10-Q 1 h92357e10-q.txt BRL UNIVERSAL EQUIPMENT 2001 A, LP FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Numbers: 333-57302 333-57302 BRL Universal Equipment 2001 A, L.P. BRL Universal Equipment Corp. (Exact name of registrants as specified in their charters) Delaware 75-2918461 Delaware 75-2918448 (States or other (I.R.S. Employer jurisdictions of Identification Nos.) incorporation or organization) 2911 TURTLE CREEK BLVD., SUITE 1240 DALLAS, TEXAS 75219 (Address of principal (Zip Code) executive offices) (214) 522-7296 (Registrants' telephone number, including area code) Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes [X] No [ ] BRL Universal Equipment 2001 A, L.P. is a Delaware limited partnership of which BRL Universal Equipment Management, Inc., a Delaware corporation, is the general partner. BRL Universal Equipment 2001 A, L.P. owns all of the 10,000 shares of outstanding common stock, $1.00 par value, of BRL Universal Equipment Corp. INDEPENDENT AUDITOR'S REPORT To the Partners of BRL Universal Equipment 2001 A, L.P.: We have audited the accompanying consolidated balance sheet of BRL Universal Equipment 2001 A, L.P. and subsidiary (the "Company") as of September 30, 2001, and the related consolidated statements of operations and cash flows for the three months ended September 30, 2001, and for the period from January 18, 2001 (inception) through September 30, 2001, and of partners' deficit for the period from January 18, 2001 (inception) through September 30, 2001. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiary as of September 30, 2001, and the results of their operations and their cash flows, for the three months ended September 30, 2001, and for the period from January 18, 2001 (inception) through September 30, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche Dallas, TX October 18, 2001 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BRL UNIVERSAL EQUIPMENT 2001 A, L.P. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET

See accompanying notes to consolidated financial statements. 3 BRL UNIVERSAL EQUIPMENT 2001 A, L.P. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements. 4 BRL UNIVERSAL EQUIPMENT 2001 A, L.P. AND SUBSIDIARY CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (DEFICIT) FOR THE PERIOD FROM JANUARY 18, 2001 (INCEPTION) THROUGH SEPTEMBER 30,

See accompanying notes to consolidated financial statements. 5 BRL UNIVERSAL EQUIPMENT 2001 A, L.P. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements. 6 BRL UNIVERSAL EQUIPMENT 2001 A, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION - BRL Universal Equipment 2001 A, L.P. ("BRL") and its wholly owned subsidiary, BRL Universal Equipment Corp. ("BRL Corp." and, collectively with BRL the "Company") were organized in Delaware in January 2001 for the purpose of BRL pursuring the purchase of $427 million of domestic based gas compression equipment in connection with an operating lease transaction. The purchase was financed by the issuance of $350 million of the Company's 8 7/8% Senior Secured Notes due 2008, coupled with bank borrowings and additional BRL equity funding. The equipment purchase, note issuance, additional financing and equity funding occurred on February 9, 2001. BRL leases its gas compression equipment to Universal Compression, Inc. ("Universal") for a seven-year term under an operating lease. In addition to rental payments, Universal is obligated to pay BRL supplemental rent, costs, taxes, indemnities, and other amounts owing under the operating lease. The general partner of BRL is BRL Universal Equipment Management, Inc., a Delaware corporation. Deutsche Bank A.G., New York Branch and First Union National Bank are the limited partners. The initial limited partner investor withdrew from BRL and was repaid his capital contribution in February 2001. Net income or loss is allocated to the partners in accordance with the terms of the partnership agreement, as amended. Separate financial information of BRL Corp. is not required as (a) BRL Corp. is a 100% owned finance subsidiary of BRL and constitutes BRL's only subsidiary and (b) BRL is a joint and several co-issuer of the 8 7/8% Senior Secured Notes due 2008 co-issued by BRL Corp. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of BRL and its wholly owned subsidiary. All material intercompany transactions and account balances have been eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for the interim period have been recorded. RENTAL EQUIPMENT - Equipment is carried at cost. Depreciation is calculated using the straight-line method, assuming a 20% salvage value and estimated useful lives of 15 years. Company management analyzes its equipment for impairments whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company will annually assess whether it is probable that the value of the property at the end of the lease term will be less than the residual value guarantee. On the date the deficiency becomes probable, BRL will assess the probability of collection from the lessee of the residual value guarantee and would recognize a loss in the year in which it is determined that collection of the residual value guarantee is not probable. ENVIRONMENTAL LIABILITIES - The Company accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. The Company's management is not aware of any environmental remediation obligations that would affect the operations, financial position or cash flows of the Company and therefore has made no loss accruals. CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, cash and cash equivalents include cash on deposit at banks and all highly liquid investments with a maturity of three months or less when purchased. RECEIVABLES - Receivables consist almost exclusively of rental receivables related to the operating lease agreement. Receivables are recorded as the related revenues are earned according to the operating lease agreement. REVENUE RECOGNITION - Rental revenues are based on the current rental rates, supplemental rent and expenses payable under the operating lease for gas compression equipment leased from BRL to Universal. INCOME TAXES - No provision has been made for federal or state income taxes because the liability for such taxes from partnership activities is that of the partners rather than BRL. No provision for taxes has been made for BRL Corp. since the taxable income is insignificant. 7 USE OF ESTIMATES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of certain assets, liabilities, revenues and expenses as of and for the reporting periods. Actual results may differ from such estimates. CONCENTRATIONS OF RISK - The Company's revenue is derived from its leasing activities with Universal, an unrelated third party lessee. The debt secured by the leased equipment is recourse only to the rental equipment and the related operating lease with Universal. The recorded assets, obligations and operations of the Company could be substantially adversely affected if the Company's relationship with and/or the financial position of Universal is adversely affected. RECENT ACCOUNTING PRONOUNCEMENTS - In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. On June 26, 2000, the SEC issued an amendment to SAB 101, effectively delaying its implementation until the fourth quarter of fiscal years beginning after December 15, 1999. After reviewing SAB 101 and its amendment, the Company believes that its revenue recognition policy is appropriate and that the effects of SAB 101 and its amendment are immaterial to the Company's results of operations. 2. NOTES PAYABLE The notes payable at September 30, 2001 consist of the following borrowings: Senior Secured Notes - $350,000,000 fixed rate of 8.875% interest due semi- annually due February 15, 2008 $350,000,000 Term Loan - $63,918,750 variable rate of LIBOR or prime plus 3.25% (5.887% at September 30, 2001) interest due monthly (based on one-month LIBOR) due February 15, 2008 63,918,750 ------------ $413,918,750 ============

In addition, BRL raised approximately $13.1 million from equity investments from its limited partners during the period from January 18, 2001 (inception) through March 31, 2001. As limited partners of BRL, Deutsche Bank A.G., New York Branch and First Union National Bank may receive return of capital payments for their equity investment in BRL upon certain repurchases or redemptions of the senior secured notes. Affiliates of such limited partners participated as initial purchasers of the senior secured notes and as lenders under the BRL term loan. Affiliates of such limited partners engage in transactions with, and perform services for, Universal in the ordinary course of business. Affiliates of BRL and a limited partner are participants in an asset-backed securitization facility with a subsidiary of Universal as lessee. The notes are collateralized by all of the equipment covered by the operating lease agreement. The indenture governing the notes contains covenants that, among other things, restrict the line of business and require offers to repurchase the notes upon a change of control or certain asset sales. In accordance with the terms of the operating lease, Universal paid all of the issuance costs associated with the senior secured notes and the term loan. In June 2001, the Company completed an exchange offer whereby it issued $350,000,000 aggregate principal amount of its registered 8 7/8% senior secured notes due 2008 (the "New Notes") and Universal's related lease and guarantee obligations in exchange for $350,000,000 aggregate principal amount of the Company's previously outstanding 8 7/8% senior secured notes due 2008 (the "Old Notes"). The Old Notes were issued in February 2001 in a private placement transaction pursuant to Rule 144A under the Securities Act of 1933, as amended. The exchange offer commenced on May 15, 2001 and expired on June 14, 2001. The terms of the New Notes issued in the exchange offer are substantially 8 identical to the terms of the Old Notes, except that the New Notes do not restrict transfer and were issued free of any covenants regarding exchange and registration rights. On October 23, 2001, the Company purchased an additional $122 million of domestic gas compression equipment from Universal and leased the equipment back to Universal under its existing operating lease facility. The Company raised the proceeds to purchase the equipment through the issuance of an additional $100 million of 8 7/8% Senior Secured Notes due February 15, 2008, together with $18.3 million in additional borrowings under the Company's term loan and an additional $3.7 million equity investment in BRL. 3. OPERATING LEASES The Company's equipment is rented to Universal under an operating lease. The lease payments equal the interest accrued on the senior secured notes, interest accrued on the bank borrowings, the margin payable to the general partner of BRL, and a return on partnership equity. The future minimum rentals (including any lease termination payments) to be received by BRL under the operating lease are estimated using interest rates and property balances applicable as of September 30, 2001, as follows Period ending December 31: 2001 (3 months) $ 9,258,500 2002 37,033,000 2003 37,033,000 2004 37,033,000 2005 37,033,000 Thereafter 427,152,000 ------------- $ 584,542,500 =============

At the end of the lease term, Universal may (a) elect to purchase all of the equipment, (b) return the equipment to BRL subject to certain conditions or (c) subject to certain provisions, renew the operating lease. Upon the expiration of the lease term, if Universal elects option (a) in the preceding sentence, Universal is required to pay the Company an amount sufficient to pay all amounts due under the notes payable plus equity funded by the limited partners of BRL. If the Company refinances all of the notes, bank debt, and equity funding, then Universal has the option to renew the operating lease for ten renewal terms of one year each. The future minimum rental schedule above includes the future amounts Universal is required to repay under the operating lease (but does not include the additional $122 million of equipment purchased and then leased to Universal in October, 2001). 4. RELATED PARTY TRANSACTIONS The Company paid affiliates $92,891 from inception through September 30, 2001, and $32,381 for the three months ended September 30, 2001, for services pursuant to the terms of the partnership and operating lease agreements. 5. SUBSEQUENT EVENTS On October 23, 2001, the Company purchased $122 million of domestic gas compression equipment from Universal and leased the equipment back under its existing operating lease facility. The Company raised the proceeds to purchase the equipment through the issuance of an additional $100 million of 8 7/8% Senior Secured Notes due February 15, 2008, together with $18.3 million in additional borrowings under the Company's term loan and the additional $3.7 million equity investment in BRL. Affiliates of the limited partners of BRL participated as purchasers of the additional Senior Secured Notes and as lenders for the additional borrowings under the Company's term loan. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This report contains "forward-looking statements." All statements other than statements of historical fact contained in report are forward-looking statements, including, without limitation, statements regarding future financial position, business strategy, budgets, litigation, projected costs and plans and objectives of management for future operations. You can identify many of these statements by looking for words such as "believes," "expects," "will," "intends," "projects," "anticipates," "estimates," "continues" or similar words or the negative thereof. Such forward-looking statements include, without limitation: o the sufficiency of available cash flows to fund continuing operations; o our future financial position; o the future value of our equipment; and o our future operations. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this report. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, these expectations may prove to be incorrect. Important factors that could cause actual results to differ materially from the expectations reflected in these forward-looking statements include the financial position and operations of our lessee, Universal, which include, among other things: o Universal's inability to successfully integrate businesses it has acquired or may acquire in the future; o conditions in the oil and gas industry, including the demand for natural gas and the impact of the price of natural gas; o competition among the various providers of contract compression services; o changes in safety and environmental regulations pertaining to the production and transportation of natural gas; o changes in economic or political conditions in operating markets; o acts of war or terrorism or governmental or military responses thereto; o introduction of competing technologies by other companies; o Universal's ability to retain and grow its customer base; o employment workforce factors, including loss of key employees; and o liability claims related to the use of our products and services. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. The forward-looking statements included herein are only made as of the date of this report and we undertake no obligation to publicly update such forward-looking statements to reflect new information, subsequent events or otherwise. The term "BRL", when used in this report, refers to BRL Universal Equipment 2001 A, L.P. and the terms "our", "us" and "we" refer to BRL and its subsidiary, BRL Universal Equipment Corp., as a combined entity. 10 GENERAL ORGANIZATION - BRL Universal Equipment 2001 A, L.P. ("BRL") and its wholly owned subsidiary, BRL Universal Equipment Corp. ("BRL Corp." and, collectively with BRL the "Company") were organized in Delaware in January 2001 for the purpose of BRL pursuing the purchase of $427 million of domestic based gas compression equipment in connection with an operating lease transaction. The purchase was financed by the issuance of $350 million of the Company's 8 7/8% Senior Secured Notes due 2008, coupled with bank borrowings and additional BRL equity funding. The equipment purchase, note issuance, additional financing and equity funding occurred on February 9, 2001. BRL leases its gas compression equipment to Universal Compression, Inc. ("Universal") for a seven-year term under an operating lease. In addition to rental payments, Universal is obligated to pay BRL supplemental rent, costs, taxes, indemnities, and other amounts owing under the operating lease. The general partner of BRL is BRL Universal Equipment Management, Inc., a Delaware corporation. Deutsche Bank A.G., New York Branch and First Union National Bank are the limited partners. The initial limited partner investor withdrew from BRL and was repaid his capital contribution in February 2001. Net income or loss is allocated to the partners in accordance with the terms of the partnership agreement, as amended. Affiliates of BRL and a limited partner are participants in an asset-backed securitization facility with a subsidiary of Universal, as lessee. THREE MONTHS ENDED SEPTEMBER 30, 2001 Revenue. Our total revenue for the period was $9.2 million. As rental revenue is primarily based on BRL's costs of financing the acquisition of the equipment, revenue will vary depending on interest rates and the outstanding principal balances. Based on current interest rates and existing outstanding principal balances, revenue is expected to be approximately $10.3 million per quarter. Interest Expense on Rental Equipment. Interest expense on rental equipment is the interest recorded in connection with the senior secured notes and the term loan. Interest expense on rental equipment for the period was $8.9 million or 96.5% of rental revenue. Due to the terms of the operating lease with Universal, interest expense on rental equipment is expected to remain fairly constant. Based on current interest rates, interest expense on rental equipment is expected to be approximately $9.9 million per quarter. Depreciation. Depreciation for the period was $5.7 million. Our policy is to record a full month of depreciation in the month an asset is placed into service. Based on current rental equipment balances, depreciation is expected to be approximately $6.5 million per quarter. PERIOD FROM JANUARY 18, 2001 (INCEPTION) TO SEPTEMBER 30, 2001 Revenue. Our total revenue for the period was $24.1 million. Revenue was not earned or recognized until after the purchase of gas compression equipment on February 9, 2001. As rental revenue is primarily based on BRL's costs of financing the acquisition of the equipment, revenue will vary depending on interest rates and the outstanding principal balances. Based on current interest rates and existing outstanding principal balances, revenue is expected to be approximately $34.4 million for the year. Interest Expense on Rental Equipment. Interest expense on rental equipment is the interest recorded in connection with the senior secured notes and the term loan. Interest expense on rental equipment for the period was $23.2 million or 96.3% of rental revenue. Due to the terms of the operating lease with Universal, interest expense on rental equipment is expected to remain fairly constant. Based on current interest rates, interest expense on rental equipment is expected to be approximately $33.1 million for the year. Depreciation. Depreciation for the period was $15.2 million. Our policy is to record a full month of depreciation in the month an asset is placed into service. As a result, for the period ended September 30, 2001, we recorded five months of depreciation on the assets placed into service on February 9, 2001. Based on current rental equipment balances, depreciation is expected to be approximately $21.7 million for the year. 11 LIQUIDITY AND CAPITAL RESOURCES Under the triple net lease terms for the equipment owned by BRL, all of the costs of maintaining and financing the equipment are borne by Universal, as the lessee. We believe we have adequate capital resources for the nature of our business and the funds provided by operations will be sufficient to satisfy our obligations. Because we have agreed to limit our activities to the ownership, financing and leasing of equipment under the lease, we do not believe we will have any need to obtain additional debt or equity financing for our current operations. On October 23, 2001, we purchased an additional $122 million of domestic gas compression equipment from Universal and then leased the equipment back to Universal under the existing operating lease facility. We raised the funds to purchase the equipment through the issuance of an additional $100 million of 8 7/8% Senior Secured Notes due 2008, together with an additional $18.3 million in borrowings under our term loan and an additional $3.7 million equity investment in BRL. Subject to certain covenants and conditions, we may issue up to $200 million of additional senior secured notes under the indenture in connection with a corresponding increase in the BRL term loan and equity investment in BRL. The proceeds of such additional notes would be used to purchase additional equipment to lease to Universal under the operating lease. Our cash and cash equivalents balance at September 30, 2001 was $.02 million. Operating activities provided $0.8 million in cash, investing activities used $427.0 million in cash and financing activities provided $426.2 million in cash. Cash provided by operating activities resulted from depreciation of $15.1 million and increased accounts payable of $4.1 million partially offset by a net loss of $14.3 million and increased accounts receivable of $4.1 million. Accounts receivable and accounts payable increased due to us being an operating entity. Cash was used in investing activities for the purchase of $427.0 million of rental equipment. Cash provided by financing activities resulted from $13.1 million of contributions from partners, $350.0 million in proceeds from issuance of senior secured notes due 2008 and $63.9 million from bank borrowings, partially offset by $0.8 million in distributions to partners. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to some market risk due to the floating or variable interest rates under the term loan and preferred equity return. As of September 30, 2001, we had $350.0 million outstanding principal amount under the notes, which bear interest at a fixed rate, and approximately $63.9 million outstanding under our term loan agreement, which bears interest at floating rates. Interest payments on the term loan and preferred equity return are based on LIBOR plus a variable amount. The one-month LIBOR rate at September 30, 2001 was 2.637%. A 1.0% increase in interest rates would result in approximately $640 thousand annual increase in our interest expense. The estimated fair value of our Senior Secured Notes due 2008 was approximately $353.7 million as of September 30, 2001. The estimated fair value amount has been determined by us based on the discounted future cash flows. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. 12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 10-Q WITHIN THE 10-Q (a) Exhibits. The following documents have been included as Exhibits to this report:

13 ---------- (b) Reports on Form 8-K. - No Report on Form 8-K was filed during the third quarter of 2001. - The Company filed a Current Report on Form 8-K on November 6, 2001 to report under Item 2 the purchase of $122 million of domestic gas compression equipment from Universal and Universal Compression Holdings, Inc. with the proceeds from the issuance of $100 million of the Company's 8 7/8 % Senior Secured Notes due 2008, the borrowing of $18.3 million under the term loan and the $3.7 million additional equity investment in BRL. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BRL UNIVERSAL EQUIPMENT 2001 A, L.P. By: BRL Universal Equipment Management, Inc., Its General Partner Date: November 13, 2001 By: /s/ Gregory C. Greene ---------------------------------------- Gregory C. Greene, President Date: November 13, 2001 By: /s/ Lucy Burgoon ---------------------------------------- Lucy Burgoon, Chief Accounting Officer BRL UNIVERSAL EQUIPMENT CORP. Date: November 13, 2001 By: /s/ Gregory C. Greene ---------------------------------------- Gregory C. Greene, President Date: November 13, 2001 By: /s/ Lucy Burgoon ---------------------------------------- Lucy Burgoon, Chief Accounting Officer 15 EXHIBIT INDEX

BRL UNIVERSAL EQUIPMENT 2001 A L P 10-Q