EX-99.7 11 h82364ex99-7.txt CONSOLIDATED FINANCIAL STATEMENTS OF GLOBAL COMP 1 INDEPENDENT AUDITORS' REPORT The Board of Directors Global Compression Holdings, Inc. We have audited the accompanying consolidated balance sheets of Global Compression Holdings, Inc. and subsidiaries as of February 2, 1999, and December 31, 1998 and 1997 and the related consolidated statements of operations, stockholder's equity and cash flows for the period January 1, 1999 through February 2, 1999 and years ended December 31, 1998 and 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Global Compression Holdings, Inc. and subsidiaries as of February 2, 1999, and December 31, 1998 and 1997 and the results of their operations and their cash flows for the period January 1, 1999 through February 2, 1999 and years ended December 31, 1998 and 1997 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Dallas, Texas April 2, 1999 181 2 GLOBAL COMPRESSION HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS FEBRUARY 2, 1999, AND DECEMBER 31, 1998 AND 1997 (IN THOUSANDS, EXCEPT SHARE DATA)
1999 1998 1997 -------- -------- -------- ASSETS Current assets: Cash...................................................... $ 1,538 $ 578 $ 256 Trade accounts receivable, net of allowance of $3,810 in 1999, $4,194 in 1998 and $2,526 in 1997................ 12,363 16,581 11,732 Other current assets...................................... 1,261 1,161 1,323 -------- -------- -------- Total current assets.............................. 15,162 18,320 13,311 Property, plant and equipment, net (note 5)................. 228,787 227,417 219,156 Goodwill and other intangibles, net......................... 30,426 30,581 33,459 Other assets................................................ 3,608 3,604 2,093 -------- -------- -------- $277,983 $279,922 $268,019 ======== ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Trade accounts payable.................................... $ 4,262 $ 3,565 $ 9,555 Accrued liabilities....................................... 6,025 5,109 5,624 Deferred revenue.......................................... 4,866 4,907 4,059 -------- -------- -------- Total current liabilities......................... 15,153 13,581 19,238 Due to Parent (note 6)...................................... 201,525 204,309 191,362 Deferred income taxes (note 7).............................. 25,797 25,444 20,647 -------- -------- -------- Total liabilities................................. 242,475 243,334 231,247 -------- -------- -------- Stockholder's equity: Common stock: $.01 par value. Authorized, issued and outstanding, 1,000 shares.............................. -- -- -- Additional paid-in capital................................ 70,518 69,871 62,020 Accumulated other comprehensive income.................... 286 299 -- Accumulated deficit....................................... (35,296) (33,582) (25,248) -------- -------- -------- Total stockholder's equity........................ 35,508 36,588 36,772 Commitments (note 8)........................................ -------- -------- -------- $277,983 $279,922 $268,019 ======== ======== ========
See accompanying notes to consolidated financial statements. 182 3 GLOBAL COMPRESSION HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEARS ENDED PERIOD JANUARY 1, DECEMBER 31, 1999 THROUGH ------------------- FEBRUARY 2, 1999 1998 1997 ----------------- -------- -------- Revenues: Equipment rentals and services......................... $ 4,491 $ 61,008 $ 46,168 Unit sales............................................. 1,606 12,490 10,531 ------- -------- -------- Total revenues................................. 6,097 73,498 56,699 ------- -------- -------- Costs and expenses: Cost of equipment rentals and services................. 2,060 27,378 21,813 Cost of unit sales..................................... 1,220 10,909 11,005 Depreciation and amortization.......................... 1,686 19,916 15,910 Selling, general and administrative expenses (note 10)................................................. 2,852 16,058 15,292 ------- -------- -------- Total costs and expenses....................... 7,818 74,261 64,020 ------- -------- -------- Loss from operations........................... (1,721) (763) (7,321) Interest expense (note 6)................................ (1,072) (12,424) (10,817) ------- -------- -------- Loss before income taxes....................... (2,793) (13,187) (18,138) Income tax benefit (note 7).............................. 1,079 4,853 6,737 ------- -------- -------- Net loss....................................... $(1,714) $ (8,334) $(11,401) ======= ======== ========
See accompanying notes to consolidated financial statements. 183 4 GLOBAL COMPRESSION HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY YEARS ENDED DECEMBER 31, 1997 AND 1998 AND PERIOD FROM JANUARY 1, 1999 THROUGH FEBRUARY 2, 1999 (IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED COMMON STOCK ADDITIONAL OTHER --------------- PAID-IN COMPREHENSIVE ACCUMULATED COMPREHENSIVE SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT TOTAL INCOME (LOSS) ------ ------ ---------- ------------- ----------- -------- ------------- Balance, January 1, 1997...... 1,000 $ -- $55,494 $ -- $(13,847) $ 41,647 $ -- Capital contribution -- forgiveness of accrued interest, net of tax benefit ($4,291)(note 6).......................... -- -- 6,526 -- -- 6,526 -- Net loss...................... -- -- -- -- (11,401) (11,401) (11,401) ----- ---- ------- ---- -------- -------- -------- Balance, December 31, 1997.... 1,000 -- 62,020 -- (25,248) 36,772 (11,401) ======== Capital contribution -- forgiveness of accrued interest, net of tax benefit ($4,989)(note 6).......................... -- -- 7,435 -- -- 7,435 -- Capital contribution -- GECC payment of certain employee severance costs, net of tax benefit ($273)(note 9)...... -- -- 416 -- -- 416 -- Net loss...................... -- -- -- -- (8,334) (8,334) (8,334) Foreign currency translation adjustment.................. -- -- -- 299 -- 299 299 ----- ---- ------- ---- -------- -------- -------- Balance, December 31, 1998.... 1,000 -- 69,871 299 (33,582) 36,588 (8,035) ======== Capital contribution -- forgiveness of accrued interest, net of tax benefit ($425)(note 6).......................... -- -- 647 -- -- 647 -- Net loss...................... -- -- -- -- (1,714) (1,714) (1,714) Foreign currency translation adjustment.................. -- -- -- (13) -- (13) (13) ----- ---- ------- ---- -------- -------- -------- Balance, February 2, 1999..... 1,000 $ -- $70,518 $286 $(35,296) $ 35,508 $ (1,727) ===== ==== ======= ==== ======== ======== ========
See accompanying notes to consolidated financial statements. 184 5 GLOBAL COMPRESSION HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PERIOD JANUARY 1, YEARS ENDED 1999 THROUGH DECEMBER 31, FEBRUARY 2, ------------------- 1999 1998 1997 ----------------- -------- -------- Cash flows from operating activities: Net loss............................................... $(1,714) $ (8,334) $(11,401) Adjustments to reconcile net loss to cash provided by operating activities: Depreciation and amortization....................... 1,686 19,916 15,910 Deferred income taxes............................... 353 4,797 9,857 Change in operating assets and liabilities: (Increase) decrease in accounts receivable........ 4,218 (4,849) (2,882) (Increase) decrease in other assets............... (104) (1,349) (2,267) Increase (decrease) in accounts payable and accrued liabilities............................ 1,613 (6,505) 5,676 Increase (decrease) in deferred revenue........... (41) 848 430 ------- -------- -------- Net cash provided by operating activities...... 6,011 4,524 15,323 Cash flows from investing activities -- net additions to property, plant and equipment.......................... (2,901) (25,299) (84,410) Cash flows from financing activities -- net change in due to parent.............................................. (2,150) 21,097 69,094 ------- -------- -------- Net increase in cash..................................... 960 322 7 Cash at beginning of period.............................. 578 256 249 ------- -------- -------- Cash at end of period.................................... $ 1,538 $ 578 $ 256 ======= ======== ======== Supplemental disclosure of noncash activities: Forgiveness of accrued interest (net of tax benefit) reflected as capital contribution................... $ 647 $ 7,435 $ 6,526 ======= ======== ======== Payment of severance costs (net of tax benefit) reflected as capital contribution................... $ -- $ 416 $ -- ======= ======== ========
See accompanying notes to consolidated financial statements. 185 6 GLOBAL COMPRESSION HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 2, 1999, AND DECEMBER 31, 1998 AND 1997 (ALL DOLLAR AMOUNTS IN THOUSANDS) (1) GENERAL INFORMATION Global Compression Holdings, Inc. (the "Company") is a wholly owned subsidiary of General Electric Capital Corporation ("GECC" or "Parent"). The Company's primary business is the purchase, fabrication, sale, lease and maintenance of natural gas compressor units and related oil field equipment. Natural gas compressor units are leased at fixed monthly rentals over varying periods (see notes 5 and 8). The Company is headquartered in Dallas, Texas and primarily operates in North America, Argentina and Thailand. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Principles of Consolidation The consolidated financial statements include the accounts of Global Compression Holdings, Inc., its wholly-owned subsidiaries and the related compression business of GE Capital Thailand Ltd., a wholly-owned subsidiary of GECC. All significant intercompany balances and transactions have been eliminated in consolidation. (b) Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At February 2, 1999, and December 31, 1998 and 1997, the Company had no cash equivalents. (c) Property, Plant, and Equipment Property, plant, and equipment is depreciated on a straight-line basis over the estimated useful lives of the assets as follows:
ESTIMATED USEFUL LIVES ------------ Buildings and improvements................................ 5-40 Rental equipment.......................................... 5-15 Machinery and equipment................................... 3-10 Office equipment.......................................... 3-10 Vehicles.................................................. 3
Expenditures for major additions and improvements are capitalized while minor replacements, maintenance and repairs are charged to expense as incurred. When property is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the related accounts and any resulting gain or loss is included in operations. (d) Goodwill and Other Intangibles Goodwill represents the excess of the aggregate price paid by the Company for acquisitions accounted for as purchases over the fair value of the net assets acquired. Goodwill is amortized on a straight-line basis over a period of 20 years. Amortization of goodwill and other intangible assets totaled $155, $2,877 and $2,541 for the period January 1, 1999 through February 2, 1999 and years ended December 31, 1998 and 1997, respectively. 186 7 GLOBAL COMPRESSION HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 2, 1999, AND DECEMBER 31, 1998 AND 1997 (ALL DOLLAR AMOUNTS IN THOUSANDS) Accumulated amortization was $9,390, $9,235, and $6,358 at February 2, 1999, and December 31, 1998, and December 31, 1997, respectively. (e) Impairment of Long-Lived Assets The Company evaluates potential impairment of property, plant and equipment and goodwill on an ongoing basis as necessary whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amount of the assets to future net cash flows expected to be generated by the assets or acquired business. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. In April 1998, the Company closed a manufacturing and warehouse facility in Houston, Texas. The facility ($1,900 carrying value at February 2, 1999) is for sale and is currently being used for storage of certain inventory items. Based on a recent appraisal of the facility, the Company does not consider the facility to be impaired. (f) Income Taxes The Company is included in the consolidated federal income tax return of GECC. Under the tax sharing arrangement, GECC pays the Company for net operating losses utilized by GECC. The benefit is computed using enacted tax rates and is reflected as a reduction in due to Parent. The Company applies the asset and liability method of accounting for income taxes. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. (g) Revenue Recognition Lease billings in advance of services are recorded as deferred revenue in the accompanying consolidated balance sheets. Unit sales are recognized when the compressor is shipped to the customer. (h) Comprehensive Income On January 1, 1998, the Company adopted the provisions of SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net loss and foreign currency translation adjustments and is presented in the consolidated statements of stockholder's equity. (i) Foreign Currency Translation The functional currency for the Company's international operations in Argentina and Thailand is the applicable local currency. Results of these foreign operations are translated from the functional currency to the U.S. Dollar using average exchange rates during the period. Assets and liabilities of these foreign subsidiaries are translated using the exchange rates in effect at the balance sheet dates, and the resulting 187 8 GLOBAL COMPRESSION HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 2, 1999, AND DECEMBER 31, 1998 AND 1997 (ALL DOLLAR AMOUNTS IN THOUSANDS) translation adjustments are included in accumulated other comprehensive income (loss), a component of stockholder's equity. (j) Use of Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. (3) CONCENTRATION OF CREDIT RISK The Company grants credit to its customers, which are primarily in the oil and gas industry. Credit risk with respect to trade accounts receivable is generally diversified due to the large number of entities comprising the Company's customer base. During the period January 1, 1999 through February 2, 1999, one customer accounted for approximately 25% of total revenues. During 1998, two customers in the aggregate accounted for approximately 11% of total revenues, and during 1997 three customers in the aggregate accounted for approximately 14% of total revenues. At February 2, 1999, four customers in the aggregate accounted for approximately 18% of gross trade receivables. At both December 31, 1998 and 1997, four customers in the aggregate accounted for approximately 31% of gross trade receivables. The accompanying consolidated statements of operations include $-0-, $1,785, and $1,945 for bad debt expenses for the period January 1, 1999 through February 2, 1999 and years ended December 31, 1998 and 1997, respectively. (4) FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of due to Parent cannot be determined without incurring excessive costs due to the related party nature of the instrument. (5) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
DECEMBER 31, FEBRUARY 2, ------------------- 1999 1998 1997 ----------- -------- -------- Land................................................. $ 425 $ 425 $ 425 Buildings and improvements........................... 4,837 4,837 4,650 Rental equipment..................................... 224,446 223,171 195,285 Machinery and equipment.............................. 775 775 1,190 Office equipment..................................... 6,024 6,028 5,679 Vehicles............................................. 524 549 946 Equipment and parts inventory........................ 41,475 39,260 43,138 Reserve for obsolescence............................. (4,738) (4,319) (3,802) -------- -------- -------- 273,768 270,726 247,511 Accumulated depreciation............................. (44,981) (43,309) (28,355) -------- -------- -------- $228,787 $227,417 $219,156 ======== ======== ========
188 9 GLOBAL COMPRESSION HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 2, 1999, AND DECEMBER 31, 1998 AND 1997 (ALL DOLLAR AMOUNTS IN THOUSANDS) Rental equipment consists of natural gas compressor units which are generally leased under short-term operating leases ranging over periods from 6 to 60 months (see note 8). Equipment and parts inventory is primarily used in the construction and refurbishment of rental equipment. (6) DUE TO PARENT Due to Parent represents advances from GECC. Advances bear interest at varying rates based on current market rates and GECC's cost of capital (5.24%, 5.41%, and 5.88% at February 2, 1999, and December 31, 1998 and December 31, 1997, respectively). Repayments are made only to the extent of excess operating cash flows (as defined) and no payments are required through February 2, 2000. Accordingly, amounts Due to Parent are reflected as a noncurrent liability in the accompanying consolidated balance sheets. Interest expense related to advances from GECC totaled $1,072, $12,424 and $10,817 for the period January 1, 1999 through February 2, 1999 and years ended December 31, 1998 and 1997, respectively. Accrued interest resulting from this liability is forgiven on an annual basis by GECC and reflected as capital contributions, net of related tax benefits, in the accompanying consolidated statements of stockholder's equity. (7) INCOME TAXES Income tax expense (benefit) consists of the following for the period January 1, 1999 through February 2, 1999 and years ended December 31, 1998 and 1997:
CURRENT DEFERRED TOTAL -------- -------- ------- 1999 U.S. federal............................................. $ (1,263) $ 311 $ (952) State and local.......................................... (169) 42 (127) -------- ------ ------- $ (1,432) $ 353 $(1,079) ======== ====== ======= 1998 U.S. federal............................................. $ (8,514) $4,232 $(4,282) State and local.......................................... (1,136) 565 (571) -------- ------ ------- $ (9,650) $4,797 $(4,853) ======== ====== ======= 1997 U.S. federal............................................. $(14,641) $8,697 $(5,944) State and local.......................................... (1,953) 1,160 (793) -------- ------ ------- $(16,594) $9,857 $(6,737) ======== ====== =======
189 10 GLOBAL COMPRESSION HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 2, 1999, AND DECEMBER 31, 1998 AND 1997 (ALL DOLLAR AMOUNTS IN THOUSANDS) Income tax benefit differed from the amount computed by applying the U.S. federal income tax rate of 35 percent to loss before income taxes as a result of the following:
PERIOD JANUARY 1, YEARS ENDED 1999 THROUGH DECEMBER 31, FEBRUARY 2, ----------------- 1999 1998 1997 ------------ ------- ------- Computed "expected" tax benefit....................... $ (977) $(4,615) $(6,348) State tax benefit..................................... (82) (371) (515) Other................................................. (20) 133 126 ------- ------- ------- $(1,079) $(4,853) $(6,737) ======= ======= =======
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:
DECEMBER 31, FEBRUARY 2, ----------------- 1999 1998 1997 ----------- ------- ------- Deferred tax assets: Allowance for doubtful accounts...................... $ 1,824 $ 1,976 $ 1,002 Noncompete agreement................................. 813 799 619 Other................................................ 1,026 859 492 ------- ------- ------- Gross deferred tax assets.................... 3,663 3,634 2,113 ------- ------- ------- Deferred tax liabilities: Property, plant and equipment........................ 27,832 27,461 22,338 Other................................................ 1,628 1,617 422 ------- ------- ------- Gross deferred tax liabilities............... 29,460 29,078 22,760 ------- ------- ------- Net deferred tax liability................... $25,797 $25,444 $20,647 ======= ======= =======
(8) RENTAL COMMITMENTS As Lessee: The Company has noncancelable operating leases, primarily for warehouse and office space, that expire over the next 5 years. These leases generally contain renewal options for periods ranging from one to five years. Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of February 2, 1999 are as follows: Period from February 3, 1999 through December 31, 1999...... $1,275 Year ending December 31: 2000...................................................... 1,027 2001...................................................... 459 2002...................................................... 30 ------ $2,791 ======
Operating lease expense for the period January 1, 1999 through February 2, 1999 and years ended December 31, 1998 and 1997 was $328, $2,080 and $1,773, respectively. 190 11 GLOBAL COMPRESSION HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 2, 1999, AND DECEMBER 31, 1998 AND 1997 (ALL DOLLAR AMOUNTS IN THOUSANDS) As Lessor: The Company leases compressor units to customers under agreements with varying terms. Typically, such leases are accounted for as operating leases. The lessee pays taxes, licenses, and insurance on such equipment. Future minimum lease rentals under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of February 2, 1999 are as follows: Period from February 3, 1999 through December 31, 1999..... $26,457 Year ending December 31: 2000..................................................... 12,249 2001..................................................... 8,152 2002..................................................... 5,558 2003..................................................... 1,236 2004 and thereafter...................................... 1,053 ------- $54,705 =======
(9) RELATED PARTY TRANSACTIONS Certain administrative services are provided to the Company by GECC. The accompanying consolidated statements of operations include $231, $2,169 and $1,452 for administrative services provided by GECC for the period January 1, 1999 through February 2, 1999 and years ended December 31, 1998 and 1997, respectively. The Company closed its Houston facility in April 1998. The accompanying 1998 consolidated statement of operations includes $1,195 for closing costs that were charged to operations and paid during 1998. Of this amount, GECC paid $416 (increase to additional paid in capital, net of tax benefit) on behalf of the Company related to severance costs associated with termination of 48 employees at the Houston facility. (10) JOINT VENTURE AGREEMENT On February 2, 1999, GECC and the Company formed a joint venture with Weatherford International, Inc., in which the Company's compression services operations were combined with Weatherford's International Inc.'s compression services operations. The joint venture is known as Weatherford Global Compression. GECC owns 36% of the joint venture and Weatherford International, Inc. owns 64%. Weatherford International, Inc., has the right to acquire GECC's interest at any time at a price equal to the greater of a market value determined by a third party valuation or book value. GECC also has the right to require Weatherford International, Inc. to purchase its interest at any time after February 2001 based on a third party valuation or can request a public offering of its interest after that date, if Weatherford International, Inc. has not purchased the Company's interest by that date. Accrued liabilities on the accompanying consolidated balance sheet at February 2, 1999 includes a provision of $2,414 for transaction costs including investment banking fees, legal, accounting and other costs related to formation of the joint venture. The Company charged $1,750 and $880 of transaction costs to selling, general and administrative expenses for the period January 1, 1999 through February 2, 1999 and the year ended December 31, 1998, respectively. 191