REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors,
Zapata Corporation:
We have audited the accompanying combined balance sheet
of Zapata Energy Industries, a wholly-owned group of
subsidiaries of Zapata Corporation (See Note 1), as of
September 30, 1994 and the related combined statements of
income, cash flows and stockholder's equity for the eleven
months then ended. 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. 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 financial statements referred to
above present fairly, in all material respects, the
combined financial position of Zapata Energy Industries
as of September 30, 1994 and the combined results of
their operations and their cash flows for the eleven
months then ended, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Houston, Texas
December 16, 1994, except as to Note 13,
as to which the date is August 24, 1995
ZAPATA ENERGY INDUSTRIES
COMBINED BALANCE SHEET
SEPTEMBER 30, 1994 (IN THOUSANDS)
ASSETS
Current assets:
Cash $ 1,678
Receivables, net of allowance of $50 11,389
Inventories 17,629
--------
Total current assets 30,696
--------
Goodwill, net 18,885
--------
Other assets 549
--------
Property and equipment, net 52,496
--------
Total assets $102,626
--------
--------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 2,745
Accrued liabilities 3,995
Current maturities of long-term debt 94
--------
Total current liabilities 6,834
--------
Long-term debt 15,106
--------
Deferred income taxes 1,422
--------
Due to parent 55,677
--------
Commitments and contingencies (Note 10)
Stockholder's equity:
Common stock ($1.00 par value) authorized, issued and
outstanding: 3,000 shares 3
Capital in excess of par value 20,787
Reinvested earnings 2,797
--------
23,587
--------
Total liabilities and stockholder's equity $102,626
--------
--------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
2
ZAPATA ENERGY INDUSTRIES
COMBINED INCOME STATEMENT
ELEVEN MONTHS ENDED SEPTEMBER 30, 1994 (IN THOUSANDS)
Revenues $72,522
-------
Expenses:
Operating 52,768
Depreciation and amortization 4,867
Selling, general and administrative 6,917
-------
64,552
-------
Operating income 7,970
Interest expense, net (3,124)
-------
Income before income taxes 4,846
Provision for income taxes 2,049
-------
Net income $ 2,797
-------
-------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
3
ZAPATA ENERGY INDUSTRIES
COMBINED STATEMENT OF CASH FLOWS
ELEVEN MONTHS ENDED SEPTEMBER 30, 1994 (IN THOUSANDS)
Cash flow provided (used) by operating activities:
Net income $ 2,797
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,867
Deferred taxes 1,363
Changes in assets and liabilities:
Receivables (2,064)
Inventories 175
Accounts payable and accrued liabilities 1,026
Other assets and liabilities (313)
--------
Total adjustments 5,054
--------
Net cash provided by operating activities 7,851
--------
Cash flow used by investing activities:
Capital expenditures (8,638)
Business acquisitions, net of cash acquired (73,222)
--------
Net cash used by investing activities (81,860)
--------
Cash flow used by financing activities:
Borrowings 15,000
Principal payments of long-term obligations (120)
Proceeds from issuance of common stock
to Parent 20,790
Repayments to Parent (15,886)
Advances from Parent 55,903
--------
Net cash used by financing activities 75,687
--------
Net decrease in cash and cash equivalents 1,678
Cash and cash equivalents at beginning of period 0
--------
Cash and cash equivalents at end of period $ 1,678
--------
--------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
4
ZAPATA ENERGY INDUSTRIES
COMBINED STATEMENT OF STOCKHOLDER'S EQUITY
IN THOUSANDS
CAPITAL IN
COMMON EXCESS OF PAR REINVESTED
STOCK VALUE EARNINGS
Balance at November 1, 1993:
Zapata Rentals, Inc. $1 $ 1,787 -
Zapata Compression Investments, Inc. 1 10,500 -
Energy Industries, Inc. 1 8,500 -
-- ------- ------
$3 $20,787 -
-- ------- ------
Net income - - $2,797
-- ------- ------
Balance at September 30, 1994 $3 $20,787 $2,797
-- ------- ------
-- ------- ------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
5
ZAPATA ENERGY INDUSTRIES
NOTES TO THE COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The combined financial statements of Zapata Energy Industries ("Zapata Energy
Industries" or the "Company") are comprised of Zapata Rentals, Inc.,
Zapata Compression Investments, Inc. and Energy Industries, Inc., three
wholly-owned subsidiaries of Zapata Corporation ("Zapata"). The
financial statements are presented on a combined basis because their
business activities are performed as one entity. 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 a network of fifteen
sales and service offices in the surrounding four state area. In 1993,
Zapata Energy Industries was formed and acquired certain natural gas
compression businesses (See Note 2).
BASIS OF PRESENTATION
The combined financial statements of Zapata Energy Industries include the
results for the eleven months ended September 30, 1994. All significant
intercompany transactions and account balances have been eliminated.
PROPERTY AND EQUIPMENT
Depreciation of property and equipment is provided using the straight-line
method over the estimated useful lives of the assets. Estimated useful
lives of assets, determined as of the date of acquisition, are as follows:
USEFUL LIVES
(YEARS)
Natural gas compressors 15
Building and leasehold improvements 20
Furniture, machinery and compressor casting molds 7
Computers and transportation equipment 5
Repairs and maintenance are charged to expense as incurred and major
renewals and betterments are capitalized. Upon the sale or retirement of
equipment, the cost of the equipment disposed and the related accumulated
depreciation are removed from the accounts and any resulting gain or loss
is reflected in results from operations.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the moving average method for parts inventories. The cost of major
component inventories is determined by using specific identification.
6
NOTES TO THE COMBINED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
GOODWILL
Goodwill represents the excess of the cost of an acquisition
over fair value of net assets acquired. Goodwill is evaluated
annually for impairment based upon undiscounted cash flows and
reduced to net realizable value if necessary. Goodwill is amortized
using the straight-line method over the estimated benefit period of
40 years.
EQUIPMENT UNDER OPERATING LEASES AND 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 during the period from the inception
of the lease to the date the option is exercised. The lease payments are
generally computed to pay-out 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 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 the rental fleet in property and equipment. Rental equipment
is depreciated over its estimated useful life.
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 long-term construction projects. The
Company maintains reserves for potential losses, and credit losses have
been within management's expectations.
At September 30, 1994, the Company had cash deposits concentrated
primarily in one bank.
REVENUE
Revenues are recognized as services are performed, or as parts or equipment
deliveries are made. In some cases, revenue is recognized on large
compressor equipment construction when the project is completed, but before
the equipment is actually shipped. This practice occurs when a customer
agrees to take delivery and pay for the equipment, but is not yet ready
to take possession of the equipment. Zapata Energy Industries 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.
Revenues are recognized on rental contracts as rental equipment is
provided. Most rental contracts have an initial contract term of six to
twelve months and then continue on a month-to-month basis.
7
NOTES TO THE COMBINED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INCOME TAXES
The Company is included in Zapata's consolidated U.S. federal income tax
return, however, income tax effects are reflected on a separate company
basis for financial reporting purposes. The Company's method of
accounting for income taxes recognizes deferred tax liabilities and assets
based on the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial statement carrying amounts and the tax basis of
assets and liabilities using currently enacted tax rates.
2. ACQUISITION
In November 1993, Zapata Energy Industries purchased the natual gas
compression business of Energy Industries, Inc. and Zapata Energy Industries
L.P. (the "Acquisition"). Total consideration paid was $90.2 million
consisting of $74.5 million in cash and 2.7 million shares of Zapata's Common
Stock. Additionally, the Company incurred approximately $2.0 million
in fees associated with the Acquisition. Zapata Energy Industries
accounted for the acquisition using the purchase method of accounting and
recorded $19.3 million of goodwill in connection therewith.
The following assets and liabilities were acquired in connection with the
Acquisition effective November 1, 1993 (in millions):
Cash.................................................. $ 3.5
Receivables........................................... 9.3
Inventory............................................. 16.2
-----
29.0
Goodwill & other assets............................... 19.7
Property & equipment, net............................. 49.6
-----
$98.3
-----
-----
Current liabilities................................... $ 5.8
Long-term debt........................................ .2
-----
$ 6.0
-----
-----
3. INVENTORIES
The Company maintains inventories to support package fabrication in the
Corpus Christi, Texas headquarters, as well as repair and maintenance
operations in the branch offices. Inventories as of September 30, 1994
are comprised of the following components (in thousands):
Major fabrication components $ 3,908
Parts to support fabrication 7,422
Parts to support field service 4,291
Used parts and equipment 1,809
Labor in process 199
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$17,629
-------
-------
8
NOTES TO THE COMBINED FINANCIAL STATEMENTS, CONTINUED
4. PROPERTY, PLANT AND EQUIPMENT
Upon the Acquisition, the Company increased the net book value of property,
plant and equipment by $22.5 million to reflect the estimated fair market
value of the rental fleet and land and facilities at the date of the
Acquisition. Property, plant and equipment as of September 30, 1994 are
comprised as follows (in thousands):
Rental fleet $49,760
Patterns and forms 145
Leasehold Improvements 899
Furniture and fixtures 212
Computer equipment 942
Machinery and equipment 1,303
Buildings 2,376
Land 1,024
-------
56,661
Less accumulated depreciation (4,165)
-------
$52,496
-------
-------
Depreciation expense for the eleven months ended September 30, 1994 was
$4,201,000.
5. GOODWILL
Goodwill as of September 30, 1994 is summarized as follows (in thousands):
Goodwill $19,328
Accumulated amortization (443)
-------
$18,885
-------
-------
Amortization expense for goodwill totaled $443,000 for the eleven months
ended September 30, 1994.
9
NOTES TO THE COMBINED FINANCIAL STATEMENTS, CONTINUED
6. ACCRUED LIABILITIES
Accrued liabilities as of September 30, 1994 are summarized as follows (in
thousands):
State Income Taxes $ 425
Accrued Payroll 1,279
Ad Valorem Taxes 375
Accrued Warranty 250
Other Accrued Liabilities 1,666
-------
$3,995
-------
-------
7. DEBT
At September 30, 1994, the Company's debt consisted of the following (in
thousands):
Texas Commerce Bank revolving/term credit facility,
interest at prime or Eurodollar rates, 7.75% at
September 30, 1994, due in quarterly installments
beginning in 1997 through 1999, collateralized by
certain compression assets $15,000
Other debt at 7.7% 200
-------
Total debt 15,200
Less current maturities 94
-------
Long-term debt $15,106
-------
-------
At September 30, 1994, the Company maintained a line of credit with Texas
Commerce Bank. This credit agreement provides the Company with a $30
million revolving credit facility that converts after two years to a three
year amortizing term loan. The debt bears interest at a variable rate,
adjusted periodically based on prime or Eurodollar interest rate.
Pursuant to the credit agreement, the Company has agreed
to maintain certain financial covenants and to limit additional
indebtedness, dividends, dispositions and acquisitions. The amount of
restricted net assets for the Company at September 30, 1994 was
approximately $65.0 million. Additionally, the Company's ability to
transfer funds to Zapata was limited to $5.0 million at
September 30, 1994.
The estimated fair value of total long term debt at September 30, 1994
approximates book value.
10
NOTES TO THE COMBINED FINANCIAL STATEMENTS, CONTINUED
7. DEBT, CONTINUED:
ANNUAL MATURITIES
The annual maturities of long-term debt for the five years ending
September 30, 1999 are as follows (in thousands):
1995 1996 1997 1998 1999
$94 $105 $5,001 $5,000 $5,000
8. CASH FLOW INFORMATION
For purposes of the statement of cash flows, all highly liquid investments
with an original maturity of three months or less are considered to be
cash equivalents.
Net cash provided by operating activities reflects cash payments of
interest and income taxes.
Cash paid during the eleven months ended September 30,
1994 for interest was $70,000.
9. INCOME TAXES
The Company's method of accounting for income taxes recognizes deferred
tax assets and liabilities based on the expected future tax consequences
of existing temporary differences between the financial reporting and tax
reporting basis of assets and liabilities, and operating loss and tax
credit carryforwards for tax purposes.
The Company's provision for income tax expense, computed on a
separate company basis, consisted of the following (in thousands):
Current
State $ 375
U.S. 311
Deferred
U.S. 1,363
------
$2,049
------
------
11
NOTES TO THE COMBINED FINANCIAL STATEMENTS, CONTINUED
9. INCOME TAXES, CONTINUED
The provision for deferred taxes results from temporary differences in the
recognition of revenues and expenses for tax and financial reporting
purposes. The sources and income tax effects of these differences for the
eleven months ended September 30, 1994 were as follows (in thousands):
Book depreciation less than tax depreciation $1,545
Book reserves not deductible for tax purposes (24)
Changes to tax carryforwards and other (158)
------
$1,363
------
------
The following table reconciles the income tax provisions computed
using the U.S. statutory rate of 34% to the provisions reflected in the
financial statements (in thousands):
Taxes at statutory rate $1,647
State taxes, net of federal benefit 247
Other 155
------
$2,049
------
------
Temporary differences and tax credit carryforwards that gave rise to
significant portions of deferred tax assets and liabilities as of
September 30, 1994 are as follows (in thousands):
Deferred tax assets:
Book reserves not yet deductible $ 215
Other 97
-------
Total deferred tax assets 312
-------
Deferred tax liabilities:
Property and equipment (1,601)
Other (133)
-------
Total deferred tax liabilities 1,734
-------
Net deferred tax liability $(1,422)
-------
-------
12
NOTES TO THE COMBINED FINANCIAL STATEMENTS, CONTINUED
10. COMMITMENTS AND CONTINGENCIES
SALES-TYPE LEASE RECEIVABLES
Zapata Energy Industries provides a capital lease financing option to its
customers. Future minimum lease payments receivable under sales-type leases
are due as follows: $3,769,000 in 1995, $241,000 in 1996 and $77,000 in 1997;
deferred interest totaling $51,000 is included in these amounts. Zapata
Energy Industries periodically sells a portion of its lease receivables to
third party financiers. Certain of these receivables are sold with partial
recourse to the Company. At September 30, 1994, the total amount of
recourse to the Company on the unpaid balance of all previously sold
receivables was $1.7 million. During the eleven months ended September 30,
1994, the Company sold a total of $8.3 million of these receivables. To
date, the Company has not experienced any significant recourse losses.
OPERATING LEASES RECEIVABLE
The Company maintains a fleet of natural gas compressor packages for
rental under operating leases. At September 30, 1994, the net book value
of such property was $46.3 million (accumulated depreciation totaled $3.5
million). Future minimum lease payments receivable under remaining
noncancelable operating leases as of September 30, 1994 are as follows:
$3,256,000 in 1995, $782,000 in 1996 and $190,000 in 1997.
OPERATING LEASES PAYABLE
The Company leases certain buildings and equipment under noncancelable
operating leases. Future minimum payments under these operating lease
obligations aggregate $1.3 million, and for the four years ending
September 30, 1998 are:
1995 1996 1997 1998
Lease obligations $487 $414 $309 $102
Rental expenses for operating leases were $ 533,000 for the eleven months
ending September 30, 1994.
CLAIMS AND LITIGATION
The Company is defending various claims and litigation arising from
operations. 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 or financial position.
13
NOTES TO THE COMBINED FINANCIAL STATEMENTS, CONTINUED
10. COMMITMENTS AND CONTINGENCIES, CONTINUED
FOREIGN REPRESENTATION
The Company entered into a contract with Atlas Copco to represent Zapata
Energy Industries in countries and markets where the Company did not have
sales contracts or convenient access. Atlas Copco receives a commission on
sales that Energy Industries makes internationally, whether they made the
initial sales contact or not. The contract specifically excludes sales to
Canada or Mexico. The contract is in effect until July 15, 1998 and
renews automatically for successive one year terms unless terminated by
one of the parties in advance.
Zapata Energy Industries is also under contract with a former affiliate
company, Energy Industries LTD, located in Calgary, Alberta, Canada.
Pursuant to this agreement, Zapata Energy Industries is required to supply
Energy Industries LTD with proprietary compressor components used in the
fabrication of gas compressor packages. Also, according to this agreement,
Energy Industries LTD cannot buy similar components from other manufacturers.
The companies also are bound by non-compete agreements in each other's
respective country. This agreement remains in effect through 1996, after
which time, Zapata Energy Industries will be obligated to sell compressor
components to Energy Industries LTD until 2002, but not on an exclusive
basis in Canada. In addition, after 1996 either company may compete in the
other's country for sales of new compressor packages or any other product
or service.
11. RELATED PARTY TRANSACTIONS
Zapata Energy Industries purchases Caterpillar engines and parts from Holt
Company of Texas, a corporation owned by the CEO of Zapata Energy
Industries, and a major stockholder and a director of Zapata. During 1994,
Zapata Energy Industries purchased $7.3 million of parts and engines from
Holt Company of Texas. At September 30, 1994, Zapata Energy Industries owed
the Holt Company $663,000 related to these purchases.
The Company's interest expense includes an allocation of interest expense
from Zapata totaling $3,384,000 for the eleven months ended September 30,
1994. Interest expense of Zapata that was not directly attributable to or
related to other operations of Zapata was allocated to the Company based on
net assets. Additionally, Zapata performs certain administrative functions
for Zapata Energy Industries including insurance policy placement, income
tax and legal support. These costs are charged to Zapata Energy Industries
based upon costs incurred in support of these activities.
12. PROFIT SHARING PLAN
All qualified employees of the Company are covered under the Energy
Industries, Inc. Profit Sharing Plan. The Company matches an employee's
voluntary contribution on a dollar-for-dollar basis, up to 2% of the
employee's gross payroll. The Company can also elect to make an annual
contribution to the plan based on profits. These contributions are
allocated to the participants based on gross payroll. Contributions of
$163,512 were made under this discretionary profit sharing feature of the
plan for the eleven months ended September 30, 1994.
14
NOTES TO THE COMBINED FINANCIAL STATEMENTS, CONTINUED
13. SUBSEQUENT EVENTS
In January 1995, Zapata Energy Industries sold its heat exchanger division,
located in Garland, Texas. The heat exchanger division manufactured one of
the integral components of the gas compressor package, the "cooler" or "heat
exchanger". The Company received $1,470,000, and entered into an alliance
agreement structured to provide Zapata Energy Industries with the heat
exchangers necessary to perform its fabrication operations. As part of the
consideration of the sale, Zapata Energy Industries received a $725,000
credit to be used against future purchases over the next five years at a
rate of 10% off of normal invoice price. Approximately $5.5 million in
revenues and approximately $471,000 in operating income, included in the
Company's results for the eleven months ended September 30, 1994, was
attributable to the heat exchanger division.
During February 1995, the Company acquired the rental fleet of J-Brex
Company for $725,000. Fourteen active rental units were acquired in
this transaction, and the Company entered into a three-year agreement
which affords the Company the right of first refusal on these and any
future compressors J-Brex may need.
In April 1995, Zapata Energy Industries acquired the forty-four unit rental
fleet of Mountain Front Pipeline Company, Inc. Zapata Energy Industries
purchased these units for $2.7 million, and entered into an agreement with
Mountain Front, which affords the Company exclusive rights for these and
any future compressors for a period of up to thirty months.
On June 30, 1995, Zapata announced that it had entered into an agreement
to sell the assets of Zapata Energy Industries for $130 million to Enterra
Corporation. The agreement is subject to the signing of a definitive
agreement containing customary representations and warranties and
indemnification provisions and certain government approvals.
As of June 1995, the Company was not in compliance with certain cash flow
loan covenants related to long term debt. The Company has requested and
expects to receive a waiver related to this incident of non-compliance.
15