<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): August 10, 1998
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, Suite 1200
Houston, Texas 77027
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (713) 439-8600
<PAGE> 2
Item 2. Acquisition or Disposition of Assets.
On August 10, 1998, Baker Hughes Incorporated ("Baker Hughes") completed the
acquisition of Western Atlas Inc. ("Western Atlas") pursuant to the Agreement
and Plan of Merger dated as of May 10, 1998 among Baker Hughes, Baker Hughes
Delaware I, Inc., a direct, wholly owned subsidiary of Baker Hughes ("Merger
Sub"), and Western Atlas, as amended on July 22, 1998 (the "Merger Agreement").
Pursuant to the Merger Agreement, Merger Sub was merged (the "Merger") with and
into Western Atlas, with Western Atlas surviving as a subsidiary of Baker
Hughes. As a result of the merger, each outstanding share of Western Atlas
common stock, par value $1.00 per share ("Western Atlas Common Stock"), has been
converted into the right to receive 2.7 shares of Baker Hughes common stock, par
value $1.00 per share ("Baker Hughes Common Stock"). In the aggregate, Baker
Hughes is issuing approximately 148.6 million shares of Baker Hughes Common
Stock in exchange for the Western Atlas Common Stock. The exchange ratio of 2.7
resulted from the formula in the Merger Agreement that was determined by
negotiations among Baker Hughes and Western Atlas. In addition, as part of the
Merger, Baker Hughes is issuing up to 7.7 million shares of Baker Hughes
Common Stock in exchange for certain rights relating to Western Atlas employee
stock options.
Western Atlas, the common stock of which was previously publicly traded, is a
leading supplier of oilfield services and reservoir information technologies
for the worldwide oil and gas industry. It specializes in land, marine and
transition-zone seismic data acquisition and processing services; well-logging
and completion services; and reservoir characterization and project management
services. Baker Hughes currently intends to continue these business activities
of Western Atlas. There were no material relationships between Baker Hughes and
Western Atlas prior to the consummation of the merger.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
The following consolidated financial statements of Western Atlas and independent
auditors' report set forth in the Western Atlas Annual Report on Form 10-K for
the year ended December 31, 1997 are incorporated herein by reference:
Independent Auditors' Report
Consolidated Statements of Income for each of the three years in the period
ended December 31, 1997
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Shareholders' Equity for each of the three years
in the period ended December 31, 1997.
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1997.
Notes to Consolidated Financial Statements.
The following condensed consolidated financial statements of Western Atlas set
forth in the Western Atlas Form 10-Q for the quarterly period ended March 31,
1998 are incorporated herein by reference:
Condensed Consolidated Statements of Income for the three months ended March
31, 1998 and 1997 (unaudited).
Condensed Consolidated Balance Sheets as of March 31, 1998 and December 31,
1997 (unaudited).
1
<PAGE> 3
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 1998 and 1997 (unaudited).
Notes to Condensed Consolidated Financial Statements (unaudited).
(b) Pro Forma Financial Information.
The following pro forma financial information is filed herewith:
Unaudited pro forma financial statements of Baker Hughes giving effect to the
merger with Western Atlas:
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
1. Unaudited Pro Forma Condensed Combined Financial
Statements - Introduction F-1
2. Unaudited Pro Forma Condensed Combined Balance
Sheet as of March 31, 1998 F-2
3. Unaudited Pro Forma Condensed Combined Statement
of Operations for the six months ended
March 31, 1998 F-3
4 Unaudited Pro Forma Condensed Combined Statement of
Operations for each of the three years in the
period ended December 31, 1997 F-4
5. Notes to Unaudited Pro Forma Condensed Combined
Financial Statements F-7
</TABLE>
(c) Exhibits.
2.1 Agreement and Plan of Merger, dated as of May 10, 1998, among Baker
Hughes Incorporated, Baker Hughes Delaware I, Inc. and Western Atlas
Inc. (filed as exhibit 2.1 to Registration Statement of Baker Hughes
Incorporated on Form S-4 (Registration No. 333-58241) and incorporated
herein by reference)
2.2 Amendment to Agreement and Plan of Merger, dated as of July 22, 1998,
among Baker Hughes Incorporated, Baker Hughes Delaware I, Inc. and
Western Atlas Inc.
13.1 Portions of the Western Atlas 1997 Annual Report to Shareholders
13.2 Portions of the Western Atlas Form 10-Q for the quarterly period ended
March 31, 1998
23 Consent of Deloitte & Touche LLP
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Baker Hughes Incorporated
Date: August 14, 1998 By: /s/ Lawrence O'Donnell, III
----------------------------------
Vice President & General Counsel
2
<PAGE> 4
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS - INTRODUCTION
The following tables set forth certain unaudited pro forma condensed
combined financial information for Baker Hughes giving effect to the Merger
with Western Atlas accounted for as a pooling of interests.
The unaudited pro forma condensed combined balance sheet was prepared using
the historical balance sheets of Baker Hughes and Western Atlas as of March 31,
1998. The fiscal year ends of Baker Hughes and Western Atlas are September 30
and December 31, respectively. The unaudited pro forma condensed combined
statements of operations for each of the three years in the period ended
September 30, 1997 were prepared using the historical statements of operations
of Baker Hughes for the years ended September 30, 1997, 1996 and 1995 and of
Western Atlas for the years ended December 31, 1997, 1996 and 1995. The
unaudited pro forma condensed combined statement of operations for the six
months ended March 31, 1998 was prepared using the historical statements of
operations of Baker Hughes and Western Atlas for such period. As such, the
results of operations for Western Atlas for the three months ended December 31,
1997 are included in both the unaudited pro forma condensed combined statement
of operations for the six months ended March 31, 1998 and the unaudited pro
forma condensed combined statement of operations for the year ended September
30, 1997. Western Atlas had revenues, income from continuing operations and
diluted income from continuing operations per share for the three months ended
December 31, 1997 of $439.5 million, $31.8 million and $0.57, respectively.
The unaudited pro forma condensed combined financial information was
included for comparative purposes only and does not purport to be indicative of
the results of operations or financial position that actually would have been
obtained if the Merger had been effected at the dates indicated or of the
financial position or results of operations that may be obtained in the future.
F-1
<PAGE> 5
BAKER HUGHES INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------- -------------------------
BAKER WESTERN
HUGHES ATLAS ADJUSTMENTS COMBINED
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents..................... $ 9.3 $ 16.5 $ 25.8
Accounts receivable, net...................... 1,105.7 450.0 1,555.7
Inventories................................... 1,197.2 39.4 1,236.6
Other current assets.......................... 141.6 83.5 225.1
-------- -------- --------
Total current assets.................. 2,453.8 589.4 3,043.2
Property, net................................. 1,129.6 967.7 2,097.3
Multiclient seismic data and other assets..... 312.5 510.1 822.6
Goodwill and intangible assets................ 1,237.7 327.5 1,565.2
-------- -------- --------
Total Assets.......................... $5,133.6 $2,394.7 $7,528.3
======== ======== ========
Current liabilities:
Notes payable and current portion of long-term
debt....................................... $ 219.9 $ 49.8 $ 269.7
Accounts payable and accrued liabilities...... 664.4 330.9 995.3
Payroll and related expenses.................. 183.3 72.1 255.4
-------- -------- --------
Total current liabilities............. 1,067.6 452.8 1,520.4
-------- -------- --------
Long-term debt................................ 961.8 701.3 1,663.1
-------- -------- --------
Deferred income taxes......................... 249.0 $ 3.0(A) 252.0
-------- --------
Deferred revenue and other long-term
liabilities................................ 163.5 316.2 (3.0)(A) 476.7
-------- -------- --------
Stockholders' equity:
Common stock.................................. 169.7 54.8 93.2(B) 317.7(B)
Capital in excess of par value................ 2,246.3 689.0 (93.2)(B) 2,842.1(B)
Retained earnings............................. 403.4 184.1 587.5
Foreign currency translation adjustment....... (159.7) (159.7)
Unrealized gain on securities available for
sale....................................... 32.0 32.0
Pension liability adjustments................. (3.5) (3.5)
-------- -------- --------
Total Stockholders' Equity............ 2,691.7 924.4 3,616.1
-------- -------- --------
Total Liabilities and Stockholders'
Equity.............................. $5,133.6 $2,394.7 $7,528.3
======== ======== ========
</TABLE>
(The accompanying notes are an integral part of the Unaudited Pro Forma
Condensed Combined Financial Statements.)
F-2
<PAGE> 6
BAKER HUGHES INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1998
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------- --------------------------
BAKER WESTERN
HUGHES ATLAS ADJUSTMENTS COMBINED
-------- ------- ----------- --------
<S> <C> <C> <C> <C>
Revenues:
Sales....................................... $1,565.4 $1,565.4
Services and rentals........................ 725.4 $930.2 1,655.6
-------- ------ --------
Total............................... 2,290.8 930.2 3,221.0
-------- ------ --------
Costs and Expenses:
Cost of sales............................... 969.5 969.5
Cost of services and rentals................ 406.5 555.1 $205.5(A)(B) 1,167.1
Research and technology..................... 28.3 (28.3)(A)
Selling, general and administrative......... 616.0 34.6 .8(B) 651.4
Amortization of goodwill and other
intangibles.............................. 20.6 6.4(B) 27.0
Depreciation, depletion and amortization.... 184.4 (184.4)(B)
-------- ------ --------
Total............................... 2,012.6 802.4 2,815.0
-------- ------ --------
Operating income.............................. 278.2 127.8 406.0
Interest income............................... 1.8 1.0 2.8
Interest expense.............................. (32.1) (23.4) (55.5)
-------- ------ --------
Income from continuing operations before
income taxes................................ 247.9 105.4 353.3
Income taxes.................................. (89.2) (40.0) (129.2)
-------- ------ --------
Income from continuing operations............. $ 158.7 $ 65.4 $ 224.1
======== ====== ========
Income from continuing operations per share:
Basic.................................... $ .94 $ .71
Diluted.................................. .91 .69
Shares used in computing per share amounts:
Basic.................................... 169.4 146.8 316.2
Diluted.................................. 178.0 151.0 329.0
</TABLE>
(The accompanying notes are an integral part of the Unaudited Pro Forma
Condensed Combined Financial Statements.)
F-3
<PAGE> 7
BAKER HUGHES INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1997
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------- ----------------------------
BAKER WESTERN
HUGHES ATLAS ADJUSTMENTS COMBINED
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
Revenues:
Sales....................................... $2,466.7 $2,466.7
Services and rentals........................ 1,218.7 $1,658.2 2,876.9
-------- -------- --------
Total............................... 3,685.4 1,658.2 5,343.6
-------- -------- --------
Costs and Expenses:
Cost of sales............................... 1,573.3 1,573.3
Cost of services and rentals................ 682.9 962.7 $ 412.7(A)(B) 2,058.3
Research and technology..................... 59.2 (59.2)(A)
Selling, general and administrative......... 966.9 66.8 2.4(B) 1,036.1
Amortization of goodwill and other
intangibles.............................. 32.3 13.0(B) 45.3
Depreciation, depletion and amortization.... 368.9 (368.9)(B)
Unusual charge.............................. 52.1 52.1
Acquired in-process research and
development.............................. 118.0 118.0
-------- -------- --------
Total............................... 3,425.5 1,457.6 4,883.1
-------- -------- --------
Operating income.............................. 259.9 200.6 460.5
Interest income............................... 1.8 1.8 3.6
Interest expense.............................. (48.6) (42.8) (91.4)
Spin-off related costs........................ (8.4) (8.4)
-------- -------- --------
Income from continuing operations before
income taxes and accounting change.......... 213.1 151.2 364.3
Income taxes.................................. (104.0) (59.4) (163.4)
-------- -------- --------
Income from continuing operations before
accounting change........................... $ 109.1 $ 91.8 $ 200.9
======== ======== ========
Income from continuing operations before
accounting change per share:
Basic.................................... $ .71 $ .67
Diluted.................................. .71 .66
Shares used in computing per share amounts:
Basic.................................... 153.1 146.6 299.7
Diluted.................................. 154.7 150.1 304.8
</TABLE>
(The accompanying notes are an integral part of the Unaudited Pro Forma
Condensed Combined Financial Statements.)
F-4
<PAGE> 8
BAKER HUGHES INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1996
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------- ----------------------------
BAKER WESTERN
HUGHES ATLAS ADJUSTMENTS COMBINED
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
Revenues:
Sales....................................... $2,046.8 $2,046.8
Services and rentals........................ 980.9 $1,418.1 2,399.0
-------- -------- --------
Total............................... 3,027.7 1,418.1 4,445.8
-------- -------- --------
Costs and Expenses:
Cost of sales............................... 1,278.1 1,278.1
Cost of services and rentals................ 559.5 834.7 $ 350.5(A)(B) 1,744.7
Research and technology..................... 54.8 (54.8)(A)
Selling, general and administrative......... 814.2 72.0 3.0(B) 889.2
Amortization of goodwill and other
intangibles.............................. 29.6 10.5(B) 40.1
Depreciation, depletion and amortization.... 309.2 (309.2)(B)
Unusual charge.............................. 39.6 39.6
-------- -------- --------
Total............................... 2,721.0 1,270.7 3,991.7
-------- -------- --------
Operating income.............................. 306.7 147.4 454.1
Interest income............................... 3.4 1.5 4.9
Interest expense.............................. (55.5) (32.4) (87.9)
Gain on Varco Stock........................... 44.3 44.3
-------- -------- --------
Income from continuing operations before
income taxes................................ 298.9 116.5 415.4
Income taxes.................................. (122.5) (46.6) (169.1)
-------- -------- --------
Income from continuing operations............. $ 176.4 $ 69.9 $ 246.3
======== ======== ========
Income from continuing operations per share:
Basic.................................... $ 1.23 $ .86
Diluted.................................. 1.21 .85
Shares used in computing per share amounts:
Basic.................................... 143.3 144.5 287.8
Diluted.................................. 151.3 146.6 297.9
</TABLE>
(The accompanying notes are an integral part of the Unaudited Pro Forma
Condensed Combined Financial Statements.)
F-5
<PAGE> 9
BAKER HUGHES INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1995
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------- ----------------------------
BAKER WESTERN
HUGHES ATLAS ADJUSTMENTS COMBINED
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
Revenues:
Sales...................................... $1,805.1 $1,805.1
Services and rentals....................... 832.4 $1,282.9 2,115.3
-------- -------- --------
Total.............................. 2,637.5 1,282.9 3,920.4
-------- -------- --------
Costs and Expenses:
Cost of sales.............................. 1,133.6 1,133.6
Cost of services and rentals............... 475.1 742.9 $ 320.8(A)(B) 1,538.8
Research and technology.................... 59.8 (59.8)(A)
Selling, general and administrative........ 743.0 71.7 3.5(B) 818.2
Amortization of goodwill and other
intangibles............................. 29.9 9.1(B) 39.0
Depreciation, depletion and amortization... 273.6 (273.6)(B)
-------- -------- --------
Total.............................. 2,381.6 1,148.0 3,529.6
-------- -------- --------
Operating income............................. 255.9 134.9 390.8
Interest income.............................. 4.8 1.8 6.6
Interest expense............................. (55.6) (33.5) (89.1)
-------- -------- --------
Income from continuing operations before
income taxes and accounting change......... 205.1 103.2 308.3
Income taxes................................. (85.1) (41.8) (126.9)
-------- -------- --------
Income from continuing operations before
accounting change.......................... $ 120.0 $ 61.4 $ 181.4
======== ======== ========
Income from continuing operations before
accounting change per share:
Basic................................... $ .67 $ .55
Diluted................................. .67 .54
Shares used in computing per share amounts:
Basic................................... 141.2 143.4 284.6
Diluted................................. 141.4 145.3 286.7
</TABLE>
(The accompanying notes are an integral part of the Unaudited Pro Forma
Condensed Combined Financial Statements.)
F-6
<PAGE> 10
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
The Unaudited Pro Forma Condensed Combined Balance Sheet reflects the
conversion of each outstanding share of Western Atlas Common Stock into 2.7
shares of Baker Hughes Common Stock at the date and for the periods presented
and reflects the following reclassifications to give pro forma effect to the
Merger:
(A) To reclassify deferred income taxes from deferred revenue and other
long-term liabilities.
(B) To reflect the assumed issuance of 148.0 million shares of Baker Hughes
Common Stock at an exchange ratio of 2.7.
The Unaudited Pro Forma Condensed Combined Statements of Operations were
prepared to reflect the following reclassifications to give pro forma effect to
the Merger:
(A) To reclassify research and technology expense to cost of services and
rentals.
(B) To reclassify depreciation, depletion and amortization to the Baker
Hughes presentation.
In computing Baker Hughes and pro forma combined diluted per share amounts,
the following after tax interest expense amounts related to the Baker Hughes
Liquid Yield Option Notes ("LYONS") are added to income: 1998 -- $3.4 million
and 1996 -- $6.0 million. (The LYONS are anti-dilutive in 1997 and 1995).
Additionally, preferred stock dividends (including the effect of preferred stock
repurchase) of $25.6 million are deducted in 1995 in computing Baker Hughes and
pro forma combined per share amounts available to common stockholders.
It is anticipated that nonrecurring charges in the amount of approximately
$100 million will be expensed in connection with the Merger. Such expenses are
not reflected in the Unaudited Pro Forma Condensed Combined Statements of
Operations.
The Unaudited Pro Forma Condensed Combined Financial Statements do not
purport to indicate what would have occurred had Baker Hughes and Western Atlas
been merged at the beginning of the periods presented, or what results may be in
the future.
F-7
<PAGE> 11
INDEX TO EXHIBITS
Exhibit
No. Description
------- -----------
2.1 Agreement and Plan of Merger, dated as of May 10, 1998, among Baker
Hughes Incorporated, Baker Hughes Delaware I, Inc. and Western Atlas
Inc. (filed as exhibit 2.1 to Registration Statement of Baker Hughes
Incorporated on Form S-4 (Registration No. 333-58241) and incorporated
herein by reference)
2.2 Amendment to Agreement and Plan of Merger, dated as of July 22, 1998,
among Baker Hughes Incorporated, Baker Hughes Delaware I, Inc. and
Western Atlas Inc.
13.1 Portions of the Western Atlas 1997 Annual Report to Shareholders
13.2 Portions of the Western Atlas Form 10-Q for the quarterly period ended
March 31, 1998
23 Consent of Deloitte & Touche LLP
<PAGE> 1
EXHIBIT 2.2
AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
THIS AMENDMENT (the "Amendment") dated as of July 22, 1998 is among Baker
Hughes Incorporated, a Delaware corporation ("Parent"), Baker Hughes Delaware I,
Inc., a Delaware corporation and a direct, wholly owned subsidiary of Parent
("Merger Sub"), and Western Atlas Inc., a Delaware corporation (the "Company").
RECITALS
WHEREAS, Parent, Merger Sub and the Company are parties to an Agreement and
Plan of Merger dated as of May 10, 1998 (the "Merger Agreement"); and
WHEREAS, Parent, Merger Sub and the Company wish to amend the Merger
Agreement pursuant to Section 10.5 thereto, and the respective Boards of
Directors of Parent, Merger Sub and the Company have approved and adopted this
Amendment;
NOW, THEREFORE, the parties agree to amend the Merger Agreement as follows:
Section 1. Amendment of the Merger Agreement.
(a) The proviso at the end of Section 4.1(c) of the Merger Agreement is
amended and restated in its entirety to read as follows:
(iv) if the Parent Share Price is greater than or equal to $34.00 but less
than $38.25, that fraction, rounded to the nearest thousandth, or if there
shall not be a nearest thousandth, to the next higher thousandth, equal to
the quotient obtained by dividing $91.80 by the Parent Share Price; and (v)
if the Parent Share Price is less than $34.00, 2.7.
(b) Section 9.3(d) of the Merger Agreement is deleted.
Section 2. Miscellaneous.
(a) Except as expressly set forth herein, all the provisions of the Merger
Agreement are hereby ratified and confirmed by the parties and shall remain in
full force and effect. All references in the Merger Agreement to "this
Agreement" shall be read as references to the Merger Agreement, as amended by
this Amendment, but references to the date of the Agreement shall remain
references to May 10, 1998.
(b) This Amendment shall be governed by and construed in accordance with
the laws of the State of Delaware, without regarding to its rules of conflict of
laws.
(c) This Amendment may be executed by the parties hereto in separate
counterparts, each of which when so executed and delivered shall be an original,
but all such counterparts shall together constitute one and the same instrument.
Each counterpart may consist of a number of copies hereof each signed by less
than all, but together signed by all of the parties hereto.
(d) Headings of the Sections of this Amendment are for the convenience of
the parties only, and shall be given no substantive or interpretative effect
whatsoever.
-1-
<PAGE> 2
IN WITNESS WHEREOF, the parties have executed this Amendment and caused the
same to be duly delivered on their behalf on the day and year first written
above.
BAKER HUGHES INCORPORATED
By: /s/ MAX L. LUKENS
----------------------------------
Name: Max L. Lukens
Title: Chairman of the Board,
President and CEO
BAKER HUGHES DELAWARE I, INC.
By: /s/ LAWRENCE O'DONNELL, III
----------------------------------
Name: Lawrence O'Donnell, III
Title: Vice President
WESTERN ATLAS INC.
By: /s/ WILLIAM H. FLORES
----------------------------------
Name: William H. Flores
Title: Senior Vice President
-2-
<PAGE> 1
EXHIBIT 13.1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Western Atlas Inc.
We have audited the accompanying consolidated balance sheets of Western Atlas
Inc. and subsidiaries (the "Company") as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Western Atlas Inc. and subsidiaries
as of December 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Houston, Texas
February 18, 1998, March 9, 1998
with respect to Note N
<PAGE> 2
WESTERN ATLAS INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenue $ 1,658,150 $ 1,418,108 $ 1,282,927
----------- ----------- -----------
Costs and expenses:
Operating expenses 962,683 834,635 742,901
General and administrative 66,758 72,004 71,730
Research and technology 59,153 54,810 59,843
Depreciation, depletion, and amortization 368,937 309,213 273,550
----------- ----------- -----------
Total costs and expenses 1,457,531 1,270,662 1,148,024
----------- ----------- -----------
Operating profit 200,619 147,446 134,903
----------- ----------- -----------
Other income and expenses:
Spin-off related costs (8,350) -- --
Interest income 1,832 1,477 1,844
Interest expense (42,856) (32,386) (33,539)
----------- ----------- -----------
Total other income and expenses (49,374) (30,909) (31,695)
----------- ----------- -----------
Earnings from continuing operations before
taxes on income 151,245 116,537 103,208
Taxes on income (59,434) (46,615) (41,799)
----------- ----------- -----------
Earnings from continuing operations 91,811 69,922 61,409
Discontinued operations -- results of UNOVA,
Inc. distributed to shareholders (154,927) 55,743 38,430
----------- ----------- -----------
Net earnings (loss) $ (63,116) $ 125,665 $ 99,839
=========== =========== ===========
Basic net earnings (loss) per share:
Continuing operations $ 1.69 $ 1.31 $ 1.16
Discontinued operations (2.85) 1.04 .72
----------- ----------- -----------
Total earnings (loss) per share $ (1.16) $ 2.35 $ 1.88
=========== =========== ===========
Diluted net earnings (loss) per share:
Continuing operations $ 1.65 $ 1.29 $ 1.14
Discontinued operations (2.78) 1.03 .72
----------- ----------- -----------
Total earnings (loss) per share $ (1.13) $ 2.32 $ 1.86
=========== =========== ===========
Shares used in computing net earnings (loss)
per share:
Basic 54,252 53,490 53,074
Diluted 55,613 54,271 53,755
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 3
WESTERN ATLAS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and number of shares)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 33,504 $ 16,296
Accounts receivable, less allowance for doubtful
accounts of $27,853 (1997) and $19,831 (1996) 445,420 360,935
Inventories 39,360 42,706
Deferred tax assets 34,841 43,049
Other current assets 39,366 35,158
Net assets of UNOVA, Inc. -- 574,508
Due from UNOVA, Inc. -- 109,574
----------- -----------
Total current assets 592,491 1,182,226
Property, plant, and equipment, net of accumulated depreciation
and depletion of $491,779 (1997) and $459,978 (1996) 926,382 692,252
Multiclient seismic data and other assets 479,654 325,238
Goodwill and other intangibles, net of accumulated amortization
of $38,778 (1997) and $30,141 (1996) 332,180 299,494
----------- -----------
Total assets $ 2,330,707 $ 2,499,210
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable and accrued liabilities $ 260,627 $ 257,070
Payroll and related expenses 111,108 97,147
Notes payable and current portion of long-term debt 106,592 53,055
----------- -----------
Total current liabilities 478,327 407,272
----------- -----------
Long-term debt 701,530 450,589
----------- -----------
Deferred tax liabilities 11,157 8,435
----------- -----------
Deferred revenue and other long-term obligations 252,826 129,976
----------- -----------
Commitments and contingencies
Shareholders' equity:
Preferred stock -- $1 par value; 25,000,000 shares authorized -- --
Common stock -- $1 par value; 150,000,000 shares authorized,
54,587,518 (1997) and 53,705,712 (1996) issued and outstanding 54,588 53,706
Additional paid-in capital 685,283 1,146,066
Retained earnings 150,502 291,458
Cumulative currency translation adjustments -- 12,482
Pension liability adjustments (3,506) --
Treasury stock, at cost -- 13,552 shares (1996) -- (774)
----------- -----------
Total shareholders' equity 886,867 1,502,938
----------- -----------
Total liabilities and shareholders' equity $ 2,330,707 $ 2,499,210
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
WESTERN ATLAS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
COMMON STOCK, PAR VALUE:
Beginning of year $ 53,706 $ 53,235 $ 52,925
Stock options exercised 541 434 310
Shares issued for acquisitions 312 -- --
Shares issued under stock purchase plan 29 37 --
----------- ----------- -----------
End of year $ 54,588 $ 53,706 $ 53,235
=========== =========== ===========
ADDITIONAL PAID-IN CAPITAL:
Beginning of year $ 1,146,066 $ 1,129,417 $ 1,119,889
Stock options exercised 23,399 14,771 9,528
Spin-off of UNOVA, Inc. (513,112) -- --
Shares issued for acquisitions 27,067 -- --
Shares issued under stock purchase plan 1,863 1,878 --
----------- ----------- -----------
End of year $ 685,283 $ 1,146,066 $ 1,129,417
=========== =========== ===========
RETAINED EARNINGS:
Beginning of year $ 291,458 $ 165,793 $ 65,954
Net earnings (loss) (63,116) 125,665 99,839
Spin-off of UNOVA, Inc. (77,840) -- --
----------- ----------- -----------
End of year $ 150,502 $ 291,458 $ 165,793
=========== =========== ===========
CUMULATIVE TRANSLATION ADJUSTMENTS:
Beginning of year $ 12,482 $ 8,402 $ 9,557
Translation rate changes (3,699) 4,080 (1,155)
Spin-off of UNOVA, Inc. (8,783) -- --
----------- ----------- -----------
End of year $ -- $ 12,482 $ 8,402
=========== =========== ===========
PENSION LIABILITY ADJUSTMENTS:
Beginning of year $ -- $ -- $ --
Current year adjustment (3,506) -- --
----------- ----------- -----------
End of year $ (3,506) $ -- $ --
=========== =========== ===========
TREASURY STOCK, AT COST:
Beginning of year $ (774) $ -- $ --
Shares purchased (4,241) (774) --
Shares issued under stock purchase plan 5,015 -- --
----------- ----------- -----------
End of year $ -- $ (774) $ --
=========== =========== ===========
TOTAL SHAREHOLDERS' EQUITY, END OF YEAR $ 886,867 $ 1,502,938 $ 1,356,847
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
WESTERN ATLAS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings from continuing operations $ 91,811 $ 69,922 $ 61,409
Adjustments to reconcile net earnings from continuing
operations to net cash provided by operating activities:
Depreciation, depletion, and amortization 368,937 309,213 273,550
Change in accounts receivable (79,363) (47,978) (42,665)
Change in inventories 4,825 (5,569) (11,551)
Change in other current assets (4,043) 31,681 (10,655)
Change in accounts payable and accrued liabilities (970) 49,332 (38,329)
Change in payroll and related expenses 13,961 10,367 5,644
Change in deferred revenue 122,132 39,501 18,494
Reimbursement for shutdown of certain acquired operations -- -- 20,000
Other operating activities 1,768 (6,852) 1,681
----------- ----------- -----------
Total from continuing operations 519,058 449,617 277,578
Net operating activities from discontinued operations 12,115 22,252 86,795
----------- ----------- -----------
Net cash provided by operating activities 531,173 471,869 364,373
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (429,972) (279,553) (171,147)
Cost of multiclient seismic data acquired (275,055) (195,922) (152,336)
Proceeds from sale of businesses -- 12,051 122,000
Acquisition of businesses, net of cash acquired (55,358) (890) (20,100)
Other investing activities 2,164 12,374 (6,371)
----------- ----------- -----------
Total from continuing operations (758,221) (451,940) (227,954)
Net investing activities of discontinued operations (406,319) 9,608 (25,249)
----------- ----------- -----------
Net cash (used in) investing activities (1,164,540) (442,332) (253,203)
----------- ----------- -----------
Cash flows from financing activities:
Payment from UNOVA, Inc. 109,574 2,855 352
Proceeds from issuance of common stock 23,940 16,346 9,838
Repayment of long-term obligations (71,275) (3,168) (38,833)
Proceeds from issuance of long-term debt 369,654 1,009 6,882
Other financing activities 8,327 1,016 (960)
----------- ----------- -----------
Total from continuing operations 440,220 18,058 (22,721)
Net financing activities of discontinued operations 210,355 (44,513) (88,139)
----------- ----------- -----------
Net cash provided by (used in) financing activities 650,575 (26,455) (110,860)
----------- ----------- -----------
Net increase in cash and cash equivalents 17,208 3,082 310
Cash and cash equivalents, beginning of year 16,296 13,214 12,904
----------- ----------- -----------
Cash and cash equivalents, end of year $ 33,504 $ 16,296 $ 13,214
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 52,951 $ 40,381 $ 40,550
Income taxes $ 52,665 $ 6,131 $ 67,095
Supplemental schedule of non-cash investing and
financing activities:
Acquisitions of businesses --
Fair value of assets acquired $ 28,176 $ -- $ --
Net cash acquired 2,528 -- --
Liabilities assumed (3,325) -- --
----------- ----------- -----------
Stock issued in connection with acquisitions $ 27,379 $ -- $ --
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
WESTERN ATLAS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations. Western Atlas Inc. ("WAI" or the "Company") is a leading
supplier of oilfield services and reservoir information technologies for the
worldwide oil and gas industry. The Company provides land, marine, and
transition-zone seismic data acquisition and processing services; well-logging
and completion services; and reservoir characterization and project management
services for a worldwide client base. The Company's principal customers are
private sector and government-owned oil and gas companies, and approximately 68%
of its revenue is generated by activities outside of the United States.
Use of Estimates in the Preparation of Financial Statements. 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 and the reported amounts of
revenue and expenses for each reporting period. Actual results could differ from
those estimates.
Principles of Consolidation. The consolidated financial statements include those
of the Company, its subsidiaries, and companies in which WAI has a controlling
interest (see Note B.) The equity method is used to account for investments in
companies over which WAI has influence but not a controlling interest. All
material intercompany transactions are eliminated in consolidation.
Earnings Per Share. In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share." The new standard simplifies the computation of earnings
per share ("EPS") and increases comparability to international accounting
standards. Under SFAS No. 128, "Primary" EPS is replaced by "Basic" EPS, which
excludes dilution and is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding for the
period. "Diluted" EPS, which is computed similarly to the former "Fully Diluted"
EPS, reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
The Company was required to adopt the new standard in its year-end 1997
financial statements. As a result, the Company's reported earnings per share for
1996 and 1995 were restated. The effect of this accounting change on previously
reported EPS data is as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Primary EPS as originally reported $ 2.31 $ 1.85
Effect of SFAS No. 128 0.04 0.03
-------- --------
Basic EPS as restated $ 2.35 $ 1.88
======== ========
Fully diluted EPS as originally reported $ 2.30 $ 1.85
Effect of SFAS No. 128 0.02 0.01
-------- --------
Diluted EPS as restated $ 2.32 $ 1.86
======== ========
</TABLE>
Cash Equivalents. The Company considers securities purchased within three months
of their date of maturity to be cash equivalents.
Inventories. Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Revenue Recognition. Revenue is recognized when products are shipped or as
services are performed.
Multiclient Seismic Data. Costs incurred in the creation of Company-owned
multiclient seismic data, included in multiclient seismic data and other assets,
are capitalized and amortized over the estimated revenue that the Company
expects to realize from the licensing of such data. Advances received from
customers in payment for specific contracts are included in deferred revenue.
<PAGE> 7
Research and Technology. Research and technology costs are charged to expense as
incurred. Worldwide expenditures on research and technology activities amounted
to $59.2 million, $54.8 million, and $59.8 million, in the years ended December
31, 1997, 1996, and 1995, respectively.
Property, Plant, and Equipment. Investment in property, plant, and equipment is
stated at cost. Depreciation, computed generally by the straight-line method for
financial reporting purposes, is provided over the estimated useful lives of the
related assets. During the fourth quarter of 1997, the Company extended the
estimated useful lives of certain assets to more closely reflect management's
current estimate of their expected lives. The effect of this change in
accounting estimate resulted in an increase in the Company's earnings from
continuing operations of $2.8 million or $0.05 basic earnings per share, for
1997. The Company uses the full cost method of accounting for its investment in
oil and gas properties. Under this method, the Company capitalizes all
acquisition, exploration, and development costs incurred for the purpose of
finding oil and gas reserves. The Company computes the provision for
depreciation, depletion, and amortization ("DD&A") of oil and gas properties on
a quarterly basis using the unit-of-production method based upon production and
estimates of proved reserve quantities. The full cost accounting rules of the
Securities and Exchange Commission include a reserve value ceiling test which
requires a write-down if the ceiling is exceeded. The Company had write-downs of
$12.5 million and $7.0 million during 1997 and 1996, respectively, due to
ceiling test limitations.
Income Taxes. The Company measures tax assets and liabilities based on a balance
sheet approach. Tax assets and liabilities are stated at the tax rate in effect
when the estimated assets and liabilities will be realized. See Note H for
further discussion.
Concentrations of Credit Risk. Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of cash and cash
equivalents and trade receivables. The Company places its cash and cash
equivalents with high-quality financial institutions and limits the amount of
credit exposure with any one institution. Concentrations of credit risk with
respect to trade receivables are limited because a large number of
geographically diverse customers make up the Company's customer base, thus
geographically spreading the trade credit risk.
Translation of Foreign Currencies. Financial statements of foreign subsidiaries
are translated into U.S. dollars based on the functional currency of each
business unit. For units whose local currency is the functional currency, asset
and liability accounts are translated at rates in effect at the balance sheet
date, and revenue and expense accounts are translated at rates approximating the
actual rates on the dates of the transactions. Translation adjustments are
included as a separate component of shareholders' equity. For units that have
the U.S. dollar as the functional currency, inventories, cost of sales,
property, plant, and equipment and related depreciation are translated at
historical rates. Other asset and liability accounts are translated at rates in
effect at the balance sheet date, and revenue and expenses (excluding cost of
sales and depreciation) are translated at rates approximating the actual rates
on the dates of the transactions. Translation adjustments are reflected in the
Consolidated Statements of Income. At December 31, 1997, the U.S. dollar was the
functional currency for substantially all of the Company's foreign operations.
Goodwill and Other Intangibles. For financial statement purposes, goodwill is
generally amortized using the straight-line method over its estimated useful
life, not exceeding 40 years. The Company assesses the recoverability of
goodwill at the end of each fiscal year or more often as circumstances warrant.
Factors considered in evaluating recoverability include management's plan with
respect to the operations to which the goodwill relates, particularly the
historical earnings and projected undiscounted cash flows of such operations.
Dividends. No cash dividends were paid on Common Stock in the years ended
December 31, 1997, 1996, and 1995.
Environmental Costs. Provisions for environmental costs are recorded when the
Company determines its responsibility for remedial efforts and such amounts are
reasonably estimable.
Reclassifications. Certain prior year amounts have been reclassified to conform
to the current year presentation.
New Accounting Standards. In 1997, the FASB issued SFAS No.130, "Reporting
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components. Comprehensive income includes all
changes in equity during a period except those resulting from investments by
owners and distributions to owners. SFAS No. 130 is effective for the Company
beginning in 1998 and is expected to impact the Company's reporting of the
excess of additional pension liability over recognized prior service cost.
Currently, these items are included as components of Shareholders' Equity.
<PAGE> 8
Also during 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes new requirements on
the reporting of information about operating segments, products and services,
geographic areas, and major customers. In February 1998, SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," was
issued which revises required disclosures relating to pensions and
postretirement benefit plans. SFAS No. 131 and 132 are effective for the Company
beginning in 1998. The Company will analyze these pronouncements during 1998 to
determine what, if any, additional disclosures will be required thereunder.
NOTE B: DISCONTINUED OPERATIONS
On May 4, 1997, the Company's Board of Directors approved, in principle, a plan
to distribute (the "Spin-off") to WAI shareholders all of the outstanding common
stock of UNOVA, Inc. ("UNOVA"), a wholly owned subsidiary of WAI. UNOVA was
subsequently organized to own and conduct all of WAI's industrial automation
systems operations, which include its automated data collection and
manufacturing systems businesses. Pursuant to the Spin-off, on October 31, 1997
each WAI shareholder of record on October 24, 1997 received an equivalent number
of shares of UNOVA common stock. The distribution of such stock was structured
to be tax-free to WAI and its shareholders. Concurrent with the Spin-off, UNOVA
repaid WAI for intercompany indebtedness totaling $230 million. WAI used the
funds to repay certain short-term borrowings.
In connection with the Spin-off, the Consolidated Financial Statements of WAI
and related notes thereto were restated to present the operations of UNOVA as
discontinued. Income (loss) from discontinued operations included interest
expense allocated on the basis of debt levels assumed in the Spin-off. Corporate
general and administrative costs of the Company were not allocated to UNOVA for
any of the periods presented.
Discontinued operations of UNOVA for the ten months ended October 31, 1997 and
the years ended December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(in millions)
<S> <C> <C> <C>
Net revenue $1,201.1 $1,164.7 $ 942.9
Allocated interest expense 17.2 11.5 12.2
Allocated interest income 2.7 4.4 2.8
Income (loss) before income taxes $ (122.7) $ 92.9 $ 64.6
Provision for income taxes 32.2 37.2 26.2
-------- -------- --------
Total discontinued operations, net of income taxes $ (154.9) $ 55.7 $ 38.4
======== ======== ========
</TABLE>
Net assets of UNOVA as of October 31, 1997, the distribution date, and December
31, 1996 are as follows:
<TABLE>
<CAPTION>
OCTOBER 31, DECEMBER 31,
1997 1996
------------ ------------
(in thousands)
<S> <C> <C>
Current assets $ 752,633 $ 695,791
Noncurrent assets 586,886 378,002
------------ ------------
Total assets 1,339,519 1,073,793
------------ ------------
Current liabilities (652,230) (429,770)
Noncurrent liabilities (87,554) (69,515)
------------ ------------
Total liabilities (739,784) (499,285)
------------ ------------
Net assets of UNOVA $ 599,735 $ 574,508
============ ============
</TABLE>
Assuming the Spin-off had occurred on January 1, 1997, the pro forma effect on
the Company's earnings from continuing operations is the reduction of general
and administrative expenses of $9.9 million, net of tax, and Spin-off related
costs of $5.0 million, net of tax. These amounts would result in an increase of
$.28 in basic earnings per share on a pro forma basis.
<PAGE> 9
NOTE C: BUSINESS ACQUISITIONS, INVESTMENTS, AND DISPOSITIONS
Acquisitions and Investments. The Company made several acquisitions and
investments during the year ended December 31, 1997. In May 1997, the Company
acquired Sungroup Energy Services Company, a Canadian well-logging, production
testing, and completion services provider. During the fourth quarter of 1997,
the Company completed the following acquisitions: Geosignal, Inc., a seismic
data processing company; Seismic Resources, Inc., a provider of nonexclusive
seismic surveys; and ParaMagnetic Logging, Inc., a well-logging research
company. These acquisitions were made using Company common stock. Also in the
fourth quarter of 1997, the Company used cash to purchase Heartland Kingfisher
Inc., a Canadian well-logging company. In 1995, the Company used cash to
purchase 50% of PetroAlliance Services Company, Ltd., which offers seismic,
well-logging, and integrated project services to local and international oil
companies operating in the former Soviet Union.
The purchase method of accounting was used to record all of these acquisitions.
Their results of operations are included in the Consolidated Statements of
Income from the acquisition dates. These acquisitions and several smaller
acquisitions in 1995 and 1996 are integral to the Company's goals, though not
material in the aggregate to the Company's consolidated financial statements in
any one year.
The Company acquired Norand Corporation ("Norand") on March 3, 1997, and United
Barcode Industries ("UBI") on April 4, 1997. These companies were integrated
into the Company's industrial automation systems operations and included in the
Spin-off. Both transactions were funded using a combination of committed credit
facilities, short-term uncommitted credit lines and excess cash. The purchase
method of accounting was used to record these acquisitions and, accordingly, the
acquisition costs (approximately $280 million and $107 million for Norand and
UBI, respectively) were allocated to the net assets acquired based upon their
relative fair values. Such allocation assigned $203 million to in-process
research and development activities, which was expensed in accordance with FASB
Interpretation No. 4 during the second quarter.
The Company also acquired the remaining 51% of Honsberg, a German machine tool
maker, in the second quarter of 1997. The original 49% of Honsberg was acquired
during 1995. In September 1997, the Company acquired the stamping, engineering,
and prototyping division of Modern Prototype Company. These companies were also
included in the Spin-off.
Dispositions. The assets of the Company's seismic equipment manufacturing
operations were sold during the second quarter of 1995 for approximately $122
million in cash. As part of the sales agreement, the Company entered into a
commitment to purchase from the buyer $350 million of seismic and related
equipment. The remaining equipment purchase commitment is approximately $67
million as of December 31, 1997. The excess of the sales price over the net book
value of the assets sold was deferred and is amortized as the Company purchases
equipment from the buyer.
<PAGE> 10
NOTE D: LONG-TERM DEBT AND FINANCIAL INSTRUMENTS
Long-term Debt
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
Commercial paper $135,250 $ --
Short-term notes payable, weighted average
interest rate of 6.25% (1997) and 10.58% (1996) 220,557 3,602
7.875% notes due 2004 250,000 250,000
8.55% debentures due 2024 150,000 150,000
5.65% notes due 1997 and 1998 48,461 96,921
Other, principally notes payable in installments
through 2002 with a weighted average interest
rate of 7.56% at December 31, 1997 3,854 3,121
-------- --------
808,122 503,644
Less current portion 106,592 53,055
-------- --------
Long-term debt $701,530 $450,589
======== ========
</TABLE>
In July 1997, the Company commenced a short-term commercial paper ("CP") program
providing for the issuance of up to $400 million in aggregate maturity value of
commercial paper at any given time. As of December 31, 1997, outstanding
commercial paper borrowings totaled $135.3 million and interest rates on such
borrowings ranged from 5.9% to 6.25% with an effective weighted average interest
rate of 6.05%. The CP program is secured by committed credit facilities with a
group of banks that provide for $400 million in long-term committed credit
reduced by the amount outstanding under the CP program. No amounts were
outstanding under the long-term committed credit facilities at December 31, 1997
except those committed in support of the CP program. At December 31, 1997, $300
million in commercial paper and short-term obligations was reclassified as
long-term debt as the Company has the ability and intent to refinance such
obligations on a long-term basis utilizing existing credit facilities.
The Company maintains off-balance-sheet guarantees and letter-of-credit
agreements. At December 31, 1997, the face values of these agreements totaled
$156 million of which $84 million was related to contracts to build two seismic
vessels. (See "Financial Instruments" below and Note K: "Litigation, Commitments
and Contingencies.") The remaining $72 million of credit arrangements are
generally related to guarantees of future performance on contracts.
At December 31, 1997, the Company was in compliance with its various debt
covenants, which relate to the Company's incurrence of debt, mergers,
consolidations, and sale of assets and require the Company to satisfy certain
ratios related to tangible net worth, debt-to-equity and interest coverage.
Aggregate Maturities of Debt
Notes payable and long-term obligations at December 31, 1997 mature as follows,
in thousands of dollars:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
1998 $ 106,592
1999 830
2000 300
2001 300
2002 300,100
Thereafter 400,000
---------
$ 808,122
=========
</TABLE>
<PAGE> 11
Financial Instruments
The Company uses forward contracts for the purpose of reducing its exposure to
adverse fluctuations in foreign exchange and interest rates. While these hedging
instruments are subject to fluctuations in value, such fluctuations are
generally offset by the value of the underlying exposure being hedged. The
Company is not a party to leveraged derivatives and does not hold or issue
financial instruments for speculative purposes.
Foreign Currency Management - From time to time, the Company enters into foreign
currency forward contracts to hedge anticipated and firmly committed foreign
currency transactions. At December 31, 1997, the Company had entered into
foreign currency forward contracts with notional amounts of $88.9 million to
primarily hedge the commitment to purchase two seismic vessels in 1999. The
notional amounts are used to express the volume of these transactions and do not
represent exposure to loss. The carrying value of the contracts was not
significant. The fair value of the contracts, based on year-end quoted rates for
purchasing contracts with similar terms and maturity dates, approximated
carrying value and was also not significant. Foreign currency gains and losses
for such purchases are deferred as part of the basis of the assets. The
counterparties to the Company's forward contracts are major financial
institutions. The credit ratings and concentration of risk of these financial
institutions are monitored on a continuing basis and, in management's opinion,
present no significant credit risk to the Company.
Interest Rate Management - The Company periodically enters into various
financial instruments to manage its interest rate exposure. At December 31,
1997, the Company did not have any outstanding interest rate swap agreements.
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------------------- ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 33,504 $ 33,504 $ 16,296 $ 16,296
Long-term debt:
Commercial paper 135,250 135,250 -- --
Short-term notes payable 220,557 220,557 3,602 3,602
7.875% notes due 2004 250,000 270,200 250,000 265,234
8.55% debentures due 2024 150,000 181,375 150,000 170,170
5.65% notes due 1997 and 1998 48,461 48,461 96,921 96,630
Other debt 3,854 3,854 3,121 3,121
</TABLE>
The following methods and assumptions were used to estimate the fair value of
the financial instruments summarized in the table above. The carrying values of
accounts receivable, accounts payable, and payrolls and related expenses
included in the accompanying Consolidated Balance Sheets approximated market
value at December 31, 1997 and 1996.
Cash and cash equivalents - The carrying amounts approximated fair value due to
the short maturity of these instruments.
Long-term debt - The fair values of the 7.875% notes and the 8.55% debentures
were based on the quoted market price for similar issues. The carrying amount of
the commercial paper, short-term notes payable, and other debt approximated fair
value due to the short maturities and because the interest rates were reflective
of market rates.
<PAGE> 12
NOTE E: ACCOUNTS RECEIVABLE AND INVENTORIES
Following are the details of accounts receivable:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
Trade receivables $440,748 $344,367
Notes receivable (see Note J) 4,672 16,568
-------- --------
Total $445,420 $360,935
======== ========
</TABLE>
Summarized below are the components of inventory balances:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
Raw materials $ 19,084 $ 20,377
Work in progress 16,032 15,730
Finished goods 4,244 6,599
-------- --------
Total $ 39,360 $ 42,706
======== ========
</TABLE>
NOTE F: PROPERTY, PLANT, AND EQUIPMENT
Investment in property, plant, and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996
------------- -------------
(in thousands)
<S> <C> <C>
Land $ 34,193 $ 35,340
Buildings 142,973 131,087
Machinery and equipment 1,130,594 952,730
Investment in E&P projects, full cost method 110,401 33,073
Less accumulated depreciation and depletion (491,779) (459,978)
------------- -------------
Total $ 926,382 $ 692,252
============= =============
</TABLE>
The net book value of assets utilized under capital leases was not material at
December 31, 1997 and 1996.
The range of estimated useful lives for determining depreciation and
amortization of the major classes of assets are:
Buildings 10 - 45 years
Land improvements and building improvements 2 - 10 years
Machinery and equipment 2 - 20 years
<PAGE> 13
As of December 31, 1997, minimum rental commitments under noncancellable
operating leases are set forth in the table below, in thousands:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998 $ 8,177
1999 6,517
2000 4,021
2001 1,222
2002 569
Thereafter 4,209
----------
$ 24,715
==========
</TABLE>
Rental expense for operating leases, including amounts for short-term leases
with nominal, if any, future rental commitments, was $111.7 million, $73.1
million, and $75.4 million, for the years ended December 31, 1997, 1996, and
1995, respectively. The minimum future rentals receivable under subleases and
the contingent rental expenses were not significant.
NOTE G: SHAREHOLDERS' EQUITY
The following table presents shares used in the computation of earnings per
share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Weighted average common shares outstanding
(net of treasury shares) 54,252 53,490 53,074
Additional potentially dilutive securities
(equivalent in common stock) 1,361 781 681
-------- -------- --------
Total 55,613 54,271 53,755
======== ======== ========
</TABLE>
Stock Option Plans
The Company has a stock option plan, which provides for the grant of incentive
awards to officers and other key employees. Incentive awards are granted in the
form of stock options at a price equal to the fair market value of the Company's
common stock on the date of grant, at terms not exceeding 10 years. The Company
also has a directors' stock option plan that provides for the grant of stock
options to the Company's nonemployee directors. Under this plan, stock options
are granted annually at the fair market value of the Company's common stock on
the date of grant at terms not exceeding 10 years. The number of options so
granted annually is fixed by the plan. Options granted under the directors'
stock option plan become fully exercisable on the first anniversary of their
grant. Under these plans, there were a total of 1,818,390 and 1,098,528 shares
subject to options which were exercisable as of December 31, 1997 and 1996,
respectively, and 1,142,464 shares available for grant as of December 31, 1997.
<PAGE> 14
The following table summarizes the shares outstanding under the Company's stock
option plans:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
------------ ----------------
<S> <C> <C>
OUTSTANDING AT DECEMBER 31, 1994 2,751,993 $ 25.87
Granted 580,500 42.89
Exercised (310,839) 18.74
Canceled (154,270) 36.13
-----------
OUTSTANDING AT DECEMBER 31, 1995 2,867,384 29.54
Granted 614,600 58.03
Exercised (441,327) 17.64
Canceled (74,005) 39.47
-----------
OUTSTANDING AT DECEMBER 31, 1996 2,966,652 36.96
Prior to the Spin-off --
Granted 1,349,879 62.37
Exercised (466,910) 28.92
Canceled (35,736) 51.10
After the Spin-off --
Spin-off adjustment 884,290 N/A
Exercised (77,325) 15.66
Canceled (895) 29.38
-----------
OUTSTANDING AT DECEMBER 31, 1997 4,619,955 38.37
===========
</TABLE>
In connection with the Spin-off, all employee and director options outstanding
immediately prior to the Spin-off were adjusted by increasing the number of
shares subject to the option and decreasing the exercise price per share so as
to preserve the difference between the aggregate exercise price of the option
and the aggregate market value of the shares subject to the option. Grants in
1997 include options to acquire 484,379 common shares with a weighted average
exercise price of $39.42 which were acquired in the acquisition of Norand.
Outstanding stock option data as of December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- -------------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
OF REMAINING EXERCISE OF EXERCISE
RANGE OF EXERCISE PRICES OPTIONS CONTRACTUAL LIFE PRICE OPTIONS PRICE
------------------------ --------- ----------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$ 1.65 to $10.99 191,060 2.37 years $ 9.85 191,060 $ 9.85
12.31 to 20.22 447,065 3.98 15.69 445,810 15.69
21.02 to 29.98 710,734 5.69 23.77 513,754 23.23
30.06 to 37.86 1,355,265 7.12 34.41 467,536 34.24
40.10 to 47.73 804,566 8.38 46.51 190,525 46.41
49.01 to 58.78 71,638 8.80 51.60 8,879 51.49
60.95 to 69.65 1,039,627 9.53 61.29 826 66.76
</TABLE>
The fair value of stock options granted during 1997 and 1996 were $26.3 million
and $12.8 million, respectively. The fair value of each stock option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions used for grants in 1997 and 1996,
respectively: risk-free interest rates of 6.3% and 6.4%, expected life of five
years for both years; and expected volatility of 33% and 26%, determined from
historical stock price fluctuations. There is no assurance that the assumptions
used in determining the fair values of stock options will prove true in the
future. The actual value of the options depends on several factors, including
the actual market price of the common stock on the date of exercise. Changes in
any of these factors as well as fluctuations in the market price of the
Company's common stock will cause the actual value of these options to vary from
the theoretical value indicated above.
<PAGE> 15
Employee Stock Purchase Plan
Under the 1996 Employee Stock Purchase Plan, the Company is authorized to sell
up to 2.5 million shares of common stock to eligible full-time employees of WAI
and participating subsidiaries. At each semi-annual offering period, employees
can choose to have up to 8% of their annual earnings withheld to purchase the
Company's common stock up to a maximum amount of $21,250 per calendar year. The
purchase price of the stock is 85% of the lower of its beginning-of-period or
end-of-period market price. The Company sold 95,129 and 36,975 shares under the
Plan in 1997 and 1996, respectively, with approximately 20% of eligible
employees participating each year. The weighted-average fair value of purchase
rights granted in 1997 and 1996 was $1,687,000 and $471,800, respectively. The
fair value of the stock purchase rights was determined using the same method and
parameters for stock option grants described above, except for the use of an
expected life equal to the purchase window period. As previously noted, the
actual value of purchase rights may vary from the theoretical value determined
using the Black-Scholes option pricing model.
Pro Forma Compensation Disclosure
The Company accounts for its stock-based compensation plans in accordance with
Accounting Principles Board Opinion No. 25, under which no compensation cost is
recognized for stock option awards or grants of stock purchase rights. Had
compensation cost for these plans been determined consistent with SFAS No. 123,
"Accounting for Stock-Based Compensation", the Company's pro forma net income
and basic earnings per share for 1997, 1996, and 1995 would have been:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
------------ ------------
(in thousands, except EPS)
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Earnings from continuing operations $ 91,811 $ 88,141
Earnings (loss) from discontinued operations (154,927) (158,294)
------------ ------------
Net earnings (loss) $ (63,116) $ (70,153)
============ ============
Basic earnings (loss) per share:
Continuing operations $ 1.69 $ 1.63
Discontinued operations (2.85) (2.92)
------------ ------------
Total earnings (loss) per share $ (1.16) $ (1.29)
============ ============
YEAR ENDED DECEMBER 31, 1996:
Earnings from continuing operations $ 69,922 $ 68,475
Earnings from discontinued operations 55,743 54,358
------------ ------------
Net earnings $ 125,665 $ 122,833
============ ============
Basic earnings per share:
Continuing operations $ 1.31 $ 1.28
Discontinued operations 1.04 1.02
------------ ------------
Total earnings per share $ 2.35 $ 2.30
============ ============
YEAR ENDED DECEMBER 31, 1995:
Earnings from continuing operations $ 61,409 $ 60,855
Earnings from discontinued operations 38,430 37,965
------------ ------------
Net earnings $ 99,839 $ 98,820
============ ============
Basic earnings per share:
Continuing operations $ 1.16 $ 1.15
Discontinued operations 0.72 0.71
------------ ------------
Total earnings per share $ 1.88 $ 1.86
============ ============
</TABLE>
The actual pro forma impact on net income and earnings per share may differ from
the theoretical valuation determined using the Black-Scholes option pricing
model due to factors previously noted. Further, the SFAS No. 123 method of
accounting was not applied to options granted prior to January 1, 1995,
therefore, the resulting pro forma compensation cost may not be representative
of that to be expected in future years.
<PAGE> 16
Shareholder Rights Plan
On August 17, 1994, the Company's Board of Directors adopted a Share Purchase
Rights Plan and, in accordance with such Plan, declared a dividend of one
preferred share purchase right for each outstanding share of Company common
stock, payable August 31, 1994 to shareholders of record on that date. In the
event that a party acquires more than 15% of the Company's then outstanding
Common Stock, the Plan will cause substantial dilution to a party that attempts
to acquire the Company in a manner or on terms not approved by the Board of
Directors, except pursuant to an offer conditioned on a substantial number of
rights being acquired.
The rights, which do not have voting rights and are not entitled to dividends
until such time as they become exercisable, expire on August 2004.
NOTE H: TAXES ON INCOME
The components of taxes on income from continuing operations consist of the
following provisions (benefits):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Currently payable:
U.S. taxes $ 8,132 $ 2,672 $ 7,003
International taxes 48,385 45,578 43,588
Deferred:
U.S. taxes 2,917 (1,635) (8,792)
-------- -------- --------
$ 59,434 $ 46,615 $ 41,799
======== ======== ========
</TABLE>
Deferred tax assets and liabilities result from the effect of transactions that
are recognized in different periods for financial and tax reporting purposes.
The primary components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------- -------------------------
ASSET LIABILITY ASSET LIABILITY
---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Accrued liabilities $ 12,934 $ -- $ 21,623 $ --
Receivables and inventory 8,421 -- 7,908 --
Research and development credit
carryover 6,555 -- -- --
Noncompete agreements -- 8,071 --
5,956
Postretirement benefits 1,244 -- 934 --
Pensions 3,103 -- 1,317 --
Depreciation, depletion, and
amortization 1,495 -- 6,053 --
Other items 1,089 3,086 5,214 2,479
---------- ---------- ---------- ----------
$ 34,841 $ 11,157 $ 43,049 $ 8,435
========== ========== ========== ==========
</TABLE>
<PAGE> 17
The following is a reconciliation of income taxes at the U.S. statutory rate of
35% to the provision for income taxes:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Tax at U.S. statutory rate $ 52,936 $ 40,788 $ 36,123
State income taxes, net of federal benefit 1,654 (450) (1,605)
Amortization of non-deductible goodwill 1,578 1,624 1,409
Foreign earnings taxed at other than U.S.
statutory rate 1,529 1,266 (1,089)
Non-deductible meals and entertainment 2,083 2,048 1,662
Other items (346) 1,339 5,299
---------- ---------- ----------
$ 59,434 $ 46,615 $ 41,799
========== ========== ==========
</TABLE>
NOTE I: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Pension Benefits
The Company has retirement and pension plans that cover most of its regular,
full-time employees. Most of the Company's U.S. employees are covered by a
defined contribution plan. The Company contributes an amount based on its
consolidated pretax earnings in accordance with the provisions of such plan.
This plan includes a voluntary savings feature that is intended to qualify under
Section 401(k) of the Internal Revenue Code and is designed to enhance the
retirement programs of participating employees. Under this feature, the Company
matches up to 67% of a certain portion of participants' contributions.
Certain subsidiaries of the Company also have retirement and savings plans for
eligible employees located outside the United States. The pension liabilities
and their related costs are computed in accordance with the laws of the
individual nations and appropriate actuarial practices.
The Company has a defined benefit retirement plan for its directors whereby
retired directors are paid an amount equal to active directors for a specified
period of time after retirement. In the event of a change in control in the
Company, directors receive a lump sum distribution of these payments.
U.S. Pension Plans
A summary of the components of net periodic pension cost for the U.S. defined
benefit plans and defined contribution plans for the years ended December 31,
1997, 1996, and 1995, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Defined benefit plans:
Service cost - benefits earned during the period $ 54 $ -- $ --
Interest cost on projected benefit obligation 537 337 271
Net amortization and deferral 314 38 (175)
---------- ---------- ----------
Net periodic pension cost 905 375 96
Defined contribution plans 39,033 32,792 30,421
---------- ---------- ----------
Net periodic pension cost $ 39,938 $ 33,167 $ 30,517
========== ========== ==========
</TABLE>
<PAGE> 18
Actuarial assumptions for the Company's U.S. defined benefit plans included an
expected long-term rate of return on plan assets of 8.00% and 9.25% for fiscal
years 1997 and 1996, respectively. The weighted-average discount rate used in
determining the actuarial present value of the projected benefit obligation was
7.0% and 7.5% at December 31, 1997 and 1996, respectively. The rate increase in
future compensation levels was 5% at December 31, 1997 and 1996. Pursuant to the
provisions of SFAS No. 87, "Employers' Accounting for Pensions," the Company
recorded in other noncurrent liabilities an additional minimum pension liability
adjustment of $5.4 million as of December 31, 1997. This additional liability
represented the amount by which the accumulated benefit obligation exceeded the
accrued amounts previously recorded. As there were no previously unrecognized
prior service costs at December 31, 1997, the full amount of the adjustment, net
of the related deferred tax benefit, was recorded as a reduction of
stockholders' equity of $3.5 million.
The following table sets forth the amounts recognized in the Company's balance
sheet at December 31, 1997 and 1996 for the Company's U.S. defined benefit
plans. All of the plans are unfunded.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
---------- ----------
(in thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ (10,095) $ (4,928)
========== ==========
Accumulated benefit obligation $ (10,095) $ (4,928)
========== ==========
Projected benefit obligation $ (11,024) $ (7,082)
Unrecognized net transition asset -- (108)
Unrecognized net loss 6,323 2,262
---------- ----------
Accrued pension liability (4,701) (4,928)
Adjustment required to recognize minimum liability (5,394) --
---------- ----------
Pension cost liability $ (10,095) $ (4,928)
========== ==========
</TABLE>
Non-U.S. Pension Plans
For the principal non-U.S. pension plans located in the United Kingdom, the
weighted-average discount rate used was approximately 8.5% at December 31, 1997.
The rate of increase in future compensation used was approximately 5.5% and the
rate of return on assets was 9.0% at December 31, 1997.
Pension costs for non-U.S. plans were not material for any of the periods
presented herein. The actuarial present value of projected benefits at December
31, 1997 was $25.8 million compared with net assets available for benefits of
$33.2 million.
Other Postretirement Benefits
In addition to pension benefits, certain of the Company's U.S. employees are
covered by postretirement health care and life insurance benefit plans. These
benefit plans are unfunded.
The net periodic postretirement benefit costs were not material for any of the
periods presented herein. The accumulated benefit obligation at December 31,
1997 was $6.1 million, of which $1.9 million was attributable to retirees and
$4.2 million to other active plan participants. The accumulated benefit
obligation for continuing operations at December 31, 1996 was $3.8 million, of
which $1.4 million was attributable to retirees and $2.4 million was
attributable to active plan participants.
Actuarial assumptions used to measure the accumulated benefit obligation include
a discount rate of 7.0% and 7.5% at December 31, 1997 and 1996, respectively.
The assumed health care cost trend rate for fiscal 1997 was 11.0% and is
projected to decrease over 20 years to 5.4%. The effect of a
one-percentage-point increase in the assumed health care cost trend rate on the
service cost and interest cost components of the net periodic postretirement
benefit cost is not material. A one-percentage-point increase in the assumed
health care cost trend rate on the accumulated benefit obligation results in an
increase of approximately $0.3 million.
<PAGE> 19
NOTE J: LITIGATION, COMMITMENTS, AND CONTINGENCIES
The Company is currently, and from time to time, subject to claims and suits
arising in the ordinary course of its business. In the opinion of the Company's
General Counsel, the ultimate resolution of currently pending proceedings will
not have a material adverse effect on the Company's financial statements.
NOTE K: RELATED PARTY TRANSACTIONS
For the purpose of governing certain relationships between UNOVA and the Company
after the Spin-off, UNOVA and the Company entered into various agreements
described below:
(i) Distribution and Indemnity Agreement - UNOVA and the Company
entered into a Distribution and Indemnity Agreement providing
for, among other things, the principal corporate transactions
required to effect the Spin-off and certain other agreements
governing the relationship between UNOVA and the Company with
respect to the Spin-off.
(ii) Tax-Sharing Agreement - As part of the Spin-off, UNOVA and the
Company entered into a Tax Sharing Agreement which provides,
among other things, for the allocation between the parties of
federal, state, local, and foreign tax liabilities for all
periods through the Spin-off date.
(iii) Benefits Agreement - UNOVA and the Company entered into an
Employee Benefits Agreement providing for the treatment of
employee benefit matters and other compensation arrangements
for certain former and current employees of UNOVA and its
subsidiaries.
(iv) Intellectual Property Agreement - UNOVA and the Company
entered into an Intellectual Property Agreement providing for
the transfer of ownership of intellectual property without
charge from Western Atlas to UNOVA and its subsidiaries, and
to provide UNOVA and its subsidiaries the rights to use the
Western Atlas name for a period of six months after the
Spin-off without charge.
The Chairman of the Company's board of directors serves as the Chairman and
Chief Executive Officer of UNOVA. In addition, one of the Company's other
directors is also a member of the board of directors of UNOVA.
Included in accounts receivable are notes due from the Company's unconsolidated
subsidiaries of $9.9 million and $15.9 million at December 31, 1997 and 1996,
respectively. Such amounts are partially collateralized by certain fixed assets
of such subsidiaries and bear interest at 10% to 18%. Accounts payable includes
$0.3 million and $1.6 million due to related parties at December 31, 1997 and
1996, respectively.
NOTE L: OPERATIONS BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
YEAR ENDED UNITED LATIN AFRICA AND
DECEMBER 31, STATES EUROPE AMERICA MIDDLE EAST OTHER TOTAL
------------ -------- -------- -------- ----------- -------- --------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue 1997 $ 529 $ 303 $ 294 $ 337 $ 195 $ 1,658
1996 432 286 209 322 169 1,418
1995 414 251 204 276 138 1,283
Operating profit 1997 $ 82 $ 8 $ 47 $ 34 $ 30 $ 201
1996 64 11 29 28 15 147
1995 49 12 28 25 21 135
Identifiable assets 1997 $ 1,287 $ 343 $ 163 $ 334 $ 204 $ 2,331
at year end 1996 1,693 255 153 284 114 2,499
1995 1,721 170 86 210 82 2,269
</TABLE>
<PAGE> 20
NOTE M: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 TOTAL
---------- ---------- ---------- ---------- ----------
(in millions, except per share data)
<S> <C> <C> <C> <C> <C>
1997
Revenue $ 380.0 $ 418.5 $ 420.2 $ 439.5 $ 1,658.2
Gross profit 71.1 83.8 93.7 97.4 346.0
Net earnings (loss) from:
Continuing operations $ 16.1 $ 16.6 $ 27.3 $ 31.8 $ 91.8
Discontinued operations 14.7 (186.5) 14.1 2.8 (154.9)
---------- ---------- ---------- ---------- ----------
Net earnings (loss) $ 30.8 $ (169.9) $ 41.4 $ 34.6 $ (63.1)
========== ========== ========== ========== ==========
Basic earnings (loss) per share from:
Continuing operations $ 0.30 $ 0.31 $ 0.50 $ 0.58 $ 1.69
Discontinued operations 0.28 (3.46) 0.27 0.06 (2.85)
---------- ---------- ---------- ---------- ----------
Total $ 0.58 $ (3.15) $ 0.77 $ 0.64 $ (1.16)
========== ========== ========== ========== ==========
Diluted earnings (loss) per share from:
Continuing operations $ 0.29 $ 0.30 $ 0.49 $ 0.57 $ 1.65
Discontinued operations 0.28 (3.37) 0.26 0.05 (2.78)
---------- ---------- ---------- ---------- ----------
Total $ 0.57 $ (3.07) $ 0.75 $ 0.62 $ (1.13)
========== ========== ========== ========== ==========
Common stock market prices:
High $ 58 63/64 $ 57 45/64 $ 71 51/64 $ 81 1/2 --
Low 45 7/8 45 3/32 56 43/64 63 7/8 --
1996
Revenue $ 309.0 $ 362.4 $ 362.6 $ 384.1 $ 1,418.1
Gross profit 56.5 70.8 80.2 77.4 284.9
Net earnings from:
Continuing operations $ 11.4 $ 17.6 $ 22.1 $ 18.8 $ 69.9
Discontinued operations 11.3 12.3 14.4 17.8 55.8
---------- ---------- ---------- ---------- ----------
Net earnings $ 22.7 $ 29.9 $ 36.5 $ 36.6 $ 125.7
========== ========== ========== ========== ==========
Basic earnings per share from:
Continuing operations $ 0.22 $ 0.33 $ 0.41 $ 0.35 $ 1.31
Discontinued operations 0.21 0.23 0.27 0.33 1.04
---------- ---------- ---------- ---------- ----------
Total $ 0.43 $ 0.56 $ 0.68 $ 0.68 $ 2.35
========== ========== ========== ========== ==========
Diluted earnings per share from:
Continuing operations $ 0.21 $ 0.33 $ 0.41 $ 0.34 $ 1.29
Discontinued operations 0.21 0.23 0.26 0.33 1.03
---------- ---------- ---------- ---------- ----------
Total $ 0.42 $ 0.56 $ 0.67 $ 0.67 $ 2.32
========== ========== ========== ========== ==========
Common stock market prices:
High $ 48 33/64 $ 51 1/4 $ 49 7/8 $ 57 7/32 --
Low 39 1/32 43 17/32 42 1/4 48 33/64 --
</TABLE>
As of February 25, 1998 there were approximately 21,200 holders of record of the
Company's common stock.
<PAGE> 21
NOTE N: SUBSEQUENT EVENTS
On March 8, 1998, the Company entered into an agreement to acquire the stock of
Wedge Dia-Log, Inc. ("Wedge Dia-Log"), for approximately $218 million in cash.
Wedge Dia-Log is a wireline company specializing in cased-hole and pipe recovery
services.
In addition, on March 8, 1998, the Company entered into an agreement to acquire
the stock of 3-D Geophysical, Inc., a supplier of primarily land-based seismic
data acquisition services, in an all cash tender offer for $9.65 per share, for
an aggregate of $115 million if all shares are tendered.
The above acquisitions will be accounted for using the purchase method of
accounting.
<PAGE> 1
EXHIBIT 13.2
WESTERN ATLAS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenue $ 490,745 $ 379,946
---------- ----------
Costs and expenses:
Operating expenses 291,748 245,840
General and administrative 16,960 16,800
Research and technology 14,427 15,235
Depreciation, depletion, and amortization 100,620 67,100
---------- ----------
Total costs and expenses 423,755 344,975
---------- ----------
Operating profit 66,990 34,971
---------- ----------
Other income and expenses:
Interest income 594 506
Interest expense (13,382) (8,669)
---------- ----------
Total other income and expenses (12,788) (8,163)
---------- ----------
Earnings from continuing operations before taxes on income 54,202 26,808
Taxes on income (20,597) (10,724)
---------- ----------
Earnings from continuing operations 33,605 16,084
Discontinued operations -- results of UNOVA, Inc.
distributed to shareholders -- 14,718
---------- ----------
Net earnings $ 33,605 $ 30,802
========== ==========
Basic net earnings per share:
Continuing operations $ 0.61 $ 0.30
Discontinued operations -- 0.28
---------- ----------
Total $ 0.61 $ 0.58
========== ==========
Diluted net earnings per share:
Continuing operations $ 0.60 $ 0.29
Discontinued operations -- 0.28
---------- ----------
Total $ 0.60 $ 0.57
========== ==========
Shares used in computing net earnings per share:
Basic 54,689 53,743
Diluted 56,075 54,734
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 2
WESTERN ATLAS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,464 $ 33,504
Accounts receivable, net 450,024 445,420
Inventories 39,391 39,360
Deferred tax assets 37,168 34,841
Other current assets 46,383 39,366
------------ ------------
Total current assets 589,430 592,491
Property, plant, and equipment, net 967,650 926,382
Multiclient seismic data and other assets 510,108 479,654
Goodwill and other intangibles, net 327,501 332,180
------------ ------------
Total assets $ 2,394,689 $ 2,330,707
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 330,811 $ 260,627
Payroll and related expenses 72,132 111,108
Notes payable and current portion of long-term debt 49,838 106,592
------------ ------------
Total current liabilities 452,781 478,327
Long-term debt 701,330 701,530
Deferred revenue and other long-term obligations 316,207 263,983
Commitments and contingencies
Shareholders' equity:
Preferred stock -- --
Common stock 54,792 54,588
Additional paid-in capital 688,978 685,283
Retained earnings 184,107 150,502
Pension liability adjustments (3,506) (3,506)
------------ ------------
Total shareholders' equity 924,371 886,867
------------ ------------
Total liabilities and shareholders' equity $ 2,394,689 $ 2,330,707
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 3
WESTERN ATLAS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings from continuing operations $ 33,605 $ 16,084
Adjustments to reconcile net earnings from continuing
operations to net cash provided by operating activities:
Depreciation, depletion, and amortization 100,620 67,100
Change in accounts receivable (4,604) (13,592)
Change in inventories (31) 3,787
Change in other current assets (7,017) 824
Change in accounts payable and accrued liabilities 70,184 13,228
Change in payroll and related expenses (38,976) (31,929)
Change in deferred revenue 48,205 94,340
Other operating activities (1,210) (249)
---------- ----------
Total from continuing operations 200,776 149,593
Net cash flow from discontinued operations -- (4,994)
---------- ----------
Net cash provided by operating activities 200,776 144,599
---------- ----------
Cash flows from investing activities:
Capital expenditures (86,817) (128,245)
Costs of multiclient seismic data acquired (80,259) (51,109)
Other investing activities 1,755 (2,049)
---------- ----------
Total from continuing operations (165,321) (181,403)
Net cash flow from discontinued operations -- (272,568)
---------- ----------
Net cash used in investing activities (165,321) (453,971)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt -- 2,201
Repayment of long-term debt (49,289) (200)
Net increase (decrease) in short-term borrowings (7,665) 200,561
Increase in UNOVA, Inc. receivable -- (56,915)
Proceeds from issuance of common stock 3,898 1,070
Other financing activities 561 (2,510)
---------- ----------
Total from continuing operations (52,495) 144,027
Net cash flow from discontinued operations -- 161,136
---------- ----------
Net cash provided by (used in) financing activities (52,495) 305,163
---------- ----------
Net decrease in cash and cash equivalents (17,040) (4,209)
Cash and cash equivalents, beginning of period 33,504 16,296
---------- ----------
Cash and cash equivalents, end of period $ 16,464 $ 12,087
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 5,164 $ 3,805
Income taxes $ 8,002 $ 20,945
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 4
WESTERN ATLAS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998
1. GENERAL
The amounts included in this report are unaudited; however, in the opinion
of the management of Western Atlas Inc. (the "Company"), all adjustments
necessary for a fair presentation of the Company's consolidated financial
position as of March 31, 1998 and its results of operations and cash flows
for the three months ended March 31, 1998 and 1997 are included. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles are condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. These condensed consolidated
financial statements should be read in conjunction with the Company's 1997
Annual Report on Form 10-K (as amended by Form 10-K/A) prepared in
accordance with generally accepted accounting principles. The results of
operations for the three months ended March 31, 1998 are not necessarily
indicative of the results to be expected for the entire year.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which established standards for reporting and
display of comprehensive income and its components. Comprehensive income
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. SFAS No. 130 was adopted
by the Company in 1998. Comprehensive income as determined under this
standard was $28.1 million for the three months ended March 31, 1997; there
was no effect for the three months ended March 31, 1998.
2. DISCONTINUED OPERATIONS
On October 31, 1997, the Company distributed all the shares of UNOVA, Inc.
("UNOVA"), its then wholly owned industrial automation systems subsidiary,
as a stock dividend to the Company's shareholders (the "Spin-off"). The
operations of UNOVA for the three months ended March 31, 1997 are
classified as discontinued operations in the Company's Condensed
Consolidated Financial Statements. For periods prior to the Spin-off, total
cash, debt, and related net interest expense were allocated based on the
capital needs of the operations. All corporate general and administrative
costs of the Company are included in continuing operations and no
allocation was made to UNOVA for any of the periods presented.
Discontinued operations of UNOVA for the three months ended March 31, 1997
are as follows (in thousands):
<TABLE>
<S> <C>
Net revenue.......................................... $323,066
Allocated interest expense........................... 3,566
Allocated interest income............................ 1,648
Income before income taxes........................... $ 24,529
Provision for income taxes........................... 9,811
--------
Total discontinued operations, net of income taxes... $ 14,718
========
</TABLE>
<PAGE> 5
3. EARNINGS PER SHARE
For the year ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, titled "Earnings per
Share," which simplifies the computation of earnings per share ("EPS") and
increases comparability to international accounting standards. The effect of
this accounting change on previously reported EPS data for the three months
ended March 31, 1997 is as follows:
<TABLE>
<S> <C>
Primary EPS as originally reported $0.56
Effect of SFAS No. 128 0.02
-----
Basic EPS as restated $0.58
=====
Fully diluted EPS as originally reported $0.56
Effect of SFAS No. 128 0.01
-----
Diluted EPS as restated $0.57
=====
</TABLE>
4. INVENTORY
Summarized below are the components of inventory balances:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
(in thousands)
<S> <C> <C>
Raw materials $ 19,330 $ 19,084
Work in progress 16,807 16,032
Finished goods 3,254 4,244
-------- --------
Total $ 39,391 $ 39,360
======== ========
</TABLE>
5. DEBT
The Company has a short-term commercial paper ("CP") program which allows
the Company to borrow up to $400 million in aggregate maturity value of
commercial paper, with maturities up to 270 days. At March 31, 1998, $201.9
million was borrowed under the CP program at annual interest rates
approximating 5.69%. In connection with the CP program, the Company agreed
to maintain committed credit facilities with a group of banks that provide
for $400 million in long-term committed credit. At March 31, 1998, there
were no amounts outstanding under the long-term committed credit facility.
At March 31, 1998, $300 million in commercial paper and short-term
obligations was reclassified to long-term debt as the Company has the
ability and intent to refinance such obligations on a long-term basis.
<PAGE> 6
6. SUBSEQUENT EVENTS
On April 1, 1998, the Company acquired all the outstanding stock of WEDGE
DIA-LOG, Inc. ("WEDGE") for approximately $218 million in cash (the "WEDGE
Acquisition"). In connection with the WEDGE Acquisition, the Company repaid
approximately $33 million of WEDGE's indebtedness. WEDGE specializes in
cased-hole logging and pipe recovery services.
In April 1998, the Company acquired 3-D Geophysical, Inc. ("3-D
Geophysical") for $9.65 cash per share for an aggregate consideration of
approximately $115 million. 3-D Geophysical is a supplier of primarily
land-based seismic data acquisition services. In addition, the holders of
unexercised options to acquire 3-D Geophysical common stock will receive an
aggregate of approximately $3 million. 3-D Geophysical also had
approximately $11 million in outstanding indebtedness which was repaid by
the Company.
The purchase method of accounting was used to record both of these
acquisitions. Unaudited pro forma information related to these acquisitions
is not included as the impact of these acquisitions is not material.
On May 10, 1998, Baker Hughes Incorporated ("Baker Hughes") and the Company
entered into a definitive merger agreement (the "Merger Agreement") which
provides for the Company to be merged (the "BHI Merger") with a subsidiary
of Baker Hughes. The Merger Agreement provides that the Company's
shareholders are to receive 2.4 shares of newly issued Baker Hughes common
stock for each Western Atlas common share, subject to adjustment. The
transaction is expected to be accounted for as a pooling of interests and is
expected to be tax-free to the Company's shareholders. It is anticipated
that the transaction will be completed by the end of September 1998 and is
subject to shareholder and regulatory approvals, including expiration of the
applicable waiting period under the Hart-Scott-Rodino Act, and other
customary closing conditions.
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
Baker Hughes Incorporated:
We consent to the incorporation by reference in Post-Effective Amendment No. 1
to Registration Statement No. 33-16094 on Form S-4, in Post-Effective Amendment
Nos. 1 and 2 to Registration Statement No. 33-14803 on Form S-8, in Registration
Statement No. 33-39445 on Form S-8, in Registration Statement No. 33-61304 on
Form S-3, in Amendment No. 1 to Registration Statement No. 33-61304 on Form S-3,
in Registration Statement No. 33-52195 on Form S-8, in Registration Statement
No. 33-57759 on Form S-8, in Registration Statement No. 33-63375 on Form S-3, in
Registration Statement No. 333-19771 on Form S-8, in Post-Effective Amendment
No. 1 on Form S-8 to Registration Statement No. 333-28123 on Form S-4, in
Post-Effective Amendment No. 1 on Form S-8 to Registration Statement No.
333-29027 on Form S-4, in Registration Statement No. 333-49327 on Form S-8, in
Registration Statement No. 333-58241 on Form S-4 and in Registration Statement
No. 333-61065 on Form S-8 of our report dated February 18, 1998 (March 9, 1998
with respect to Note N), included in the Annual Report on Form 10-K, as amended,
of Western Atlas Inc. for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Houston, Texas
August 11, 1998
