<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED June 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE TRANSITION PERIOD FROM ________________________ TO __________________.
COMMISSION FILE NUMBER 0-18205
OEC COMPRESSION CORPORATION
(Exact name of small business issuer as specified in its charter)
Oklahoma 73-1345732
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2501 Cedar Springs Road, Suite 600, Dallas, Texas 75201
-------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
214-953-9560
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(Issuer's telephone number)
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(d) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2)
HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
Number of Shares of Common Stock Outstanding on June 30, 2000 - 37,060,766
Transitional Small Business Format (Check one): Yes ; No X
--- ---
1
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OEC COMPRESSION CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
PART I
FINANCIAL INFORMATION:
<S> <C>
Item 1 - Financial Statements
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999..........................................3
Consolidated Statements of Operations
Six and Three Months Ended June 30, 2000 and 1999............................4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999......................................5
Notes to Consolidated Financial Statements.....................................6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations................................8
Item 3 - Quantitative and Qualitative Disclosures About Market Risk....................12
PART II
OTHER INFORMATION:
Item 1 - Legal Proceedings ...................................................13
Item 2 - Changes in Securities and Use of Proceeds ...........................13
Item 3 - Defaults Upon Senior Securities .....................................13
Item 4 - Submission of Matters to a Vote of Security Holders .................13
Item 5 - Other Information ...................................................13
Item 6 - (a) Exhibits and Reports on Form 8-K.................................13
Signatures ...................................................................14
Exhibit Index.................................................................15
</TABLE>
2
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OEC COMPRESSION CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---- -----
UNAUDITED
(in thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ......................................... $ 8,919 $ 405
Accounts receivable, less allowances for doubtful accounts
of $225 and $197 in 2000 and 1999, respectively ................... 1,488 2,163
Accounts receivable - related party ............................... 151 255
Unbilled accounts receivable ...................................... 121 119
Prepaid Assets .................................................... 131 151
Compressors and compressor parts inventory ........................ 6,025 6,193
Other.............................................................. 70 84
--------- ---------
Total current assets ........................................... 16,905 9,370
Property and equipment, less depreciation of $20,775 and $18,344 in
2000 and 1999, respectively ......................................... 93,953 95,093
Interest receivable - related party ................................. 63 52
Notes receivable - related party .................................... 332 332
Goodwill and other intangibles, net of amortization of
$1,230 in 2000 and $960 in 1999 ................................... 1,321 1,544
Other assets......................................................... 1 2
--------- ---------
Total assets ................................................... $ 112,575 $ 106,393
========= =========
Current Liabilities:
Accounts payable and accrued liabilities .......................... $ 3,540 $ 5,324
Accounts payable - related party .................................. 28 12
Current portion of capital lease obligations ...................... 201 195
Current portion of long term debt ................................. 3,483 2,918
--------- ---------
Total current liabilities ...................................... 7,252 8,449
Long-term debt ...................................................... 57,653 58,381
Capital lease obligations ........................................... 1,006 1,107
Deferred income taxes ............................................... 10,164 9,802
--------- ---------
Total Liabilities .............................................. 76,075 77,739
Stockholders' Equity:
Preferred stock, $1.00 par value, 1,000,000
shares authorized, none issued .................................... -- --
Common stock, $.01 par value, 60,000,000 shares
Authorized, 37,381,211 shares issued, and 37,060,766 28,986,711
shares outstanding in 2000 and 1999 ................................. 373 291
Additional paid-in capital ......................................... 39,039 31,841
Accumulated deficit ................................................ (2,644) (3,210)
Treasury stock, at cost (320,445 and 184,500 shares in 2000 and 1999
respectively)....................................................... (268) (268)
--------- ---------
Total stockholders' equity ......................................... 36,500 28,654
--------- ---------
Total Liabilities and Stockholders' Equity ......................... $ 112,575 $ 106,393
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
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OEC COMPRESSION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
--------- --------- -------- --------
2000 1999 2000 1999
--------- --------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Compressor rentals, service and treating fees................. $ 5,410 5,603 $ 11,198 $ 11,630
Compressor sales and re-manufacturing......................... 44 127 101 204
Oil & gas sales............................................... -- 699 -- 1,399
--------- --------- -------- --------
Total revenues............................................. 5,454 6,429 11,299 13,233
--------- --------- -------- --------
Expenses:
Costs - Compressor rentals, service and treating............. 2,059 2,318 4,171 4,877
Costs - compressor sales and re-manufacturing............... 34 100 57 128
Operating costs - oil and gas................................ -- 248 -- 475
Depreciation, depletion and amortization..................... 1,462 1,668 2,902 3,325
General and administrative................................... 651 1,048 1,179 2,074
--------- --------- -------- --------
Total expenses............................................ 4,206 5,382 8,309 10,879
--------- --------- -------- --------
Income from operations......................................... 1,248 1,047 2,990 2,354
--------- --------- -------- --------
Other income (expense):
Gain on sale of assets....................................... 7 9 738 22
Interest income and other.................................... 29 38 38 72
Interest expense............................................. (1,402) (1,322) (2,838) (2,592)
Minority interest............................................ -- (44) -- (88)
--------- --------- -------- --------
(1,366) (1,319) (2,062) (2,586)
--------- --------- -------- --------
Income (loss) before income taxes.............................. (118) (272) 928 (232)
Income tax benefit (expense)................................... 40 97 (362) 75
--------- --------- -------- --------
Net (loss) income.............................................. $ (78) (175) $ 566 $ (157)
========= ========= ======== ========
Basic and dilutive net income (loss) per common share $ .00 (.01) $ .02 $ (.01)
========= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
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OEC COMPRESSION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
2000 1999
---- ----
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................................... $ 566 $ (157)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization.................................. 2,902 3,325
Deferred income taxes..................................................... 362 (75)
Minority interest in results of oil and gas operations.................... -- 88
Gain on sale of assets.................................................... (738) --
Other..................................................................... -- 6
Changes in operating assets and liabilities:
Accounts and notes receivable............................................ 766 821
Compressor and compressor parts inventory................................ 168 (48)
Accounts payable and accrued liabilities................................. (1,768) 765
Other.................................................................... 65 124
--------- ---------
Net cash provided (used) by operating activities....................... 2,323 4,849
--------- ---------
Cash flows from investing activities:
Acquisitions of compressor and other equipment........................... (2,790) (6,674)
Proceeds from disposition of assets...................................... 36 127
Proceeds from sale of 50% of gas treating assets 2,000 --
Additions to oil and gas properties...................................... -- (108)
Increase in goodwill and other assets.................................... (46) (23)
--------- ----------
Net cash provided (used) in investing activities...................... (800) (6,678)
--------- ----------
Cash flows from financing activities:
Proceeds of long-term debt.............................................. 6 2,479
Sale of common stock.................................................... 7,280 --
Payments on long-term debt.............................................. (200) (466)
Payments on capital lease obligations................................... (95) (184)
--------- ----------
Net cash provided (used) by financing activities..................... 6,991 1,829
--------- ---------
Net increase in cash and cash equivalents.................................. 8,514 --
Cash and cash equivalents, beginning of period............................. 405 7
--------- ---------
Cash and cash equivalents, end of period................................... $ 8,919 $ 7
========= =========
Supplemental disclosure of cash flow information:
Interest paid............................................................ $ 2,967 $ 2,430
========= =========
Income taxes paid........................................................ $ - $ --
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
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OEC COMPRESSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 ORGANIZATION AND BASIS OF PRESENTATION
OEC Compression Corporation, formerly Equity Compression Services
Corporation, formerly Hawkins Energy Corporation (the "Company") is engaged in
the leasing, contract management, outsourcing, re-manufacturing and direct sale
of gas compression equipment to operators of producing natural gas wells and gas
gathering systems and in the production of natural gas and oil. Its principal
geographical operating areas lie within the states of Alabama, Mississippi,
Louisiana, Oklahoma, Arkansas, Kansas, New Mexico and Texas.
The consolidated financial statements include the accounts of the
Company, its wholly owned subsidiaries Ouachita Energy Corporation ("Ouachita"),
Equity Leasing Corporation and Sunterra Energy Corporation ("Sunterra"). All
intercompany transactions have been eliminated.
In the opinion of the Company, the accompanying financial statements
contain all adjustments necessary (all of which are of a normal recurring
nature) to present fairly the financial position of OEC Compression Corporation
and its wholly owned subsidiaries as of June 30, 2000, and the results of its
operations and cash flows for the periods ended June 30, 2000 and 1999. Certain
prior year amounts have been reclassified to conform to the current year
presentation.
The financial statements should be read in conjunction with the
Company's Form 10-K for the year-ended December 31, 1999. The year-end
Consolidated Balance Sheet data was derived from audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles.
NOTE 2 PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31,1999
------------- ----------------
(In thousands)
<S> <C> <C>
Land and building....................................... $ 1,939 $ 1,938
Compressor equipment and gas plant..................... 110,675 109,401
Other equipment......................................... 2,114 2,098
---------- --------
114,728 113,437
Less accumulated depreciation........................... 20,775 18,344
---------- --------
Net property and equipment.............................. $ 93,953 $ 95,093
========== ========
</TABLE>
NOTE 3 TRANSACTIONS WITH RELATED PARTIES
The Company transacts business with certain companies, which are
directly controlled by members of the Company's Board of Directors and
employees. The terms of these transactions are equivalent to the terms of
transactions conducted with non-related parties.
NOTE 4 COMMITMENTS
The Company leases compressor equipment under contracts with terms
ranging from month to month to six years. The future revenues to be received
under contracts at June 30, 2000 are $3.1 million, $3.2 million, $1.6 million,
$880,000 and $7,000 in 2000, 2001, 2002, 2003 and 2004, respectively.
6
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 EARNINGS PER SHARE
Earnings per share ("EPS") is computed based on the weighted average
number of shares of common stock outstanding during the period.
The following is a reconciliation of basic and dilutive EPS computations:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2000 1999 2000 1999
---- ---- ---- ----
(in thousands, except per share amounts.)
<S> <C> <C> <C> <C>
Basic:
Net income (loss) $ (78) $ (175) $ 566 $ (157)
Common stock 30,658 28,987 29,822 29,066
-------- --------- -------- ---------
Basic Earnings (loss) Per Share $ -- $ (.01) $ .02 $ (.01)
======== ========= ======== =========
Effect of dilutive securities:
Warrants -- -- -- --
Common stock options -- -- 50 --
-------- --------- -------- ---------
-- -- 50 --
Dilutive:
Net income (loss) $ (78) $ (175) $ 566 $ (157)
Common stock and dilutive securities 30,658 28,987 29,872 29,066
-------- --------- -------- ---------
Dilutive Earnings (loss) Per Share $ -- $ (.01) $ .02 $ (.01)
======== ========= ======== =========
</TABLE>
NOTE 6 SUBSEQUENT EVENTS
In May 2000, three members of the Company's board of directors, Dennis
W. Estis, Charles M. Butler, III and Don Smith ("The Estis Group"), filed proxy
materials to solicit votes from the Company's shareholders to elect an
alternative slate of directors in lieu of the directors nominated by the
Company's board of directors. On July 13, 2000, the Company held its annual
shareholders' meeting at which was present, in person or by proxy, 65% of the
Company's issued and outstanding shares. 98% of the shares present voted in
favor of the Company's slate of directors, which will serve for a one-year term.
No votes were cast for the Estis Group's slate of directors. Messer's Estis,
Butler and Smith are no longer directors of the Company.
On July 17, 2000, the Company and Hanover Compressor Company
("Hanover") announced the two companies had executed a definitive merger
agreement under which Hanover will acquire the Company in an all-stock
transaction. Under the terms of the merger agreement, the Company's common stock
will be valued at $1.00 per share on the closing date of the merger. The
Company's shares being acquired will be exchanged for newly issued Hanover
Common shares equal to the average of the closing price for Hanover common
shares for the 20 day trading period ending two days prior to the merger. The
conversion ratio is subject to a Hanover share price floor and ceiling of $30.00
and $32.50, respectively. The merger which is subject to approval by the
Company's shareholders and approval by Hanover's management is expected to be
completed before mid-October 2000.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is Management's discussion and analysis of certain
significant factors which have affected the Company's earnings and financial
condition during the periods included in the accompanying Consolidated Balance
Sheets, Statements of Operations and Cash Flows.
Certain matters discussed in this Report on Form 10-Q are
"forward-looking statements" intended to qualify for the safe harbors from
liability established by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements can generally be identified as such because the
context of the statement will include words such as the Company "believes",
"anticipates", "expects", "estimates" or words of similar import. Similarly,
statements that describe the Company's future plans, objectives or goals are
also forward-looking statements. Such forward-looking statements are subject to
certain risks and uncertainties, which could cause actual results to differ
materially from those anticipated as of the date of this report. The risks and
uncertainties include (1) the loss of market share through competition, (2) a
prolonged substantial reduction in natural gas prices which would cause a
decline in the demand for the Company's compression and oil and gas production
equipment, (3) the introduction of competing technologies by other companies,
(4) new governmental safety, health and environmental regulations which could
require significant capital expenditures by the Company and (5) changes in
economics in the markets in which the Company operates. The forward-looking
statements included herein are only made as of the date of this report and the
Company undertakes no obligation to publicly update such forward-looking
statements to reflect subsequent events or circumstances.
RESULTS OF OPERATIONS
2ND QUARTER, 2000 VERSUS 2ND QUARTER, 1999
Gas compressor rentals, service and treating fees of $5.4 million for
the three months ended June 30, 2000 ("QTR-2000") represented a 3% reduction
from that achieved in the three months ended June 30, 1999 ("QTR-1999").
QTR-2000 average deployed compression horsepower declined 2% from comparative
QTR-1999 levels; however, the average size of a unit, determined by horsepower
increased 13%. Typically, compression rental and service rates per horsepower
are inversely related to compressor unit size due to economies of scale achieved
in operating costs as unit size increases. The slight decline in rental service
and treating fees was more than offset by an 11% decline, from QTR-1999 levels,
in the associated direct operating costs to $2.1 million. The comparative period
cost reduction was due to 1) the previously described economies of scale in cost
structure from deploying larger horsepower equipment and 2) a continued focus on
cost structure efficiencies in the Company's field operations. As a result, the
Company's gas compressor rental, service and treating operations generated a
gross profit (revenues less direct expense) of $3.4 million for QTR-2000 versus
QTR-1999's $3.3 million. QTR-2000's and QTR-1999's gross profit margins (gross
profit divided by revenue) were 62% and 59%, respectively, for the rental,
service and treating operations.
QTR-2000 compressor sales and remanufacturing revenues decreased 65%
from QTR-1999 levels to $44,000. Associated costs of goods sold fell 66% to
$34,000. The Company continues to de-emphasize this line of business in favor of
the higher margin rental, service and treating business.
Oil and gas sales and the associated production costs fell to $0 in
QTR-2000 as a result of the July 1999 sale of 100% of the Company's equity
interest in Sunterra Petroleum, L.L.C. The Company exited the oil and gas
exploration and production business with the Sunterra sale in order to focus on
the Company's core compression operations.
QTR-2000's total depreciation, depletion and amortization declined
$200,000 (-12%) from QTR-1999 levels to $1.46 million. Compression and treating
equipment depreciation declined $77,000 (-6%) as result of the transition to
larger horsepower equipment. Oil and gas depletion ($158,000 in QTR-1999) was
eliminated as a result of the previously described Sunterra sale. Other
depreciation and amortization costs increased $27,000 to $158,000 reflecting the
incremental amortization costs of a non-compete agreement entered into with a
former officer of the Company.
QTR-2000 general and administrative expense ("G&A") decreased $397,000
(-38%) from QTR-1999 levels. The decrease reflected the Company's continued
focus on expense controls. The bulk of the G&A reduction was achieved through
reductions in personnel. QTR-2000 G&A expense also includes an estimated
$100,000 in legal, professional and other expenses associated with 1)
the Company's response to a shareholders' proxy solicitation
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED) instigated by
three dissident directors of the Company and 2) costs associated with the
Company's support of the Investment bank, hired in February 2000, in its efforts
to market the Company (see Note 6, Subsequent Events).
The improved gross profit margins in the Company's core gas compression
rental, service and treating operations, coupled with the reduced depreciation
and G&A expenses more than offset the loss of the income from the sold oil and
gas operations. As a result, QTR-2000 income from operations increased $201,000
(19%) from QTR-1999 levels to $1.25 million. QTR-2000 interest expense rose
$80,000 (6%) from QTR-1999 levels, reflecting the overall increase in interest
rates from period to period. The improved income from operations, somewhat
offset by the increased interest expense, reduced the QTR-2000 period's pretax
loss to $118,000 as compared to QTR-1999's pretax loss of $272,000. Adjusted for
generated tax benefits, the net loss for QTR-2000 was $78,000 versus a $175,000
loss for QTR-1999.
6 MONTHS ENDED JUNE 30, 2000 VERSUS 6 MONTHS ENDED JUNE 30, 1999
Gas compressor rentals, service and treating fees of $11.2 million for
the six months ended June 30, 2000 ("6 Mo.-2000") represented a 4% reduction
from that achieved in the six months ended June 30, 1999 ("6 Mo.-1999"). 6
Mo.-2000 average deployed compression horsepower declined 3% from comparative 6
Mo.-1999 levels; however, the average size of a unit, determined by horsepower,
increased 10%. Typically, compression rental and service rates per horsepower
are inversely related to compressor unit size due to economies of scale achieved
in operating costs as unit size increases. The slight decline in rental service
and treating fees was more than offset by an 15% decline, from 6 Mo.-1999
levels, in the associated direct operating costs to $4.2 million. The
comparative period cost reduction was due to 1) the previously described
economies of scale in cost structure from deploying larger horsepower equipment
and 2) a continued focus on cost structure efficiencies in the Company's field
operations. As result, the Company's gas compressor rental, service and treating
operations generated a gross profit (revenues less direct expense) of $7.0
million for 6 Mo.-2000 versus 6 Mo.-1999's $6.75 million. 6 Mo.-2000's and 6
Mo.-1999's gross profit margins (gross profit divided by revenue) were 62% and
58%, respectively, for the rental, service and treating operations.
6 Mo.-2000 compressor sales and remanufacturing revenues decreased 50%
from 6 Mo.-1999 levels to $100,000. Associated costs of goods sold fell 55% to
$57,000. The Company continues to de-emphasize this line of business in favor of
the higher margin rental, service and treating business.
Oil and gas sales and the associated production costs fell to $0 in 6
Mo.-2000 as a result of the July, 1999 sale of 100% of the Company's equity
interest in Sunterra Petroleum, L.L.C. The Company exited the oil and gas
exploration and production business with the Sunterra sale in order to focus on
the Company's core compression related operations.
6 Mo.-2000's total depreciation, depletion and amortization declined
$400,000 (-13%) from 6 Mo.-1999 levels to $2.9 million. Compression and treating
equipment depreciation declined $95,000 (-4%) as result of the transition to
larger horsepower equipment. Oil and gas depletion ($330,000 in QTR-1999) was
eliminated as a result of the previously described Sunterra sale. Other
depreciation and amortization costs remained unchanged from 6 Mo.-1999 levels.
6 Mo.-2000 general and administrative expense ("G&A") decreased
$900,000 (-43%) from 6 Mo.-1999 levels. The decrease reflected the Company's
continued focus on expense controls. The bulk of the G&A reduction was achieved
through reductions in personnel. 6 Mo.-2000 G&A expense also includes an
estimated $120,000 in legal, professional and other expenses associated with 1)
the Company's response to a shareholder proxy solicitation instigated by three
dissident directors of the Company and 2) costs associated with the Company's
support of the investment bank, hired in February 2000, in its efforts to market
the Company (see Note 6, Subsequent Events).
The improved gross profit margins in the Company's core gas compression
rental, service and treating operations, coupled with the reduced depreciation
and G&A expenses more than offset the loss of the income from the sold oil and
gas operations. As a result, 6 Mo.-2000 income from operations increased
$640,000 million (27%) from 6 Mo.-1999 levels to $3.0 million. QTR-2000 interest
expense rose $246,000 (9%) from QTR-1999 levels, reflecting the overall increase
in interest rates from period to period.
In February 2000, the Company sold a 50% undivided interest in the
Will-O-Mills gas treating plant for cash proceeds of $2 million. The sale
generated a gain-on-sale of $738,000 during the first quarter of 2000.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The improved income from operations and the described treating plant
sale gain, somewhat offset by the increased interest expense, generated pretax
income $928,000 as compared to 6 Mo.-1999's pretax loss of $232,000. Adjusted
for income tax expense, 6 Mo.-2000 net income was $566,000 versus a $157,000
loss for 6 Mo.-1999.
CAPITAL RESOURCES AND LIQUIDITY
As of June 30, 2000, the Company has in place a $40 million senior
credit facility with a major international bank. The facility is a borrowing
base revolver effective through July 2001, due in full on July 31, 2001. The
June 30, 2000 borrowing base is $47.6 million but is limited to the $40 million
commitment that reduces by $150,000 per month beginning in July 2000. The credit
facility is collateralized by substantially all of the assets of the Company. On
June 30, 2000, the senior credit facility's outstanding balance was $39.8
million.
In July 1997, the Company entered into a senior subordinated term note
agreement and senior floating rate note agreement with The Prudential Insurance
Company of North America ("Prudential") for $15 million and $5 million,
respectively. The $15 million term note agreement contained a warrant purchase
agreement authorizing Prudential to purchase up to 1 million shares of the
Company's common stock at an initial exercise price of $2.80 per share until the
termination date of the related term note. The fair value of the warrants,
$870,000, was determined using the Black-Scholes model and was treated as an
addition to paid-in capital. The resulting term note amount of $14,130,000 will
be accreted over the 10-year term using its effective interest rate of 11.14%.
The exercise price of the warrants was subsequently lowered to $1.00 per share
in 1999 in connection with the waiver of covenants. The Company's cash interest
payout over the term of the note is at the stated rate of 10.15%.
Covenants related to the debt agreements include the maintenance of
specific levels of working capital, tangible net worth, and various debt service
ratios, as defined by the agreements. At June 30, 2000, the Company was out of
compliance with certain financial covenants with two of its credit facilities.
The non-compliance was waived by the lending institutions. Further, the debt
agreements prohibit the payment of dividends, limit the Company's repurchase of
its own stock, and restrict new borrowings.
The Company relies primarily on the collection of revenues associated
with rental-with-maintenance and contract compression contracts to fund the
Company's working capital and capital expenditure needs. Borrowings from the
Company's senior credit facility are used primarily to finance the growth of the
Company. The coordination of the cash flow from operations and borrowings from
the senior credit facility allows the Company to optimize its cash flow.
On June 12, 2000, the Company's Co-Chief Executive Officers and Chief
Financial Officer exercised a warrant, issued by the Company in December 1996,
for 8 million shares of the Company's common stock at an exercise price of $0.91
per share. The Company received cash proceeds of $7.28 million upon the warrant
exercise. The Company has invested the cash in short-term liquid investments.
In July 1999, the Company sold approximately 5,000 horsepower of idle
compression equipment (approximately 2% of the total fleet) in a single
transaction for $2 million. The purchase and sale agreement contains put and
call features that permit 1) the Company to repurchase, at its option, ("Call")
the equipment by the end of 1999 at cost, and 2) the purchaser to ("Put") the
equipment back to the Company and recover the purchase price plus accrued
interest at 10%. The Put and Call features, which were to expire on December 31,
1999, have been extended by mutual agreement of the Company and the purchaser to
August 30, 2000. On July 17, 2000, the Company announced that it had executed a
definitive merger agreement with Hanover Compressor Company (see Note 6), the
purchaser of the equipment. The merger is expected to close by mid-October 2000.
The Company expects that the existing terms of the equipment purchase and sale
agreement will be extended until the merger's completion. Regardless, the
Company has sufficient cash reserves to pay-off the note. The Company has
treated the transaction as a loan for accounting purposes until such time as the
put and call features have either been exercised or expire. To that end, the $2
million sale is carried as a $2 million current note payable at June 30, 2000.
Net cash provided by operating activities decreased to $2.3
million in the first six months, ending June 30, 2000 from $4.8 million in the
comparable six months of 1999 primarily due to a $1.8 million reduction in
accounts payable and accrued liabilities as well as the backing out of the
$738,000 gain on asset sale from the previously described
10
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February,2000 sale of a 50% interest in the Will-O-Mills gas treating plant. Net
cash used in investing activities fell from 1999's $6.7 million to 2000's
$800,000. The causes were 1) a $3.9 million reduction in capital expenditure
levels for acquisitions to and enhancements of the Company's compressor fleet
and 2) the $2 million cash proceeds from the previously described February 2000
Sunterra transaction. Net cash provided by financing activities increased from
1999's $1.8 million to 2000's $7.0 million due primarily to the $7.28 million in
cash proceeds received from the previously described June 12, 2000 stock warrant
exercise.
At June 30, 2000, the Company had current assets of $16.9 million and
current liabilities of $7.3 million. The Company is effectively fully advanced
on its senior credit facility and does not have access to the borrowing base
above the current $39.7 million commitment (as of August 8, 2000) unless
additional lenders are recruited into the credit facility. Given the planned
Hanover merger (see Note 6), the Company has no plans to recruit additional
lenders at this time. Further, as of June 30, 2000, the Company possesses $8.9
million in cash reserves which management believes is sufficient, along with
cash from operations, to support working capital and capital investments through
completion of the Hanover merger(See Note 6 - Subsequent Events).
YEAR 2000
The Company prepared a Year 2000 Plan and reviewed all Company
hardware, software and embedded systems for Year 2000 compliance. As part of the
review, the Company tested all critical compressor equipment and systems to the
extent possible. The Company incurred no material costs in testing its internal
compressor equipment and systems. There have been no issues involving the Year
2000, therefore the Company does not anticipate any future concerns.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EFFECTS OF INFLATION
In recent years inflation has not had a significant impact on the
Company's operations or financial condition. The impact of inflation on the
Company in the future will depend on the relative increases, if any, the Company
may realize from its compressor sales, interest rates on debt, rental rates and
the selling price of gas.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company had used derivative financial instruments such as commodity
futures agreements to hedge against fluctuations in oil and gas prices. Gains
and losses on these derivative instruments are recorded as adjustments to oil
and gas sales. The Board of Directors of the Company have adopted a policy
governing the use of derivative instruments which requires that all derivatives
used by the Company relate to an anticipated transaction and prohibits the use
of speculative or leveraged derivatives. As of June 30, 2000, the Company did
not have any derivative financial instruments.
INTEREST RATE RISK
Total debt at June 30, 2000, included $16 million of fixed rate debt
and $45 million of floating-rate debt attributed to borrowings. As a result, the
Company's annual interest cost will fluctuate based on changes in short-term
interest rates. The impact on annual cash flow of a 10% change in the short-term
interest rate would be less than $400,000.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not currently involved in any material litigation or
proceeding and is not aware of any such litigation or proceeding threatened
against it.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders
during the quarter ending March 31, 2000.
ITEM 5. OTHER INFORMATION
On July 13, 2000, the Company entered into an Agreement & Plan of
Merger with Hanover Compressor Company . Under the terms of the merger
agreement, the OEC common stock will be valued at $1.00 per share on the closing
date of the merger. The OEC shares being acquired will be exchanged for newly
issued Hanover common shares equal to the average of the closing price for
Hanover common shares for the 20-day period ending 2 days prior to the merger.
The conversion ratio is subject to a Hanover share price floor and ceiling of
$30.00 and $32.50, respectively. The transaction is subject to approval by the
OEC's shareholders and required regulatory approvals. The transaction is
expected to close by mid-October 2000.
ITEM 6. EXHIBITS
(a) Exhibits:
Exhibit
No. Description
-- ------------
27 Financial Data Schedule
13
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SIGNATURES
Pursuant to the requirements of Sections 13 of 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OEC COMPRESSION CORPORATION
DATE: August 10, 2000 By: /s/ Kelcy L. Warren
----------------------------------------
KELCY L. WARREN
Co-Chief Executive Officer
DATE: August 10, 2000 By: /s/ Ray C. Davis
----------------------------------------
RAY C. DAVIS
Co-Chief Executive Officer
DATE: August 10, 2000 By: /s/ Jack D. Brannon
----------------------------------------
JACK D. BRANNON
Senior Vice President and Chief
Financial Officer
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EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
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27 Financial Data Schedule
15
