidiaries and
all Losses arising therefrom (including any Losses arising from the failure to
pay such Taxes), relating to any Pre-Closing Tax Period and (ii) all United
States federal income Taxes of the Company and its subsidiaries or any Parent
Indemnitee and any Losses arising therefrom to the extent such Taxes or Losses
are attributable to income recognized by any foreign subsidiaries of the Company
that are described in Treasury Regulation ss.1.1502-76(b)(2)(vi)(C) and that are
included on a Tax Return of the Company, any of its subsidiaries or a Parent
Indemnitee for a taxable period that ends after the Effective Time but that are
properly allocable to the portion of such period ending on the day that includes
the Effective Time ("Deemed Income"); provided, however, any such Taxes or
Losses shall be reduced by any foreign Taxes paid by such foreign subsidiaries
of the Company prior to the Effective Time which are attributable to the Deemed
Income. Such United States federal income Taxes properly allocable to the
portion of such period ending on the day that includes the Effective Time shall
be computed on the basis of the taxable income or loss of any foreign subsidiary
of the Company for such partial period as determined from the books and records
of the foreign subsidiaries of the Company as if the taxable period of the
foreign subsidiaries had
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ended as of the Effective Time. WEUS shall not be responsible or liable for and
shall not indemnify the Parent Indemnitees against any state, local or foreign
Taxes of the Company and its subsidiaries, whether any of such Taxes relate to
or arise from Pre-Closing Tax Periods or Post-Closing Tax Periods. WEUS shall be
entitled to reduce its obligation to pay Taxes for which it is liable pursuant
to this Section 11.8 to the extent such Taxes are paid by or on behalf of the
Company or its subsidiaries on or before the Effective Time or are accrued as a
liability on the Partnership Unaudited Financial Statements.
Section 11.9 Taxes of Other Persons. WEUS agrees to indemnify the
Parent from and against the liability of the Company or its subsidiaries (i)
under Treasury Regulation Section 1.1502-6 by reason of the Company's having
been a member of any consolidated group at any time on or prior to the Effective
Time, or (ii) for United States federal income Taxes with respect to any
Pre-Closing Tax Period as a transferee or successor.
Section 11.10 Tax Allocation - Parent's Obligations. Parent shall be
solely liable for, shall pay, and shall indemnify the Company Indemnitees
against, (a) all federal income Taxes of the Company and its subsidiaries and
all Losses arising therefrom, relating to any Post-Closing Tax Period, (b) all
state, local and foreign Taxes of the Company and its subsidiaries and all
Losses arising therefrom, whether any of such Taxes relate to or arise from
Pre-Closing Tax Periods or Post-Closing Tax Periods, and (c) all Taxes and
Losses arising therefrom relating to the obligations of Parent and its
subsidiaries under Section 11.2.
Section 11.11 Tax Claim Notices. Each party shall promptly notify the
other party of (i) the commencement of any demand, claim, audit, examination,
action, or other proposed change or adjustment by any Taxing Authority (as
defined in Section 12.17) concerning any Tax and (ii) any other adjustment or
claim which could give rise to a liability for Taxes of the other party or other
payment pursuant to this Article XI, as the case may be (each a "Tax Claim").
Such notice shall contain factual information describing the asserted Tax Claim
in reasonable detail and shall include copies of any notice or other document
received from any Taxing Authority or other Person in respect of any such
asserted Tax Claim.
Section 11.12 Pre-Closing Tax Period Tax Claims. WEUS, or an affiliate
of WEUS, at its own expense, shall have the sole right to represent the
Company's interests in any Tax Claim relating to United States federal income
Taxes relating to any Pre-Closing Tax Period and to employ counsel of its
choice. Parent shall have the right to participate in such Tax Claim at its own
expense. None of WEUS or its affiliates shall consent to any settlement of
issues relating to the Company that reasonably would be expected to have an
adverse effect on the Taxes of the Company in any period after the Effective
Time without Parent's consent, which consent shall not be unreasonably withheld.
If WEUS elects to control the defense, compromise, or settlement of any Tax
Claim relating to United States federal income Taxes, WEUS shall keep Parent
informed of the progress and disposition of such Tax Claim. Parent shall handle
any Tax Claim relating to any Tax period of the Company included in a
Pre-Closing Tax Period which WEUS elects in writing not to control, and Parent
shall be entitled to defend, compromise or settle such Tax Claim in its sole
discretion.
Section 11.13 Survival and Time Limitation. All of the covenants,
obligations and agreements of the parties set forth in this Article XI shall
survive the Effective Time.
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Notwithstanding the foregoing sentence, after the Effective Time, any assertion
by Parent or any Parent Indemnitee that WEUS is liable to Parent or any Parent
Indemnitee, or any assertion by WEUS or any Company Indemnitee that Parent is
liable to WEUS or any Company Indemnitee, under this Article XI must be made in
writing and must be given to the indemnifying party on or prior to the date that
is 90 days after the date on which the applicable statute of limitations expires
with respect to such matters (or not at all).
Section 11.14 Sole and Exclusive Remedy. From and after the Effective
Time, the provisions of this Article XI shall be the exclusive agreement among
the parties (including the Company Indemnitees and the Parent Indemnitees) with
respect to Tax matters, including indemnification for Tax matters.
ARTICLE XII
Miscellaneous
Section 12.1 Representations, Warranties and Agreements. Except as set
forth in Section 10.1(f) hereof, all representations and warranties of the
parties, or any authorized representative thereof, contained in this Agreement,
or in any certificate, document or other instrument delivered in connection
herewith, shall terminate and cease to be of further force and effect as of the
Effective Time. Each of Parent and the Company covenant never to institute,
directly or indirectly, any action or proceeding of any kind against the other
based on or arising out of, or in any manner related to, the breach of such
representations or warranties contained in this Agreement (other than as set
forth in Section 10.1(f) hereof). The agreements contained herein and in any
certificate or other writing delivered pursuant hereto (other than the
Stockholders' Agreement, the Registration Rights Agreement, the Voting
Agreement, the Acknowledgement, the GC Purchase Agreement, and the Transitional
Services Agreement) shall not survive the Effective Time except for the
agreements set forth in Sections 6.5, 6.6, 6.9, 6.10, 6.11, 6.14, 7.3, 7.4, 7.6,
7.9, and Articles X, XI and XII.
Section 12.2 Governing Law. This Agreement shall be governed by and
construed in accordance with the law of the State of Delaware without reference
to the choice of law principles thereof.
Section 12.3 Entire Agreement. This Agreement, together with the
Schedules and Exhibits hereto, and any other agreements to be entered into as
contemplated herein, and the Confidentiality Agreement constitute the entire
agreement between the parties with respect to the subject matter hereof and
there are no agreements, understandings, representations or warranties between
the parties other than those set forth or referred to herein.
Section 12.4 Expenses and Fees. (a) Except as otherwise provided in
this Section 12.4, all costs and expenses incurred in connection with this
Agreement shall be paid by the party incurring such cost or expense.
(b) With respect to litigation in connection with Section
7.2(c)(iii), all expenses incurred by Parent and WEUS in connection with such
litigation will be shared equally between Parent and WEUS.
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(c) Parent agrees that if this Agreement is terminated by (i)
either Parent or the Company pursuant to Section 9.1(b)(i) or Section
9.1(b)(iii) and prior to the termination hereof a bonafide Takeover Proposal has
been made by any Person or any Person publicly announces its intent to make a
Takeover Proposal, and in the case of a determination pursuant to Section
9.1(b)(i) such Takeover Proposal has not been withdrawn or such public
announcement of intent to make a Takeover Proposal has not been withdrawn or
revoked and in the case of a determination pursuant to Section 9.1(b)(iii) such
Takeover Proposal has not been withdrawn or such public announcement of intent
to make a Takeover Proposal has not been withdrawn or revoked at least 10
Business Days prior to the closing of the polls at the Parent Stockholders'
Meeting, unless, in the case of a termination by Parent, the failure to
consummate the Merger is the result of a material breach of any covenant or
agreement by WEUS or the Company under this Agreement, or, unless in the case of
a termination by the Company or Parent, the failure to consummate the Merger is
the result of the failure of the conditions in Section 8.1(b), (c), (e), (g),
(h), or (i) or Section 8.2(c) or (d), (ii) the Company pursuant to Sections
9.1(b)(iv), 9.1(d) or 9.1(e), or (iii) Parent pursuant to Section 9.1(c), then
Parent shall pay to WEUS $15,000,000. The Company and WEUS agree that if this
Agreement is terminated by Parent in accordance with the terms of Section
9.1(b)(iv), WEUS shall pay to Parent $15,000,000. The amounts payable as
provided in this Section 12.4(c) shall be paid as liquidated damages, and such
payment (x) shall constitute the exclusive monetary remedy available to the
payee at law or in equity in respect of any such termination or any breach of
this Agreement by the payor (other than for specific performance and for
indemnification after the Effective Time in accordance with the provisions of
this Agreement), (y) shall constitute payment for all claims, damages,
out-of-pocket expenses and fees arising out of or incurred by the payee in
connection with this transaction and (z) shall be payable by wire transfer of
same day funds not later than the day following the date of termination of this
Agreement.
(d) Parent and Weatherford agree that the Company and its
subsidiaries shall only be responsible for up to $500,000 for the costs and
expenses (including any transfer taxes) paid or incurred (including
reimbursement of Weatherford) in distributing the Excluded Assets pursuant to
Section 5.3, with any costs or expenses in excess of $500,000 to be borne by
Weatherford.
Section 12.5 Notices. All notices hereunder shall be sufficient upon
receipt for all purposes hereunder if in writing and delivered personally, sent
by documented overnight delivery service or, to the extent receipt is confirmed,
telecopy, telefax, or other electronic transmission service to the appropriate
address or number as set forth below.
If to Parent or Merger Subsidiary, to:
Parent
Universal Compression Holdings, Inc.
4440 Brittmoore Road
Houston, Texas 77041
Attention: Stephen A. Snider
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with a copy to:
King & Spalding
1100 Louisiana
Houston, Texas 77002-5219
Attention: Mark Zvonkovic and Chris LaFollette
if to any of the Weatherford Entities, to:
Weatherford International, Inc.
515 Post Oak Boulevard, Suite 600
Houston, Texas 77027
Attention: Curtis W. Huff
with a copy to:
Andrews & Kurth L.L.P.
4200 Chase Tower
600 Travis
Houston, Texas 77002-3090
Attention: Robert V. Jewell
Section 12.6 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that no party may assign, delegate,
or otherwise transfer any of its rights or obligations under this Agreement
without the consent of each other party hereto, except (i) Parent or Merger
Subsidiary may transfer or assign, in whole or from time to time in part, to one
or more of their affiliates, the right to enter into the transactions
contemplated by this Agreement, but any such transfer or assignment will not
relieve Parent or Merger Subsidiary of its obligations hereunder and (ii) the
Company may assign to Weatherford or one of its subsidiaries the rights and
obligations of the Company under the GC Agreement, but any such assignment will
not relieve the Company of its obligations hereunder.
Section 12.7 Headings; Definitions. The Section and Article headings
contained in this Agreement are inserted for convenience of reference only and
will not affect the meaning or interpretation of this Agreement. All references
to Sections or Articles contained herein mean Sections or Articles of this
Agreement unless otherwise stated. All capitalized terms defined herein are
equally applicable to both the singular and plural forms of such terms.
Section 12.8 Amendments and Waivers. This Agreement may not be modified
or amended except by an instrument or instruments in writing signed by the party
against whom enforcement of any such modification or amendment is sought. Any
party hereto may, only by an instrument in writing, waive compliance by any
other party hereto with any term or provision of this Agreement on the part of
such other party hereto to be performed or complied with. The waiver by any
party hereto of a breach of any term or provision of this Agreement shall not be
construed as a waiver of any subsequent breach.
Section 12.9 Construction of Certain Provisions. It is understood and
agreed that the specification of any dollar amount in the representations and
warranties contained in this Agreement or the inclusion of any specific item in
the Schedules or Exhibits is not intended to
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imply that such amounts or higher or lower amounts, or the items so included or
other items, are or are not material, and no party shall use the fact of the
setting of such amounts or the fact of the inclusion of any such item in the
Schedules in any dispute or controversy between the parties as to whether any
obligation, item, or matter not described herein or included in a Schedule or
Exhibit is or is not material for purposes of this Agreement.
Section 12.10 Agreement for the Parties' Benefit. This Agreement is not
intended to confer upon any Person not a party hereto (other than the Merger
Subsidiary and WEUS) any rights or remedies hereunder, and no Person other than
the parties hereto or such Persons described above is entitled to rely on any
representation, warranty, or covenant contained herein.
Section 12.11 Severability. If any term or other provision of this
Agreement is invalid, illegal, or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect. Upon such determination that any
term or other provision is invalid, illegal, or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in an
acceptable manner to the end that the transactions contemplated by this
Agreement are fulfilled to the extent possible.
Section 12.12 Jurisdiction. Any legal action, suit, or proceeding in
law or equity arising out of or relating to this Agreement and transactions
contemplated by this Agreement may be instituted in any state or federal court
in Harris County, Houston, Texas, and each party agrees not to assert, by way of
motion, as a defense, or otherwise, in any such action, suit, or proceeding, any
claim that it is not subject personally to the jurisdiction of such court, that
its property is exempt or immune from attachment or execution, that the action,
suit, or proceeding is brought in an inconvenient forum, that the venue of the
action, suit, or proceeding is improper or that this Agreement, or the subject
matter hereof or thereof may not be enforced in or by such court. Each party
further irrevocably submits to the jurisdiction of any such court in any such
action, suit, or proceeding. Any and all service of process and any other notice
in any such action, suit, or proceeding shall be effective against any party if
given by registered or certified mail, return receipt requested, or by any other
means of mail which requires a signed receipt, postage prepaid, mailed to such
party at the address listed in Section 10.5.
Section 12.13 Waiver of Jury Trial. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
Section 12.14 Specific Performance. The parties hereto agree that
irreparable damage would occur if any provision of this Agreement was not
performed in accordance with its terms or were otherwise breached, and that the
parties shall be entitled to specific performance of the terms hereof, in
addition to any other remedy to which they are entitled at law or in equity.
Section 12.15 Payments Constitute Liquidated Damages. The parties agree
that the dollar amounts provided in Section 12.4(c) payable upon the occurrence
of the events specified therein have been determined by negotiation and reflect
their best estimate and judgment of the monetary value of the losses and damages
to be incurred in connection with, and the time,
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efforts, expense and cost of opportunity associated with, the transactions
contemplated in this Agreement, and the parties agree to accept payment of such
amount as liquidated damages in full and complete satisfaction of all claims and
expenses arising from the occurrence of such events (including, but not limited
to, claims for specific performance).
Section 12.16 Counterparts; Effectiveness. This Agreement may be
executed in one or more counterparts, all of which shall be considered one and
the same agreement, and shall become effective when one or more counterparts
have been signed by each of the parties and delivered to the other party. In
making proof of this Agreement, it shall not be necessary to produce or account
for more than one such counterpart.
Section 12.17 Definitions and Usage For the purposes of this Agreement:
"368 Reorganization" shall have the meaning specified in Section
3.18.
"1933 Act" shall have the meaning specified in Section 4.4.
"1934 Act" shall have the meaning specified in Section 4.4.
"Acquisition Agreement" shall have the meaning specified in
Section 6.13(b).
"Action" shall mean any action, suit, arbitration, inquiry,
proceeding, or investigation by or before any Governmental Authority.
"Adjustment Payment" shall mean a cash payment determined with
respect to a Transferred Employee subject to Section 7.11, determined by
multiplying the number of shares subject to options specified for such retained
Transferred Employee on Schedule 3.16 by the excess of the closing price of a
share of Weatherford Common Stock on the NYSE on the Business Day immediately
prior to the Effective Time over the exercise price or prices for the options
specified for such Transferred Employee on Schedule 7.11.
"affiliate" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under common control with
such Person.
"Agreement" shall have the meaning specified in the introductory
paragraph of this Agreement and Plan of Merger.
"Business" shall mean all compression services business conducted
by the Company and its subsidiaries, and all operations conducted by them and
related thereto, including, without limitation, (a) the sale and rental of
natural gas compressors, (b) the packaging, fabrication, and sales of natural
gas compressors, (c) the design of compression systems, (d) providing
compression related services, including full service turnkey compression
management, (e) maintenance, reconditioning, and repair services, and (f)
offshore platform installation and management of compression equipment and
excluding any business conducted by, and operations related to, the Excluded
Assets.
"Business Day" shall mean any day other than a Saturday, Sunday,
or legal holiday recognized by banking institutions in the State of Texas.
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"Canada" shall have the meaning specified in the recitals to this
Agreement.
"CERCLA" shall have the meaning specified in Section 3.14.
"Certificates" shall have the meaning specified in Section 1.4.
"Certificate of Merger" shall have the meaning specified in
Section 1.1(b).
"Code" shall have the meaning specified in the recitals of this
Agreement.
"Commitment" shall have the meaning specified in Section 3.2(a).
"Company" shall have the meaning specified in the introductory
paragraph of this Agreement.
"Company Benefit Plans" shall have the meaning specified in
Section 3.16(a).
"Company Common Stock" shall have the meaning specified in
Section 1.2(a).
"Company Disclosure Letter" shall mean the schedules referred
to in Article III delivered by the Company to Parent in connection with this
Agreement.
"Company Indemnitees" shall mean, collectively, Weatherford,
WEUS, and their affiliates (other than the Company and its subsidiaries) and its
and their officers, directors, employees, agents, and representatives.
"Company Insurance Policies" shall mean the insurance policies
maintained by WEUS or its affiliates (other than the Company or its
subsidiaries), including those relating to the Business.
"Company Material Adverse Effect" shall mean any fact,
circumstance, event, or condition which has or would reasonably be expected to
have a materially adverse effect on the business, condition (financial or
otherwise), assets, or liabilities of the Company and its subsidiaries, taken as
a whole (after taking into account insurance recoveries in respect thereof);
provided, however, that any actual or prospective change or changes relating to
or resulting from any change or changes in the prices of oil, gas, natural gas
liquids, or other hydrocarbon products, general economic conditions, local,
regional, national, or international industry conditions (including, without
limitation, changes in applicable laws or regulations, and changes in financial
or market conditions) or changes in the compressor manufacturing, sales, rental,
or services businesses of a general nature shall be deemed not to constitute a
"Company Material Adverse Effect."
"Company Material Contracts" shall have the meaning specified
in Section 3.13(a).
"Company Pension Plans" shall have the meaning specified in
Section 3.16(a).
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"Company Returns" shall mean all Tax Returns required to be
filed by the Company or any of its subsidiaries, and the term "Company Return"
means any one of the foregoing Company Returns.
"Company Shares" shall have the meaning specified in Section
3.2(a).
"Company Welfare Plan" shall have the meaning specified in
Section 3.16(a).
"Confidentiality Agreement" shall have the meaning specified
in Section 7.7(b).
"Deemed Income" shall have the meaning specified in Section
11.8.
"DGCL" shall have the meaning specified in Section 1.1(a).
"Direct Claim" shall mean any claim by an Indemnitee on
account of a Loss which does not result from a Third Party Claim.
"Effective Time" shall have the meaning specified in Section
1.1(b).
"Employee Options" shall have the meaning specified in Section
7.11.
"Employees" shall have the meaning specified in Section 7.11.
"Environmental Laws" shall have the meaning specified in
Section 3.14.
"ERISA" shall have the meaning specified in Section 3.16(a).
"Excluded Assets" shall have the meaning specified in Section
5.3.
"Excluded Liability" shall have the meaning given to the term
"Excluded Weatherford Liabilities" in the Formation Agreement.
"Formation Agreement" shall mean the Formation Agreement,
dated as of February 2, 1999, among Weatherford, the Limited Partnership, GC,
General Electric Capital Corporation, a New York corporation.
"FTC" shall have the meaning specified in Section 7.2(b).
"GAAP" shall have the meaning specified in Section 3.5.
"GC" shall have the meaning specified in the recitals to this
Agreement.
"GC Agreement" shall have the meaning specified in the
recitals to this Agreement.
"General Partner" shall mean Weatherford Global Compression
Holding, L.L.C., a Delaware limited liability company.
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"Global Compression Business Historical Financial Statements"
shall have the meaning specified in Section 3.5.
"Governmental Authority" shall mean (a) the United States of
America and any foreign nation, (b) any state, county, municipality, or other
governmental subdivision within or outside the United States of America, and (c)
any court or any governmental department, commission, board, bureau, agency, or
other instrumentality of the United States of America or any foreign nation or
of any state, county, municipality, water rights, taxing, or zoning authority,
or other governmental subdivision within or outside the United States of
America.
"GSI" shall have the meaning specified in Section 3.1(a).
"GSI Companies" shall have the meaning specified in Section
3.1(a).
"HSR Act" shall have the meaning specified in Section 3.4.
"Indemnifying Party" shall mean a party required to provide
indemnification under Section 10.1.
"Indemnitee" shall mean a Company Indemnitee or a Parent
Indemnitee.
"Investment" shall have the meaning specified in Section
5.3(b).
"Justice Department" shall have the meaning specified in
Section 7.2(b).
"Knowledge" when used in relation to any Person shall mean the
knowledge of such Person's officers, directors, and key employees.
"Licenses" shall have the meaning specified in Section 3.9.
"Liens" shall mean all liens, mortgages, security interests,
pledges, claims, options, and other encumbrances of any kind.
"Limited Partnership" shall mean Weatherford Enterra Compression
Company, L.P., a Delaware limited partnership and a subsidiary of the Company.
"Losses" shall mean, collectively, any and all claims,
liabilities, losses, causes of action, fines, penalties, litigation, lawsuits,
administrative proceedings, administrative investigations, damages, fines,
penalties, interest obligations, costs, and expenses, including amounts paid in
settlement, reasonable attorneys' fees and expenses, court costs, costs of
investigators, experts, accountants and financial advisors, and other costs of
suit.
"Marks" shall have the meaning specified in Section 6.6(b).
"Material Breach" shall have the meaning specified in Section
9.1(b).
"Merger" shall have the meaning specified in Section 1.1(a).
"Merger Consideration" shall have the meaning specified in
Section 1.2(a).
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"Merger Subsidiary" shall have the meaning specified in the
introductory paragraph of this Agreement.
"Merrill Lynch" shall have the meaning specified in Section
4.20.
"New Option" shall have the meaning specified in Section 7.11.
"NYSE" shall have the meaning specified in Section 7.11.
"officer" means in the case of Parent and the Company, any
executive officer of Parent, Merger Subsidiary, WEUS, or the Company, as
applicable, within the meaning of Rule 3b-7 of the 1934 Act.
"Parent" shall have the meaning specified in the introductory
paragraph of this Agreement.
"Parent 10-K" shall have the meaning specified in Section
4.5(a).
"Parent 10-Q" shall have the meaning specified in Section
4.5(a).
"Parent 401(k) Plan" shall have the meaning specified in
Section 6.5(c).
"Parent Average Price" shall mean the average closing price of
a share of Parent Common Stock on the NYSE for the twenty (20) consecutive
trading days ending on the Business Day prior to the Effective Time.
"Parent Common Stock" shall have the meaning specified in the
recitals to this Agreement.
"Parent Disclosure Letter" shall mean the schedules referred
to in Article IV delivered by Parent to the Company in connection with this
Agreement.
"Parent Employee Plan" shall have the meaning specified in
Section 4.16(a).
"Parent Indemnitees" shall mean, collectively, Parent and its
affiliates and its and their officers, directors, employees, agents, and
representatives.
"Parent Material Adverse Effect" shall mean any fact,
circumstance, event, or condition which has or would reasonably be expected to
have a materially adverse effect on the business, condition (financial or
otherwise), assets, or liabilities of Parent and its subsidiaries, taken as a
whole (after taking into account insurance recoveries in respect thereof);
provided, however, that any actual or prospective change or changes relating to
or resulting from any change or changes in the prices of oil, gas, natural gas
liquids, or other hydrocarbon products, general economic conditions, local,
regional, national, or international industry conditions (including, without
limitation, changes in applicable laws or regulations, and changes in financial
or market conditions), or changes in the compressor manufacturing, sales,
rental, or services businesses of a general nature shall be deemed not to
constitute a "Parent Material Adverse Effect."
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"Parent Material Contracts" shall have the meaning specified
in Section 4.13.
"Parent Organizational Documents" shall have the meaning
specified in Section 4.1.
"Parent Returns" shall mean all Tax Returns required to be
filed by Parent or any of its subsidiaries, and the term "Parent Return" means
any one of the foregoing Parent Returns.
"Parent SEC Filings" shall have the meaning specified in
Section 4.5(a).
"Parent Shares" shall have the meaning specified in Section
4.2(a).
"Parent Stockholders' Approval" shall have the meaning
specified in Section 6.3.
"Parent Stockholders' Meeting" shall have the meaning
specified in Section 6.3.
"Parent Unaudited Balance Sheet" shall have the meaning
specified in Section 4.6.
"Parent Unaudited Balance Sheet Date" shall have the meaning
specified in Section 4.6.
"Parent Unaudited Financial Statements" shall mean Parent's
unaudited financial statements included in its Quarterly Report on Form 10-Q for
the three months ended June 30, 2000, as filed with the SEC.
"Partnership" shall mean Weatherford Global Compression Services,
L.P., a Delaware limited partnership.
"Partnership Audited Financial Statements" shall have the
meaning specified in Section 3.5.
"Partnership Unaudited Balance Sheet Date" shall have the
meaning specified in Section 3.6.
"Partnership Unaudited Financial Statements" shall have the
meaning specified in Section 3.5.
"Permitted Encumbrances" shall mean:
(a) easements, rights-of-way, servitudes, permits, licenses,
surface leases, and other rights in respect of surface
operations, pipelines, grazing, logging, canals, ditches,
reservoirs or the like; conditions, covenants or other
restrictions; and easements for streets, alleys, highways,
pipelines, telephone lines, power lines, railways, and other
easements and rights-of-way on, over, or in respect of any
property which will not materially interfere with the
operation or use of any of the affected properties;
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(b) Liens for taxes or assessments, to the extent not yet
delinquent or, if delinquent, to the extent being contested
in good faith by appropriate proceedings;
(c) any materialman's, landlord's, carrier's, warehouseman's,
mechanics', repairman's, employees', contractors',
operators', or other similar liens, security interests, or
charges for liquidated amounts arising in the ordinary
course of business that are not delinquent or, if
delinquent, are being contested in good faith by appropriate
proceedings;
(d) rights of parties under contracts entered into in the
ordinary course of business, including, but not limited to,
leasehold and purchase rights;
(e) Liens on the assets of any entity or asset as a result of an
agreement relating to the acquisition of such entity or
asset;
(f) Liens incurred to secure the performance of tenders, bids,
leases, statutory obligations, surety and appeal bonds,
government contracts, performance and return-of-money bonds
and other obligations of a like nature incurred in the
ordinary course of business (exclusive of obligations for
the payment of borrowed money);
(g) Any interest or title of a lessor in property subject to any
Capitalized Lease Obligation (as defined in the Synthetic
Leases) or operating lease which Capital Lease Obligation or
operating lease is not prohibited under the Participation
Agreement;
(h) Liens arising under the Synthetic Leases; and
(i) all agreements, instruments, documents, Liens, and other
matters described or referred to in Schedule I hereto, or
which are waived by Parent.
Further, with respect to Parent, "Permitted Encumbrances" shall include Liens
arising under Parent's or its subsidiaries' revolving credit facility, operating
lease facility and such financial agreements referred to on Schedule 4.13 of the
Parent Disclosure Letter.
"Person" shall mean an individual, partnership, corporation,
limited liability company, trust, incorporated or unincorporated association,
joint venture, joint stock company, Governmental Authority or other legal entity
of any kind.
"Post-Closing Tax Period" shall mean any Tax period ending
after the Effective Time.
"Post-Closing Tax Return" shall mean any Company Return that
is required to be filed with respect to a Post-Closing Tax Period.
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"Pre-Closing Tax Period" shall mean any Tax periods ending on
or before the Effective Time.
"Pre-Closing Tax Return" shall mean any Company Return that is
required to be filed after the Effective Time with respect to a Pre-Closing Tax
Period.
"Proxy Statement" shall have the meaning specified in Section
3.19.
"Registration Rights Agreement" shall have the meaning
specified in Section 6.7.
"release" shall have the meaning specified in Section 3.14.
"Representatives" shall have the meaning specified in Section
6.13(a).
"Retained E-mail" shall mean all electronic mail and other
computer based communications stored on any electronic, digital, or other
storage or back up media and retained in the ordinary course of Weatherford,
WEUS's, the Company's, any of the Company's subsidiaries', or any of their
respective affiliates' business.
"Retained Liabilities" shall mean (a) the Excluded Liabilities
to the extent, and only to the extent, that Weatherford or WEUS has a continuing
obligation for such liabilities under the Formation Agreement and then only upon
the terms and conditions and for the amounts and time periods provided for in
the Formation Agreement, (b) the amounts payable by the Company or its
affiliates in connection with the termination of the Company's President, and
(c) any liabilities related to or arising out of the Excluded Assets.
"SEC" shall have the meaning specified in Section 3.13.
"Services Agreement" shall mean the Shared Services Agreement
between Weatherford and the Limited Partnership dated February 2, 1999.
"Stockholder Agreement" shall have the meaning specified in
the recitals of this Agreement.
"subsidiary" means, with respect to any Person, any entity of
which securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other Persons performing similar
functions are at any time directly or indirectly owned by such Person and shall
include, with respect to the Company, the Partnership and the Limited
Partnership.
"Superior Proposal" shall have the meaning specified in
Section 6.13(b).
"Surviving Corporation" shall have the meaning specified in
Section 1.1(a).
"Synthetic Leases" shall mean, collectively, (i) the
Participation Agreement, dated as of July 9, 1999, among the Partnership, as
lessee, ABN Amro Bank N.V., agent for the lessors, and the lessors listed on
Schedule I thereto, (ii) the First Amendment, dated as of February 2, 1999, to
the Participation Agreement, dated as of December 8, 1998, among the
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Partnership, ABN Amro Bank N.V., as agent for the lessors, and the lessors
listed on Schedule I thereto, (iii) the Participation Agreement, dated as of
December 8, 1998, among the Partnership, as lessee, and the lessors listed on
Scheduled I thereto, and (iv) all documents relating thereto, including any
guaranty in connection therewith.
"Takeover Proposal" shall have the meaning specified in
Section 6.13(a).
"Tax" or "Taxes" shall have the meaning specified in Section
3.15(a).
"Taxing Authority" shall mean any Governmental Authority
responsible for the imposition or collection of any Tax.
"Tax Benefit" shall mean any decreases in Tax actually
realized.
"Tax Claim" shall have the meaning specified in Section 11.11.
"Tax Return" shall mean any return or report, declaration,
report, claim for refund, information return, or statement relating to Taxes,
including any related schedules, attachments, or other supporting information,
with respect to Taxes, and including any amendment thereto.
"TBCA" shall have the meaning specified in Section 1.1.
"Third Party" shall mean any Person other than (i) WEUS or any
of its affiliates (including the Company and its subsidiaries) or (ii) Parent
and its affiliates.
"Third Party Claim" shall mean any claim or the commencement
of any claim, action or proceeding brought by a Third Party.
"Transferred Employee" shall have the meaning specified in
Section 6.5(a).
"Voting Agreement" shall have the meaning specified in Section
6.8.
"Weatherford" shall have the meaning specified in the
introductory paragraph of this Agreement.
"Weatherford 401(k) Plan" shall have the meaning specified in
Section 6.5(c).
"Weatherford Average Price" shall have the meaning specified
in Section 7.11.
"Weatherford Common Stock" shall have the meaning specified in
Section 7.11.
"Weatherford Compression Business Historical Financial
Statements" shall have the meaning specified in Section 3.5.
"Weatherford Entities" shall mean collectively Weatherford,
WEUS, the Company, and its subsidiaries, and any of such entities shall
individually be a "Weatherford Entity."
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"Weatherford Nominees" shall have the meaning specified in
Section 6.9.
"Weatherford Organizational Documents" shall have the meaning
specified in Section 3.1(c).
"WEUS" shall have the meaning specified in the introductory
paragraph of this Agreement.
A reference in this Agreement to any statute shall be to such
statute as amended from time to time, and the rules and regulations promulgated
thereunder.
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective authorized officers as of the
day and year first above written.
Weatherford International, Inc.
By: /s/ CURTIS W. HUFF
----------------------------------
Name: Curtis W. Huff
--------------------------------
Title: Executive Vice President
-------------------------------
WEUS Holdings, Inc.
By: /s/ CURTIS W. HUFF
----------------------------------
Name: Curtis W. Huff
--------------------------------
Title: Executive Vice President
-------------------------------
Enterra Compression Company
By: /s/ CURTIS W. HUFF
----------------------------------
Name: Curtis W. Huff
--------------------------------
Title: Executive Vice President
-------------------------------
Universal Compression Holdings, Inc.
By: /s/ ERNIE L. DANNER
----------------------------------
Name: Ernie L. Danner
--------------------------------
Title: Executive Vice President
-------------------------------
Universal Compression, Inc.
By: /s/ ERNIE L. DANNER
----------------------------------
Name: Ernie L. Danner
--------------------------------
Title: Executive Vice President
-------------------------------
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ANNEX B
[Merrill Lynch Letterhead]
October 23, 2000
Board of Directors
Universal Compression Holdings, Inc.
4440 Brittmoore Road
Houston, TX 77041
Members of the Board of Directors:
Enterra Compression Company (the "Company"), a subsidiary of Weatherford
International Incorporated (the "Parent"); the Parent; Benstar, Inc., a wholly
owned subsidiary of the Parent; WEUS Holding, Inc., a wholly owned subsidiary of
the Parent; Universal Compression Holdings, Inc. (the "Acquiror") and Universal
Compression, Inc., a wholly owned subsidiary of the Acquiror (the "Acquisition
Sub"), propose to enter into the Agreement and Plan of Merger (the "Agreement")
pursuant to which the Company will be merged with and into the Acquisition Sub
in a transaction (the "Merger") in which the outstanding shares of the Company's
common stock, par value $1.00 per share (the "Company Shares"), will be
converted into the right to receive 13,750,000 shares (the "Merger
Consideration") of the common stock of the Acquiror, par value $0.01 per share
(the "Acquiror Shares").
You have asked us whether, in our opinion, the Merger Consideration is fair
from a financial point of view to the Acquiror.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed certain publicly available business and financial information
relating to the Company, the Parent and the Acquiror that we deemed to
be relevant;
(2) Reviewed certain information, including financial forecasts, relating
to the business, earnings, cash flow, assets, liabilities and
prospects of the Company and the Acquiror, as well as the amount and
timing of the cost savings and related expenses and synergies expected
to result from the Merger (the "Expected Synergies") furnished to us
by the Company, the Parent and the Acquiror.
(3) Conducted discussions with members of senior management of the
Company, the Parent and the Acquiror concerning the matters described
in clauses 1 and 2 above, as well as their respective businesses and
prospects before and after giving effect to the Merger and the
Expected Synergies.
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(4) Reviewed the market prices and valuation multiples for the Acquiror
Shares and compared them with those of certain publicly traded
companies that we deemed to be relevant;
(5) Reviewed the results of operations of the Company and the Acquiror and
compared them with those of certain publicly traded companies that we
deemed to be relevant;
(6) Compared the proposed financial terms of the Merger with the financial
terms of certain other transactions that we deemed to be relevant;
(7) Participated in certain discussions and negotiations among
representatives of the Company, the Parent and the Acquiror and their
financial and legal advisors;
(8) Reviewed the potential pro forma impact of the Merger;
(9) Reviewed a draft of the Agreement dated October 23, 2000;
(10) Reviewed forms of a Voting Agreement, a Registration Rights Agreement
and a Stockholder Agreement, in each case related to the Agreement
(collectively, the "Ancillary Agreements"); and
(11) Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our
assessment of general economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us the
Company, the Parent and the Acquiror, discussed with or reviewed by or for us,
or publicly available, and we have not assumed any responsibility for
independently verifying such information or undertaken an independent evaluation
or appraisal of any of the assets or liabilities of the Company or the Acquiror
or been furnished with any such evaluation or appraisal. In addition, we have
not assumed any obligation to conduct any physical inspection of the properties
or facilities of the Company or the Acquiror. With respect to the financial
forecast information and the Expected Synergies furnished to or discussed with
us by the Company, the Parent or the Acquiror, we have assumed that they have
been reasonably prepared and reflect the best currently available estimates and
judgment of the Company's, the Parent's or the Acquiror's management as to the
expected future financial performance of the Company or the Acquiror, as the
case may be, and the Expected Synergies. We have made no independent
investigation of any legal matters and accounting advice give to such parties
and their respective boards of directors, including, without limitation, advice
as to the accounting and tax consequences of the merger. We have further assumed
that the Merger will qualify as a tax-free reorganization for U.S. federal
income tax purposes. We have also assumed that the terms and provisions
contained in the final form of each of the Agreement and the Ancillary
Agreements will not differ from the last draft reviewed by us in any matter
material to our opinion expressed herein.
Our opinion is necessarily based upon market, economic and other conditions
as they exist and can be evaluated on, and on the information made available to
us as of, the date hereof. We have assumed that in the course of obtaining the
necessary regulatory or other consents or approvals (contractual or otherwise)
for the Merger, no restrictions, including any divestiture requirements or
amendments or modifications, will be imposed that will have a material adverse
effect on the contemplated benefits of the Merger.
Our opinion does not address the merits of the underlying decision by the
Acquiror to engage in the Merger and does not constitute a recommendation to any
shareholder of the Acquiror as to how such shareholder should vote on the
issuance of the Acquiror Shares in the proposed Merger or any matter related
thereto. We also are not expressing any opinion as to the prices at which the
Acquiror Shares will trade following the announcement or consummation of the
Merger.
We are acting as financial advisor to the Acquiror in connection with the
Merger and will receive a fee from the Acquiror for our services, a significant
portion of which is contingent upon the consummation of the Merger. In addition,
the Acquiror has agreed to indemnify us for certain liabilities arising out of
our engagement. We have, in the past, provided financial advisory and financing
services to the Acquiror, the
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Parent and their affiliates and may continue to do so and have received, and may
receive, fees for the rendering of such services. We also participated as a lead
manager for the Acquiror's initial public offering of common stock that closed
in May 2000. In addition, in the ordinary course of our business, we may
actively trade the Company Shares, as well as shares of the common stock of the
Parent for our own account and for the accounts of customers and, accordingly,
may at any time hold a long or short position in such securities.
This opinion is for the use and benefit of the Board of Directors of the
Acquiror. Our opinion does not address the merits of the underlying decision by
the Acquiror to engage in the Merger and does not constitute a recommendation to
any shareholder of the Acquiror as to how such shareholder should vote on the
issuance of the Acquiror Shares in the proposed Merger or any matter related
thereto. We expressly disclaim any undertaking or obligation to advise any
person of any change in any fact or matter affecting, or which may affect, this
opinion of which we became aware after the date hereof.
On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Merger Consideration is fair from a financial point
of view to the Acquiror.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
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ANNEX C
STOCKHOLDERS' AGREEMENT
This STOCKHOLDERS' AGREEMENT (the "Agreement"), dated as of October 23,
2000, is among WEUS Holdings, Inc., a Delaware corporation ("WEUS"), Universal
Compression Holdings, Inc., a Delaware corporation ("Universal"), Castle Harlan
Partners III, L.P., a Delaware limited partnership ("CHPIII"), Castle Harlan
Offshore Partners III, L.P., a Delaware limited partnership ("Offshore"), Castle
Harlan Affiliates III, L.P., a Delaware limited partnership ("CH Affiliates"),
and John K. Castle, an individual ("Castle" and, together with CHPIII, Offshore,
and CH Affiliates, the "Stockholders").
WITNESSETH:
WHEREAS, WEUS owns all of the outstanding capital stock of Enterra
Compression Company, a Delaware corporation (the "Company"); and
WHEREAS, the Company owns a 1% general partner interest in Weatherford
Enterra Compression Company, L.P., a Delaware limited partnership (the "Limited
Partnership"), and Enterra Compression Investment Company, a Delaware
corporation and a wholly owned subsidiary of the Company ("ECIC"), owns a 99%
limited partner interest in the Limited Partnership; and
WHEREAS, the Limited Partnership owns 64% of the outstanding member
interests of Weatherford Global Compression Holding, L.L.C., a Delaware limited
liability company (the "General Partner"); and
WHEREAS, ECIC owns 64% of the outstanding capital stock of Weatherford
Global Compression Services Ltd., an Alberta, Canada corporation ("WGCS"); and
WHEREAS, Global Compression Services, Inc. ("GC"), an indirect wholly
owned subsidiary of General Electric Capital Corporation, a New York corporation
("GE Capital"), owns the remaining (i) 36% of the outstanding capital stock of
WGCS and (ii) 36% of the outstanding member interests of the General Partner;
and
WHEREAS, the General Partner is the sole general partner, and the
Limited Partnership and GC are the sole limited partners, of Weatherford Global
Compression Services, L.P., a Delaware limited partnership (the "Partnership"),
and the partner interests of the General Partner, the Limited Partnership and GC
as partners of the Partnership are 1%, 63.36%, and 35.64%, respectively; and
WHEREAS, Weatherford (defined below), WEUS, the Company, GC, and GE
Capital have entered into a Purchase Agreement (the "GC Purchase Agreement")
pursuant to which the Company will purchase the interests of GC in the General
Partner, the Partnership, and WGCS immediately prior to the Merger (as
hereinafter defined); and
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WHEREAS, Weatherford International, Inc., a Delaware corporation and
the parent of WEUS ("Weatherford"), WEUS, the Company, Universal, and Universal
Compression, Inc. ("UCI") have entered into an Agreement and Plan of Merger,
dated of even date herewith (the "Merger Agreement"), pursuant to which the
Company will be merged with and into UCI with UCI as the surviving corporation
of the merger (the "Merger"); and
WHEREAS, pursuant to the Merger, all of the outstanding capital stock
of the Company owned by WEUS will be converted into the right to receive a total
of 13,750,000 newly issued shares of common stock, par value $0.01 per share, of
Universal ("Universal Common Stock"), subject to adjustment as provided in the
Merger Agreement; and
WHEREAS, the Merger is to be effected after the conditions to
consummation thereof set forth in the Merger Agreement have been satisfied or
waived, which conditions include, among other things, approval by Universal's
stockholders of the issuance by Universal of the Universal Common Stock to be
issued in the Merger, as required by the applicable rules of the New York Stock
Exchange; and
WHEREAS, the Stockholders (i) are the record owners of 3,124,848 shares
of Universal Common Stock, (ii) have the power to vote an additional 195,497
shares of Universal Common Stock pursuant to the Voting Trust (as hereinafter
defined), and (iii) have the power to cause other holders of 2,174,529 shares of
Universal Common Stock to vote pursuant to the Voting Agreement (as hereinafter
defined (collectively, (i), (ii), and (iii) represent 5,494,874 shares of
Universal Common Stock, hereinafter referred to as the "Existing Shares"); and
WHEREAS, in order to induce Weatherford, WEUS, and the Company to enter
into the Merger Agreement and consummate the transactions contemplated thereby,
the Stockholders are willing to enter into this Agreement in order to provide
for, among other things, (i) the obligations of the Stockholders to vote, or
cause the record or beneficial owner of the Shares (as defined in Section 1(a))
to vote, the Shares (other than Shares subject to unexercised options) (the
"Voting Shares") in the manner specified herein and, in connection therewith, to
grant a proxy with respect to the Voting Shares, and (ii) certain restrictions
on the sale, conveyance, or transfer of the Shares by the Stockholders;
NOW, THEREFORE, in consideration of the premises, the terms and
provisions set forth herein, the mutual benefits to be gained by the performance
thereof and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
SECTION 1. Defined Terms.
(a) As used herein, the terms set forth below shall have the following
respective meanings:
"1934 Act" means the Securities Exchange Act of 1934, as amended.
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"beneficial owner" has the meaning set forth in Rule 13d-3 under the
1934 Act, and the term "beneficial ownership" shall have a correlative meaning.
"Co-Investors" shall mean those stockholders of Universal whose shares
are subject to the Voting Agreement or the Voting Trust and shall include Castle
Harlan Partners III, L.P., Castle Harlan Offshore Partners III, L.P., Castle
Harlan Affiliates III, L.P. and their affiliates, and any person or entity whose
manner of voting shares of capital stock or voting securities of Universal the
Stockholders can influence or determine pursuant to a written agreement.
"Shares" means the Existing Shares, together with all other shares of
capital stock or voting securities of Universal of which the Stockholder (a) is
a direct or indirect beneficial owner as of the date of this Agreement, (b)
becomes the direct or indirect beneficial owner after the date hereof,
including, but not limited to, shares or voting securities received pursuant to
any stock splits, stock dividends, or distributions, shares or voting securities
acquired by purchase or upon the exercise, conversion, or exchange of any
option, warrant, or convertible security or otherwise, and shares or voting
securities received pursuant to any change in the capital stock of Universal by
reason of any recapitalization, merger, reorganization, consolidation,
combination, exchange of shares, or any transaction with like purpose or effect,
and (c) becomes able to vote, direct the vote of, or cause in any manner the
voting of, which shares or other securities are not owned beneficially or of
record solely by the Stockholders.
"Voting Arrangements" means (a) those documents filed as Exhibits 1 and
2 to the Schedule 13D, dated May 30, 2000 (the "13D"), and filed with the
Securities and Exchange Commission on June 9, 2000 by Castle Harlan Partners
III, L.P. et al. (together, the "Voting Trust") and (b) those documents filed as
Exhibits 3 and 4 to the 13D and as Exhibit 9.6 to Amendment No. 2 to the
Registration Statement on Form S-1, dated May 22, 2000, (together, the "Voting
Agreement").
(b) Capitalized terms used herein without definition shall have the
respective meanings assigned to such terms in the Merger Agreement.
SECTION 2. Agreement to Vote.
(a) For so long as this Agreement remains in effect (the "Term"), the
Stockholders shall, and shall take any and all actions necessary to cause the
Co-Investors to, at any meeting of the stockholders of Universal (including, but
not limited to, the Parent Stockholders' Meeting (as defined in the Merger
Agreement)), and in any action by written consent of the stockholders of
Universal in lieu of a meeting, vote all of the Voting Shares (a) in favor of
all matters requiring the approval of the stockholders of Universal to
consummate the Merger, including, but not limited to, the issuance of the shares
of Universal Common Stock pursuant to the Merger, and the other transactions
contemplated by the Merger Agreement and (b) against any Takeover Proposal or
any agreement, arrangement, or transaction relating to any Takeover Proposal or
required in order to implement the same or any action or agreement that,
directly or indirectly, is inconsistent with the Merger Agreement or the
transactions contemplated thereby or that is reasonably likely (i) to impede,
interfere with, delay, or postpone the Merger or the other transactions
contemplated by the Merger Agreement, (ii) to result in a breach of any
covenant,
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representation, warranty, or any other obligation of Universal or UCI under the
Merger Agreement, or (iii) to cause any conditions to the obligations of the
parties under the Merger Agreement not to be fulfilled.
SECTION 3. [INTENTIONALLY OMITTED]
SECTION 4. Agreement to Take Action. During the term of this Agreement,
without the prior written consent of WEUS, none of the Stockholders shall agree
to amend or waive any right under the Voting Arrangements and each of them shall
take all actions necessary and use their best efforts to enforce the terms of
such Voting Arrangements in order to effectuate the transactions contemplated by
this Agreement, including, but not limited to, the delivery of specific
instructions if so requested; provided however, nothing herein shall prevent any
Stockholder from agreeing to transfer shares subject to an existing Voting Trust
to a Voting Agreement so long as such transfer results in the Shares so
transferred being Voting Shares subject to this Agreement.
SECTION 5. Representations and Warranties.
(a) The Stockholders hereby represent and warrant to WEUS as follows:
(i) The Stockholders have all necessary power and authority to
enter into and perform their respective obligations under this Agreement and to
consummate the transactions contemplated hereby. This Agreement has been duly
executed and delivered by the Stockholders and constitutes a legal, valid, and
binding obligation of each of the Stockholders, enforceable against each of the
Stockholders in accordance with the terms hereof subject to (x) applicable
bankruptcy, insolvency, reorganization, moratorium, and other similar laws of
general application with respect to creditors, (y) general principles of equity,
and (z) the power of a court to deny enforcement of remedies generally based
upon public policy.
(ii) The execution and delivery by the Stockholders of this
Agreement, the performance by each of them of their obligations hereunder, and
the consummation by them of the transactions contemplated hereby will not (i)
conflict with, result in any violation or breach of, or constitute a default
under, any term or provision of any note, bond, mortgage, indenture, lease,
franchise, permit, license, contract, or other instrument or document to which
any Stockholder is a party by which its properties or assets are bound,
including, but not limited to, any of the Voting Arrangements or (ii) subject to
filing of reports as may be required under Section 13(d) and Section 16 of the
1934 Act, conflict with, or result in any violation of, any law, ordinance,
statute, rule, or regulation of any Governmental Entity or of any order, writ,
injunction, judgment, or decree of any court, arbitrator, or Governmental
Authority applicable to any of the Stockholders, or their respective properties
or assets.
(iii) There is no requirement applicable to any Stockholder to
obtain any consent of, or to make or effect any declaration, filing, or
registration with, any Governmental Authority for the valid execution and
delivery by each Stockholder of this Agreement, the due performance by each of
them of their respective obligations hereunder, or the lawful consummation by
each of them of the transactions contemplated hereby, except for any filings
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required to be made by any Stockholder in connection with this Agreement
pursuant to Section 13(d) of the 1934 Act and the rules and regulations
promulgated thereunder.
(iv) As of the date hereof, each Stockholder is the record
owner of the number of Existing Shares set forth opposite the name of such
Stockholder on Exhibit A and presently has, and following the execution and
delivery of the Merger Agreement by the parties thereto, will continue to have,
the power and right to vote all of the Existing Shares, including, but not
limited to, in each case, the power and right to vote all of the Existing Shares
with respect to the proposals to be presented at the Parent Stockholders'
Meeting relating to the issuance of the shares of Universal Common Stock in
connection with the Merger, except as the right to vote shares subject to the
Voting Arrangements may expire upon the transfer thereof. Nothing herein shall
restrict the right of any Stockholder to transfer any Voting Shares so long as
the transferee agrees to be bound by the terms of this Agreement and executes
and delivers a copy of this Agreement as a condition to such transfer. The
Existing Shares set forth opposite the name of the Stockholder on such exhibit
are the only shares of capital stock or voting securities of Universal of which
the Stockholder is the record owner. Except as described on Exhibit A, the
Shares held of record by each Stockholder are, or, if acquired after the date
hereof, will be, owned by the Stockholder free and clear of all liens, claims,
charges, and encumbrances, except for those provided for under the express terms
of this Agreement, the Voting Arrangements, and the Merger Agreement. The
Stockholders have not entered into any voting trust or other agreement with
respect to any of the Shares other than the Voting Arrangements and this
Agreement and has not appointed or granted any proxy, unless such appointment or
grant is no longer effective, with respect to any of the Shares.
(v) The Voting Agreements and the Voting Trust have been duly
authorized, executed, and delivered by each of the Stockholders that is a party
thereto and constitute valid and binding obligations of each such Stockholder,
enforceable against each of them in accordance with its terms, subject to (x)
applicable bankruptcy, insolvency, reorganization, moratorium, and other similar
laws of general application with respect to creditors, (y) general principles of
equity, and (z) the power of a court to deny enforcement of remedies generally
based upon public policy.
(vi) There is no suit, action, investigation, or proceeding
pending or, to the knowledge of any of the Stockholders, threatened against any
Stockholder at law or in equity before or by any Governmental Authority that
could impair the ability of any Stockholder to perform its obligations hereunder
on a timely basis, and there is no agreement, commitment or, to the Knowledge of
such Stockholder, law to which any Stockholder is subject that could impair the
ability of any Stockholder to perform its obligations hereunder on a timely
basis.
(b) Universal hereby represents and warrants to WEUS and further
covenants as follows:
(i) Universal has all necessary corporate power and authority
to enter into and perform its obligations under this Agreement and to consummate
the transactions contemplated hereby. This Agreement has been duly executed and
delivered by Universal and constitutes a legal, valid, and binding obligation of
Universal, enforceable against Universal in accordance
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with the terms hereof subject to (x) applicable bankruptcy, insolvency,
reorganization, moratorium, and other similar laws of general application with
respect to creditors, (y) general principles of equity, and (z) the power of a
court to deny enforcement of remedies generally based upon public policy.
(ii) The execution and delivery by Universal of this
Agreement, the performance by it of its obligations hereunder, and the
consummation by it of the transactions contemplated hereby will not (i) conflict
with, result in any violation or breach of, or constitute a default under, any
term or provision of any note, bond, mortgage, indenture, lease, franchise,
permit, license, contract, or other instrument or document to which Universal is
a party or by which its properties or assets are bound or (ii) conflict with, or
result in any violation of, any law, ordinance, statute, rule, or regulation of
any Governmental Authority or of any order, writ, injunction, judgment, or
decree of any court, arbitrator, or Governmental Authority applicable to
Universal or its properties or assets.
(iii) There is no requirement applicable to Universal to
obtain any consent of, or to make or effect any declaration, filing, or
registration with, any Governmental Authority for the valid execution and
delivery by Universal of this Agreement, the due performance by it of its
obligations hereunder, or the lawful consummation by it of the transactions
contemplated hereby.
(iv) All of the Existing Shares have been duly authorized and
validly issued and are fully paid and non-assessable.
(v) Universal will not, and will cause its stock transfer
agent not to, register the transfer of any of the Shares of the Stockholders on
the stock transfer ledger of Universal at any time prior to the termination of
this Agreement pursuant to Section 14 unless the transferee agrees to be bound
by the terms of this Agreement and executes and delivers a copy of this
Agreement as a condition to such transfer.
SECTION 6. No Encumbrances on or Transfer of Shares. Except pursuant to
the terms of this Agreement or the Merger Agreement, for so long as this
Agreement remains in effect, none of the Stockholders shall directly or
indirectly sell, convey, or transfer record or beneficial ownership of any
Shares, including the right to vote, cause the voting of, or influence the
manner in which are voted, the Voting Shares, by any means whatsoever to any
person or entity, without the prior written consent of WEUS unless such
transferee agrees to be bound by the terms hereof and executes and delivers this
agreement to WEUS. Without limiting the generality of the foregoing, for so long
as this Agreement remains in effect, none of the Stockholders shall, directly or
indirectly, (i) except pursuant to the terms of this Agreement, grant any proxy
or enter into any voting trust or other agreement or arrangement with respect to
the Shares or (ii) except pursuant to the terms of the Merger Agreement and
unless such transferee agrees to be bound by the terms hereof and executes and
delivers this agreement to WEUS, sell, assign, transfer, encumber, or otherwise
dispose of, or enter into any contract, option, or other arrangement or
understanding with respect to the direct or indirect sale, assignment, transfer,
encumbrance, or other disposition of, any Shares, in each case without the prior
written consent of WEUS. If requested by WEUS, the Stockholders shall cause an
appropriate legend referring to the restrictions provided for in this Section 6
to be placed on the certificates evidencing the Shares.
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SECTION 7. No Solicitation. For so long as this Agreement remains in
effect, and subject to Section 14 hereof, none of the Stockholders shall, and
none of them shall permit any affiliates or, if applicable, any director,
officer, employee, consultant, agent, advisor, or representative of any of them
or any of their affiliates to, take or participate in any actions that, if taken
by Universal, would be prohibited under the terms of Section 6.13 of the Merger
Agreement.
SECTION 8. Additional Shares. For so long as this Agreement remains in
effect, each Stockholder shall notify WEUS promptly of the number of any
additional shares of Universal Common Stock and the number and type of any other
Shares acquired by such Stockholder, if any, after the date hereof.
SECTION 9. Best Efforts. Each of the parties hereto shall use its
reasonable best efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper, or advisable under applicable
laws and regulations and which may be required under any agreements, contracts,
commitments, instruments, understandings, arrangements, or restrictions of any
kind to which it is a party or by which it is or may be bound, in order to
effectuate the transactions contemplated by this Agreement, to obtain all
necessary waivers, consents, and approvals from, and effect all necessary
registrations and filings with, any Governmental Authority, and to rectify any
event or circumstances which could impede the effectuation of the transactions
contemplated hereby; provided, however, that Universal shall only be required to
use its reasonable best efforts to take such actions or do such things in
pursuant to Section 5(b)(v) hereof.
SECTION 10. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, without regard
to any principles of conflicts of laws that would result in the application of
the laws of any other jurisdiction.
SECTION 11. Severability. If any provision contained herein shall be
held to be invalid, illegal, or unenforceable in any respect, the validity,
legality, and enforceability of any such provision in every other respect and
the validity, legality, and enforceability of the remaining provisions contained
in this Agreement shall not be in any way impaired thereby. Upon a determination
that any term or other provision is invalid, illegal, or unenforceable, such
term or provision shall be modified, without any further action by any of the
parties, so as to effect the original intent of the parties as closely as
possible in order that the terms of this Agreement remain as originally
contemplated to the fullest extent possible.
SECTION 12. Expenses. All fees and expenses incurred by any of the
parties hereto in connection with this Agreement or any of the transactions
contemplated hereby shall be borne and paid solely by the party incurring such
fees and expenses.
SECTION 13. Further Assurances. Each Stockholder shall execute and
deliver, or cause to be executed and delivered, at the expense of WEUS, all such
other and further documents and instruments and take all such further actions as
may be reasonably necessary in order to effectuate the transactions contemplated
by this Agreement.
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SECTION 14. Action in Stockholder Capacity Only. It is expressly
understood and agreed that each Stockholder makes no agreement or understanding
under this Agreement in its, his or her capacity as a director of Universal.
Each Stockholder is entering into this Agreement solely in its, his or her
capacity as a record and beneficial owner of Shares, and nothing contained
herein shall limit or affect, or impose any obligations with respect to, any
actions taken by the Stockholder in its, his or her capacity as a director of
Universal.
SECTION 15. Termination. This Agreement shall terminate and be of no
further force or effect (a) by the written mutual consent of all the parties
hereto or (b) automatically and without any required action by the parties on
the earliest of (i) the Effective Time of the Merger, (ii) the date upon which
the Merger Agreement has been terminated, or (iii) April 1, 2001. In addition,
any Stockholder may terminate this Agreement if Weatherford, WEUS, or the
Company breaches any representation, warranty, covenant or other agreement
contained in the Merger Agreement that (A) would give rise to the failure of
Weatherford, WEUS, or the Company to satisfy any condition set forth in Section
8.2(a) thereof, and (B) cannot be or has not been cured within 45 days after the
giving of written notice to Weatherford, WEUS, or the Company of such breach (a
"Material Breach") (provided that such Stockholder is not then in breach in any
material respect of any obligation, covenant, or other agreement contained in
this Agreement or in Material Breach of any representation or warranty contained
in this Agreement. If, however, the Parent Stockholders' Meeting is scheduled to
occur after the giving of notice of a Material Breach but before (i) the
determination that such breach cannot be cured or (ii) expiration of the 45-day
cure period, as applicable (the dates in (i) and (ii), the "Cure Deadline"), if
necessary Universal will adjourn the Parent Stockholders' Meeting for such time
as may be necessary so that such meeting shall not occur prior to the applicable
Cure Deadline.
SECTION 16. Notices. All notices and other communications hereunder
shall be in writing and shall be given by delivery in person, by registered or
certified mail (return receipt requested and with postage prepaid thereon) or by
cable, telex, or facsimile transmission to (i) in the case of WEUS, the address
set forth in Section 12.5 of the Merger Agreement and (ii) in the case of each
Stockholder, the address set forth in Exhibit A hereto (or at such other address
as any party shall have furnished to the others in accordance with the terms of
this Section 16). All notices and other communications hereunder that are
addressed as provided in or pursuant to this Section 16 shall be deemed duly and
validly given (a) if delivered in person, upon delivery, (b) if delivered by
registered or certified mail (return receipt requested and with postage paid
thereon), 72 hours after being placed in a depository of the United States
mails, and (c) if delivered by facsimile transmission, upon transmission thereof
and receipt of the appropriate answerback or confirmation.
SECTION 17. Amendment; Waiver. The terms and provisions of this
Agreement may be modified or amended only by a written instrument executed by
each of the parties hereto, and compliance with any term or provision hereof may
be waived only by a written instrument executed by each party entitled to the
benefits of the same. No failure to exercise any right, power, or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise thereof preclude any other or further exercise thereof or the exercise
of any other right, power, or privilege granted hereunder.
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SECTION 18. Entire Agreement. This Agreement (including the Exhibit
hereto) constitutes the entire agreement among the parties with respect to the
subject matter hereof and supersedes all prior written or oral agreements and
understandings and all contemporaneous oral agreements and understandings among
the parties or any of them with respect to the subject matter hereof.
SECTION 19. Parties in Interest; Assignment. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns (it being understood and agreed that nothing contained in
this Agreement is intended to confer any rights, benefits, or remedies of any
kind or character on any other person under or by reason of this Agreement). No
party may delegate any of its obligations or assign or otherwise transfer any
its rights under this Agreement without the prior written consent of each of the
other parties. Any attempted or purported assignment, delegation, or other
transfer by any party in violation of this Section 19 shall be null and void.
SECTION 20. Specific Performance. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed by any of the Stockholders in accordance with the
terms hereof. Accordingly, the parties agree that WEUS shall be entitled to
injunctive relief to prevent breaches of the terms of this Agreement and to
specific performance of the terms hereof, in addition to any other remedy now or
hereafter available at law or in equity, or otherwise.
SECTION 21. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
WEUS Holdings, Inc.
By: /s/ CURTIS W. HUFF
--------------------------------
Name: Curtis W. Huff
Title: Executive Vice President
Universal Compression Holdings, Inc.
By: /s/ ERNIE L. DANNER
--------------------------------
Name: Ernie L. Danner
Title: Executive Vice President
Castle Harlan Partners III, LP
By: Castle Harlan Associates, III,
L.P., as its general partner
By: /s/ JOHN K. CASTLE
--------------------------------
Name: John K. Castle
Title:
Castle Harlan Offshore Partners III, LP
By: Castle Harlan Associates, III,
L.P., as its general partner
By: /s/ JOHN K. CASTLE
--------------------------------
Name: John K. Castle
Title:
Castle Harlan Affiliates, L.P.
By: Castle Harlan Associates, III,
L.P., as its general partner
By: /s/ JOHN K. CASTLE
--------------------------------
Name: John K. Castle
Title:
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Castle Harlan Associates III, L.P.
By: /s/ JOHN K. CASTLE
--------------------------------
Name: John K. Castle
Title:
John K. Castle
By: /s/ JOHN K. CASTLE
-----------------------------------------
In his capacity as Trustee for the First
Voting Trust and the Second Voting Trust
/s/ JOHN K. CASTLE
----------------------------
John K. Castle, individually
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EXHIBIT A
EXISTING SHARES
OWNED BY THE STOCKHOLDERS
<TABLE>
<CAPTION>
NUMBER NUMBER OF SHARES NAME AND
NAME AND ADDRESS OF SHARES PLEDGED ADDRESS OF PLEDGEE
---------------- --------- ---------------- ------------------
<S> <C> <C> <C>
STOCKHOLDERS:
Castle Harlan Partners III, L.P. 2,936,718 2,936,718 WEUS Holding, Inc.
c/o Castle Harlan, Inc. 515 Post Oak Park, Suite 600
150 East 58th Street, 37th Floor Houston, Texas 77027-3415
New York, NY 10155
Castle Harlan Offshore Partners III, L.P. 48,142 48,142 WEUS Holding, Inc.
c/o Castle Harlan, Inc. 515 Post Oak Park, Suite 600
150 East 58th Street, 37th Floor Houston, Texas 77027-3415
New York, NY 10155
Castle Harlan Affiliates III, L.P. 49,079 49,079 WEUS Holding, Inc.
c/o Castle Harlan, Inc. 515 Post Oak Park, Suite 600
150 East 58th Street, 37th Floor Houston, Texas 77027-3415
New York, NY 10155
John K. Castle 90,909 90,909 WEUS Holding, Inc.
c/o Castle Harlan, Inc. 515 Post Oak Park, Suite 600
150 East 58th Street, 37th Floor Houston, Texas 77027-3415
New York, NY 10155
VOTING TRUST:
Branford Castle Holding, Inc. 19,449 19,449 WEUS Holding, Inc.
c/o Castle Harlan, Inc. 515 Post Oak Park, Suite 600
150 East 58th Street, 37th Floor Houston, Texas 77027-3415
New York, NY 10155
Frogmore Forum Family Fund, LLC 11,177 11,177 WEUS Holding, Inc.
c/o Castle Harlan, Inc. 515 Post Oak Park, Suite 600
150 East 58th Street, 37th Floor Houston, Texas 77027-3415
New York, NY 10155
Samuel Urcis 80,417 80,417 WEUS Holding, Inc.
1160 Marilyn Drive 515 Post Oak Park, Suite 600
Beverly Hills, CA 90210 Houston, Texas 77027-3415
William M. Pruellage 167 167 WEUS Holding, Inc.
c/o Castle Harlan, Inc. 515 Post Oak Park, Suite 600
150 East 58th Street, 37th Floor Houston, Texas 77027-3415
New York, NY 10155
</TABLE>
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<TABLE>
<CAPTION>
NUMBER NUMBER OF SHARES NAME AND
NAME AND ADDRESS OF SHARES PLEDGED ADDRESS OF PLEDGEE
---------------- --------- ---------------- ------------------
<S> <C> <C> <C>
Howard Weiss 1,337 1,337 WEUS Holding, Inc.
c/o Castle Harlan, Inc. 515 Post Oak Park, Suite 600
150 East 58th Street, 37th Floor Houston, Texas 77027-3415
New York, NY 10155
Marc A. Weiss 1994 Trust 334 334 WEUS Holding, Inc.
c/o Castle Harlan, Inc. 515 Post Oak Park, Suite 600
150 East 58th Street, 37th Floor Houston, Texas 77027-3415
New York, NY 10155
Michael D. Weiss 1994 Trust 334 334 WEUS Holding, Inc.
c/o Castle Harlan, Inc. 515 Post Oak Park, Suite 600
150 East 58th Street, 37th Floor Houston, Texas 77027-3415
New York, NY 10155
William J. Lovejoy 334 334 WEUS Holding, Inc.
c/o Castle Harlan, Inc. 515 Post Oak Park, Suite 600
150 East 58th Street, 37th Floor Houston, Texas 77027-3415
New York, NY 10155
Marcel Fournier 1,337 1,337 WEUS Holding, Inc.
c/o Castle Harlan, Inc. 515 Post Oak Park, Suite 600
150 East 58th Street, 37th Floor Houston, Texas 77027-3415
New York, NY 10155
Jeffrey M. Siegal 3,344 3,344 WEUS Holding, Inc.
c/o Castle Harlan, Inc. 515 Post Oak Park, Suite 600
150 East 58th Street, 37th Floor Houston, Texas 77027-3415
New York, NY 10155
David H. Chow 10,035 10,035 WEUS Holding, Inc.
c/o Castle Harlan, Inc. 515 Post Oak Park, Suite 600
150 East 58th Street, 37th Floor Houston, Texas 77027-3415
New York, NY 10155
Sylvia B. Rosen 334 334 WEUS Holding, Inc.
c/o Castle Harlan, Inc. 515 Post Oak Park, Suite 600
150 East 58th Street, 37th Floor Houston, Texas 77027-3415
New York, NY 10155
John Peter Laborde 33,453 33,453 WEUS Holding, Inc.
601 Poydras Street, Suite 1637 515 Post Oak Park, Suite 600
New Orleans, LA 70136 Houston, Texas 77027-3415
John Tracy Laborde 6,689 6,689 WEUS Holding, Inc.
c/o John Peter Laborde 515 Post Oak Park, Suite 600
601 Poydras Street, Suite 1637 Houston, Texas 77027-3415
New Orleans, LA 70136
</TABLE>
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<TABLE>
<CAPTION>
NUMBER NUMBER OF SHARES NAME AND
NAME AND ADDRESS OF SHARES PLEDGED ADDRESS OF PLEDGEE
---------------- --------- ---------------- ------------------
<S> <C> <C> <C>
Cliffe Floyd Laborde 6,689 6,689 WEUS Holding, Inc.
c/o John Peter Laborde 515 Post Oak Park, Suite 600
601 Poydras Street, Suite 1637 Houston, Texas 77027-3415
New Orleans, LA 70136
Gary Lee Laborde 6,689 6,689 WEUS Holding, Inc.
c/o John Peter Laborde 515 Post Oak Park, Suite 600
601 Poydras Street, Suite 1637 Houston, Texas 77027-3415
New Orleans, LA 70136
John Peter Laborde, Jr. 6,689 6,689 WEUS Holding, Inc.
c/o John Peter Laborde 515 Post Oak Park, Suite 600
601 Poydras Street, Suite 1637 Houston, Texas 77027-3415
New Orleans, LA 70136
Marion Adrianne Laborde Parsons 6,689 6,689 WEUS Holding, Inc.
c/o John Peter Laborde 515 Post Oak Park, Suite 600
601 Poydras Street, Suite 1637 Houston, Texas 77027-3415
New Orleans, LA 70136
VOTING AGREEMENT:
Bell Atlantic Master Trust 535,269 535,269 WEUS Holding, Inc.
c/o Bell Atlantic Management Company 515 Post Oak Park, Suite 600
200 Park Avenue Houston, Texas 77027-3415
New York, NY 10166
Mellon Bank, N.A.
Trustee of Bell Atlantic Master Trust
One Mellon Bank Center
Pittsburgh, PA 15248-0001
First Union Capital Partners, Inc. 535,269 535,269 WEUS Holding, Inc.
One First Union Center 515 Post Oak Park, Suite 600
301 South College Street, 5th Floor Houston, Texas 77027-3415
Charlotte, NC 28288-0732
DB Capital Partners SBIC, L.P. 535,269 535,269 WEUS Holding, Inc.
Mail Stop 2255 515 Post Oak Park, Suite 600
130 Liberty Street Houston, Texas 77027-3415
New York, NY 10006
</TABLE>
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<TABLE>
<CAPTION>
NUMBER NUMBER OF SHARES NAME AND
NAME AND ADDRESS OF SHARES PLEDGED ADDRESS OF PLEDGEE
---------------- --------- ---------------- ------------------
<S> <C> <C> <C>
Du Pont Pension Trust 535,269 535,269 WEUS Holding, Inc.
c/o Du Pont Capital Management Corp. 515 Post Oak Park, Suite 600
Delaware Corporate Center Houston, Texas 77027-3415
One Righter Parkway
Wilmington, DE 19803
Brown University Third Century Fund 33,453 33,453 WEUS Holding, Inc.
Attn: Christopher Longee 515 Post Oak Park, Suite 600
164 Angell Street Houston, Texas 77027-3415
Box C
Providence, RI 02912
Grand Total: 5,494,874 5,494,874
</TABLE>
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ANNEX D
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of
_____________, ____, is by and between WEUS Holding, Inc. ("WEUS") and Universal
Compression Holdings, Inc., a Delaware corporation ("Parent"). Certain
capitalized terms used herein are defined in Section 6 below. Capitalized terms
not otherwise defined herein have the meaning ascribed to them in the Merger
Agreement (as hereinafter defined).
RECITALS:
WHEREAS, Weatherford International, Inc., a Delaware corporation and
the parent of WEUS ("Weatherford"), WEUS, Enterra Compression Company, a
Delaware corporation and a wholly owned subsidiary of WEUS (the "Company"),
Parent and Universal Compression, Inc., a Texas corporation and a wholly owned
subsidiary of Parent ("Merger Subsidiary"), have entered into an Agreement and
Plan of Merger, dated as of October 23, 2000 (the "Merger Agreement"), that
provides, subject to the terms and conditions thereof, for the merger (the
"Merger") of the Company with and into Merger Subsidiary;
WHEREAS, as consideration to be paid in the Merger, WEUS will acquire
13,750,000 shares (the "Acquired Shares") of Common Stock, par value $.01 per
share, of Parent (the "Common Stock"); and
WHEREAS, in order to induce Weatherford and WEUS to enter into the
Merger Agreement, Parent has agreed to provide certain registration rights on
the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and intending to be
legally bound hereby, the parties hereto hereby agree as follows:
Section 1. Registration Under The Securities Act.
1.1 Demand Registrations.
(a) Requests for Registration. Subject to Section 1.1(b)
hereof, WEUS may at any time request registration under the Securities Act of
all or any portion of its Registrable Securities on Form S-l or, if available,
on Form S-2 or S-3, or any similar short-form registration. All registrations
requested pursuant to this Section l.1(a) are referred to herein as "Demand
Registrations." Each request for a Demand Registration shall specify the
approximate number of Registrable Securities requested to be registered;
provided, however, that a request for an offering shall not qualify for a Demand
Registration unless the market value of the Registrable Securities to be
included is at least $5 million in the case of a non-underwritten offering and
$20 million in the case of an underwritten offering. Following receipt of the
request from WEUS for a Demand Registration, Parent will file a registration
statement on the appropriate form to cover the Registrable Securities to be
included.
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(b) Determination of Demand Registration. WEUS shall be
entitled to receive three Demand Registrations. A registration shall not count
as one of the Demand Registrations until it has become effective (unless such
Demand Registration has not become effective due solely to the fault of WEUS),
and unless at least 75% of the Registrable Securities requested to be included
in such registration are registered; provided, however, that if, after such
registration has become effective, the offering of the Registrable Securities
included therein is interfered with by any stop order, injunction or other order
or requirement of the Securities and Exchange Commission (the "SEC") or other
governmental agency or court, such registration will be deemed not to have been
effective (and it shall not count as one of the three Demand Registrations); and
provided further that in any event Parent shall pay all Registration Expenses in
connection with any registration initiated as a Demand Registration whether or
not it has become effective.
(c) Priority on Demand Registrations. Parent shall not include
in any Demand Registration any securities other than the Registrable Securities
without the prior written consent of WEUS. If a Demand Registration is an
underwritten offering and the managing underwriters advise Parent and WEUS in
writing that in their opinion the number of Registrable Securities and, if
permitted hereunder, other securities requested to be included in such offering
exceeds the number of Registrable Securities and other securities, if any, which
can be sold therein without adversely affecting the marketability of the
offering, Parent shall include in such registration prior to the inclusion of
any securities which are not Registrable Securities such Registrable Securities
requested to be included by WEUS which in the opinion of such underwriters can
be sold without adversely affecting the marketability of the offering.
(d) Restrictions on Demand Registrations. Parent shall not be
obligated to effect any Demand Registration within 180 days after the effective
date of a previous Demand Registration. Parent may postpone for up to 180
consecutive days in any two-year period the filing or the effectiveness of a
registration statement for a Demand Registration if Parent determines that such
Demand Registration would reasonably be expected to have a material adverse
effect on any proposal or plan by Parent or any of its Subsidiaries to engage in
any acquisition of assets (other than in the ordinary course of business) or any
merger, consolidation, tender offer, reorganization, or similar transaction;
provided that in such event, WEUS shall be entitled to withdraw such request
and, if such request is withdrawn, such Demand Registration shall not count as
one of the permitted Demand Registrations hereunder and Parent shall pay all
Registration Expenses in connection with such registration.
(e) Selection of Underwriters. WEUS shall select the
investment banker(s) and manager(s) to administer each Demand Registration,
which banker(s) or manager(s), to the extent that Parent will sell securities
therein, shall be subject to the reasonable approval of Parent.
1.2. Piggyback Registrations.
(a) Right to Piggyback. Whenever Parent proposes to register
any of its securities under the Securities Act (whether or not such registration
relates to a primary offering of securities by Parent or a secondary sale of
securities by a selling securityholder) and the registration form to be used may
be used for the registration of Registrable Securities (a
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"Piggyback Registration"), Parent shall give prompt written notice to WEUS of
its intention to effect such a registration and shall include, subject to
Sections 1.2(b) and 1.2(c), in such registration all Registrable Securities with
respect to which Parent has received a written request for inclusion therein
within twenty (20) days after Parent's notice, provided that the foregoing shall
not apply to a registration on Form S-4 or S-8 or an effective registration
statement as of the date of this Agreement.
(b) Priority on Primary Registrations. If a Piggyback
Registration is an underwritten primary registration on behalf of Parent, and
the managing underwriters advise Parent and WEUS in writing that in their
opinion the number of securities requested to be included in such registration
exceeds the number which can be sold in such offering without adversely
affecting the marketability of the offering, Parent shall include in such
registration (i) first, the securities Parent proposes to sell, (ii) second, the
Registrable Securities requested to be included in such registration, pro rata
with holders entitled to registration rights under the Registration Rights
Agreement, dated as of February 20, 1998, by and among Parent, Castle Harlan
Partners III, L.P. and the other persons or entities signatory thereto, and
(iii) third, other securities requested to be included in such registration, pro
rata among other holders of such securities.
(c) Priority on Secondary Registrations. If a Piggyback
Registration is an underwritten secondary registration on behalf of holders
(other than WEUS) of Parent securities, and the managing underwriters advise
Parent and WEUS in writing that in their opinion the number of securities
requested to be included in such registration exceeds the number which can be
sold in such offering without adversely affecting the marketability of the
offering, Parent shall include in such registration (i) first, the securities
requested to be included therein by the holders requesting such registration,
(ii) second, the securities Parent proposes to sell, (iii) third, the
Registrable Securities requested to be included in such registration, pro rata
with holders entitled to registration rights under the Registration Rights
Agreement, dated as of February 20, 1998, by and among Parent, Castle Harlan
Partners III, L.P. and the other persons or entities signatory thereto, and (iv)
fourth, other securities requested to be included in such registration, pro rata
among other holders of such securities.
(d) Selection of Underwriters. Parent shall select the
investment banker(s) and manager(s) to administer each Piggyback Registration.
1.3 Registration Procedures. Whenever WEUS has requested that any
Registrable Securities be registered pursuant to this Agreement, Parent shall
use its reasonable best efforts to effect the registration and the sale of such
Registrable Securities in accordance with the intended method of disposition
thereof, and pursuant thereto Parent shall as expeditiously as possible:
(a) promptly prepare and file with the SEC a registration
statement with respect to such Registrable Securities (and any amendment,
including any post-effective amendment, to such registration statement Parent
deems to be necessary) and use its reasonable best efforts to cause such
registration statement to become effective and to comply with the provisions of
the Securities Act applicable to it (provided that before filing a registration
statement or prospectus or any amendments or supplements thereto, Parent shall
furnish to counsel for WEUS copies of all such documents proposed to be filed so
as to provide WEUS and
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its counsel a reasonable opportunity to review and comment on such documents,
and such documents shall be subject to the review and comment of WEUS and its
counsel);
(b) furnish to WEUS such number of copies of such registration
statement, each amendment and supplement thereto, the prospectus included in
such registration statement (including each preliminary prospectus) and such
other documents as WEUS may reasonably request in order to facilitate the
disposition of the Registrable Securities owned by WEUS (including, without
limitation, the documentation referred to in Section 1.3(o) below);
(c) make such filings of the preliminary and final prospectus,
and any amended or supplemented prospectus, as may be required under Rule 424
and keep the registration statement with respect to such Registrable Securities
continuously effective in order to permit the prospectus forming a part thereof
to be usable for the offer and sale of the Registrable Securities for a period
of time not less than the earlier of: (i) 180 days after the date such
registration statement is declared effective; and (ii) the date that all of the
Registrable Securities covered by such registration statement have been sold
pursuant to such registration statement;
(d) use its reasonable best efforts to register or qualify
such Registrable Securities under such other securities or blue sky laws of such
jurisdictions as WEUS (or any other holder whose securities are undivided in a
registration statement on which Registrable Securities are requested) reasonably
requests and do any and all other acts and things which may be reasonably
necessary or advisable to enable WEUS to consummate the disposition in such
jurisdictions of the Registrable Securities owned by WEUS (provided that Parent
shall not be required to (i) qualify generally to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
subsection, (ii) subject itself to taxation in any such jurisdiction or (iii)
consent to general service of process in any such jurisdiction);
(e) notify WEUS and any underwriter, at any time when a
prospectus relating thereto is required to be delivered under the Securities Act
(i) when a registration statement or any post-effective amendment has become
effective under the Securities Act, (ii) of the happening of any event as a
result of which the prospectus included in such registration statement contains
an untrue statement of a material fact or omits any fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, and, at the request of WEUS, Parent shall prepare a supplement
or amendment to such prospectus so that, as thereafter delivered to the
purchasers of such Registrable Securities, such prospectus shall not contain an
untrue statement of a material fact or omit to state any fact necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, and (iii) of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any of the Registrable Securities included in such registration statement for
sale in any jurisdiction;
(f) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by Parent are then listed
and, if not so listed, to be listed on a securities exchange or on the NASD
automated quotation system and, if listed on the NASD automated quotation
system, use its reasonable best efforts to secure designation of all
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such Registrable Securities covered by such registration statement as a NASDAQ
"national market system security" within the meaning of Rule 11Aa2-1 of the
Securities and Exchange Commission or, failing that, to secure NASDAQ
authorization for such Registrable Securities;
(g) provide a transfer agent and registrar for all such
Registrable Securities not later than the effective date of such registration
statement;
(h) enter into such customary agreements (including
underwriting agreements in customary form and with customary provisions relating
to indemnification from Parent and WEUS) and take all such other actions as WEUS
or the underwriters, if any, reasonably request in order to expedite or
facilitate the disposition of such Registrable Securities (including effecting a
stock split or a combination of shares);
(i) make available for inspection by WEUS, any underwriter
participating in any disposition pursuant to such registration statement, and
any attorney, accountant or other agent retained by WEUS or any such
underwriter, all financial and other records, pertinent corporate documents, and
properties of Parent, and cause Parent's officers, directors, employees, and
independent accountants to supply all information reasonably requested by WEUS
and any such underwriter, attorney, accountant, or agent in connection with such
registration statement;
(j) otherwise use its reasonable best efforts to comply with
all applicable rules and regulations of the SEC, and make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months beginning with the first day of
Parent's first full fiscal quarter after the effective date of the registration
statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act and Rule 158 thereunder;
(k) permit WEUS, if WEUS is an underwriter or controlling
person of Parent, to participate in the preparation of such registration or
comparable statement and to require the insertion therein of material, furnished
to Parent in writing, which in the reasonable judgment of WEUS and its counsel
should be included;
(l) in the event of the issuance of any stop order suspending
the effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any Registrable Securities included in such registration statement for sale in
any jurisdiction, Parent shall use its reasonable best efforts promptly to
obtain the withdrawal of such order and shall prepare and file an amended or
supplemented prospectus, if required;
(m) use its reasonable best efforts to cause such Registrable
Securities covered by such registration statement to be registered with or
approved by such other governmental agencies or authorities as may be necessary
to enable WEUS and the underwriters, if any to consummate the disposition of
such Registrable Securities;
(n) obtain a cold comfort letter addressed to Parent, WEUS,
and the underwriters from Parent's independent public accountants in customary
form and covering such matters of the type customarily covered by cold comfort
letters;
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(o) use reasonable efforts to cause certificates for the
Registrable Securities covered by such registration statement to be delivered by
WEUS to the underwriters in such denominations and registered in such names as
the underwriters may request; and
(p) in the case of a Demand Registration which is an
underwritten offering, participate in customary "roadshow" and similar marketing
presentations as reasonably requested by the underwriters.
Section 2. Holdback Agreements.
2.1 WEUS hereby agrees to not effect any public sale or distribution
(including sales pursuant to Rule 144 other than Rule 144(k)) of equity
securities of Parent, or any securities convertible into or exchangeable or
exercisable for such securities, during the seven days prior to and the 90-day
period beginning on the effective date of any underwritten registered public
offering of equity securities of Parent or securities convertible or
exchangeable into or exercisable for equity securities of Parent (except as part
of such underwritten registration), unless the underwriters managing the
registered public offering otherwise agree, and WEUS will deliver an undertaking
to the managing underwriters (if requested) consistent with this covenant. WEUS
shall not be obligated to comply the provisions of this Section 2.1 more than
two times in any 12-month period.
2.2 Parent (i) shall not effect any public sale or distribution of its
equity securities, or any securities convertible into or exchangeable or
exercisable for such securities, during the seven days prior to and during the
90-day period beginning on the effective date of any underwritten Demand
Registration or any underwritten Piggyback Registration (except as part of such
underwritten registration or pursuant to registrations on Form S-4 or S-8 or any
successor forms), unless the underwriters managing the registered public
offering otherwise agree, and (ii) shall use reasonable efforts to cause each
holder of at least 5% of the outstanding Common Stock purchased from Parent at
any time after the date of this Agreement (other than in a registered public
offering) to agree not to effect any public sale or distribution (including
sales pursuant to Rule 144 other than Rule 144(k)) of any such securities during
such period (except as part of such underwritten registration, if otherwise
permitted), unless the underwriters managing the registered public offering
otherwise agree. Parent shall not be obligated to comply the provisions of this
Section 2.2 more than two times in any 12-month period.
Section 3. Registration Expenses.
3.1 All Registration Expenses shall be borne by Parent. Also, Parent
shall be responsible for its internal expenses (including, without limitation,
all salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual or special audit or quarterly
review, the expense of any liability insurance, and the expenses and fees for
listing the securities to be registered on each securities exchange on which
similar securities issued by Parent are then listed or on the NASD automated
quotation system.
3.2 In connection with each Demand Registration and each Piggyback
Registration, Parent shall reimburse WEUS for the reasonable fees and
disbursements of its counsel.
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Section 4. Indemnification.
4.1 Parent agrees to indemnify, to the extent permitted by law, WEUS,
its officers and directors and each Person who controls WEUS (within the meaning
of the Securities Act) against all losses, claims, damages, liabilities, and
expenses caused by any untrue or alleged untrue statement of material fact
contained in any registration statement, prospectus or preliminary prospectus,
or any amendment thereof or supplement thereto or any omission or alleged
omission of a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as the same are caused by
or contained in any information furnished in writing to Parent by WEUS expressly
for use therein or by WEUS's failure to deliver a copy of the registration
statement or prospectus or any amendments or supplements thereto after Parent
has furnished WEUS with a sufficient number of copies of the same. In connection
with an underwritten offering, Parent shall indemnify the underwriters, their
officers and directors, and each Person who controls such underwriters (within
the meaning of the Securities Act) to the same extent as provided above with
respect to the indemnification of WEUS.
4.2 In connection with any registration statement in which WEUS is
participating, WEUS shall furnish to Parent in writing such information as
Parent reasonably requests for use in connection with any such registration
statement or prospectus and, to the extent permitted by law, shall indemnify
Parent, its directors and officers, and each Person who controls Parent (within
the meaning of the Securities Act) against any losses, claims, damages,
liabilities, and expenses resulting from any untrue or alleged untrue statement
of material fact contained in the registration statement, prospectus, or
preliminary prospectus, or any amendment thereof or supplement thereto or any
omission or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading, but only to the extent
that any information or affidavit so furnished in writing by WEUS contains such
untrue statement or omits a material fact required to be stated therein
necessary to make the statements therein not misleading; provided that the
obligation to indemnify shall be limited to the net amount of proceeds received
by WEUS from the sale of Registrable Securities pursuant to such registration
statement.
4.3 Any Person entitled to indemnification hereunder shall (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification (provided that the failure to give prompt notice
shall not impair any Person's right to indemnification hereunder to the extent
such failure has not prejudiced the indemnifying party) and (ii) unless in such
indemnified party's reasonable judgment a conflict of interest between such
indemnified and indemnifying parties may exist with respect to such claim,
permit such indemnifying party to assume the defense of such claim with counsel
reasonably satisfactory to the indemnified party. If such defense is assumed,
the indemnifying party shall not be subject to any liability for any settlement
made by the indemnified party without its consent (but such consent shall not be
unreasonably withheld). An indemnifying party who is not entitled to, or elects
not to, assume the defense of a claim shall not be obligated to pay the fees and
expenses of more than one counsel (in addition to local counsel) for all parties
indemnified by such indemnifying party with respect to such claim, unless in the
reasonable judgment of any indemnified party a conflict of interest may exist
between such indemnified party and any other of such indemnified parties with
respect to such claim.
4.4 The indemnification provided for under this Agreement shall remain
in full force and effect regardless of any investigation made by or on behalf of
the indemnified party or any
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officer, director, or controlling Person of such indemnified party and shall
survive the transfer of securities. If the indemnification provided under
Section 4.1 or Section 4.2 this Agreement (other than as it relates to
underwriters) is for any reason unavailable to, or insufficient to hold
harmless, an indemnified party, then each indemnifying party shall contribute to
the amount paid or payable to the indemnified party or parties an amount that is
proportionate to reflect the relative fault of such indemnifying party on the
one hand and the indemnified party or parties on the other.
Section 5. Participation in Underwritten Registrations.
No Person may participate in any registration hereunder which is
underwritten unless such Person (i) agrees to sell such Person's securities on
the basis provided in any customary underwriting arrangements approved by the
Person or Persons entitled hereunder to approve such arrangements (which shall
be on the same terms for all holders of securities participating in such
registration) and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents customarily
required under the terms of such underwriting arrangements.
Section 6. Definitions.
"Person" means any individual, firm, partnership, corporation, trust,
joint venture, limited liability company, association, joint stock company,
unincorporated organization, or any other entity or organization, including a
governmental entity or any department, agency, or political subdivision thereof.
"Public Sale" means any sale of equity interests of Parent to the
public pursuant to an offering registered under the Securities Act or to the
public through a broker, dealer, or market maker pursuant to the provisions of
Rule 144 adopted under the Securities Act.
"Registrable Securities" means (i) the Acquired Shares, (ii) any other
shares of Common Stock issued as a dividend or other distribution on or as a
result of a subdivision, combination, or reclassification of any such shares of
Common Stock; (iii) any other shares of Common Stock acquired by WEUS at any
time; and (iv) any Common Stock issued to WEUS in any merger, consolidation, or
business combination involving Parent.
"Registration Expenses" means all expenses incident to Parent's
performance of or compliance with this Agreement, including without limitation
all registration and filing fees, fees and expenses of compliance with
securities or blue sky laws, fees with respect to filings required to be made
with the NASD, roadshow expenses, printing expenses, messenger and delivery and
mailing expenses, fees and disbursements of custodians, and fees and
disbursements of counsel for Parent and all independent certified public
accountants, underwriters (excluding discounts and commissions) and other
Persons retained by Parent, and such other expenses payable by Parent as
provided herein.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations thereunder, or any successor statute.
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"Subsidiary" means, with respect to any Person, any company,
partnership, limited liability company, association, or other business entity of
which at the time of such determination (i) if a company, a majority of the
total voting power of shares of stock entitled (without regard to the occurrence
of any contingency) to vote in the election of directors, managers, or trustees
thereof is at the time owned or controlled, directly or indirectly, by that
Person or one or more of the other Subsidiaries of that Person or a combination
thereof, or (ii) if a partnership, limited liability company, association, or
other business entity, a majority of the partnership or other similar ownership
interest thereof is at the time owned or controlled, directly or indirectly, by
any Person or one or more Subsidiaries of that Person or a combination thereof.
For purposes hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a partnership, limited liability company, association, or
other business entity if such Person or Persons shall be allocated a majority of
partnership, limited liability company, association, or other business entity
gains or losses or shall be or control any managing director or general partner
of such partnership, limited liability company, association, or other business
entity.
Section 7. Miscellaneous.
7.1 No Inconsistent Agreements. Parent shall not hereafter enter into
any agreement with respect to its securities which is inconsistent with or
violates the rights granted to WEUS in this Agreement. Parent shall also not
grant more favorable registration rights to any party than those granted to WEUS
in this Agreement. At the date hereof, Parent is not party to any registration
rights agreement (other than this Agreement and the Registration Rights
Agreement, dated February 28, 2000, among Parent and the co-investors party
thereto, and the accessions to such agreement by Messrs. Banner and Fitzgerald
and the Registration Agreement, dated September 15, 2000, among Parent, The
Reuben James Helton Trust dated January 24, 2000, and Michael Pahl) relating to
the capital stock of Parent.
7.2 Adjustments Affecting Registrable Securities. Parent shall not take
any action, or permit any change to occur, with respect to its securities which
would materially and adversely affect the ability of WEUS to include such
Registrable Securities in a registration undertaken pursuant to this Agreement
or which would materially and adversely affect the marketability of such
Registrable Securities in any such registration (including, without, effecting a
stock split or a combination of shares).
7.3 Specific Performance. The parties hereto acknowledge and agree that
in the event of any breach of this Agreement, the non-breaching parties would be
irreparably harmed and could not be made whole by monetary damages. It is
accordingly agreed that the parties hereto shall and do hereby waive the defense
in any action for specific performance that a remedy at law would be adequate
and that the parties hereto, in addition to any other remedy to which they may
be entitled at law or in equity, shall be entitled to compel specific
performance of this Agreement in any action instituted in the Supreme Court of
the State of Texas or the United States District Court for the Southern District
of Texas, or, in the event such courts shall not have jurisdiction of such
action, in any court of the United States or any state thereof having subject
matter jurisdiction of such action.
7.4 Amendments and Waivers. The failure of any party to enforce any of
the provisions of this Agreement shall in no way be construed as a waiver of
such provisions and
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shall not affect the right of such party thereafter to enforce each and every
provision of this Agreement in accordance with its terms. No modification,
amendment, or waiver of any provision of this Agreement shall be effective
against Parent or WEUS except by a written agreement signed by Parent and WEUS.
7.5 Successors and Assigns. All covenants and agreements in this
Agreement by or on behalf of any of the parties hereto shall bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not including, without limitation, any Person which is
the successor to Parent or an affiliate of WEUS, it being understood that WEUS
shall have the right to assign any of its rights in whole or in part, hereunder
to any Person.
7.6 Severability. If any term, provision, covenant or restriction of
this Agreement, or any part thereof, is held by a court of competent
jurisdiction or any foreign federal, state, county, or local government or any
other governmental, regulatory, or administrative agency or authority to be
invalid, void, unenforceable, or against public policy for any reason, the
remainder of the terms, provisions, covenants, and restrictions of this
Agreement shall remain in full force and effect and shall in no way be affected,
impaired, or invalidated.
7.7 Entire Agreement. Except as otherwise expressly set forth herein,
this document embodies the complete agreement and understanding among the
parties hereto with respect to the subject matter hereof and supersedes and
preempts any prior understandings, agreements, or representations by or among
the parties, written or oral, which may have related to the subject matter
hereof in any way.
7.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument, and it shall not be necessary in making
proof of this Agreement to produce or account for more than one such
counterpart.
7.9 Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning of terms
contained herein.
7.10 Governing Law; Consent of Jurisdiction; Waiver of Jury Trial. This
Registration Rights Agreement and the validity and performance of the terms
hereof shall be governed by and construed in accordance with the laws of the
State of New York without regard to principles of conflicts of law or choice of
law, except to the extent that the laws of Delaware regulate Parent's issuance
of securities. The parties hereto hereby agree that all actions or proceedings
arising directly or indirectly from or in connection with this Registration
Rights Agreement shall be litigated only in the Supreme Court of the State of
Texas or the United States District Court for the Southern District of Texas. To
the extent permitted by applicable law, the parties hereto consent to the
jurisdiction and venue of the foregoing courts and consent that any process or
notice of motion or other application to either of said courts or a judge
thereof may be served inside or outside the State of New York or the Southern
District of New York by registered mail, return receipt requested, directed to
such party at its address set forth in this Registration Rights Agreement (and
service so made shall be deemed complete five (5) days after the same has been
posted as aforesaid) or by personal service or in such other manner as may be
permissible under
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the rules of said courts. The parties hereto hereby waive any right to a jury
trial in connection with any litigation pursuant to this Registration Rights
Agreement.
7.11 Notices. Any notice or other communication required or which may
be given hereunder shall be in writing and shall be delivered personally,
telecopied with confirmed receipt, sent by certified, registered, or express
mail, postage prepaid, or sent by a national next-day delivery service. Such
notice or other communication shall be sent to WEUS at the address indicated
below or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party and
shall be deemed given when so delivered personally or telecopied, or if mailed,
5 days after the date of mailing, or, if by national next-day delivery service,
on the day after delivery to such service.
IN WITNESS WHEREOF, the parties hereto have executed this Registration
Rights Agreement on the day and year first above written.
WEUS HOLDING, INC.
By:
----------------------------------------
Name:
Title:
Address: 515 Post Oak Park, Suite 600
Houston, Texas 77027
Attn: Curtis W. Huff
UNIVERSAL COMPRESSION HOLDINGS, INC.
By:
----------------------------------------
Name:
Title:
Address: 4430 Brittmoore Road
Houston, Texas 77041
Attn: Ernie L. Danner
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ANNEX E
VOTING AGREEMENT
This VOTING AGREEMENT (the "Agreement"), dated as of _______________,
2000, is among Weatherford International, Inc., a Delaware corporation
("Weatherford"), WEUS Holding, Inc., a Delaware corporation (the "Stockholder"),
and Universal Compression Holdings, Inc., a Delaware corporation ("Universal").
WITNESSETH:
WHEREAS, as a result of the consummation of the transactions
contemplated by the Agreement and Plan of Merger, dated October 23, 2000 (the
"Merger Agreement"), pursuant to which Enterra Compression Company, a Delaware
corporation, will be merged with and into Universal Compression, Inc., a Texas
corporation and a wholly owned subsidiary of Universal ("UCI"), Stockholder
(directly or through one or more of its affiliates) owns 13,750,000 shares of
common stock, par value $0.01 per share ("Common Stock"), of Universal issued
pursuant to the Merger Agreement (the "Acquired Shares"); and
WHEREAS, in order to induce Universal and UCI to enter into the Merger
Agreement and to consummate the transactions contemplated thereby, Weatherford
and the Stockholder agreed to enter into this Agreement relating to the manner
in which the Stockholder will vote certain shares of Common Stock owned by it.
NOW, THEREFORE, in consideration of the premises, the terms and
provisions set forth herein, the mutual benefits to be gained by the performance
thereof and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
SECTION 1. Defined Terms.
(a) As used herein, the terms set forth below shall have the following
respective meanings:
"1934 Act" means the Securities Exchange Act of 1934, as amended.
"beneficial owner" has the meaning set forth in Rule 13d-3 under the
1934 Act, and the term "beneficial ownership" shall have a correlative meaning.
"Castle Harlan" means Castle Harlan, Inc., Castle Harlan Partners III,
L.P., Castle Harlan Offshore Partners III, L.P., Castle Harlan Affiliates III,
L.P. and their affiliates, including without limitation any voting trusts for
which John K. Castle serves as trustee or voting agreements pursuant to which
other stockholders of the Company are obligated to vote their shares of Common
Stock as voted by Mr. Castle or any of the foregoing persons or entities.
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"Public Shares" means, with respect to any record date, all issued and
outstanding shares of Common Stock on such record date, other than shares
directly or indirectly beneficially owned by Castle Harlan (including any shares
subject to voting trusts, voting agreements or similar agreements to which
Castle Harlan or any of its affiliates is a party or of which any of them is a
beneficiary) and other than shares directly or indirectly beneficially owned by
Weatherford, the Stockholder, or Weatherford's subsidiaries.
"Voting Shares" means, as of any record date, all shares of Common
Stock in excess of 33 1/3% of the total shares of Common Stock issued and
outstanding (excluding any shares of Common Stock owned by any subsidiary of
Universal) as of such record date that the Stockholder has the right to vote,
direct the vote of, or cause in any manner the voting of.
(b) Capitalized terms used herein without definition shall have the
respective meanings assigned to such terms in the Merger Agreement.
SECTION 2. Agreement to Vote. For so long as this Agreement remains in
effect (the "Term"), the Stockholder shall, and Weatherford shall cause the
Stockholder to, on each matter presented for a vote at any duly convened meeting
of the stockholders of Universal, and in any action by written consent of the
stockholders of Universal in lieu of a meeting, vote the Voting Shares in the
same proportions as the Public Shares are voted. Certificates representing
shares of Common Stock that are covered by this Agreement will bear an
appropriate legend to reflect the existence of this Agreement.
SECTION 3. Proxy. If requested by Universal, the Stockholder shall, and
Weatherford shall cause the Stockholder to, execute and deliver a proxy (in a
form to be mutually agreed upon by Parent and the Stockholder) in favor of
Universal with respect to the Voting Shares in connection with each
stockholders' meeting or action by written consent.
SECTION 4. Representations and Warranties.
(a) The Stockholder and Weatherford hereby represent and warrant to
Universal as follows:
(i) The Stockholder and Weatherford have all necessary power
and authority to enter into and perform their respective obligations under this
Agreement and to consummate the transactions contemplated hereby. This Agreement
has been duly executed and delivered by the Stockholder and Weatherford and
constitutes a legal, valid, and binding obligation of the Stockholder and
Weatherford, enforceable against each of them in accordance with the terms
hereof.
(ii) The execution and delivery by the Stockholder and
Weatherford of this Agreement, the performance by each of them of their
obligations hereunder, and the consummation by each of them of the transactions
contemplated hereby will not (i) conflict with, result in any violation or
breach of, or constitute a default under, any term or provision of any material
note, bond, mortgage, indenture, lease, franchise, permit, license, contract, or
other instrument or document to which the Stockholder or Weatherford is a party
or by which their
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respective properties or assets are bound or (ii) conflict with, or result in
any violation of, any law, ordinance, statute, rule, or regulation of any
Governmental Authority (as defined in the Merger Agreement) or of any order,
writ, injunction, judgment, or decree of any court, arbitrator, or Governmental
Authority applicable to the Stockholder or Weatherford or their respective
properties or assets.
(iii) There is no requirement applicable to the Stockholder or
Weatherford to obtain any consent of, or to make or effect any declaration,
filing, or registration with, any Governmental Authority for the valid execution
and delivery by the Stockholder and Weatherford of this Agreement, the due
performance by them of their obligations hereunder, or the lawful consummation
by them of the transactions contemplated hereby, except for any filings required
to be made by the Stockholder and Weatherford in connection with this Agreement
pursuant to Section 13(d) of the 1934 Act and the rules and regulations
promulgated thereunder.
(iv) As of the date hereof, the Stockholder is the record or
beneficial owner of 13,750,000 shares of Common Stock and has the power and
right to vote all of such shares. Neither the Stockholder nor Weatherford has
entered into any voting trust or other voting agreement with respect to any of
the Voting Shares other than this Agreement and the Registration Rights
Agreement and neither of them has appointed or granted any proxy with respect to
any of the Voting Shares.
(v) There is no suit, action, investigation, or proceeding
pending or, to the knowledge of the Stockholder or Weatherford, threatened
against the Stockholder or Weatherford, at law or in equity, before or by any
Governmental Authority that could impair the ability of the Stockholder or
Weatherford to perform their obligations hereunder on a timely basis, and there
is no agreement, commitment, or law to which the Stockholder or Weatherford is
subject that could impair the ability of the Stockholder or Weatherford to
perform their respective obligations hereunder on a timely basis.
(b) Universal hereby represents and warrants to the Stockholder and
Weatherford as follows:
(i) Universal has all necessary corporate power and authority
to enter into and perform its obligations under this Agreement and to consummate
the transactions contemplated hereby. This Agreement has been duly executed and
delivered by Universal and constitutes a legal, valid, and binding obligation of
Universal, enforceable against Universal in accordance with the terms hereof.
(ii) The execution and delivery by Universal of this
Agreement, the performance by it of its obligations hereunder, and the
consummation by it of the transactions contemplated hereby will not (i) conflict
with, result in any violation or breach of, or constitute a default under, any
term or provision of any material note, bond, mortgage, indenture, lease,
franchise, permit, license, contract, or other instrument or document to which
Universal is a party or by which its properties or assets are bound or (ii)
conflict with, or result in any violation of, any law, ordinance, statute, rule,
or regulation of any Governmental Authority or of any order,
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writ, injunction, judgment, or decree of any court, arbitrator, or Governmental
Authority applicable to Universal or its properties or assets.
(iii) There is no requirement applicable to Universal to
obtain any consent of, or to make or effect any declaration, filing, or
registration with, any Governmental Authority for the valid execution and
delivery by Universal of this Agreement, the due performance by it of its
obligations hereunder, or the lawful consummation by it of the transactions
contemplated hereby.
SECTION 5. Affliliates Bound. During the Term of this Agreement, if the
Stockholder transfers any shares of Common Stock to a controlled affiliate of
Weatherford, or any holding company or other successor to Weatherford (a
"Weatherford Controlled Affiliate"), such Weatherford Controlled Affiliate (and
any other subsequent transferee that is a Weatherford Controlled Affiliate) will
agree to be bound by the terms of this Agreement as a condition to such transfer
and any purported transfer to any such Person who does not agree by executing a
counterpart to this Agreement shall be null and void and of no effect.
SECTION 6. Information. During the Term of this Agreement, upon
Universal's written request, the Stockholder shall, and Weatherford shall cause
the Stockholder to, notify Universal of the number of shares of Common Stock
then owned by the Stockholder as of such date, and Universal shall notify the
Stockholder promptly after any fixing of any record date of the number of shares
of Common Stock issued and outstanding with respect to such record date.
SECTION 7. Reasonable Best Efforts. Each of the parties hereto shall
use its reasonable best efforts to take, or cause to be taken, all action and to
do, or cause to be done, all things necessary, proper, or advisable under
applicable laws and regulations and which may be required under any agreements,
contracts, commitments, instruments, understandings, arrangements, or
restrictions of any kind to which it is a party or by which it is or may be
bound, in order to effectuate the provisions of this Agreement, to obtain all
necessary waivers, consents, and approvals from, and effect all necessary
registrations and filings with, any Governmental Authorities, and to rectify any
event or circumstances which could impede the provisions hereof.
SECTION 8. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, without regard
to any principles of conflicts of laws that would result in the application of
the laws of any other jurisdiction.
SECTION 9. Severability. If any provision contained herein shall be
held to be invalid, illegal, or unenforceable in any respect, the validity,
legality, and enforceability of any such provision in every other respect and
the validity, legality, and enforceability of the remaining provisions contained
in this Agreement shall not be in any way impaired thereby. Upon a determination
that any term or other provision is invalid, illegal, or unenforceable, such
term or provision shall be modified, without any further action by any of the
parties, so as to effect the original intent of the parties as closely as
possible in order that the terms of this Agreement remain as originally
contemplated to the fullest extent possible.
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SECTION 10. Expenses. Unless otherwise provided herein, all fees and
expenses incurred by any of the parties hereto in connection with this Agreement
or any of the provisions hereof shall be borne and paid solely by the party
incurring such fees and expenses.
SECTION 11. Further Assurances. The Stockholder shall execute and
deliver, or cause to be executed and delivered, at the expense of Universal, all
such other and further documents and instruments and take all such further
actions as may be reasonably necessary in order to effectuate the provisions of
this Agreement.
SECTION 12. Action in Stockholder Capacity Only. It is expressly
understood and agreed that the Stockholder makes no agreement or understanding
under this Agreement other than in the Stockholder's capacity as a stockholder
of Universal. The Stockholder is entering into this Agreement solely in its
capacity as a record and beneficial owner of Common Stock, and nothing contained
herein shall limit or affect, or impose any obligations with respect to, any
actions taken by the nominees of Stockholder or Weatherford who serve in the
capacity of a director of Universal.
SECTION 13. Termination. This Agreement shall terminate and be of no
further force or effect (a) by the written mutual consent of all the parties
hereto, (b) automatically and without any required action by the parties on the
earlier of (i) the second anniversary of the Effective Time (as defined in the
Merger Agreement) or (ii) that date that Castle Harlan, Inc., Castle Harlan
Partners III, L.P., Castle Harlan Offshore Partners III, L.P., Castle Harlan
Affiliates III, L.P., and their affiliates collectively own less than 5% of the
issued and outstanding Common Stock, or (c) on such earlier date that the
Acquired Shares represent less than 33 1/3% of the then outstanding shares of
Common Stock. The representations and warranties set forth in Section 3 and
Section 4 hereof shall not survive the termination of this Agreement.
SECTION 14. Notices. All notices and other communications hereunder
shall be in writing and shall be given by delivery in person, by registered or
certified mail (return receipt requested and with postage prepaid thereon) or by
cable, telex, or facsimile transmission to the addresses set forth in Section
12.5 of the Merger Agreement (or at such other address as any party shall have
furnished to the others in accordance with the terms of this Section 14). All
notices and other communications hereunder that are addressed as provided in or
pursuant to this Section 14 shall be deemed duly and validly given (a) if
delivered in person, upon delivery, (b) if delivered by registered or certified
mail (return receipt requested and with postage paid thereon), 72 hours after
being placed in a depository of the United States mails, and (c) if delivered by
facsimile transmission, upon transmission thereof and receipt of the appropriate
answerback or confirmation.
SECTION 15. Amendment; Waiver. The terms and provisions of this
Agreement may be modified or amended only by a written instrument executed by
each of the parties hereto, and compliance with any term or provision hereof may
be waived only by a written instrument executed by each party entitled to the
benefits of the same. No failure to exercise any right, power, or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise thereof preclude any other or further exercise thereof or the exercise
of any other right, power, or privilege granted hereunder.
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SECTION 16. Entire Agreement. This Agreement constitutes the entire
agreement among the parties with respect to the subject matter hereof and
supersedes all prior written or oral agreements and understandings and all
contemporaneous oral agreements and understandings among the parties or any of
them with respect to the subject matter hereof.
SECTION 17. Parties in Interest. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns (it being understood and agreed that nothing contained in this
Agreement is intended to confer any rights, benefits, or remedies of any kind or
character on any other person under or by reason of this Agreement).
SECTION 18. Specific Performance. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed by the Stockholder in accordance with the terms
hereof. Accordingly, the parties agree that Universal shall be entitled to
injunctive relief to prevent breaches of the terms of this Agreement and to
specific performance of the terms hereof, in addition to any other remedy now or
hereafter available at law or in equity, or otherwise.
SECTION 19. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
WEATHERFORD INTERNATIONAL, INC.
By:
-----------------------------------------
Name:
Its:
WEUS HOLDING, INC.
By:
-----------------------------------------
Name:
Its:
UNIVERSAL COMPRESSION HOLDINGS, INC.
By:
-----------------------------------------
Name:
Its:
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ANNEX F
AMENDMENT NUMBER THREE
TO THE
UNIVERSAL COMPRESSION HOLDINGS, INC.
INCENTIVE STOCK OPTION PLAN
WHEREAS, Universal Compression Holdings, Inc., a Delaware corporation
(the "Corporation"), previously adopted the Universal Compression Holdings, Inc.
Incentive Stock Option Plan (the "Plan");
WHEREAS, Section 17 of the Plan reserves to the Corporation the right
to amend the Plan by action of its Board of Directors (the "Board"); and
WHEREAS, the Corporation desires to amend the Plan, subject to the
approval of the shareholders of the Corporation, to increase the maximum
aggregate number of shares available to be granted under the Plan.
NOW, THEREFORE, pursuant to the power of amendment reserved in Section
17 of the Plan, the Board hereby amends Section 6 of the Plan in its entirety,
as of the date of adoption of this Amendment to provide as follows:
6. Maximum Shares Available. The maximum aggregate number of
shares available to be granted under the Plan is 3,012,421 shares of
Common Stock, and such shares shall be reserved for Options granted
under the Plan (subject to adjustment as provided in Section 10(h)).
IN WITNESS WHEREOF, the undersigned authorized officer of the
Corporation certifies that the Board adopted this Amendment Number Three on
November 27, 2000.
/s/ Stephen A. Snider
----------------------------
Stephen A. Snider
President and Chief
Executive Officer
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Universal Compression Holdings, Inc. encourages all shareholders to
vote their proxies. We now provide three convenient methods of voting:
1. PROXY CARD: Complete, sign, date and return the proxy card attached
below in the enclosed envelope (no postage required);
2. TELEPHONE: Call toll-free on a touch-tone phone 1-877-779-8683, 7 days
a week, 24 hours a day; or
3. INTERNET: Log on to the website HTTP://WWW.EPROXYVOTE.COM/UCO.
If you choose to vote via Telephone or the Internet, you will be given
instructions and asked to enter your control number, located on your proxy card.
Telephone and Internet voting access will close at midnight on the day prior to
the date of the Special Meeting. IF YOU VOTE VIA TELEPHONE OR THE INTERNET,
PLEASE DO NOT MAIL YOUR PROXY CARD.
PROXY
UNIVERSAL COMPRESSION HOLDINGS, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR SPECIAL MEETING OF SHAREHOLDERS TO BE HELD FEBRUARY 6, 2001
I have received the Notice of Special Meeting of Shareholders and Proxy
Statement dated December 27, 2000 of Universal Compression Holdings, Inc. and
hereby appoint Stephen A. Snider, Ernie L. Danner and Richard W. FitzGerald, and
each of them, as my proxies, with full power of substitution, to represent me at
the Special Meeting of Shareholders of the Company to be held on February 6,
2001 (and at any adjournments or postponements of the special meeting), and to
vote all shares of common stock that I would be entitled to vote if personally
present at the special meeting in the manner specified below (or, if I do not
specify how to vote, to vote all of my shares FOR all proposals described below
and to vote in the discretion of the proxies as to any other matters coming
before the special meeting).
----------- -----------
SEE REVERSE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE
SIDE SIDE
----------- -----------
<PAGE> 316
<TABLE>
<S> <C>
----------------- ----------------
VOTE BY TELEPHONE VOTE BY INTERNET
----------------- ----------------
It's fast, convenient, and immediate! It's fast, convenient, and your vote
Call Toll-Free on a Touch-Tone Phone is immediately confirmed and posted.
1-877-PRX-VOTE (1-877-779-8683)
----------------------------------------- --------------------------------------------
Follow these four easy steps: Follow these four easy steps:
1. Read the accompanying Proxy Statement 1. Read the accompanying Proxy Statement
and Proxy Card. and Proxy Card.
2. Call the toll-free number 2. Go to the Website
1-877-PRX-VOTE (1-877-779-8683) http://www.eproxyvote.com/uco
3. Enter your 14-digit Voter Control 3. Enter your 14-digit Voter Control
Number located on your Proxy Card Number located on your Proxy Card
above your name. above your name.
4. Follow the recorded instructions. 4. Follow the instructions provided.
----------------------------------------- --------------------------------------------
YOUR VOTE IS IMPORTANT! YOUR VOTE IS IMPORTANT!
Call 1-877-PRX-VOTE anytime! Go to http://www.eproxyvote.com/uco anytime!
</TABLE>
DO NOT RETURN YOUR PROXY CARD IF YOU ARE VOTING BY TELEPHONE OR INTERNET
[X] Please mark
votes as in
this example.
If you choose not to vote via Telephone or the Internet, please promptly mark
this Proxy Card to specify how you would like your shares voted and date, sign
and mail it in the enclosed envelope. No postage is required. OUR BOARD OF
DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSALS REFERRED TO BELOW.
<TABLE>
<S> <C> <C> <C> <C>
FOR AGAINST ABSTAIN
Proposal 1. Proposal to issue 13,750,000 shares of Universal Compression common stock [ ] [ ] [ ]
in connection with the acquisition of Weatherford Global Compression
Services L.P. and certain related entities, as described in the Proxy
Statement.
Proposal 2. Proposal to amend Universal Compression's Incentive Stock Option Plan to [ ] [ ] [ ]
increase by 1,100,000 shares the number of shares of common stock
available for issuance under the Plan to a total of 3,012,421 shares, as
described in the Proxy Statement.
</TABLE>
In addition, I hereby authorize such proxies to vote my shares in their
discretion as to any other matters that may come before the Special Meeting.
<TABLE>
<S> <C> <C>
MARK HERE [ ] MARK HERE [ ]
FOR ADDRESS IF YOU PLAN
CHANGE AND TO ATTEND
NOTE AT LEFT THE MEETING
</TABLE>
<TABLE>
<S> <C>
IF YOU EXECUTE AND RETURN THIS PROXY CARD
BUT DO NOT SPECIFY THE MANNER IN WHICH THE
PROXIES SHOULD VOTE YOUR SHARES, THE
PROXIES WILL VOTE YOUR SHARES "FOR" ALL OF THE
FOREGOING PROPOSALS AND IN THEIR DISCRETION AS
TO ANY OTHER MATTERS COMING BEFORE THE
MEETING.
Please date this Proxy Card and sign your name
exactly as it appears hereon. Where there is
more than one owner, each should sign. When
signing as an attorney, administrator, executor,
guardian or trustee, please add your title as such.
If executed by a corporation, this Proxy Card should
be signed by a duly authorized officer. If signed by
a partnership, please sign in the partnership name
by authorized person.
</TABLE>
<TABLE>
<S> <C> <C> <C>
Signature ______________________ Date: ___________ Signature ______________________ Date: _________
</TABLE>
