<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of
the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): July 2, 1997
BAKER HUGHES INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 1-9397 76-0207995
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
3900 Essex Lane
Houston, Texas 77027
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (713) 439-8600
<PAGE> 2
This Form 8-K/A amends and supplements the Form 8-K dated July 16, 1997. The
purpose is to amend Item 7 as set forth below:
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
Except for Note 15 of Notes to Consolidated Financial Statements on
page 19 and Note 7 of Notes to Financial Statements on page 27, the information
presented below is as of October 31, 1996 and April 30, 1997, as appropriate.
(i) The following Consolidated Financial Statements of Petrolite
Corporation ("Petrolite") are filed herewith as follows:
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
1. Report of Independent Accountants dated
November 22, 1996. 3
2. Consolidated Statements of Earnings for the six
months ended April 30, 1997 and 1996
(unaudited) and for the year ended
October 31, 1996. 4
3. Consolidated Balance Sheets as of April 30, 1997
(unaudited) and as of October 31, 1996. 5
4. Consolidated Statements of Cash Flows for the six
months ended April 30, 1997 and 1996
(unaudited) and for the year ended
October 31, 1996. 6
5. Consolidated Statements of Changes In Stockholders'
Equity for the year ended October 31, 1996 and
for the Six months ended April 30, 1997
(unaudited). 7
6. Notes to Consolidated Financial Statements. 8
(ii) The following Financial Statements of Wm. S. Barnickel &
Company ("Barnickel") are filed herewith as follows:
1. Report of Independent Accountants dated January 17,
1997. 20
2. Statements of Income and Retained Earnings for the
six months ended April 30, 1997 and 1996
(unaudited) and for the year ended
October 31, 1996. 21
3. Balance Sheets as of April 30, 1997 (unaudited)
and as of October 31, 1996. 22
4. Statements of Cash Flows for the six months ended
April 30, 1997 and 1996 (unaudited) and for
the year ended October 31, 1996. 23
5. Notes to Financial Statements. 24
</TABLE>
Page 1
<PAGE> 3
(b) Pro Forma Financial Information.
The following pro forma financial information is filed herewith:
Unaudited pro forma financial statements of Baker Hughes Incorporated, giving
effect to the acquisition of Petrolite and Barnickel:
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
1. Introduction 28
2. Unaudited Pro Forma Condensed Combined Balance
Sheet as of March 31, 1997 29
3. Unaudited Pro Forma Condensed Combined Statement
of Operations for the six months ended
March 31, 1997 30
4. Unaudited Pro Forma Condensed Combined Statement
of Operations for the year ended
September 30, 1996. 31
5. Notes to Unaudited Pro Forma Condensed Combined
Balance Sheet and Statements of Operations 32
</TABLE>
Page 2
<PAGE> 4
Report of Independent Accountants
To the Stockholders and Directors of
Petrolite Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of earnings, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Petrolite Corporation and its subsidiaries at October 31, 1996, and the results
of their operations and their cash flows for the year in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of Petrolite's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
(Price Waterhouse LLP)
St. Louis, Missouri
November 22, 1996, except as to Notes 12 and 15 which are dated
July 2, 1997.
Page 3
<PAGE> 5
PETROLITE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Six Months Six Months Year
Ended Ended Ended
(Dollars in thousands, April 30, April 30, October 31,
except per share data) 1997 1996 1996
- -----------------------------------------------------------------------------------
(unaudited) (unaudited)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Revenues $ 195,138 $ 177,194 $ 360,703
Cost of Products Sold and Other
Direct Costs 117,453 113,856 215,883
- -----------------------------------------------------------------------------------
Gross Profit 77,685 63,338 144,820
- -----------------------------------------------------------------------------------
Expenses:
Selling 34,379 33,683 85,360
Research 8,947 10,007 15,336
General and administrative 9,826 11,964 22,723
Write-off of investment in subsidiary 5,137 5,137
- -----------------------------------------------------------------------------------
53,152 60,791 128,556
- -----------------------------------------------------------------------------------
Earnings from operations 24,533 2,547 16,264
Other Income (Expense):
Equity in earnings of affiliates 2,888 2,549 5,859
Interest expense (1,324) (1,587) (2,795)
Interest income 1,413 1,217 2,191
Gain on sale of Singapore facility 8,606
Other income, net 354 329 93
- -----------------------------------------------------------------------------------
Earnings before income taxes 36,470 5,055 21,612
- -----------------------------------------------------------------------------------
Provision for U.S. and Foreign
Income Taxes:
Current 12,282 (260) 884
Deferred, net (75) (2,627) 1,695
- -----------------------------------------------------------------------------------
12,207 (2,887) 2,579
- -----------------------------------------------------------------------------------
Net Earnings $ 24,263 $ 7,942 $ 19,033
- -----------------------------------------------------------------------------------
Earnings Per Share $ 2.13 $ .70 $ 1.68
- -----------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 4
<PAGE> 6
PETROLITE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, October 31,
1997 1996
(Dollars in thousands) (unaudited)
=============================================================================
<S> <C> <C>
Assets
Current Assets:
Cash and equivalents $ 55,155 $ 44,669
Accounts receivable, less estimated doubtful
accounts of $1,210 and $1,191, respectively 71,649 68,324
Inventories 37,246 37,117
Other current assets 12,742 11,729
- -----------------------------------------------------------------------------
Total current assets 176,792 161,839
- -----------------------------------------------------------------------------
Investment in Affiliated Companies 13,644 14,417
- -----------------------------------------------------------------------------
Other Assets:
Patents and other intangibles, less accumulated
amortization of $11,045 and $9,585,
respectively 5,843 7,068
Prepaid pension costs 11,577 9,484
Other 8,582 8,228
- -----------------------------------------------------------------------------
Total other assets 26,002 24,780
- -----------------------------------------------------------------------------
Properties:
Buildings 63,344 66,063
Machinery and equipment 190,389 201,109
Construction in progress 5,881 3,681
Accumulated depreciation (170,143) (176,971)
- -----------------------------------------------------------------------------
89,471 93,882
Land 6,921 6,869
- -----------------------------------------------------------------------------
96,392 100,751
- -----------------------------------------------------------------------------
Total Assets $ 312,830 $ 301,787
- -----------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term borrowings 10,855 5,493
Accounts payable 30,599 48,251
Income taxes payable 9,887 2,113
Accrued vacation payable 3,620 3,720
Other current liabilities 17,229 9,568
- -----------------------------------------------------------------------------
Total current liabilities 72,190 69,145
- -----------------------------------------------------------------------------
Other Liabilities:
Long-term debt 31,714 38,000
Retiree medical benefits 14,817 14,165
Other 4,929 4,598
- -----------------------------------------------------------------------------
Total other liabilities 51,460 56,763
- -----------------------------------------------------------------------------
Deferred Income taxes, Net 8,969 9,044
- -----------------------------------------------------------------------------
Stockholders' Equity:
Capital Stock, without par value-
Authorized - 35,000 shares
Issued - 12,293 and 12,230 shares,
respectively 11,596 9,620
Reinvested earnings 195,167 177,283
Cumulative translation adjustment (7,858) (1,374)
- -----------------------------------------------------------------------------
198,905 185,529
Less treasury stock, at cost - 888 shares (18,694) (18,694)
- -----------------------------------------------------------------------------
Total Stockholders' Equity 180,211 166,835
- -----------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 312,830 $ 301,787
=============================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 5
<PAGE> 7
PETROLITE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Six Months Year
Ended Ended Ended
April 30, April 30, October 31,
1997 1996 1996
(Dollars in thousands) (unaudited) (unaudited)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net earnings $ 24,263 $ 7,942 $ 19,033
- ------------------------------------------------------------------------------------
Adjustments to reconcile net
earnings to net cash provided by
operations:
Depreciation and amortization 8,590 9,096 17,990
Deferred income taxes (75) (2,627) 1,695
Write-down of assets 2,000
Gain on sale of Singapore
facility (8,606)
Gain on sale of fixed assets (77) (545) (592)
Changes in assets and liabilities:
Accounts receivable (3,325) (2,706) (5,148)
Inventories (130) 936 (569)
Accounts payable and accrued
liabilities (1,398) (2,229) 2,160
Other, net (2,639) (2,197) (4,275)
- ------------------------------------------------------------------------------------
(7,660) 1,728 11,261
- ------------------------------------------------------------------------------------
Net cash provided by operating
activities 16,603 9,670 30,294
- ------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Capital expenditures, net (4,998) (4,126) (11,178)
Proceeds from sale of Singapore
facility 6,807
Proceeds from sale of airplane 5,250 5,250
Other, net 255
- ------------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities 1,809 1,124 (5,673)
- ------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Short-term borrowings
(repayments), net (924) 2,184 (1,152)
Dividends paid (6,372) (6,348) (12,693)
Sale of common stock 1,976 151 231
- ------------------------------------------------------------------------------------
Net cash used in financing activities (5,320) (4,013) (13,614)
- ------------------------------------------------------------------------------------
Effect of exchange rate on cash (2,606) (1,019) 0
Net Increase in Cash and
Equivalents 10,486 5,762 11,007
Cash and Equivalents at Beginning
of Period 44,669 33,662 33,662
- ------------------------------------------------------------------------------------
Cash and Equivalents at End of Period $ 55,155 $ 39,424 $ 44,669
- ------------------------------------------------------------------------------------
Interest Paid $ 1,324 $ 1,587 $ 2,795
Income Taxes Paid $ 4,508 $ 1,779 $ 4,959
- ------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 6
<PAGE> 8
PETROLITE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Amounts in Cumulative
thousands, Capital Stock Rein- Trans- Stock-
except per ----------------------- vested lation Treasury holders'
share data) Shares Amount Earnings Adjustment Stock Equity
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
October 31, 1995 12,221 $ 9,389 $170,943 $(2,174) $(18,694) $159,464
Net earnings 19,033 19,033
Dividends paid
$1.12 per share (12,693) (12,693)
Foreign currency
translation
adjustments 800 800
Exercise of stock
under options 9 231 231
- -------------------------------------------------------------------------------------------------------------------------
October 31, 1996 12,230 $ 9,620 $177,283 $(1,374) $(18,694) $166,835
(Unaudited)
Net earnings 24,263 24,263
Dividends paid
$.56 per share (6,372) (6,372)
Foreign currency
translation
adjustments (6,484) (6,484)
Exercise of stock
under options 63 1,976 (7) 1,969
- -------------------------------------------------------------------------------------------------------------------------
April 30, 1997 12,293 $ 11,596 $195,167 $(7,858) $(18,694) $180,211
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 7
<PAGE> 9
PETROLITE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated statements include the accounts of Petrolite Corporation, its
subsidiaries (collectively, the "Company") and its unconsolidated 50% owned
corporate affiliates, Toyo-Petrolite Co. Ltd. and Bareco Products, a
partnership, both of which are accounted for using the equity method. All
significant intercompany accounts and transactions have been eliminated.
Translation of Foreign Currencies
Foreign-currency-denominated financial statements are translated in accordance
with Statement of Financial Accounting Standard No. 52. Under this standard all
assets and liabilities of operations outside the United States, except for
operations in highly inflationary economies, are translated into U.S. dollars
at exchange rates in effect at the end of the year. Operating results are
translated at a weighted average of exchange rates in effect during the year.
Net unrealized gains and losses on translation of foreign currency financial
statements, other than those in highly inflationary economies, are recorded in
stockholders' equity, as a cumulative translation adjustment, and will be
included in income only upon sale or liquidation of the underlying asset.
Realized gains and losses resulting from completed transactions are included in
net earnings.
Cash Equivalents
Cash equivalents are comprised of highly liquid debt instruments with original
maturities of three months or less.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined under
the last-in, first-out (LIFO) method for most domestic inventories of Specialty
Chemical Products. The remainder is stated at standard cost, which approximates
actual cost, or at actual cost. Standard costs are determined on a fully
absorbed basis.
Intangibles
Patents and other intangibles are amortized over periods ranging from 1 to 15
years.
Properties and Depreciation
Properties are carried at cost and include expenditures for new facilities and
those which substantially extend the useful lives of existing capital assets.
Maintenance, repairs and minor renewals are expensed as incurred. Upon disposal
or retirement of properties, the related cost and accumulated depreciation are
removed from the accounts and any profit or loss on disposition is recorded in
income. Depreciation is generally provided on a straight-line basis at rates
based on estimated useful lives of the properties (buildings 5 to 50 years,
machinery and equipment 3 to 20 years). Included in properties are land and
certain assets which are being
Page 8
<PAGE> 10
PETROLITE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
held for sale. The net book value of these assets at October 31, 1996,
approximates $7.8 million.
Income Taxes
The Company follows the practice of providing for income taxes based on
financial statement earnings. Consolidated income taxes include provisions for
additional taxes or tax refunds on repatriation of income earned abroad and
also reflect the deferred tax effect of accelerated depreciation and other
timing differences in reporting income and deductions for tax purposes.
Capital Stock
Proceeds from sales of capital stock issued under stock option and incentive
plans are credited to capital stock. Proceeds in excess of cost from sales of
treasury stock are also credited to capital stock.
Revenue Recognition
The Company follows the practice of reporting income from equipment contracts
on the percentage-of-completion method. Revenue other than equipment contracts
is recorded based on shipment date.
Earnings per Share
Net earnings per share are based on the weighted average number of shares of
common stock equivalents outstanding during the respective year.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited Consolidated Financial Statements
In the opinion of the Company, the unaudited consolidated financial statements
include all adjustments consisting of normal recurring accruals necessary to
present fairly the Company's financial position as of April 30, 1997, and
results of operations and cash flows for the six months ended April 30, 1997
and 1996. Accounting measures at interim dates inherently involve greater
reliance on estimates than at fiscal year end. Due to seasonal and other
factors, interim period results are not necessarily indicative of results to be
expected for the full year.
Summary of Other Financial Data
Concentration of Credit Risk
The Company sells a majority of its products to customers in the oil and
Page 9
<PAGE> 11
PETROLITE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
gas industry. While most of the Company's business activity is with customers
located within North America, the Company also serves customers in Europe,
Africa, the Middle East, Far East and South America. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. When appropriate, the Company requires letters of credit or other
similar guarantees particularly in international transactions. The Company
maintains reserves for potential credit losses and such losses have been within
management's expectations. As of October 31, 1996, the Company had no
significant concentrations of credit risk.
Financial Instruments
The fair value of financial instruments is determined by reference to various
market data and other valuation techniques as appropriate. Unless otherwise
disclosed, the fair values of financial instruments approximate their recorded
values.
Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
No. 121, Accounting for the Impairment of Long-Lived Assets. The Statement
prescribes the accounting for the impairment of long-lived assets, such as
property, plant, and equipment; identifiable intangibles, including patents and
trademarks; and goodwill related to those assets. This Statement was adopted in
fiscal 1997 with no significant effect on the Company's consolidated financial
statements.
2. WRITE-DOWN OF INVESTMENT IN SUBSIDIARY
In April 1996, the Company closed its Petrolite Suramericana, S.A. subsidiary.
Write-off of the Company's remaining investment in the subsidiary resulted in a
$5.137 million charge to operations and a $6.250 million tax benefit. The
Company's tax basis in this subsidiary exceeded its book basis at the time of
the closure.
3. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) April 30, 1997 October 31, 1996
(unaudited)
- -------------------------------------------------------------------------
<S> <C> <C>
Raw materials, parts and supplies $ 19,708 $ 19,706
Finished goods 37,575 37,704
Less reserve for revaluation of
inventories to LIFO cost (19,087) (18,626)
Less reserve for obsolete inventory (1,056) (1,056)
- -------------------------------------------------------------------------
37,140 37,728
Equipment contracts in progress 793 (402)
Less advance billings (687) (209)
- -------------------------------------------------------------------------
Inventories, net $ 37,246 $ 37,117
- -------------------------------------------------------------------------
</TABLE>
Page 10
<PAGE> 12
PETROLITE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The reserve for inventory represents the carrying value of raw materials and
finished goods which will be disposed of in the succeeding 12 months.
Approximately 62% of total inventories (exclusive of equipment contracts in
progress) were accounted for on a last-in, first-out (LIFO) basis at October
31, 1996.
4. INVESTMENT IN UNCONSOLIDATED AFFILIATES
The Company's investment in affiliated companies which are not majority owned
or controlled are accounted for using the equity method. Investments carried at
equity and the percentage interest owned consist of Toyo-Petrolite Co. Ltd.
(50%) and Bareco Products (50%).
Financial information representing Petrolite's share of affiliated companies
accounted for by the equity method is as follows, based on fiscal year-end
results at March 31, 1996, for Toyo-Petrolite Co. Ltd. and October 31, 1996,
for Bareco Products, respectively:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996
- -----------------------------------
<S> <C>
Earnings data
Net revenues $ 56,028
Gross profit 11,364
Net earnings 4,264
- -----------------------------------
Balance sheet data
Current assets $ 19,471
Other assets 2,821
Current liabilities 7,134
Other liabilities 439
- -----------------------------------
Net assets $ 14,719
- -----------------------------------
</TABLE>
The Company's share of undistributed earnings of affiliated companies included
in consolidated retained earnings was $7.3 million at October 31, 1996.
Dividends from affiliated companies were $0.4 million in 1996.
5. SHORT-TERM BORROWINGS AND LINES OF CREDIT
Short-term funds for certain international operations are obtained through
unsecured overdraft facilities and short-term notes payable with local banks.
These totaled $3.5 million at October 31, 1996. Domestic short-term funds are
obtained through an unsecured, uncommitted line of credit with a bank totaling
$15.0 million. Domestic borrowings bear interest at a fluctuating rate below
prime determined by the banks' cost of funds. At October 31, 1996, the amount
available and unused under this line of credit totaled $15.0 million.
6. LONG-TERM DEBT
In September 1993, the Company entered into a Note Purchase Agreement with
several institutional investors providing for the private placement of its
5.90% Services A Senior Notes, due 2000, and 6.39% Services A Senior Notes,
Page 11
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PETROLITE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
due 2003, in aggregate principal amounts of $10.0 million and $30.0 million,
respectively. Proceeds from the sale of these unsecured notes, which were
issued in November 1993, were used to retire short-term borrowings.
The Note Purchase Agreement contains certain restrictive covenants, including
limitations on additional borrowings and disposition of assets, and the
maintenance of minimum net worth. Long-term debt maturities at October 31,1996
are (in millions): 1997-$2.0, 1998-$6.3, 1999-$6.3, 2000-$6.3, 2001-$6.3.
The fair value of long-term debt at October 31, 1996 is approximately
$39.4 million.
7. INCOME TAXES
Below is a summary of income taxes for the year ended October 31, 1996:
<TABLE>
<CAPTION>
(Dollars in thousands)
- ----------------------------------
<S> <C>
Current
U.S. $ (2,263)
Foreign 3,015
State 132
Deferred
U.S. 2,334
Foreign (916)
State 277
- ----------------------------------
Total $ 2,579
- ----------------------------------
</TABLE>
Pretax earnings related to domestic and foreign operations for the year ended
October 31, 1996 are summarized below:
<TABLE>
<CAPTION>
(Dollars in thousands)
- -------------------------------
<S> <C>
Domestic $ 16,063
Foreign 5,549
- -------------------------------
Total $ 21,612
- -------------------------------
</TABLE>
A reconciliation of income taxes at the U.S. statutory rate to the Company's
reported effective tax rate for the year ended October 31, 1996 follows:
<TABLE>
- ------------------------------------------------------------
<S> <C>
Income taxes computed at the U.S. statutory rate 35.0%
State income taxes net of federal tax benefit 1.2
Tax benefit - U.S. export sales (4.7)
Net income of foreign affiliates (1.1)
Tax benefit of write-off of investment in subsidiary (20.6)
Foreign tax rate greater than domestic rate 1.2
Nondeductible items 1.7
Other, net (0.8)
- ------------------------------------------------------------
Effective tax rate 11.9%
- ------------------------------------------------------------
</TABLE>
Page 12
<PAGE> 14
PETROLITE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The deferred tax assets and deferred tax liabilities recorded on the balance
sheet as of October 31, 1996 are as follows:
<TABLE>
<CAPTION>
----------------------
(Dollars in thousands) Assets Liabilities
- --------------------------------------------------------------------
<S> <C> <C>
Current
Intercompany profit in inventory $ 1,574
Accrued liabilities 2,449
Inventory valuation/disposal costs 1,000
Other items 1,596 $ 269
- --------------------------------------------------------------------
6,619 269
- --------------------------------------------------------------------
Noncurrent
Accrued liabilities 1,851
Postretirement expenses other than pension 5,326
Depreciation 12,912
Other property basis difference 1,123
Pension expense 3,302
Other items 1,116
- --------------------------------------------------------------------
8,293 17,337
- --------------------------------------------------------------------
Total deferred taxes $14,912 $17,606
- --------------------------------------------------------------------
</TABLE>
United States federal income tax returns for all years through 1994 have been
settled with the Internal Revenue Service.
8. PENSION BENEFITS
The Company has a noncontributory, final-average-pay defined benefit plan
covering all eligible U.S. employees. The Company contributes funds to trustees
as necessary to provide for current service and for any unfunded, prior-service
costs. To the extent that these requirements are fully covered by assets on
hand, a contribution may not be made in a particular year. Plan assets consist
principally of common stocks and fixed income securities. Pension costs for
non-U.S. plans are not material in the aggregate and are not included in these
disclosures.
Page 13
<PAGE> 15
PETROLITE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The funded status of the U.S. plan at October 31, 1996 was as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
- ------------------------------------------------------------
<S> <C>
Actuarial present value of:
Vested benefits $(73,121)
Nonvested benefits (4,978)
- ------------------------------------------------------------
Accumulated benefit obligation (78,099)
Effect of future salary increases (17,045)
- ------------------------------------------------------------
Projected benefit obligation (95,144)
Plan assets at fair value 140,469
- ------------------------------------------------------------
Excess of assets over projected benefit obligation 45,325
Unamortized net transition asset (8,134)
Unrecognized net gain (30,919)
Unrecognized prior service cost 3,212
- ------------------------------------------------------------
Prepaid pension cost $ 9,484
- ------------------------------------------------------------
</TABLE>
The net pension credit for the year ended October 31, 1996 included the
following components:
<TABLE>
<CAPTION>
(Dollars in thousands)
- ---------------------------------------------------------
<S> <C>
Service cost-
Benefits earned during the period $ 2,846
Interest cost on projected benefit obligation 6,741
Return on Plan Assets (15,999)
Net amortization and deferral 3,134
- ---------------------------------------------------------
Net pension credit $ (3,278)
- ---------------------------------------------------------
</TABLE>
In addition to the net pension credits, net expenses of $1.1 million was
recorded in 1996 due to voluntary work-force reduction programs associated with
reorganization efforts. The net expense is comprised of the cost of special
termination benefits of $1.1 million in 1996.
The projected benefit obligation was determined using a discount rate of 7.5%
for fiscal 1996. The assumed long-term rate of return on plan assets is 9.0%
for fiscal 1996. The assumed long-term rate of compensation increases is 5.0%.
The net transition asset at November 1, 1985, is being amortized over 19 years.
Net consolidated pension income was $2.7 million for 1996.
9. SUPPLEMENTAL RETIREMENT PLAN
The Company maintains a nonqualified, supplemental executive retirement plan
(SERP). The SERP, which is an unfunded defined benefit plan, provides
incremental benefits to eligible employees from the Company's funds so that
total pension payments equal amounts that would have been payable from the
Page 14
<PAGE> 16
PETROLITE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company's principal pension plan if it were not for limitations imposed by
income tax regulations. The plan also provides such additional benefits as may
be authorized by the board of directors. The unfunded, accumulated benefit
obligation and projected benefit obligation related to this plan totaled $2.9
million and $3.2 million respectively, at October 31, 1996. Pension expense for
this plan was $0.6 million in 1996. The projected benefit obligation was
determined using a discount rate of 7.5% and the assumed long-term rate of
compensation increases is 5%.
10. POSTRETIREMENT BENEFITS
Statement of Financial Accounting Standard (SFAS) No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions, requires
recognition during employees' active service periods of the expected cost of
providing postretirement benefits (primarily health benefits). Postretirement
health benefits are provided to current and former employees and their spouses
who retire at or after age 55 with 10 years of service. The postretirement
health care plans are contributory, based upon years of service at retirement,
and are subject to deductibles and copayments. The Company reserves the right
to change or terminate the benefits at any time. The plan is funded as claims
are paid.
The status of the plan at October 31, 1996 was as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
- -----------------------------------------------------------------
<S> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees $ (9,088)
Fully eligible plan participants (767)
Other plan participants (4,396)
- -----------------------------------------------------------------
Total APBO $ (14,251)
Unrecognized net loss 86
- -----------------------------------------------------------------
Accrued postretirement benefit cost $ (14,165)
- -----------------------------------------------------------------
</TABLE>
The net periodic postretirement benefit for the year ended October 31, 1996 was
as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------
<S> <C>
Service cost-
Benefits earned during the period $ 271
Interest cost on APBO 978
Net amortization and deferral 5
- --------------------------------------------------
Net periodic postretirement benefit cost $ 1,254
- --------------------------------------------------
</TABLE>
In addition to the net periodic postretirement benefit cost, the Company
recorded a net expense of $0.1 million in 1996 representing the net effect of
special termination benefits due to voluntary work-force reduction programs
associated with reorganization efforts.
Page 15
<PAGE> 17
PETROLITE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Under the former practice of expensing postretirement benefits when paid, the
expense would have been $.4 million in fiscal 1996.
For measurement purposes, a health care cost trend of 9.0% was assumed for
fiscal 1996, declining gradually over the next four years to 5%, and remaining
at that level thereafter. The health care cost trend rate affects the
accumulated postretirement benefit obligation and net periodic cost for health
benefits. A one-percentage-point increase in the assumed health care cost trend
rate would increase the accumulated postretirement benefit obligation for
health benefits at October 31, 1996, by $84,000 and would increase the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for health benefits for fiscal 1996 by $11,000. The
discount rate used in determining the accumulated postretirement benefit
obligation was 7.5% at October 31, 1996.
11. STOCK OPTION PLANS
At October 31, 1996, the Company has two stock-based compensation plans, which
are described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its fixed-stock option plans.
On December 10, 1986, the Company's Board of Directors approved the 1987
Incentive Stock Option Plan. Under this plan, 600,000 shares of unissued stock
were reserved for grant to officers and key employees and could have been
awarded in the form of stock options or restricted stock units.
Stock options are granted at prices not less than 100% of fair market value of
stock on dates of grant and were issued with a fixed expiration date, not to
exceed 11 years from date of grant. Options are exercisable ratably in annual
installments of 25% commencing one year from date of grant.
A restricted stock unit is the right to receive either cash or shares of
capital stock, upon fulfillment of certain conditions, without payment to the
Company. Restricted stock units are contingent upon continued employment or
attainment of predetermined performance targets during a restriction period,
generally three years. No additional grants will be made under this plan.
Transactions under the 1987 Incentive Stock Option Plan for the year ended
October 31, 1996 are summarized below:
<TABLE>
<CAPTION>
Number Average
of Option
Options Price
- -----------------------------------------------------------------
<S> <C> <C>
Outstanding October 31, 1995 102,500 31.57
Exercised (6,500) 23.00
Forfeited (20,600) 31.58
Expired (5,900) 32.50
- -----------------------------------------------------------------
Outstanding October 31, 1996 69,500 $ 32.29
- -----------------------------------------------------------------
</TABLE>
Page 16
<PAGE> 18
PETROLITE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Under the 1993 Stock Incentive Plan, which was approved by the shareholders on
March 1, 1993, 800,000 shares of unissued stock were reserved for grant to
executive officers, key managers and non-employee members of the Board of
Directors and may be awarded in the form of stock options or restricted stock
units. The plan provides that stock options are granted at prices not less than
100% of fair market value of stock on dates of grant and are issued with a
fixed expiration date, not to exceed 10 years from date of grant.
Annually, each member of the Board of Directors who has served on the board at
least six months, is not an employee of the Company, and who is elected at an
annual shareholders meeting, receives an option to purchase 2,000 shares of the
Company's capital stock, subject to the five-year term of the plan. The Board
of Directors initially granted two groups of options under the 1993 plan with
different performance criteria. Both awards included triggers based on specific
minimum increases in the Company's stock values. The first award required
annual minimum increases and the second award was tied to an increase in
Company stock value over a five-year period.
The competitive market conditions and forward outlook changed substantially
from the factors contemplated by management in recommending the initial awards.
Upon review, the Compensation Committee of the Board of Directors determined
the awards did not provide the needed element of longer-term incentive
compensation. The Committee and the Board of Directors therefore authorized
certain optionees to exchange their initial stock option awards for a new stock
option award. The new option awards, which were made on January 9, 1996, are
exercisable ratably in annual installments of 20% commencing one year from the
date of grant. The Compensation Committee also approved the award of options
under the 1993 Stock Incentive Plan to certain officers who previously were not
awarded options.
Transactions under the 1993 Stock Incentive Plan for the year ended October 31,
1996 are summarized below:
<TABLE>
<CAPTION>
Number of Options
----------------------- Average
Non-employee Option
Employees Directors Price
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding October 31, 1995 624,000 36,000 32.61
Granted-various dates 560,000 14,000 26.19
Exercised (3,000) 27.04
Forfeited (629,000) 30.40
Expired (8,000) 29.27
- -----------------------------------------------------------------------
Outstanding October 31, 1996 555,000 39,000 $28.81
- -----------------------------------------------------------------------
</TABLE>
Under a Stock Option Agreement dated August 11, 1995, Mr. Paul H. Hatfield,
then a director of the Company, received an option to purchase 36,000 shares,
at an exercise price of $21.03 per share exercisable in monthly installments of
3,000 shares, subject to the terms of a concurrent management agreement. The
Stock Option Agreement was canceled effective November 20, 1995. The option,
exercisable with respect to 6,000 shares, will expire on August 11, 2000.
Page 17
<PAGE> 19
PETROLITE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCKHOLDER RIGHTS PLAN
In March 1994, the Company adopted a stockholder rights plan and distributed a
dividend of a right to purchase one share of capital stock (a "Right") for each
share of capital stock of the Company ("Capital Stock") outstanding on and
after April 8, 1994. Each Right initially would entitle the holder to purchase
one share of Capital Stock for $120 under certain circumstances. The Rights
become exercisable only if a person or group becomes the beneficial owner of
15% or more of the Company's Capital Stock, or announces a tender or exchange
offer which would result in its ownership of 15% or more of the Capital Stock.
Stockholders who reported beneficial ownership of 15% or more of the
outstanding Capital Stock before April 8, 1994, do not trigger the exercise of
the Rights unless they acquire beneficial ownership of an additional 1% of the
outstanding Capital Stock.
After the Rights have become exercisable, holders would be entitled to purchase
additional shares of Capital Stock at one-half of the then-current price per
share. If the Company is acquired in a merger, or 50% or more of the Company's
assets are sold in one or more related transactions, the holder would be
entitled to purchase shares of capital stock of the acquiring company at
one-half of the then-current market price of such capital stock.
The Company amended the stockholder rights plan on February 25, 1997 to
provide, among other things, that the acquisition of the Company as described
in Note 15, shall not be deemed to be a triggering event for purposes of the
stockholder rights plan and that the rights under the stockholder rights plan
would expire immediately prior to consummation of the acquisition of the
Company.
13. ENVIRONMENTAL MATTERS
The Registrant has been named a potentially responsible party (PRP) under the
Federal Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, (the "Superfund Law") with respect to one "Superfund" site. The
Registrant has not owned or operated the site, other PRPs also have been so
designated, and the extent of the Registrant's liability at the site has been
determined with respect to anticipated remediation costs. The extent of the
Registrant's percentage contribution to remediation costs at the site has been
capped at 1%. The Registrant's reserves include amounts expected to be incurred
with respect to this site. The Registrant also is involved in remedial response
and voluntary environmental cleanups, in some cases under the direction of
governmental agencies, at other locations which are not the subject of the
Superfund law. The Registrant accrues for these costs when it is likely that a
liability exists and the amount of a payment with respect thereto can be
reasonably estimated. Actual costs may vary from estimates due to inherent
uncertainties in evaluating environmental conditions. Based on, among other
factors, its previous experience with respect to such activities and its
ongoing review and analysis, at October 31, 1996, the Registrant's balance
sheet included an accrual for estimated remediation and other environmental
costs of approximately $2.8 million. Subject to the difficulty in estimating
future environmental costs, the Registrant believes that any sums it may be
required to pay in connection with such environmental matters in excess of the
amounts so recorded will
Page 18
<PAGE> 20
PETROLITE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
not have a material adverse effect on its financial condition or results of
operations.
14. LITIGATION AND OTHER CONTINGENCIES
Various claims, lawsuits and other legal and administrative proceedings,
arising in the ordinary course of business, are pending against the Registrant.
The Registrant accrues for these costs when it is probable that a liability has
been incurred and the amount of the loss can be reasonably estimated. At
October 31, 1996, the Registrant's balance sheet included an accrual for
estimated litigation costs and other contingencies of $3.0 million. Management
and legal counsel are of the opinion that any sum the Registrant may be
required to pay in connection with the ultimate dispositions of such
proceedings in excess of the amounts recorded or disclosed above will not have
a material adverse effect on its financial condition or results of operations.
15. SUBSEQUENT EVENT
On July 2, 1997, Baker Hughes Incorporated ("Baker Hughes") acquired the Company
and Wm. S. Barnickel & Company, the holder of 47.1% of the Company's common
stock ("Barnickel"), in a tax-free exchange of stock in which the Company's
stockholders, other than Barnickel, received 1.6135 shares of Baker Hughes
common stock in exchange for each share of the Company's common stock. The
exchange ratio was based on $61 per share of the Company's common stock and an
average market price of Baker Hughes common stock of $37.80625. As a result of
the acquisitions, certain employee and director related benefits described in
the Notes to the Consolidated Financial Statements, have or may change as
permitted by the respective plans.
Page 19
<PAGE> 21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Directors of
Wm. S. Barnickel & Company
In our opinion, the accompanying balance sheet and the related statements of
income and retained earnings and of cash flows present fairly, in all material
respects, the financial position of Wm. S. Barnickel & Company at October 31,
1996, and the results of its operations and its cash flows for the year in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of Wm. S. Barnickel & Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
(Price Waterhouse LLP)
St. Louis, Missouri
January 17, 1997, except as to Note 7,
which is as of July 2, 1997.
Page 20
<PAGE> 22
WM. S. BARNICKEL & COMPANY
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Six Months Six Months Year
Ended Ended Ended
(Dollars in thousands, April 30, April 30, October 31,
except per share data) 1997 1996 1996
- ------------------------------------------------------------------------
(unaudited) (unaudited)
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend income:
Petrolite Corporation stock $ 2,989 $ 2,989 $ 5,978
Other stocks 587 542 1,117
--------------------------------------
3,576 3,531 7,095
Profit from oil and gas
investments 97 99
Interest income 62 125 277
Gain from sale of investments 4,678 4,776
--------------------------------------
3,638 8,431 12,247
General and administrative expenses 1,091 202 1,648
--------------------------------------
Income before taxes 2,547 8,228 10,599
Income taxes 79 36 (1,705)
--------------------------------------
Net income 2,626 8,264 8,894
Retained earnings at beginning
of period 6,052 4,198 4,198
Dividends declared (3,520) (3,520) (7,040)
--------------------------------------
Retained earnings at end of period $ 5,158 $ 8,942 $ 6,052
--------------------------------------
Per Common Share:
Net income $ 298.47 $ 939.14 $1,010.68
Dividends declared 400.00 400.00 800.00
</TABLE>
See accompanying Notes to Financial Statements.
Page 21
<PAGE> 23
WM. S. BARNICKEL & COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, October 31,
1997 1996
(Dollars in thousands) (unaudited)
- --------------------------------------------------------------------------
Assets
- --------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 2,131 $ 3,641
Other receivables 1 11
Refundable income taxes 497 709
Deferred income taxes 912 620
Interest receivable 19
- --------------------------------------------------------------------------
Total current assets 3,541 5,000
- --------------------------------------------------------------------------
Investments in capital stock:
Petrolite Corporation 323,578 172,130
Other stocks 50,868 43,547
- --------------------------------------------------------------------------
374,446 215,677
- --------------------------------------------------------------------------
Total Assets $377,987 $220,677
- --------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- --------------------------------------------------------------------------
Accrued professional fees $ 67 $ 633
- --------------------------------------------------------------------------
Total current liabilities 67 633
- --------------------------------------------------------------------------
Deferred income taxes 126,440 72,458
Stockholders' Equity
Capital Stock:
Authorized and issued, 8,800 shares of $100
par value 880 880
Net unrealized investment gains 245,442 140,654
Retained earnings 5,158 6,052
- --------------------------------------------------------------------------
Total Stockholders' Equity 251,480 147,586
- --------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $377,987 $220,677
- --------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
Page 22
<PAGE> 24
WM. S. BARNICKEL & COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Six Months Year
Ended Ended Ended
April 30, April 30, October 31,
1997 1996 1996
(Dollars in thousands) (unaudited) (unaudited)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from investing activities:
Net income $ 2,626 $ 8,264 $ 8,894
- ------------------------------------------------------------------------------------------
Adjustments to reconcile net income
to net cash provided by investing
activities:
Depletion, depreciation and
amortization 14
Deferred income taxes (291) (336)
Gain on sale of investments in
oil and gas properties (4,678) (4,776)
Changes in assets and
liabilities:
Other receivables 10 (24) (9)
Interest receivable 19 12 (6)
Income taxes payable and
refundable income taxes 212 (2,041) (961)
Accrued professional fees (566) (30) 602
Investments in oil and gas
properties (6)
Proceeds from sale of
investments in oil and gas
properties, net 4,939 5,030
- ------------------------------------------------------------------------------------------
Total adjustments (616) (1,822) (448)
- ------------------------------------------------------------------------------------------
Net cash provided by investing
activities 2,010 6,442 8,446
- ------------------------------------------------------------------------------------------
Cash flows from financing activities:
Dividends paid (3,520) (3,520) (7,040)
- ------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and equivalents (1,510) 2,922 1,406
Cash and equivalents at
beginning of period 3,641 2,235 2,235
- ------------------------------------------------------------------------------------------
Cash and equivalents at end of
period $ 2,131 $ 5,157 $ 3,641
- ------------------------------------------------------------------------------------------
Supplemental disclosure of cash
flow information:
Cash paid during the period for
income taxes $ 0 $ 2,014 $ 3,010
- ------------------------------------------------------------------------------------------
Supplemental disclosure of noncash activity:
Net unrealized investment gains $ 104,788 $ 30,183 $ 37,359
- ------------------------------------------------------------------------------------------
Deferred income taxes 53,981 15,548 19,246
- ------------------------------------------------------------------------------------------
Net increase in carrying value of
investments 158,769 45,731 56,605
- ------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
Page 23
<PAGE> 25
WM. S. BARNICKEL & COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Wm. S. Barnickel & Company ("Barnickel"), founded in 1922, was 90 percent owned
by the Trust of Wm. S. Barnickel (the "Trust") and 10 percent owned by John S.
Lehmann and the trusts established under his will. Following the death of
Genevieve Barnickel Janes in 1993, the Trust terminated resulting in a
terminating distribution of the Trust's shares of Barnickel to a large group of
beneficiaries. Barnickel trades in various securities and purchases mineral
rights.
UNAUDITED FINANCIAL STATEMENTS
The financial statements as of and for the six months ended April 30, 1997 and
1996 are unaudited; however, they include all adjustments (consisting only of
normal recurring adjustments) which, in the opinion of management, are
necessary to present fairly the financial position of Barnickel at April 30,
1997 and the results of operations and cash flows for the six months ended
April 30, 1997 and 1996. Accounting measurements at interim dates inherently
involve greater reliance on estimates than at year end. The results of
operations for the interim periods presented are not necessarily indicative of
the results to be expected for the entire year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
Cash equivalents are comprised of highly liquid debt instruments with an
original maturity of three months or less.
INVESTMENTS
On October 31, 1995, Barnickel adopted Statement of Financial Accounting
Standards No. 115, "Accounting For Certain Investments in Debt and Equity
Securities" ("FAS 115"). This standard requires that certain debt and equity
securities be adjusted to market value at the end of each accounting period.
Unrealized market value gains and losses are charged to earnings if the
securities are purchased and held principally for the purpose of selling them
in the near term. Otherwise, such unrealized gains and losses are charged or
credited to a separate component of shareholders' equity. FAS 115 was adopted
prospectively with the cumulative effect of adoption recorded as a separate
component of shareholders' equity. Prior to the adoption of this statement,
such securities were carried at the lower of cost or market.
Management determines the proper classifications of investments in obligations
with fixed maturities and marketable equity securities at the time of purchase
and reevaluates such designations as of each balance sheet date. At October 31,
1996, all securities covered by FAS 115 were designated as available for sale.
Accordingly, these securities are stated at fair value, with unrealized gains
and losses reported in a separate component of shareholders' equity. Realized
gains and losses on sales of investments are included in the Statement of
Income.
Page 24
<PAGE> 26
WM. S. BARNICKEL & COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OIL AND GAS PROPERTIES
Oil and gas properties represent Barnickel's proportionate share (working
interest) in the capitalized costs incurred in successful oil and gas ventures.
Depletion of royalties and development costs, amortization of leaseholds and
depreciation of equipment are computed using the units-of-production method
based on estimated recoverable oil and gas reserves.
All oil and gas properties were sold by Barnickel on December 1, 1995, except
for the LaGloria royalty interests and the M. M. Garcia Land Trust, which had
effective sale dates of March 1, 1996 and July 1, 1996, respectively.
INCOME TAXES
Barnickel accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). Under FAS 109,
the deferred tax provision is determined using the liability method, whereby
deferred tax assets and liabilities are recognized based upon temporary
differences between the financial statement and income tax bases of assets and
liabilities using presently enacted tax rates.
2. INVESTMENT IN PETROLITE CORPORATION
The investment in Petrolite Corporation ("Petrolite") represents 47.06% of the
issued and outstanding capital stock of Petrolite at October 31, 1996. The
financial statements of Petrolite, as examined by Price Waterhouse LLP, reflect
net assets of $166.8 million at October 31, 1996 and net income of $19.0
million for the year ended October 31, 1996. Barnickel's equity in Petrolite's
net assets totals $78.5 million at October 31, 1996 and its equity in net
income totals $9.0 million for the year ended October 31, 1996.
3. SECURITIES AVAILABLE FOR SALE
Securities available for sale as of October 31, 1996 are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
GROSS
UNREALIZED MARKET
COST HOLDING GAINS VALUE
-------- ------------- --------
<S> <C> <C> <C>
Common stock:
Petrolite Corporation $ 877 $171,253 $172,130
Other stocks 1,688 41,859 43,547
-------- -------- --------
$ 2,565 $213,112 $215,677
======== ======== ========
</TABLE>
The difference between cost and market at October 31, 1996 of $213.1 million
(less deferred taxes of $72.5 million), was credited to a separate component of
shareholders' equity called "Net Unrealized Investment Gains". Market value is
determined by the most recently traded price of the security at the balance
sheet date. Because Barnickel's investment represents a significant portion of
Petrolite's outstanding stock, this value may be only an approximation of the
realizable value of the investment. See subsequent event at Note 7.
Page 25
<PAGE> 27
WM. S. BARNICKEL & COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. OIL AND GAS INVESTMENTS
Profit from oil and gas investments for the year ended October 31, 1996 is
summarized below (dollars in thousands):
<TABLE>
<S> <C>
Income:
Leases $234
Royalties 17
----
251
Expenses:
Field, royalty and other 138
Depletion, depreciation and amortization 14
----
Profit from oil and gas investments $ 99
====
</TABLE>
5. SALE OF INVESTMENTS
On December 1, 1995, Barnickel sold all oil and gas properties except for the
LaGloria royalty interests and the M. M. Garcia Land Trust which had effective
sales dates of March 1, 1996 and July 1, 1996, respectively. Total proceeds
from the sale of the oil and gas investments were $5.0 million and resulted in a
pretax gain on the sale of such investments of $4.8 million.
6. INCOME TAXES
The provision for income taxes for the year ended October 31, 1996, is
summarized as follows (dollars in thousands):
<TABLE>
<S> <C>
Current $2,041
Deferred (336)
------
$1,705
======
</TABLE>
The deferred tax provision results in the recognition of certain income and
expense items for financial statement purposes in periods different than those
recognized for tax purposes. The temporary differences included in deferred tax
assets are related to accrued advisory and legal fees.
Barnickel has recorded a deferred tax liability at October 31, 1996 of $72.5
million on the unrealized gain reported as a separate component of
stockholders' equity until realized resulting from carrying Barnickel's equity
securities at fair value. The income tax rate of 34% used to record the
deferred tax liability may not reflect the actual amount of income taxes owed
if Barnickel disposes of its investment in Petrolite and other investments.
The effective income tax rate of 16.1% for the year ended October 31, 1996,
differs from the amount of income tax determined by applying the U.S. statutory
federal income tax rate to pretax income as a result of state taxes, the
dividends received deduction and the depletion allowance.
Page 26
<PAGE> 28
WM. S. BARNICKEL & COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. SUBSEQUENT EVENT
On July 2, 1997, Baker Hughes Incorporated ("Baker Hughes") acquired Petrolite
and Barnickel in a tax-free exchange of stock in which Barnickel's stockholders
received 1,075.5367 shares of Baker Hughes common stock in exchange for each
share of Barnickel common stock. The exchange ratio was based on the market
value of Barnickel's assets, other than its 5,337,360 shares of Petrolite
common stock, of $32.2 million, $61 per share of Petrolite common stock and an
average market price of Baker Hughes common stock of $37.80625.
Page 27
<PAGE> 29
INTRODUCTION
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following tables set forth certain unaudited pro forma condensed combined
financial information for Baker Hughes Incorporated ("Baker Hughes") giving
effect to the acquisition of Petrolite Corporation ("Petrolite") and Wm. S.
Barnickel & Company ("Barnickel") accounted for as a purchase by Baker Hughes.
Such acquisitions are referred to herein as the "Mergers".
The unaudited pro forma condensed combined balance sheet was prepared as if the
Mergers had occurred on March 31, 1997. The unaudited pro forma condensed
combined statements of operations were prepared as if the Mergers had occurred
on October 1, 1995, the beginning of Baker Hughes' fiscal year ended September
30, 1996. For purposes of preparing the unaudited pro forma condensed combined
balance sheet, the financial information for Petrolite and Barnickel is as of
April 30, 1997. For purposes of preparing the unaudited pro forma condensed
combined statements of operations for the six months ended March 31, 1997 and
for the year ended September 30, 1996, the financial information for Petrolite
and Barnickel is for the six months ended April 30, 1997 and for the year ended
October 31, 1996, respectively.
The unaudited pro forma condensed consolidated balance sheet and statements of
operations are not necessarily indicative of the consolidated financial
position or results of operations as they might have been had the Mergers
actually occurred on the dates indicated. The pro forma adjustments are based
on preliminary assumptions and estimates made by Baker Hughes and do not
reflect adjustments for anticipated operating efficiencies and cost savings
Baker Hughes expects to achieve as a result of the Mergers. The actual
allocation of the consideration paid by Baker Hughes for Petrolite and
Barnickel may differ from the allocation reflected in the unaudited pro forma
condensed combined financial statements after a more extensive review of the
fair market values of the assets acquired and liabilities assumed has been
completed. Amounts allocated will be based upon the estimated fair values at
the effective time of the Mergers (July 2, 1997), which could vary
significantly from the amounts as of March 31, 1997.
Page 28
<PAGE> 30
BAKER HUGHES INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------------ ------------------------------
BAKER
HUGHES PETROLITE BARNICKEL ADJUSTMENTS COMBINED
---------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents $ 7.2 $ 55.2 $ 2.1 $ 64.5
Accounts receivable,
net 826.1 71.6 897.7
Inventories 879.1 37.2 $ 39.9 (A) 956.2
Other current assets 124.2 12.8 1.4 138.4
---------- -------- -------- -------- ----------
Total current
assets 1,836.6 176.8 3.5 39.9 2,056.8
Property, net 639.8 96.4 100.0 (B) 836.2
Investments 60.1 13.6 323.6 (293.9)(C) 103.4
Other assets 129.6 26.0 50.9 72.4 (D) 278.9
Goodwill 745.6 404.9 (E) 1,150.5
---------- -------- -------- -------- ----------
Total Assets $ 3,411.7 $ 312.8 $ 378.0 $ 323.3 $ 4,425.8
========== ======== ======== ======== ==========
Current liabilities:
Notes payable $ 1.1 $ 10.9 $ 12.0
Accounts payable 343.0 30.6 373.6
Other current
liabilities 299.2 30.7 $ .1 $ 37.6 (F) 367.6
---------- -------- -------- -------- ----------
Total current
liabilities 643.3 72.2 .1 37.6 753.2
---------- -------- -------- -------- ----------
Long-term debt 695.2 31.7 726.9
---------- -------- -------- -------- ----------
Deferred income taxes 172.1 9.0 126.4 (32.4)(G) 275.1
---------- -------- -------- -------- ----------
Other long-term
liabilities 143.2 19.7 162.9
---------- -------- ----------
Stockholders' Equity:
Common stock $ 145.6 $ 11.6 $ .9 $ 6.8 (H)(I) $ 164.9
Capital in excess of
par value 1,417.3 730.5 (I) 2,147.8
Retained earnings 313.4 195.2 5.2 (200.4)(H) 313.4
Foreign currency
translation
adjustment (133.3) (7.9) 7.9 (H) (133.3)
Unrealized gain on
securities available
for sale 14.9 245.4 (245.4)(H) 14.9
Treasury stock (18.7) 18.7 (H)
---------- -------- -------- -------- ----------
Total Stockholders'
Equity 1,757.9 180.2 251.5 318.1 2,507.7
---------- -------- -------- -------- ----------
Total Liabilities
and Stockholders'
Equity $ 3,411.7 $ 312.8 $ 378.0 $ 323.3 $ 4,425.8
========== ======== ======== ======== ==========
</TABLE>
(The accompanying notes are an integral part of the Pro Forma Financial
Statements.)
Page 29
<PAGE> 31
BAKER HUGHES INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1997
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------------- ----------------------
BAKER
HUGHES PETROLITE BARNICKEL ADJUSTMENTS COMBINED
------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Sales $1,098.5 $ 195.1 $ 3.6 $ (3.6)(J) $1,293.6
Services and rentals 543.3 543.3
-------- --------- --------- ------ --------
Total 1,641.8 195.1 3.6 (3.6) 1,836.9
-------- --------- --------- ------ --------
Costs and Expenses:
Cost of sales 643.5 117.5 1.4 (K) 762.4
Cost of services and
rentals 256.8 256.8
Research and
engineering 49.7 8.9 58.6
Marketing and field
service 387.6 34.4 422.0
General and
administrative 90.8 9.8 1.1 101.7
Amortization of
goodwill and
other intangibles 14.8 6.3 (L) 21.1
-------- --------- --------- ------ --------
Total 1,443.2 170.6 1.1 7.7 1,622.6
-------- --------- --------- ------ --------
Operating income 198.6 24.5 2.5 (11.3) 214.3
Interest income .9 1.3 .6 (J) 2.8
Interest expense (23.3) (1.3) (24.6)
Equity income 2.9 (1.0)(M) 1.9
Gain on sale of
Singapore facility 8.6 8.6
Other income, net .5 .5
-------- --------- --------- ------ --------
Income before income
taxes and accounting
change 176.2 36.5 2.5 (11.7) 203.5
Income taxes (67.8) (12.2) .1 1.1 (N) (78.8)
-------- --------- --------- ------ --------
Income before
accounting change $ 108.4 $ 24.3 $ 2.6 $(10.6) $ 124.7
======== ========= ========= ====== ========
Income before
accounting change
per share $ .75 $ .76
Weighted average
number of common
shares outstanding 145.2 19.3 (O) 164.5
</TABLE>
(The accompanying notes are an integral part of the Pro Forma Financial
Statements.)
Page 30
<PAGE> 32
BAKER HUGHES INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------------- ----------------------
BAKER
HUGHES PETROLITE BARNICKEL ADJUSTMENTS COMBINED
------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Sales $2,046.8 $ 360.7 $ 7.1 $ (7.1)(J) $2,407.5
Services and rentals 980.9 980.9
-------- -------- -------- ------ --------
Total 3,027.7 360.7 7.1 (7.1) 3,388.4
-------- -------- -------- ------ --------
Costs and Expenses:
Cost of sales 1,186.8 215.9 23.1 (K) 1,425.8
Cost of services and
rentals 496.0 496.0
Research and
engineering 87.0 15.3 102.3
Marketing and field
service 682.1 85.4 767.5
General and
administrative 199.9 22.7 1.7 224.3
Amortization of
goodwill and other
intangibles 29.6 12.8 (L) 42.4
Unusual charge, net 39.6 5.1 44.7
-------- -------- -------- ------ --------
Total 2,721.0 344.4 1.7 35.9 3,103.0
-------- -------- -------- ------ --------
Operating income 306.7 16.3 5.4 (43.0) 285.4
Interest income 3.4 2.2 .3 1.1 (J) 7.0
Interest expense (55.5) (2.8) (58.3)
Sale of investments 44.3 4.9 49.2
Equity income 5.9 (2.0)(M) 3.9
-------- -------- -------- ------ --------
Income before income
taxes 298.9 21.6 10.6 (43.9) 287.2
Income taxes (122.5) (2.6) (1.7) 9.4 (N) (117.4)
-------- -------- -------- ------ --------
Net income $ 176.4 $ 19.0 $ 8.9 $(34.5) $ 169.8
-------- -------- -------- ------ --------
Net income per share $ 1.23 $ 1.04
Weighted average
number of common
shares outstanding 143.2 19.3 (O) 162.5
</TABLE>
(The accompanying notes are an integral part of the Pro Forma Financial
Statements.)
Page 31
<PAGE> 33
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
The Mergers will be accounted for using the purchase method of accounting with
Baker Hughes acquiring Petrolite and Barnickel. Under this method of
accounting, Baker Hughes will record the assets and liabilities of Petrolite
and Barnickel at fair market value as of July 2, 1997, with the remaining
purchase price reflected as goodwill.
The total consideration paid in connection with the Mergers is determined as
follows:
<TABLE>
<CAPTION>
(MILLIONS, EXCEPT
PRICE PER SHARE)
-----------------
<S> <C>
Petrolite common stock outstanding including shares
held by Barnickel 11.419
Purchase price per share $ 61
Consideration for Petrolite common stock 696.6
Consideration for Petrolite's outstanding employee stock
options 21.0
Consideration for Barnickel's non-Petrolite assets, net of
liabilities 32.2
---------
Total value of Baker Hughes consideration $ 749.8
=========
</TABLE>
Total consideration is calculated based on a purchase price of $61 per share of
Petrolite common stock, a net after-tax value of $32.2 million for Barnickel's
non-Petrolite assets, net of liabilities, a Baker Hughes Share Value of
$37.80625 (the average of the per share closing price of Baker Hughes common
stock as reported on the NYSE for the ten consecutive trading days immediately
prior to June 27, 1997), a fair market value of $21.0 million for the
assumption by Baker Hughes of Petrolite's outstanding vested and unvested
employee stock options to purchase an aggregate of 591,000 shares of Petrolite
common stock which have been converted into the right to acquire approximately
954,000 shares of Baker Hughes common stock and the number of shares of
Petrolite common stock outstanding on July 2, 1997.
The excess of the total purchase price over the allocation of fair value to the
net assets of Petrolite and Barnickel will be recorded as goodwill. Baker
Hughes' calculation of goodwill is based on the following assumptions and
calculations:
Page 32
<PAGE> 34
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
(MILLIONS)
----------
<S> <C>
Total value of Baker Hughes consideration -- see above $ 749.8
Severance and transaction costs 37.6
Historical net asset values at April 30, 1997:
Petrolite (180.2)
Barnickel, net of its investment in Petrolite (37.6)
-------
Initial purchase price in excess of historical net asset values 569.6
Increase (decrease) from fair value allocations:
Inventory (39.9)
Property (100.0)
Investments (29.7)
Unrecognized pension asset (52.0)
Other assets (20.4)
Deferred income tax on fair value allocation adjustments 77.3
-------
Total goodwill $ 404.9
=======
</TABLE>
The following adjustments were made to the unaudited pro forma condensed
combined balance sheet:
(A) Adjust Petrolite's inventories to fair market value which consists of
increasing last-in, first-out ("LIFO") inventories by $18.9 million and
increasing total inventories by $21.0 million to estimated selling price less a
reasonable profit allowance for the selling effort of Baker Hughes.
(B) Adjust Petrolite's property to fair market value.
(C) Eliminate Barnickel's investment in Petrolite ($323.6 million) and
adjust Petrolite's equity investments to fair market value ($29.7 million).
(D) Adjust Petrolite's prepaid pension costs to the excess of the plan
assets at fair value over the accumulated benefit obligation ($52.0 million),
identifiable intangible assets to fair market value ($14.0 million) and
property held for sale to fair market value ($6.4 million).
(E) Reflect goodwill associated with the Mergers.
(F) Reflect severance and transaction costs directly associated with the
Mergers, which were not considered in the unaudited pro forma condensed
combined statements of operations.
(G) Eliminate the deferred tax effect of Barnickel's investment in
Petrolite ($109.7 million) and record deferred taxes related to the fair market
value adjustments of the assets and liabilities of Petrolite ($77.3 million).
(H) Eliminate Petrolite and Barnickel equity accounts.
(I) Record the Mergers under purchase accounting and reflect the issuance
of 19.3 million shares of Baker Hughes common stock.
The following adjustments were made to the unaudited pro forma condensed
combined statements of operations:
(J) To eliminate dividends received by Barnickel from Petrolite. There is
no tax effect to the adjustment since taxes were paid by Barnickel on dividends
from Petrolite. In addition, dividend income received by Barnickel from
investments in marketable securities is reclassified from revenue to interest
income.
Page 33
<PAGE> 35
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS (CONTINUED)
(K) Record an increase in depreciation expense arising from the
depreciation of the fair market value of property over an average of 12 years
($17.6 million and $8.8 million for the year ended September 30, 1996 and for
the six months ended March 31, 1997, respectively, netted against actual
depreciation of $15.5 million and $7.4 million, respectively, recorded by
Petrolite). Additionally, the unaudited pro forma condensed combined statement
of operations for the year ended September 30, 1996 includes the $21.0 million
inventory fair market value adjustment for increasing total inventories to
estimated selling price less a reasonable profit allowance for the selling
effort of Baker Hughes since it is assumed that the purchased inventories will
be sold within the first three months after the closing date which for purposes
herein is assumed to be October 1, 1995.
(L) Record an increase in goodwill amortization arising from the
amortization over 40 years of the excess of the purchase price over the fair
market value of the net assets acquired ($10.9 million for the year ended
September 30, 1996 and $5.4 million for the six months ended March 31, 1997)
and the increase in the amortization of identifiable intangible assets over an
average life of seven years ($1.9 million for the year ended September 30, 1996
and $.9 million for the six months ended March 31, 1997).
(M) Amortize the increase in the fair value of the Petrolite equity
investees over 15 years.
(N) Record the tax effect at the federal statutory rate of all pretax
adjustments after excluding nondeductible goodwill amortization and the
dividend adjustment -- See (J) above.
(O) Reflect the issuance of Baker Hughes common stock to be issued in the
Mergers.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
BAKER HUGHES INCORPORATED
August 11, 1997 By: /s/ LAWRENCE O'DONNELL, III
------------------------------------
Lawrence O'Donnell, III
Vice President & General Counsel
Page 34
