OEC COMPRESSION CORP, 10-Q, 2000-11-20

OEC COMPRESSION CORP
10-Q, 2000-11-20
EQUIPMENT RENTAL & LEASING, NEC

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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 SEPTEMBER 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
--------------------------------------------------------------------------------
(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 September 30, 2000 - 37,060,766

Transitional Small Business Format (Check one): Yes ; No X
--- ---

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OEC COMPRESSION CORPORATION
TABLE OF CONTENTS

PAGE
----
<S> <C>

PART I

FINANCIAL INFORMATION:

Item 1 - Financial Statements
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999.........................3

Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2000 and 1999..........4

Consolidated Statements of Cash Flows
Nine Months Ended September 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.....................14

Signatures .......................................................15

Exhibit Index.....................................................16

</TABLE>

<PAGE>

OEC COMPRESSION CORPORATION
CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
UNAUDITED
(in thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ................................................ $ 8,689 $ 405
Accounts receivable, less allowances for doubtful accounts
of $225 and $197 in 2000 and 1999, respectively ........................ 1,366 2,163
Accounts receivable - related party ...................................... 131 255
Unbilled accounts receivable ............................................. 300 119
Prepaid Assets ........................................................... 146 151
Compressors and compressor parts inventory ............................... 6,298 6,193
Other .................................................................... 75 84
--------- ---------
Total current assets .................................................. 17,005 9,370

Property and equipment, less depreciation of $22,053 and $18,344 in
2000 and 1999, respectively .............................................. 93,798 95,093
Interest receivable - related party ........................................ 68 52
Notes receivable - related party ........................................... 332 332
Goodwill and other intangibles, net of amortization of
$1,389 in 2000 and $960 in 1999 .......................................... 1,186 1,544
Other assets ............................................................... 1 2
--------- ---------
Total assets .......................................................... $ 112,390 $ 106,393
========= =========

Current Liabilities:
Accounts payable and accrued liabilities ................................. $ 4,086 $ 5,324
Accounts payable - related party ......................................... -- 12
Current portion of capital lease obligations ............................. 205 195
Current portion of long term debt ........................................ 41,367 2,918
--------- ---------
Total current liabilities ............................................. 45,658 8,449

Long-term debt ............................................................. 19,315 58,381
Capital lease obligations .................................................. 954 1,107
Deferred income taxes ...................................................... 10,092 9,802
--------- ---------
Total Liabilities ..................................................... 76,019 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 ....................................................... (2,773) (3,210)
Treasury stock, at cost (320,445 and 184,500 shares in 2000
and 1999 respectively) .................................................. (268) (268)
--------- ---------
Total stockholders' equity ................................................ 36,371 28,654
--------- ---------
Total Liabilities and Stockholders' Equity ................................ $ 112,390 $ 106,393
========= =========

</TABLE>

The accompanying notes are an integral part of the
consolidated financial statements.

<PAGE>

OEC COMPRESSION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------- ------------- ------------- -------------
2000 1999 2000 1999
------------- ------------ ------------- -------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Compressor rentals, service and treating fees ................... $ 5,275 5,819 $ 16,473 $ 17,484
Compressor sales and re-manufacturing ........................... 97 82 198 286
Oil & gas sales ................................................. -- -- -- 1,399
---------- ---------- --------- ----------
Total revenues ............................................... 5,372 5,901 16,671 19,169
---------- ---------- --------- ----------

Expenses:
Costs - Compressor rentals, service and treating ................ 1,597 2,475 5,767 7,358
Costs - compressor sales and re-manufacturing ................... 51 59 108 180

Operating costs - oil and gas ................................... -- -- -- 510
Depreciation, depletion and amortization ........................ 1,457 1,504 4,360 4,829
General and administrative ...................................... 579 865 1,759 2,939
---------- ---------- --------- ----------
Total expenses ............................................... 3,684 4,903 11,994 15,816
---------- ---------- --------- ----------
Income from operations ............................................ 1,688 998 4,677 3,353
---------- ---------- --------- ----------

Other income (expense):
Merger related and employee retention expense ................... (608) -- (608) --
Gain on sale of assets .......................................... 10 313 748 335
Interest income and other ....................................... 135 7 173 78
Interest expense ................................................ (1,426) (1,323) (4,263) (3,915)
Minority interest ............................................... -- -- -- (88)
---------- ---------- --------- ----------
(1,889) (1,003) (3,950) (3,590)
---------- ---------- --------- ----------

Income (loss) before income taxes ................................. (201) (5) 727 (237)

Income tax benefit (expense) ...................................... 72 378 (290) 454
---------- ---------- --------- ----------

Net (loss) income ................................................. $ (129) $ 373 $ 437 $ 217
========== ========== ========= ==========

Basic and dilutive net income (loss) per common share ............. $ .00 $ .01 $ .01 $ .01
========== ========== ========= ==========
</TABLE>

The accompanying notes are an integral part of the
consolidated financial statements.

<PAGE>

OEC COMPRESSION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED

NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
------- -------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................ $ 437 $ 217
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization ......................... 4,360 4,784
Deferred income taxes ............................................ 290 (454)
Minority interest in results of oil and gas operations ........... -- 88
Gain on sale of assets ........................................... (748) --
Other ............................................................ -- --

Changes in operating assets and liabilities:
Accounts and notes receivable .................................... 724 677
Compressor and compressor parts inventory ........................ (105) 300
Accounts payable and accrued liabilities ......................... (1,249) 6
Other ............................................................ 55 1,384
------- -------
Net cash provided (used) by operating activities ............... 3,764 7,002
------- -------

Cash flows from investing activities:
Acquisitions of compressor and other equipment ................... (3,978) (9,217)
Proceeds from disposition of assets .............................. 90 954
Proceeds from sale of 50% of gas treating assets ................. 2,000 --
Additions to oil and gas properties .............................. -- (108)
Increase in goodwill and other assets ............................ (71) 20
------- -------
Net cash provided (used) in investing activities .............. (1,959) (8,351)
------- -------

Cash flows from financing activities:
Proceeds of long-term debt ....................................... 6 2,477
Sale of common stock ............................................. 7,280 --
Payments on long-term debt ....................................... (664) (469)
Payments on capital lease obligations ............................ (143) (266)
------- -------
Net cash provided (used) by financing activities .............. 6,479 1,742
------- -------

Net increase in cash and cash equivalents .......................... 8,284 393

Cash and cash equivalents, beginning of period ..................... 405 7
------- -------

Cash and cash equivalents, end of period ........................... $ 8,689 $ 400
======= =======

Supplemental disclosure of cash flow information:
Interest paid .................................................... $ 4,263 $ 3,915
======= =======
Income taxes paid ................................................ $ -- $ --
======= =======

</TABLE>

The accompanying notes are an integral part of the
consolidated financial statements.

<PAGE>

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 September 30, 2000, and
the results of its operations and cash flows for the periods ended September
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

SEPTEMBER 30, 2000 DECEMBER 31,1999
------------------ ----------------
(In thousands)
<S> <C> <C>
Land and building .................................... $ 1,939 $ 1,938
Compressor equipment and gas plant .................. 111,776 109,401
Other equipment ...................................... 2,136 2,098
-------- --------
115,851 113,437
Less accumulated depreciation ........................ 22,053 18,344
-------- --------
Net property and equipment ........................... $ 93,798 $ 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 September 30, 2000 are $2.1 million, $3.5 million, $1.6
million, $854,000 and $7,000 in 2000, 2001, 2002, 2003 and 2004, respectively.

<PAGE>

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:

THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
(in thousands, except per share amounts.)
<S> <C> <C> <C> <C>
Basic:
Net income (loss) ................................ $ (129) $ 373 $ 437 $ 217
Common stock ..................................... 37,061 28,987 32,253 29,040
-------- -------- -------- --------

Basic Earnings (loss) Per Share ...................... $ -- $ .01 $ .01 $ .01
======== ======== ======== ========

Effect of dilutive securities:
Warrants ......................................... -- 1,135 -- 1,135
Common stock options ............................. -- 97 71 97
-------- -------- -------- --------
-- 1,232 71 1,232

Dilutive:
Net income (loss) ................................ $ (129) $ 373 $ 437 $ 217
Common stock and dilutive securities ............. 37,061 30,219 32,324 30,272
-------- -------- -------- --------

Dilutive Earnings (loss) Per Share ................... $ .00 $ .01 $ .01 $ .01
======== ======== ======== ========

</TABLE>

NOTE 6 MERGER WITH HANOVER COMPRESSION

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. One of the conditions to the
consummation of the proposed merger between OEC and Hanover is the approval
of the OEC shareholders of such merger. Under Securities and Exchange
Commission rules, this approval must be done at a special meeting of the
shareholders of OEC following delivery of a merger proxy and registration
statement for the Hanover common stock to be issued to the OEC shareholders
in the merger. In September of 2000, Hanover acquired the Dresser-Rand
Compression Services Division ("DRCS") from Ingersoll-Rand Company and under
SEC rules, the registration/proxy statement needed to include audited
financial statements of DRCS and certain pro forma financial statements. The
required DRCS audit was just recently completed. Hanover and OEC expect to
file a proxy/registration statement shortly and to consummate the merger in
either December of 2000 or early 2001.

Due to the delay in filing the proxy/registration statement, on November 14
2000, the Company's Board of Directors and Hanover agreed to (i) extend the
outside date for closing the merger from January 15, 2001 to March 1,
2001,(ii) agreed that actions and events that have occurred prior to November
14, 2000 are not material adverse changes under the Merger Agreement, (iii)
change the definition of material adverse change in the merger agreement such
that changes in the financial performance or condition of the Company will
not be grounds for Hanover refusing to close the merger, and

<PAGE>

(iv) eliminated the requirement that the Company have in place an agreement
for one of the Company's lenders to cancel certain warrants prior to the
closing of the merger.

Given the extended delay in closing the proposed merger of the Company and/
Hanover, on November 14, 2000 the Company's board of Directors and Hanover
agreed to enter into a management agreement whereby Hanover will assume
management responsibilities for the Company's shop and field operations
through completion of the merger. Hanover will receive monthly compensation
under the agreement of $900,000 effective beginning in October of this year.
. The Company's senior management will continue to oversee all marketing,
administrative, accounting and financial operations as well as oversight of
the Company's shop and field management.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS 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

3RD QUARTER, 2000 VERSUS 3RD QUARTER, 1999

Gas compressor rentals, service & treating fees of $5.3 million for the three
months ended September 30, 2000 ("QTR-2000") represented a 9% reduction from
that achieved in the three months ended September 30, 1999 ("QTR-1999"). The
February, 2000 sale of a 50% undivided interest in the Will-o-Mills gas
treating plant accounted for approximately a third of the revenue decline.
The balance was due to a slight drop in the average amount of compression
horsepower deployed during QTR-2000 and a slight increase in the average unit
size of a deployed unit. Regarding the latter, compression rental rates and,
in general, operating costs, on a per horsepower basis is inversely related
to unit size. The decline in rental service and treating fees was more than
offset by a 35% decline, from QTR-1999 levels, in the associated direct
operating costs to $1.6 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) continued focus on cost
structure efficiencies in the Company's field operations. As a result, the
Company's gas compressor rentals, service and treating operations generated a
gross profit (revenues - direct expense) of $3.7 million for QTR-2000 versus
QTR-1999's $3.3 million, a 12% improvement. QTR-2000's and QTR-1999's gross
margins for these operations (gross profit divided by revenue) were 69% and
58%, respectively.

QTR-2000 compressor sales and remanufacturing revenues increased 18% from
QTR-1999 levels to $97,000. The associated cost of goods sold fell 14% from
QTR-1999 levels to $51,000. As a result the gross profit from these
operations rose 100% from QTR-1999 levels to $46,000. The gross margin
improved to 47% from QTR-1999's 28%.

Depreciation and amortization costs remained virtually unchanged from
QTR-1999 levels at $1.5 million.

<PAGE>

QTR-2000's selling, general and administrative expense ("G&A") fell 33% from
QTR-1999 levels to $.579 million. The decrease reflected the Company's
continued focus on expense controls. The bulk of the G&A reduction was
achieved through personnel reductions.

The Company's improved cost structure in both its field operations and
selling / administration more than offset QTR-2000's revenue decline from the
comparative quarter. As a result, Income from Operations rose $690,000 (69%)
from QTR-1999 levels to $1.7 million. Cashflow, defined here as earnings
before interest, taxes, depreciation, amortization and non-recurring expenses
(commonly referred to as "EBITDA"), rose $643,000 (26%) from QTR-1999's
performance level to $3.1 million.

Interest income for QTR-2000 of $135,000 represents a $128,000 increase over
QTR-1999 levels and is due to the increase in short-term cash investments
held by the Company during QTR-2000. As of September 30, 2000, the Company
had $8.7 million in cash and short-term investments. The bulk of the cash
investments are the result of a common stock warrant exercise by three
officers of the Company in mid-June, 2000. QTR-2000 interest expense of $1.4
million represented an 8% increase over QTR-1999 levels and was due
predominantly to higher debt interest rates in the current period.

On July 17, 2000, the Company and Hanover Compressor Company ("Hanover")
announced the two companies have executed a definitive merger agreement under
which Hanover will acquire the Company in an all-stock transaction. The
merger, which is subject to the approval of the Company's shareholders, is
expected to close in late December, 2000 or early January, 2001. Prior to the
merger announcement, the Company's board approved a company wide employee
retention plan to incentivise Company employees to remain during the sale and
merger process. During QTR-2000, the Company incurred legal costs of
approximately $150,000 associated with the planned merger and paid retention
bonuses under the employee retention plan totaling $458,000. These combined
costs have been included as a line item under "Other income (expense)" in the
financial statements.

For QTR-2000, the Company reported pretax net income of $407,000 before the
previously described merger and employee retention expense versus a QTR-1999
pretax loss of $5,000. Included in QTR-1999's pretax earnings is a $313,000
gain on the sale of the Company's oil and gas operations during that quarter.
Inclusion of the merger and employee retention expense generates a pretax
loss of $201,000 for QTR-2000 with a $72,000 tax benefit generating a net
loss for the quarter of $129,000. This compares with QTR-1999 net income of
$373,000 after a $378,000 tax benefit offset the $5,000 pretax loss.

9 MONTHS ENDED SEPTEMBER 30, 2000 VERSUS 9 MONTHS ENDED SEPTEMBER 30, 1999

Gas compressor rentals, service & treating fees of $16.5 million for the nine
months ended September 30, 2000 ("9 Mo.-2000") represented a 6% reduction
from that achieved in the nine months ended September 30, 1999 ("9 Mo.-1999").
The decline was due to a slight drop in the average amount of compression
horsepower deployed during the 9 Mo.-2000 period as compared to the 9 Mo.-1999
period and a slight increase in the average unit size of a deployed unit. As
stated earlier, compression rental rates and, in general, operating costs, on
a per horsepower basis is inversely related to unit size. The decline in
rental service and treating fees was more than offset by a 22% decline, from
9 Mo.-1999 levels, in the associated direct operating costs to $5.8 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) continued focus on cost structure efficiencies in the Company's field
operations. As a result, the Company's gas compressor rentals, service and
treating operations generated a gross profit (revenues - direct expense) of
$10.7 million for 9 Mo.-2000 versus 9 Mo.-1999's $10.1 million, a 6%
improvement. 9 Mo.-2000's and 9 Mo.-1999's gross margins for these operations
(gross profit divided by revenue) were 65% and 58%, respectively.

9 Mo.-2000 compressor sales and remanufacturing revenues decreased 31% from
9 Mo.-1999 levels to $198,000. The associated cost-of-goods-sold fell 40%
from 9 Mo.-1999 levels to $108,000. As a result the gross profit from these
operations declined just 15% from 9 Mo.-1999 levels to $90,000. The gross
margin improved to 45% from 9 Mo.-1999's 37%. The Company continues to
minimize its focus on this business sector in favor of the typically more
profitable gas compression rental, service and treating sector.

Oil and gas revenues and the associated operating costs fell to $0 in the
9 Mo.-2000 period due to the July, 1999 sale of 100% of its oil and gas
operations to Prize Petroleum. The Company exited the oil and gas production
business to redirect its capital investment into its core gas compression,
service and treating business.

9
<PAGE>

Depreciation, depletion and amortization costs for the 9 Mo.-2000 period fell
10% from 9 Mo.-1999 levels. The loss of depletion due to the July, 1999 sale
of the oil and gas operations was the predominant cause.

9 Mo.-2000's selling, general and administrative expense ("G&A") fell $1.2
million (-40%) from 9 Mo.-1999 levels to $1.8 million. The decrease reflected
the Company's continued focus on expense controls. The bulk of the G&A
reduction was achieved through personnel reductions. The 9 Mo.-2000 G&A
expense also includes an estimated $130,000 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, engaged
in February, 2000, in its efforts to market the Company (see Note 6,
Subsequent Events). At the July 13th, 2000 annual OEC shareholders' meeting,
the Company's shareholders overwhelming rejected the dissident directors'
alternative slate of directors to that proposed by the Company and the three
dissident directors were not reelected to the Company's board. Additionally,
the Company rejected the dissident group's request, delivered by their legal
counsel, to reimburse the dissident group's legal and proxy solicitation
expenses.

The Company's improved cost structure in both its field operations and
selling / administration more than offset 9 Mo.-2000's revenue decline from
the comparative quarter. As a result, Income from Operations rose $1.3
million (39%) from 9 Mo.-1999 levels to $4.7 million. Cashflow, defined here
as earnings before interest, taxes, depreciation, amortization and
non-recurring expenses (commonly referred to as "EBITDA"), rose $855,000
(10%) from QTR-1999's performance level to $9.0 million.

Interest income for 9 Mo.-2000 of $173,000 represents a $95,000 increase over
9 Mo.-1999 levels and is due to the increase in short-term cash investments
held by the Company during the last three months of the 9 Mo.-2000 period. As
of September 30, 2000, the Company had $8.7 million in cash and short-term
investments. The bulk of the cash investments are the result of a common
stock warrant exercise by three officers of the Company in mid June, 2000.
9 Mo.-2000 interest expense of $4.3 million represented a 9% increase over
QTR-1999 levels and was due 1) slightly higher levels of senior debt and 2)
higher debt interest rates in the current period.

On July 17, 2000, the Company and Hanover Compressor Company ("Hanover")
announced the two companies have executed a definitive merger agreement under
which Hanover will acquire the Company in an all-stock transaction. The
merger, which is subject to the approval of the Company's shareholders, is
expected to close in late December, 2000 or early January, 2001(see Note 6,
Merger with Hanover Compression). Prior to the merger announcement, the
Company's board approved a company wide employee retention plan to
incentivise Company employees to remain during the sale and merger process.
During 9 Mo.-2000, the Company incurred legal costs of approximately $150,000
associated with the planned merger and paid retention bonuses under the
employee retention plan totaling $458,000. These combined costs have been
included as a line item under "Other income (expense)" in the financial
statements.

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. This
compares with a $310,000 gain taken in July, 1999 with the previously
described sale of the Company's oil and gas operations to Prize Petroleum.
Minority interest was eliminated with the Prize sale.

As result of the improved operating margins and reduced G&A expenses, the
Company reported pretax net income of $727,000 for the 9 Mo.-2000 period
versus a $237,000 pretax loss for the comparative 9 Mo.-1999 period. The
9 Mo.-2000 period's pretax net income, before 1) the merger and employee
retention Expenses and 2) one time gains on asset sales, was $587,000. The
comparative 9 Mo.-1999 period generated a pretax net loss before comparable
expenses and sale gains of $572,000.

Income tax expense for the 9 Mo.-2000 period of $290,000 resulted in net
income for the period of $437,000. A $454,000 tax benefit in the comparative
9 Mo.-1999 period reversed the period's $237,000 pretax net loss to a
positive net income of $217,000.

<PAGE>

CAPITAL RESOURCES AND LIQUIDITY

As of September 30, 2000, the Company has in place a $39.5 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 September 30, 2000 borrowing base is $48 million but is limited to
the current commitment that reduces by $150,000 per month through the July
31, 2001 maturity. The credit facility is collateralized by substantially all
of the assets of the Company. On September 30, 2000, the senior credit
facility's outstanding balance was $39.3 million which was classified as a
current maturity.

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. Further, the debt agreements
prohibit the payment of dividends, limit the Company's repurchase of its own
stock, and restrict new borrowings. At September 30, 2000, the Company was in
compliance with all covenants in both its senior and subordinated credit
facilities.

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, were 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
between late December, 2000 and earlry January, 2001. 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 September 30,
2000.

Net cash provided by operating activities decreased to $3.8 million in
the first nine months, ending September 30, 2000 from $7.0 million in the
comparable Nine months of 1999 primarily due to a $1.3 million reduction in
accounts payable and accrued liabilities as well as the backing out of the
$.748 million gain on asset sale from the previously described 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 $8.4 million to 2000's $2.0 million.
The principal causes were 1) a $5.2 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 Gas plant interest sale. Net cash provided by financing activities
increased from 1999's $1.7million to 2000's $6.5 million due primarily to the
$7.28 million in cash proceeds received from the previously described June
12, 2000 stock warrant exercise and a $658 thousand net reduction in
borrowings.

<PAGE>

At September 30, 2000, the Company had current assets of
$17.0 million and current liabilities, excluding the $39.3 million senior
revolver balance, of $7.3 million. The Company has minimal availability under
its senior credit facility and does not have access to the borrowing base
above the current $39.0 million commitment (as of November 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 September 30, 2000, the Company
possesses $8.7 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.

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 September
30, 2000, the Company did not have any derivative financial instruments.

INTEREST RATE RISK

Total debt at September 30, 2000, included $15 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.

<PAGE>

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

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.

ITEM 5. OTHER INFORMATION

<PAGE>

receive monthly compensation under the agreement of $900,000 effective
beginning in October of this year. The Company's senior management will
continue to oversee all marketing, administrative, accounting and financial
operations as well as oversight of the Company's shop and field management.

ITEM 6. EXHIBITS

(a) Exhibits:

Exhibit
No. Description
--- -----------
<S> <C>

10.1 Agreement and Plan of Merger dated July 14, 2000 by
and among The Company, Hanover Compressor Company and
Caddo Acquisition Corp.

10.2 Amendment No. 1 to Agreement and Plan of Merger

10.3 Voting and Disposition Agreement

10.4 Management Agreement

</TABLE>

<PAGE>

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: November 14, 2000 By: /s/ Kelcy L. Warren
------------------------------------------
KELCY L. WARREN
Co-Chief Executive Officer

DATE: November 14, 2000 By: /s/ Ray C. Davis
------------------------------------------
RAY C. DAVIS
Co-Chief Executive Officer

DATE: November 14, 2000 By: /s/ Jack D. Brannon
------------------------------------------
JACK D. BRANNON
Senior Vice President and Chief Financial
Officer

<PAGE>

EXHIBIT INDEX

EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>

10.1 Agreement and Plan of Merger dated July 14, 2000 by and among The
Company, Hanover Compressor Company and Caddo Acquisition Corp.

10.2 Amendment No. 1 to Agreement and Plan of Merger

10.3 Voting and Disposition Agreement

10.4 Management Agreement

</TABLE>