================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 31, 1998
SCHLUMBERGER N.V.
(Schlumberger Limited)
(Exact name of registrant as specified in charter)
NETHERLANDS ANTILLES 001-04601 52-0684746
(State or other jurisdiction (Commission File No.) (I.R.S. Employer
of incorporation) Identification No.)
42, RUE SAINT-DOMINQUE 277 PARK AVENUE PARKSTRAAT 83
PARIS, FRANCE 75007 NEW YORK NEW YORK, USA 10172 THE HAGUE
(33-1) 4062-1000 (212) 350-9400 THE NETHERLANDS
2514 JG
(31-70) 310-5447
(Address, including Zip Code, and Telephone Number,
Including Area Code, of Principal Executive Offices)
================================================================================
Page 1
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On August 31, 1998, Schlumberger Limited ("Schlumberger") completed the
acquisition of Camco International Inc. ("Camco") pursuant to the Agreement and
Plan of Merger dated as of June 18, 1998 among Schlumberger Technology
Corporation, a Texas corporation and a wholly owned subsidiary of Schlumberger
("STC"), Schlumberger OFS, Inc., a Delaware corporation and a wholly owned
subsidiary of STC ("Sub"), and Camco (the "Merger Agreement"). Pursuant to the
Merger Agreement, Sub was merged (the "Merger") with and into Camco, with Camco
surviving as a wholly owned subsidiary of STC. As a result of the Merger, each
outstanding share of Camco common stock, par value $.01 per share ("Camco Common
Stock"), has been converted into the right to receive 1.18 shares of
Schlumberger common stock, par value $.01 per share ("Schlumberger Common
Stock"). In addition, outstanding options to acquire shares of Camco Common
Stock have been converted into options to acquire 1.18 times as many shares of
Schlumberger Common Stock at an exercise price equal to the old exercise price
divided by 1.18. In the aggregate, Schlumberger is issuing approximately 45.1
million shares of Schlumberger Common Stock and reserving for issuance an
additional 2.1 million shares of Schlumberger Common Stock in exchange for the
Camco Common Stock and outstanding Camco options. The exchange ratio of 1.18
resulted from arms-length negotiations among Schlumberger and Camco.
Camco, the common stock of which was previously publicly traded, is one of
the world's leading providers of oilfield equipment and services for numerous
specialty applications in key phases of oil and gas drilling, completion and
production. In particular, Camco is the leading world producer of gas lift
systems. Camco also is one of the world's two leading providers of subsurface
safety valve systems, synthetic diamond drill bits and electric submersible pump
systems, is the world's third leading provider of roller cone drill bits and
also operates a large fleet of coiled tubing units in the United States.
Schlumberger currently intends to continue such business activities of Camco.
There were no material relationships between Schlumberger and Camco prior to the
consummation of the Merger.
A copy of Schlumberger's August 31, 1998 press release that relates to the
Merger is attached as Exhibit 99 hereto and incorporated herein by reference.
Page 2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired.
The following consolidated financial statements of Camco and
independent auditors' report set forth in the Camco Annual Report on Form 10-K
for the year ended December 31, 1997 are incorporated herein by reference:
Report of Independent Public Accountants.
Consolidated Statements of Operations 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 Stockholders' 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 unaudited consolidated condensed financial statements of
Camco set forth in the Camco Form 10-Q for the quarterly period ended June 30,
1998 are incorporated herein by reference:
Consolidated Condensed Statements of Income for the three months and
six months ended June 30, 1998 and 1997.
Consolidated Condensed Balance Sheets as of June 30, 1998 and December
31, 1997.
Consolidated Condensed Statements of Cash Flows for the six months
ended June 30, 1998 and 1997.
Consolidated Condensed Statements of Comprehensive Income for the
three months and six months ended June 30, 1998 and 1997.
Notes to Consolidated Condensed Financial Statements.
(b) Pro Forma Financial Information.
Provision of pro forma financial information for the Company which
this item
Page 3
requires is currently impracticable. The Company will file that
information in an amendment to this Current Report as soon as practicable, but
not later than 60 days after the required filing date hereof.
(c) Exhibits.
2.1 - Agreement and Plan of Merger among Schlumberger Technology
Corporation, a Texas corporation, Schlumberger OFS, Inc., a Delaware
corporation, and Camco International Inc., a Delaware corporation,
dated as of June 18, 1998 (incorporated by reference to Exhibit 2.1
to Schlumberger's Form 8-K dated June 18, 1998, File 001-04601).
10.1 - Transaction Agreement between Schlumberger Limited and Camco
International Inc., a Delaware corporation, dated as of June 18,
1998 (incorporated by reference to Exhibit 10.1 to Schlumberger's
Form 8-K dated June 18, 1998, File 001-04601).
13.1 - Portions of the Camco 1997 Annual Report to Shareholders.
13.2 - Portions of the Camco Form 10-Q for the quarterly period ended
June 30, 1998.
23.1 - Consent of Arthur Andersen LLP.
99.1 - Press Release dated August 31, 1998, announcing the closing of the
Merger.
Page 4
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.
SCHLUMBERGER N.V.
(SCHLUMBERGER LIMITED)
/s/ David S. Browning
Dated: August 31, 1998 ----------------------------------------
David S. Browning
Secretary and General Counsel
Page 5
INDEX TO EXHIBITS
Number Exhibit
------ -------
2.1 Agreement and Plan of Merger among Schlumberger Technology
Corporation, a Texas corporation, Schlumberger OFS, Inc., a
Delaware corporation, and Camco International, Inc., a Delaware
corporation, dated as of June 18, 1998 (incorporated by reference to
Exhibit 2.1 to Schlumberger's Form 8-K dated June 18, 1998, File
001-04601).
10.1 Transaction Agreement between Schlumberger Limited and Camco
International, Inc., a Delaware corporation, dated as of June 18, 1998
(incorporated by reference to Exhibit 10.1 to Schlumberger's Form
8-K dated June 18, 1998, File 001-04601).
13.1 Portions of the Camco 1997 Annual Report to Shareholders.
13.2 Portions of the Camco Form 10-Q for the quarterly period ended
June 30, 1998.
23.1 Consent of Arthur Andersen LLP.
99.1 Press Release dated August 31, 1998, announcing the closing of the
Merger.
Page 6
EXHIBIT 13.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Camco International Inc.:
We have audited the consolidated balance sheets of Camco International Inc.
(a Delaware Corporation) and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, cash flows and stockholders'
equity 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 these 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Camco
International 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.
As explained in Note 1 to the financial statements, effective November 20,
1997, the Company changed its method of accounting for costs of business process
reengineering activities associated with systems development projects.
ARTHUR ANDERSEN LLP
Houston, Texas
February 10, 1998
1
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31
--------------------------------
1997 1996 1995
-------- -------- --------
REVENUES:
Sales...................................................... $609,725 $503,235 $459,733
Services................................................... 304,116 261,300 208,199
-------- -------- --------
913,841 764,535 667,932
-------- -------- --------
COST AND EXPENSES:
Cost of sales.............................................. 313,551 270,712 253,268
Cost of services........................................... 212,923 188,394 153,096
-------- -------- --------
526,474 459,106 406,364
-------- -------- --------
Gross margin.............................................. 387,367 305,429 261,568
Selling, general and administrative expenses............... 219,510 191,706 177,491
Merger expenses............................................ 12,500 -- --
Amortization of intangible assets.......................... 8,604 6,460 6,022
-------- -------- --------
Operating income.......................................... 146,753 107,263 78,055
Interest expense........................................... 8,473 7,842 8,888
Interest income............................................ (2,802) (3,303) (3,754)
-------- -------- --------
Income before provision for income taxes................... 141,082 102,724 72,921
Provision for income taxes................................. 49,321 34,720 22,626
-------- -------- --------
Income from continuing operations.......................... 91,761 68,004 50,295
Loss from discontinued operation........................... -- -- (7,151)
Cumulative effect of change in accounting principle, net
of benefit for income taxes............................... (2,909) -- --
-------- -------- --------
Net income.............................................. $ 88,852 $ 68,004 $ 43,144
======== ======== ========
Earnings per share:
Basic --
Income from continuing operations......................... $ 2.45 $ 1.81 $ 1.35
Loss from discontinued operation.......................... -- -- (.19)
Cumulative effect of change in accounting principle....... (.08) -- --
-------- -------- --------
Net income.............................................. $ 2.37 $ 1.81 $ 1.16
======== ======== ========
Average common shares outstanding......................... 37,386 37,506 37,257
======== ======== ========
Diluted --
Income from continuing operations......................... $ 2.39 $ 1.78 $ 1.33
Loss from discontinued operation.......................... -- -- (.19)
Cumulative effect of change in accounting principle....... (.08) -- --
-------- -------- --------
Net income.............................................. $ 2.31 $ 1.78 $ 1.14
======== ======== ========
Average common and common equivalent shares
outstanding.............................................. 38,481 38,230 37,780
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
2
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31
---------------------
1997 1996
---------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................... $ 57,255 $ 42,645
Accounts receivable, net of allowances of $16,283 and
$14,210................................................ 177,112 169,989
Inventories............................................. 206,471 169,007
Deferred income taxes................................... 44,088 27,031
Prepaid expenses and other.............................. 21,575 19,320
---------- --------
Total current assets.................................. 506,501 427,992
---------- --------
PROPERTY, PLANT AND EQUIPMENT, net of depreciation....... 353,312 308,762
INTANGIBLE ASSETS, net of amortization of $66,448 and
$57,844................................................. 212,749 214,826
OTHER.................................................... 45,278 20,125
---------- --------
Total assets.......................................... $1,117,840 $971,705
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt.................... $ 120 $ 10,345
Accounts payable........................................ 57,765 47,595
Accrued liabilities..................................... 159,085 134,583
Income taxes payable.................................... 31,832 18,750
---------- --------
Total current liabilities............................. 248,802 211,273
---------- --------
LONG-TERM DEBT........................................... 110,300 93,551
DEFERRED INCOME TAXES.................................... 28,690 24,742
OTHER LONG-TERM LIABILITIES.............................. 43,803 47,266
---------- --------
Total liabilities..................................... 431,595 376,832
---------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 100,000,000 shares
authorized, 38,583,393 and 38,465,998 shares issued.. 386 385
Additional paid-in capital.............................. 525,662 518,856
Retained earnings....................................... 203,911 117,364
Cumulative translation adjustment....................... (15,194) (11,405)
Treasury stock, 1,046,372 and 1,264,528 shares, at cost. (28,520) (30,327)
---------- --------
Total stockholders' equity............................ 686,245 594,873
---------- --------
Total liabilities and stockholders' equity............ $1,117,840 $971,705
========== ========
The accompanying notes are an integral part of these
consolidated financial statements.
3
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ADDITIONAL CUMULATIVE
COMMON PAID-IN RETAINED TRANSLATION TREASURY
STOCK CAPITAL EARNINGS ADJUSTMENT STOCK
------ -------- --------- ------------ ---------
BALANCE, December 31, 1994, as previously
reported................................... $251 $436,892 $(35,871) $(19,049) $(18,430)
Adjustments for pooling-of-interest........ 133 76,211 57,362 -- --
------ -------- -------- -------- --------
BALANCE, December 31, 1994.................. 384 513,103 21,491 (19,049) (18,430)
Net income................................. -- -- 43,144 -- --
Dividends to stockholders ($.22 per
share).................................... -- -- (7,449) -- --
Common stock issued pursuant to
employee stock plans...................... 1 2,673 -- -- --
Deferred compensation related to
ESOP...................................... -- 87 40 -- --
Currency translation adjustment............ -- -- -- 473 --
------ -------- -------- -------- --------
BALANCE, December 31, 1995.................. 385 515,863 57,226 (18,576) (18,430)
Net income................................. -- -- 68,004 -- --
Purchase of treasury stock................. -- -- -- -- (13,413)
Dividends to stockholders ($.22 per
share).................................... -- -- (7,698) -- --
Common stock issued pursuant to
employee stock plans...................... -- 2,131 (211) -- 1,516
Deferred compensation related to
ESOP...................................... -- 862 43 -- --
Currency translation adjustment............ -- -- -- 7,171 --
------ -------- -------- -------- --------
BALANCE, December 31, 1996.................. 385 518,856 117,364 (11,405) (30,327)
Net income................................. -- -- 88,852 -- --
Change in subsidiary year end.............. -- 612 4,560 -- --
Dividends to stockholders ($.21 per share).. -- -- (6,865) -- --
Common stock issued pursuant to
employee stock plans...................... 1 5,008 -- -- 1,807
Deferred compensation related to
ESOP...................................... -- 1,186 -- -- --
Currency translation adjustment............ -- -- -- (3,789) --
------ -------- -------- -------- --------
BALANCE, December 31, 1997.................. $386 $525,662 $203,911 $(15,194) $(28,520)
====== ======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
4
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31
----------------------------------
1997 1996 1995
---------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $ 88,852 $ 68,004 $ 43,144
Adjustments to reconcile net income to net cash provided
by operating activities --
Loss on discontinued operations............................ -- -- 6,702
Cumulative effect of change in accounting principle........ 2,909 -- --
Depreciation and amortization.............................. 62,464 55,384 46,092
Gain from sale of assets................................... (234) (4,678) (3,456)
Provision (benefit) for deferred and other taxes........... (14,389) (4,984) (5,757)
Increase in accounts receivable............................ (4,698) (2,532) (20,158)
Increase in inventories.................................... (36,425) (6,566) (3,810)
Increase (decrease) in accounts payable.................... 11,405 (803) (529)
Increase in accrued liabilities............................ 31,807 27,614 8,662
Increase (decrease) in income taxes payable................ 14,065 5,341 (2,932)
(Increase) decrease in other, net.......................... 929 10,885 (2,195)
--------- -------- --------
Net cash provided by operating activities................ 156,685 147,665 65,763
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures....................................... (95,754) (61,848) (89,155)
Proceeds from sale of assets............................... 386 14,934 14,343
Business acquisitions...................................... (14,503) (46,373) (5,750)
Investment in joint venture................................ (21,700) -- --
Change in subsidiary year-end.............................. (6,496) -- --
Other...................................................... (5,061) (2,390) (5,180)
--------- -------- --------
Net cash used in investing activities.................... (143,128) (95,677) (85,742)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in borrowings under revolving credit facility..... 110,000 -- --
Decrease in borrowings under term loan..................... (50,000) (10,000) (10,000)
Increase (decrease) in borrowings under revolving loan
facility.................................................. (30,000) 10,000 (5,000)
Increase (decrease) in other debt.......................... (30,277) (26,284) 37,213
Dividends paid to stockholders............................. (6,865) (7,698) (7,449)
Proceeds from exercise of stock options.................... 2,404 2,361 1,629
Purchase of treasury stock................................. -- (13,413) --
Change in subsidiary year-end and other.................... 6,158 803 68
--------- -------- --------
Net cash provided by (used in) financing
activities.............................................. 1,420 (44,231) 16,461
--------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS................................................ (367) 1,613 (215)
--------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 14,610 9,370 (3,733)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 42,645 33,275 37,008
--------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 57,255 $ 42,645 $ 33,275
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest..................................... $ 5,886 $ 4,519 $ 5,654
Cash paid for income taxes................................. $ 51,580 $ 34,002 $ 31,389
The accompanying notes are an integral part of these
consolidated financial statements.
5
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Camco International Inc. and subsidiaries ("Camco" or the "Company")
manufactures products and provides services to customers in the oil and gas
drilling, completion and production sectors of the oilfield services industry.
The consolidated financial statements include the accounts of the Company and
all of its wholly owned and majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. Investments in 20%
to 50% owned joint ventures where the Company exercises significant influence
over operating and financial policies are accounted for by the equity method.
All other investments are carried at cost, which does not exceed the estimated
net realizable value of such investments.
On June 13, 1997, Camco, acquired Production Operators Corp. ("Production
Operators") through a merger (the "Merger") of a wholly owned subsidiary of the
Company with and into Production Operators. The Merger was effected pursuant to
an Agreement and Plan of Merger dated February 27, 1997, by and among the
Company, a wholly owned subsidiary of the Company, and Production Operators. A
total of 13,300,404 shares of the Company's common stock was issued to the
stockholders of Production Operators as consideration for the acquisition. The
principle followed in fixing the exchange ratio in the Merger was based on
negotiations between the parties. The business combination has been accounted
for using the pooling-of-interests method of accounting. Accordingly, the
financial statements have been prepared as if Camco and Production Operators
were combined as of the beginning of the earliest period presented. All costs of
the Merger, which were $12.5 million, or $8.6 million net of tax benefits ($.22
per share), were expensed during the second quarter of 1997.
As a result of the differing year-ends of Camco and Production Operators,
financial information for different period-ends have been combined. Camco's
financial position, results of operations and cash flows as of and for the years
ended December 31, 1996 and 1995, have been combined with Production Operators'
financial position, results of operations and cash flows as of and for the years
ended September 30, 1996 and 1995, respectively. Effective January 1, 1997,
Production Operators' fiscal year-end was changed to conform to Camco's December
31 year-end. Financial information as of and for the year ended December 31,
1997, combines both Camco's and Production Operators' results of operations for
comparable periods. Production Operators' unaudited revenues, net income and
dividends on its common stock for the three-month period ended December 31,
1996, were $26.7 million, $5.3 million and $.7 million, respectively.
Accordingly, adjustments are included in the consolidated statements of
operations, stockholders' equity and cash flows for the activity attributed to
the three-month period.
Use of Estimates
The preparation of these financial statements required the use of certain
estimates by management in determining the Company's assets, liabilities,
revenue and expenses. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid financial instruments purchased
with original maturities of three months or less to be cash equivalents. The
reported amounts of such investments approximate fair value.
Inventories
Inventories, net of allowances, are valued at the lower of cost (first-in,
first-out or last-in, first-out) or market. Inventory costs consist of
materials, labor and plant overhead.
6
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property, Plant and Equipment
Property, plant and equipment is recorded at cost and generally depreciated
on a straight-line basis over the estimated useful lives of the assets. The
estimated useful lives used in computing depreciation range from 10 to 30 years
for buildings and 3 to 12 years for machinery and equipment, including service
equipment. Expenditures for major additions and improvements are capitalized
while minor replacements, maintenance and repairs are charged to expense as
incurred. When property is retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the related accounts and any resulting
gain or loss is included in the consolidated statements of operations.
Intangible Assets
Intangible assets is comprised primarily of goodwill which is amortized
over 20 to 40 years using the straight-line method. Camco's management
periodically evaluates goodwill, net of accumulated amortization, for impairment
based on the undiscounted cash flows associated with the asset compared to the
carrying amount of that asset. Management believes that there have been no
events or circumstances which warrant revision to the remaining useful life or
affect the recoverability of goodwill in any of its business units.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
This standard requires an asset and liability approach for financial accounting
and income tax reporting based on enacted tax rates and laws in effect in the
years in which differences are expected to reverse.
Revenue Recognition
The Company's revenues are composed of product sales and rental, service
and other revenues. The Company records product sales when the goods are sold to
a customer. Rental, service and other revenues are recorded as the services are
performed.
Foreign Currency Translation
The Company's financial statements of foreign subsidiaries are reported in
U.S. dollars based on the functional currency.
Foreign subsidiaries using the U.S. dollar as their functional currency
translate as follows: current assets (except inventories) and all liabilities
(except minority interests) at the rates of exchange in effect at year-end,
long-term assets and inventories at historical rates and minority interest at
the rates in effect at the dates provided. Revenue and expense accounts are
translated at the average rates of exchange in effect during the year, except
for depreciation and cost of manufactured products sold, which are translated at
historical rates. Translation adjustments are charged or credited directly to
operations.
Foreign subsidiaries using the local currency as their functional currency
translate into U.S. dollars using the current rate method. Assets and
liabilities are translated at the rates of exchange in effect at year-end,
common stock and paid-in capital are translated using historical rates and
revenue and expense accounts are translated at the average rates of exchange in
effect during the year. Translation adjustments are recorded as a separate
component of stockholders' equity rather than directly to operations.
Concentration of Credit Risk
The Company extends credit to various companies in the oil and gas industry
which may be affected by changes in economic or other external conditions. The
Company's policy is to manage its exposure to credit
7
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
risk through credit approvals and limits and, where appropriate, to be secured
by collateral, and to provide an allowance for doubtful accounts for potential
losses. Management does not believe the Company is exposed to concentrations of
credit risk that are likely to have a material impact on the Company's financial
position or results of operations.
Environmental Expenditures
Liabilities for environmental expenditures are recorded when it is probable
that obligations have been incurred and the costs can be reasonably estimated.
Estimates are based on currently available facts and technology, presently
enacted laws and regulations and the Company's prior experience in remediation
of contaminated sites.
Change in Accounting Principle
The FASB Emerging Issues Task Force Issue No. 97-13, "Accounting for Costs
Incurred in Connection with a Consulting Contract or an Internal Project That
Combines Business Process Reengineering and Information Technology
Transformation," issued November 20, 1997, required the Company to expense
certain costs that were previously capitalizable prior to this pronouncement.
The cumulative effect of this accounting change decreased income by $4.5 million
($2.9 million, net of tax) for the year ended December 31, 1997.
Earnings Per Share
SFAS No. 128, "Earnings Per Share," was adopted by the Company in the
fourth quarter of 1997 and all earnings per share previously reported have been
restated. Basic earnings per share is computed by dividing net income by the
weighted average common shares outstanding. Diluted earnings per share is
computed by dividing net income by the weighted average number of common and
common equivalent shares outstanding. The computation of diluted earnings per
share includes the dilutive effects of options to purchase common stock and
restricted stock grants which aggregated 1,095,000, 724,000 and 523,000 in 1997,
1996 and 1995, respectively.
Pending Accounting Pronouncements
SFAS No. 130, "Reporting Comprehensive Income," was issued in June 1997.
The Company will adopt SFAS No. 130 in the first quarter of 1998. Had SFAS No.
130 been adopted in 1997, net income, as reported, would have been adjusted for
changes in the cumulative translation for foreign currency.
2. ACQUISITIONS AND DIVESTITURES
During 1997, the Company acquired gas lift valve businesses in the United
States and Argentina for a total of $11.8 million in cash.
In September 1996, the Company acquired Lasalle Engineering Limited for
$29.5 million in a cash transaction. In December 1996, the Company acquired the
gas lift business of Halliburton, including their Venezuelan subsidiary, for
$16.9 million in a cash transaction.
In March 1995, the Company acquired Site Oil Tools, a Canadian manufacturer
of completion equipment, for $5.8 million in a cash transaction. The Company
sold the assets of its safety service business in March 1995. The Company
recognized net income of $1.5 million, or 6 cents per share, on the disposal.
The acquisitions described above were accounted for using the purchase
method of accounting.
8
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The acquisition of Production Operators in June 1997, which was accounted
for using the pooling-of-interests method of accounting, is described in Note 1.
Revenues and net income for the periods preceding the Merger were as follows (in
thousands):
REVENUES NET INCOME
-------- -----------
Six months ended June 30, 1997 --
Camco, as previously reported...... $366,092 $29,391
Production Operators............... 56,537 14,791
Merger expenses.................... -- (8,600)
-------- -------
$422,629 $35,582
======== =======
Year ended December 31, 1996 --
Camco, as previously reported...... $672,732 $50,508
Production Operators............... 91,803 17,496
-------- -------
$764,535 $68,004
======== =======
Year ended December 31, 1995 --
Camco, as previously reported....... $595,131 $36,318
Production Operators................ 72,801 6,826
-------- -------
$667,932 $43,144
======== =======
3. INVENTORIES
Inventories, net of allowances, are summarized as follows (in thousands):
DECEMBER 31
----------------------
1997 1996
-------- --------
Raw materials....................... $ 19,916 $ 18,405
Parts and components................ 69,656 54,786
Work-in-process..................... 24,079 27,180
Finished goods...................... 92,820 68,636
-------- --------
$206,471 $169,007
======== ========
Inventories determined using the --
LIFO basis......................... $ 43,661 $ 38,107
FIFO basis......................... 162,810 130,900
-------- --------
$206,471 $169,007
======== ========
Work-in-process and finished goods inventories include the cost of
materials, labor and plant overhead. The excess of current costs, determined
using the FIFO basis, over the carrying values of LIFO inventories was
approximately $10.0 million and $11.9 million at December 31, 1997 and 1996,
respectively.
9
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
DECEMBER 31
---------------------
1997 1996
--------- ---------
Land........................................ $ 5,120 $ 4,327
Buildings................................... 77,279 71,856
Machinery and equipment..................... 266,137 234,803
Service equipment........................... 366,732 313,997
--------- ---------
715,268 624,983
Accumulated depreciation.................... (361,956) (316,221)
--------- ---------
$ 353,312 $ 308,762
========= =========
5. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
DECEMBER 31
-------------------
1997 1996
-------- --------
Salaries, wages and related benefits........ $ 45,626 $ 42,979
Accrued insurance........................... 12,978 13,451
Accrued taxes other than income............. 9,814 11,117
Other....................................... 90,667 67,036
-------- --------
$159,085 $134,583
======== ========
6. DEBT
Long-term debt consisted of the following (in thousands):
DECEMBER 31
-------------------
1997 1996
-------- --------
Revolving credit facility................... $110,000 $ --
Term loan................................... -- 50,000
Revolving loan facility..................... -- 30,000
Other....................................... 420 23,896
-------- --------
110,420 103,896
Less -- Current portion of long-term debt... 120 10,345
-------- --------
$110,300 $ 93,551
======== ========
In October 1997, the Company refinanced its previously outstanding debt
under a new $220 million unsecured revolving credit facility. Borrowings
outstanding under the revolving credit facility are due October 2002 and
interest rates on borrowings are LIBOR based. The weighted average interest rate
for borrowings outstanding under the revolving credit facility was 6.2% for
1997. The maximum and average borrowings were $120.0 million and $107.0 million,
respectively. The Company had $110.0 million of unused borrowing availability as
of December 31, 1997.
In addition to customary representations, warranties, borrowing conditions,
affirmative covenants and events of default, the revolving credit facility
includes financial covenants, with which Camco is in compliance,
10
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
relating to maintenance of a minimum level of net worth, maintenance of a
minimum interest coverage ratio, a maximum ratio of funded debt to total capital
and limitations on payment of dividends, sales of assets, pledges of assets,
subsidiary indebtedness, mergers, consolidations and transactions with
affiliates.
Maturities of the Company's long-term debt at December 31, 1997, are as
follows (in thousands):
1998...................................................... $ 120
1999...................................................... 140
2000...................................................... 160
2002...................................................... 110,000
--------
$110,420
========
The weighted average interest rate for the Company's previously outstanding
loans was 6.4% during 1997, 6.2% during 1996 and 6.5% during 1995.
7. INCOME TAXES
Income before provision for income taxes and provision (benefit) for income
taxes is composed of the following (in thousands):
1997 1996 1995
-------- -------- -------
Income before provision for income taxes
United States............................. $ 37,519 $ 24,815 $30,504
Non-United States......................... 103,563 77,909 42,417
-------- -------- -------
$141,082 $102,724 $72,921
======== ======== =======
Provision for income taxes
Current
United States............................ $ 27,400 $ 18,604 $18,497
Non-United States........................ 36,310 19,065 11,873
-------- -------- -------
63,710 37,669 30,370
-------- -------- -------
Deferred
United States............................ (14,276) (5,400) (9,268)
Non-United States........................ (113) 2,451 1,524
-------- -------- -------
(14,389) (2,949) (7,744)
-------- -------- -------
$ 49,321 $ 34,720 $22,626
======== ======== =======
The table above excludes a tax benefit of $1.6 million recorded in 1997 in
connection with the accounting change described in Note 1.
11
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes in 1997 and 1996 reflect the impact of temporary
differences between the amount of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws and regulations. The
components of the net deferred tax asset (liability) are as follows (in
thousands):
DECEMBER 31
---------------------
1997 1996
--------- ---------
Deferred tax assets:
Accruals and reserves.................. $ 31,487 $ 24,813
Compensation and benefits.............. 11,619 11,873
Other.................................. 12,366 10,005
-------- --------
55,472 46,691
Valuation allowance.................... (11,384) (19,660)
-------- --------
44,088 27,031
-------- --------
Deferred tax liabilities:
Excess of tax over book depreciation... (28,649) (24,619)
Other.................................. (41) (123)
-------- --------
(28,690) (24,742)
-------- --------
Net deferred tax asset................ $ 15,398 $ 2,289
======== ========
The consolidated provision for income taxes differs from the provision
computed at the statutory U.S. Federal income tax rate for the following reasons
(in thousands):
1997 1996 1995
-------- -------- --------
Expected tax provision at U.S. statutory rate........ $49,379 $35,953 $25,522
Non-U.S. income, taxed at less than U.S. statutory
rate................................................ (3,190) (1,233) (3,030)
Change in valuation allowance........................ (8,276) -- --
Expenses for which no tax benefit was received....... 11,408 -- 134
------- ------- -------
$49,321 $34,720 $22,626
======= ======= =======
SFAS No. 109 requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or all of the deferred
tax asset will not be realized. During 1997, the net decrease in the valuation
allowance was $8.3 million in connection with the disallowance of a portion of
the previously reserved deferred tax assets.
Undistributed earnings of non-U.S. subsidiaries included in consolidated
retained earnings amounted to $177.8 million at December 31, 1997. It is the
Company's policy that these earnings, which reflect full provision for non-U.S.
income taxes, have no additional provision for U.S. taxes on foreign
subsidiaries earnings which are expected to be reinvested indefinitely. However,
additional income taxes have been provided on planned repatriations of foreign
earnings after taking into account tax-exempt earnings and applicable foreign
tax credits.
8. RETIREMENT AND EMPLOYEE BENEFIT PLANS
Retirement Plans
The Company and its subsidiaries have defined benefit retirement plans
covering substantially all employees. The total cost of all plans for 1997, 1996
and 1995 was $6.0 million, $5.4 million and $5.2 million, respectively.
12
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Annual cost is determined using the projected unit credit actuarial method.
Prior service cost is amortized on a straight-line basis over the average
remaining service period of employees expected to receive benefits. An
assumption is made for modified career average plans such that the average
earnings base period will be updated to the years prior to retirement.
It is the Company's practice to fund amounts for pensions sufficient to
meet the minimum requirements set forth in applicable employee benefit and tax
laws and such additional amounts as the Company may determine to be appropriate
from time to time. The assets of the various plans include corporate equities,
government securities and corporate debt securities.
The funded status at December 31 was as follows (in thousands):
U.S. PLANS NON-U.S. PLANS
--------------------- -----------------
1997 1996 1997 1996
--------- --------- -------- ------
Actuarial present value of benefit
obligations
Vested benefit obligation.................. $ 64,446 $ 58,839 $ 9,754 $5,550
======== ======== ======= ======
Accumulated benefit obligation............. $ 67,118 $ 61,285 $10,332 $5,804
======== ======== ======= ======
Projected benefit obligation............... $ 82,121 $ 75,626 $13,126 $7,642
Plan assets at fair value................... 65,024 63,936 11,670 8,182
-------- -------- ------- ------
Projected benefit obligation in excess of
plan assets................................ (17,097) (11,690) (1,456) 540
Unrecognized net loss....................... 4,054 2,284 2,774 51
Unrecognized prior service cost............. 3,951 2,871 -- --
Additional liability........................ (3,032) (2,400) -- --
-------- -------- ------- ------
(Accrued) prepaid pension cost recognized
in the consolidated balance sheets......... $(12,124) $ (8,935) $ 1,318 $ 591
======== ======== ======= ======
Net periodic pension cost for the years ended December 31 included the
following components (in thousands):
U.S. PLANS NON-U.S. PLANS
------------------------------ ------------------------
1997 1996 1995 1997 1996 1995
-------- -------- -------- ------ ------ ------
Service cost, benefits earned during
the period............................ $ 3,742 $ 3,695 $ 3,573 $ 976 $ 793 $ 677
Interest cost on the projected
benefit obligation.................... 5,916 5,341 4,747 657 525 361
Actual return on plan assets........... (5,509) (5,272) (4,578) (788) (544) (407)
Net amortization....................... 1,034 890 871 -- 2 --
------- ------- ------- ----- ----- -----
Net periodic pension cost.............. $ 5,183 $ 4,654 $ 4,613 $ 845 $ 776 $ 631
======= ======= ======= ===== ===== =====
All defined benefit pension plans sponsored by the Company are funded to
the extent required by Federal regulation in each of the years ended December
31, 1997, 1996 and 1995. The assumed long-term rate of return on plan assets was
9.0%, the discount rate used in estimating benefit obligations was 8.0% and the
rate of compensation increase assumed for salary-related plans was 6.5%.
Included in the above tables is the funded status and net periodic pension
cost of Camco's deferred compensation plan (the "DC Plan"). Under the DC Plan,
certain officers and selected key management personnel of the Company may
receive an amount upon retirement at age 65 equal to (x) an award level for such
individual as determined by the Board (up to a maximum of 60%) multiplied by the
average of the
13
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
individual's highest five consecutive years earnings (including bonuses up to a
maximum of 20% of base pay each year) out of the last ten consecutive years
before retirement minus (y) the sum of the individual's benefits under the
pension plan and other tax-qualified plans sponsored by the individual's former
employers. An individual's benefits under the DC Plan vest on the earliest of
the date the individual completes ten years of service, the individual's death
or age 65. Benefits are subject to adjustment for early retirement (before age
65).
Thrift Plans
All U.S. employees are eligible to participate in the Company-sponsored
thrift plans. The plan allows eligible employees to contribute a percentage of
compensation, subject to IRS and plan limitations. The plans provide for
matching contributions which amounted to annual expense recognized by the
Company of $2.6 million, $2.3 million and $1.9 million in 1997, 1996 and 1995,
respectively.
Nonpension Postretirement Benefits
The Company offers a postretirement medical plan to substantially all
employees in the United States over age 60 who qualify for retirement and, on
the last day of active employment, are enrolled as participants in Company
medical plans for active employees. Participants under age 65 are required to
pay the full average actual cost of providing benefits to active and retired
employees. Participants age 65 and older contribute approximately 30% of the
actual cost of providing benefits to active and retired employees. Total
benefits provided over the lifetime of participants after they reach age 65 are
limited to $100,000 per participant.
The expected cost of providing nonpension postretirement benefits is
accrued during the years employees render service. The discount rate used in
determining costs and future obligations was 8.0% in 1997, 1996 and 1995. The
assumed health care cost trend rate was 10.0% in 1995, 9.0% in 1996 and 8.0% in
1997, scaling to 6.0% over six years. A one percent increase in the trend rate
for health care costs would increase the accumulated postretirement benefit
obligation by approximately 6.5% and the service and interest cost by
approximately 7.0%. The Company is not required to fund its future obligation
under the plan and does not intend to, unless favorable tax treatment becomes
available.
Accumulated postretirement benefit obligations in excess of plan assets is
classified in the accompanying balance sheets as other long-term liabilities and
consists of the following as of December 31 (in thousands):
DECEMBER 31
-----------------
1997 1996
------- -------
Retirees and beneficiaries.... $ 4,669 $ 6,421
Fully eligible participants... 1,172 2,542
Other active participants..... 2,421 3,339
Unrecognized net gain......... 9,611 6,158
------- -------
Total..................... $17,873 $18,460
======= =======
Net periodic postretirement cost for the years ended December 31, are as
follows (in thousands):
DECEMBER 31
------------------------
1997 1996 1995
------ ------ ------
Service cost........................ $ 214 $ 314 $ 375
Interest cost....................... 619 919 1,337
Amortization of unrecognized gain... (811) (451) --
----- ----- ------
Total.............................. $ 22 $ 782 $1,712
===== ===== ======
14
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Management Incentive Programs
The Company has an incentive bonus plan in which selected key employees,
including executive officers, are eligible to receive cash bonus payments based
on measures of profitability and cash flow of the Company and various units of
the Company which are established and approved by the Board of Directors for
each participant in the program at the beginning of each year. A minimum
performance level must be achieved by the Company or a particular unit of the
Company before any bonus may be earned.
Stock Plans
The Company has two plans currently in effect under which future stock
option grants may be issued: the 1997 Long-Term Incentive Plan (the "1997
Incentive Plan") and the Non-Employee Directors Stock Option Plan (the
"Directors' Plan").
The 1997 Incentive Plan provides for the granting of options to officers
and key employees at an option price greater than or equal to the fair market
value of a Company share on the date of grant. The term of each option is ten
years and the options are generally exercisable in either three or four equal
annual installments beginning one year after the date of grant. Initially,
1,500,000 shares of the Company's common stock were reserved for issuance under
the 1997 Incentive Plan.
The Directors' Plan provides for the granting of options to non-employee
directors at an option price greater than or equal to the fair market value of a
Company share on the date of grant. The term of each option is ten years and the
options are generally exercisable in three equal annual installments beginning
one year after the date of grant. Two hundred and fifty thousand shares of the
Company's common stock were reserved for issuance under the Directors' Plan.
Information regarding the Company's stock option plans, including
predecessor plans, is summarized below:
WEIGHTED
SHARES UNDER AVERAGE OPTION
OPTION EXERCISE PRICE PRICE RANGE
------------- -------------- ------------
Balance at December 31, 1994... 1,359,468 $14.86 $3.37-$19.75
Granted....................... 141,218 19.31 18.37-23.94
Exercised..................... (200,041) 11.41 3.37-15.00
Canceled...................... (58,000) 16.09 15.00-22.75
--------- ------ ------------
Balance at December 31, 1995... 1,242,645 15.86 3.37-23.94
Granted....................... 552,918 28.88 24.14-36.94
Exercised..................... (177,105) 14.49 4.81-22.63
Canceled...................... (4,875) 17.45 18.00-22.63
--------- ------ ------------
Balance at December 31, 1996... 1,613,583 20.47 3.37-36.94
Granted....................... 563,372 49.20 27.89-60.81
Exercised..................... (382,256) 18.52 3.37-28.63
Canceled...................... (30,273) 29.05 15.00-49.06
--------- ------ ------------
Balance at December 31, 1997... 1,764,426 $29.67 $3.37-$60.81
========= ====== ============
Available for grant at
December 31, 1997............. 1,288,070
=========
Shares exercisable at
December 31, 1997............. 733,045
=========
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for the stock option plans. Had compensation cost for the
Company's stock option plans been determined based on the fair value
15
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
at the grant date for awards in 1997, 1996 and 1995 consistent with the
provisions of SFAS No. 123, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below (in thousands,
except per share amounts):
1997 1996 1995
------- ------- -------
Net income -- as reported................... $88,852 $68,004 $43,144
Net income -- pro forma..................... 83,999 65,925 42,843
Diluted earnings per share -- as reported... $ 2.31 $ 1.78 $ 1.14
Diluted earnings per share -- pro forma..... 2.17 1.72 1.13
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995, and additional awards in future years are anticipated. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: expected dividend yield of
0.4% to 0.8%; expected stock price volatility range of 27.6% to 35.9%; risk-free
interest rate range of 6.1% to 7.2%; and expected life of 10 years.
The ranges of option fair values granted during 1997, 1996 and 1995 are
from $19.59 to $32.21 and from $12.61 to $18.39 and $10.01 to $11.54,
respectively. The weighted average of these fair values are $25.77, $14.30 and
$10.29, respectively.
Information with respect to stock options outstanding and stock options
exercisable as of December 31, 1997, is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ -------------------
WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
OPTIONS LIFE EXERCISE OPTIONS EXERCISE
RANGE OF EXERCISE PRICE OUTSTANDING (YEARS) PRICE EXERCISABLE PRICE
----------- --------- -------- ------------ -----------------
$3.37-$19.75............... 703,846 5.78 $15.58 500,774 $15.20
$21.54-$36.94.............. 557,080 8.19 29.22 232,271 29.64
$49.06-$60.81.............. 503,499 9.39 49.89 -- --
--------- ---- ------ ------- ------
1,764,426 7.57 $29.67 733,045 $19.77
========= ==== ====== ======= ======
The Company's 1997 Incentive Plan also authorizes the granting of restricted
stock awards. Under this and previous plans, 158,750 shares of restricted stock
were awarded to Company executive officers and other key employees that will
vest over periods ranging from three to five years based upon the completion of
specified periods of future service with the Company. In addition, 135,000
restricted shares of Common Stock were awarded to executive officers and other
key employees and approximately 119,000 shares have been earned based upon the
attainment of specified performance objectives. Compensation is charged to
income over the vesting period for these awards which resulted in expense
recognition of $4.5 million, $2.3 million and $1.7 million in 1997, 1996 and
1995, respectively.
The Company's ESOP covers all full-time domestic employees of Production
Operators. ESOP contributions are made at the discretion of the Company's Board
of Directors. Contributions to the ESOP by the Company for the years ended
December 31, 1997, 1996 and 1995, were $925,000, $891,000 and $818,000,
respectively. Dividends received by the ESOP Trust and applied to reduction of
the ESOP term loan were $65,000, $126,000 and $119,000 in 1997, 1996 and 1995,
respectively.
16
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
Operating Leases
Aggregate minimum rental commitments under noncancelable operating leases
with lease terms in excess of one year as of December 31, 1997, are as follows
(in thousands):
1998....................................................... $ 6,375
1999....................................................... 4,066
2000....................................................... 2,784
2001....................................................... 2,141
2002....................................................... 1,516
Thereafter................................................. 12,834
-------
$29,716
=======
The Company incurred total rental expense of approximately $10.4 million,
$10.0 million and $9.3 million in 1997, 1996 and 1995, respectively.
Construction Commitment
The Company is committed to provide up to $40.0 million in additional
funding to its Venezuelan joint venture to fund progress payments on the
construction of contract gas compression equipment and facilities. The venture
expects to obtain project financing upon completion of construction and repay
all advances.
Legal Proceedings
The Company is involved in certain lawsuits and claims, including claims by
federal and local authorities under various environmental protection laws,
arising in the normal course of business. In the opinion of management,
uninsured losses, if any, resulting from the ultimate resolution of these
matters will not have a material adverse effect on the financial position or
results of operations of the Company.
Foreign Exchange Contracts
Camco enters into a variety of foreign exchange contracts to manage its
exposure to fluctuations in foreign currency exchange rates. These contracts
generally involve the exchange of one currency for another at a future date. The
carrying value of these contracts at December 31, 1997 and 1996, approximated
fair value based on exchange rates and quoted market prices at December 31, 1997
and 1996, for comparable contracts and was not significant.
Standby Letters of Credit
As of December 31, 1997, the Company has $16.1 million of standby letters
of credit outstanding under various unsecured credit arrangements.
Stockholder Rights Agreement
The Company has a Stockholder Rights Agreement to protect against coercive
or unfair takeover tactics. Under the terms of the agreement, the Company
distributed to its stockholders one right for each share of Common Stock held.
Each right, as amended, entitles the holder to purchase one share of Common
Stock for $250 per share, subject to adjustment or, under certain circumstances,
to purchase stock of the Company or of the acquiring entity for one half of the
market value. The rights are exercisable only if a person or group acquires 15%
or
17
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
more of the Company's Common Stock or makes a tender offer for 15 percent or
more of the Common Stock. The rights expire on December 15, 2004.
Stock Repurchase Plan
In 1996, the Board of Directors authorized a stock repurchase program for
up to $20 million of the Company's Common Stock. Shares of the Company's Common
Stock purchased pursuant to the program are reserved and used exclusively for
employee benefit plans. During 1996, the Company purchased 342,600 shares of the
Company's stock for an aggregate amount of $13.4 million.
10. SEGMENT INFORMATION
The Company is a diversified international energy service and manufacturing
company that provides a variety of services and equipment to the oil and gas
industry.
Revenues by industry segment and geographic area include both revenues from
unaffiliated customers and intercompany revenues from related companies. The
price at which intercompany sales are made is generally based on the selling
price to unaffiliated customers, less a discount, or the direct product cost
plus a markup.
Export sales from the United States to other geographic areas, including
intercompany sales to foreign subsidiaries, are as follows (in thousands):
1997 1996 1995
-------- -------- --------
Europe (including Former Soviet Union)... $ 52,137 $ 43,218 $ 33,519
Mexico and Central and South America..... 56,149 79,978 86,857
Far East................................. 32,827 28,610 30,002
Middle East and Africa................... 25,474 25,610 17,670
Canada................................... 21,598 19,557 16,120
-------- -------- --------
$188,185 $196,973 $184,168
======== ======== ========
18
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following financial information by geographic region for the years
ended December 31, 1997, 1996 and 1995, is based on the source from which the
equipment and services originate (in thousands):
ADDITIONAL
OUTSIDE INTERCOMPANY OPERATING IDENTIFIABLE
REVENUES REVENUES INCOME ASSETS
-------- ------------- ---------- ------------
1997
USA and Canada........................... $506,725 $ 157,881 $ 71,853 $ 641,407
Europe (including Former Soviet Union)... 106,876 34,055 36,285 152,494
Middle East and Africa................... 22,104 -- 884 11,852
Mexico and Central and South America..... 110,502 730 13,656 101,516
Far East................................. 167,634 75,004 38,800 210,571
Eliminations............................. -- (267,670) (14,725) --
-------- --------- -------- ----------
Consolidated............................ $913,841 $ -- $146,753 $1,117,840
======== ========= ======== ==========
1996
USA and Canada........................... $432,923 $ 114,950 $ 47,757 $ 517,645
Europe (including Former Soviet Union)... 136,851 27,182 21,148 134,036
Middle East and Africa................... 14,541 -- 3,705 18,092
Mexico and Central and South America..... 79,406 207 11,961 94,576
Far East................................. 100,814 53,300 32,761 207,356
Eliminations............................. -- (195,639) (10,069) --
-------- --------- -------- ----------
Consolidated............................ $764,535 $ -- $107,263 $ 971,705
======== ========= ======== ==========
1995
USA and Canada........................... $377,709 $ 110,397 $ 46,241 $ 488,424
Europe (including Former Soviet Union)... 103,361 17,002 6,988 84,478
Middle East and Africa................... 10,833 -- 1,667 14,807
Mexico and Central and South America..... 75,063 -- 3,777 75,896
Far East................................. 100,966 37,070 22,552 217,894
Eliminations............................. -- (164,469) (3,170) --
-------- --------- -------- ----------
Consolidated............................ $667,932 $ -- $ 78,055 $ 881,499
======== ========= ======== ==========
19
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information for industry segments is as follows (in thousands):
DEPRECIATION
OUTSIDE OPERATING IDENTIFIABLE AND CAPITAL
REVENUES INCOME ASSETS AMORTIZATION EXPENDITURES
-------- ------------- ------------ ------------ ------------
1997
Oilfield equipment... $697,015 $125,904 $ 696,494 $34,927 $37,303
Oilfield services.... 216,826 48,404 318,835 26,620 57,943
Corporate............ -- (27,555)(a) 102,511 917 508
-------- --------- ---------- ------- -------
Consolidated........ $913,841 $146,753 $1,117,840 $62,464 $95,754
======== ======== ========== ======= =======
1996
Oilfield equipment... $568,314 $ 87,893 $ 616,404 $31,473 $28,001
Oilfield services.... 196,221 40,121 270,816 23,003 33,685
Corporate............ -- (20,751) 84,485 908 162
-------- -------- ---------- ------- -------
Consolidated........ $764,535 $107,263 $ 971,705 $55,384 $61,848
======== ======== ========== ======= =======
1995
Oilfield equipment... $493,397 $ 62,209 $ 532,981 $23,574 $20,766
Oilfield services.... 174,535 29,321 272,189 21,906 68,074
Corporate............ -- (13,475) 76,329 612 315
-------- -------- ---------- ------- -------
Consolidated........ $667,932 $ 78,055 $ 881,499 $46,092 $89,155
======== ======== ========== ======= =======
- ---------------
(a) Includes merger expenses of $12.5 million incurred in connection with the
merger between Camco and Production Operators.
11. DISCONTINUED OPERATIONS
The oil and gas production activities of Production Operators were
discontinued in 1995 with a $6.7 million provision, net of tax, recorded related
to the disposal of assets and $.5 million loss, net of tax, recorded related to
operations. The discontinued operation's revenues, operating loss, tax benefit
and loss after tax in 1995 were $9.2 million, $.7 million, $.2 million and $.5
million, respectively.
20
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. UNAUDITED QUARTERLY FINANCIAL DATA
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997
Revenues............................... $195,484 $227,145 $239,058 $252,154 $913,841
Gross margin........................... 82,246 96,113 99,649 109,359 387,367
Income before provision for income
taxes................................. 30,189 24,453 41,579 44,861 141,082
Income before cumulative effect of
change in accounting principle........ 19,810 15,772 27,023 29,156 91,761
Net income............................. 19,810 15,772 27,023 26,247 88,852
Earnings per share:
Basic --
Income before cumulative effect of
change in accounting
principle........................... $ .53 $ .42 $ .72 $ .78 $ 2.45
======== ======== ======== ======== ========
Net income........................... $ .53 $ .42 $ .72 $ .70 $ 2.37
======== ======== ======== ======== ========
Diluted --
Income before cumulative effect of
change in accounting
principle........................... $ .52 $ .41 $ .70 $ .76 $ 2.39
======== ======== ======== ======== ========
Net income........................... $ .52 $ .41 $ .70 $ .68 $ 2.31
======== ======== ======== ======== ========
1996
Revenues............................... $167,648 $185,283 $190,171 $221,433 $764,535
Gross margin............................ 67,763 74,507 75,508 87,651 305,429
Income before provision for income
taxes.................................. 21,280 23,495 26,538 31,411 102,724
Net income.............................. 14,288 15,593 17,452 20,671 68,004
Earnings per share:
Basic --
Net income............................ $ .38 $ .42 $ .47 $ .55 $ 1.81
======== ======== ======== ======== ========
Diluted --
Net income............................ $ .37 $ .41 $ .46 $ .54 $ 1.78
======== ======== ======== ======== ========
21
EXHIBIT 13.2
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
1998 1997 1998 1997
------------ ----------- ----------- ----------
REVENUES:
Sales $151,813 $156,319 $303,092 $279,751
Services 83,290 70,826 160,078 142,878
-------- -------- -------- --------
235,103 227,145 463,170 422,629
-------- -------- -------- --------
COSTS AND EXPENSES:
Cost of sales 76,837 82,228 151,222 144,451
Cost of services 57,651 48,804 111,722 99,819
-------- -------- -------- --------
134,488 131,032 262,944 244,270
-------- -------- -------- --------
Gross margin 100,615 96,113 200,226 178,359
Selling, general and administrative expenses 53,090 55,476 105,930 104,185
Merger expenses -- 12,500 -- 12,500
Amortization of intangible assets 2,403 2,178 4,573 4,072
-------- -------- -------- --------
Operating income 45,122 25,959 89,723 57,602
Interest expense, net 2,175 1,506 3,768 2,960
-------- -------- -------- --------
Income before provision for income taxes 42,947 24,453 85,955 54,642
Provision for income taxes 14,801 8,681 30,214 19,060
-------- -------- -------- --------
Net income $ 28,146 $ 15,772 $ 55,741 $ 35,582
======== ======== ======== ========
Earnings Per Share:
Basic-
Net Income $ .74 $ .42 $ 1.48 $ .95
Average common shares outstanding 37,887 37,320 37,780 37,300
Diluted-
Net Income $ .73 $ .41 $ 1.44 $ .93
Average common and common
equivalent shares outstanding 38,745 38,348 38,638 38,325
Cash dividends per common share $ .05 $ .05 $ .10 $ .10
The accompanying notes are an integral part of these
consolidated condensed financial statements.
1
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share data)
June 30, 1998 December 31, 1997
------------- -----------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 69,231 $ 57,255
Accounts receivable, net 194,823 177,112
Inventories 225,808 206,471
Prepaid expenses and other 71,670 65,663
---------- ----------
Total current assets 561,532 506,501
---------- ----------
PROPERTY, PLANT AND EQUIPMENT
Land 5,708 5,120
Buildings 78,275 77,279
Machinery and equipment 279,800 266,137
Service equipment 397,564 366,732
---------- ----------
761,347 715,268
Accumulated depreciation (387,850) (361,956)
---------- ----------
Property, plant and equipment, net 373,497 353,312
---------- ----------
INTANGIBLE ASSETS, net 223,058 212,749
OTHER 79,930 45,278
---------- ----------
Total assets $1,238,017 $1,117,840
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 120 $ 120
Accounts payable 60,115 57,765
Accrued liabilities 151,726 159,085
Income taxes payable 29,429 31,832
---------- ----------
Total current liabilities 241,390 248,802
---------- ----------
LONG-TERM DEBT 170,300 110,300
DEFERRED INCOME TAXES 32,213 28,690
OTHER LONG-TERM LIABILITIES 45,064 43,803
---------- ----------
Total liabilities 488,967 431,595
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock $.01 par value, 100,000,000
shares authorized, 38,763,668 and
38,583,393 shares issued 388 386
Additional paid-in capital 533,576 525,662
Retained earnings 255,875 203,911
Cumulative translation adjustment (15,966) (15,194)
Treasury stock, 799,989 and 1,046,372
shares at cost (24,823) (28,520)
---------- ----------
Total stockholders' equity 749,050 686,245
---------- ----------
Total liabilities and stockholders' equity $1,238,017 $1,117,840
========== ==========
The accompanying notes are an integral part of these
consolidated condensed financial statements.
2
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Six Months Ended June 30
--------------------------
1998 1997
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 55,741 $ 35,582
Adjustments to reconcile net income to net cash
provided by operating activities, net of
effects of acquisitions -
Gain from sale of assets (687) (139)
Depreciation and amortization 35,476 30,444
Provision for deferred and other taxes 3,539 7,102
Increase in accounts receivable (20,776) (16,402)
Increase in inventories (14,686) (24,051)
Increase in accounts payable 4,104 4,753
Increase (decrease) in accrued liabilities (7,685) 24,201
Decrease in income taxes payable (2,010) (11,776)
Decrease in other, net 3,158 2,310
-------- --------
Net cash provided by operating activities 56,174 52,024
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (50,954) (44,407)
Proceeds from sale of property, plant and equipment 734 223
Business acquisitions, net of cash acquired (19,496) (11,753)
Investment in joint venture (37,288) --
Change in subsidiary year-end -- (6,496)
--------- --------
Net cash used in investing activities (107,004) (62,433)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in borrowings under revolving credit facility 60,000 --
Increase in other debt -- 4,996
Dividends paid to stockholders (3,777) (3,122)
Proceeds from exercise of stock options 6,752 864
Change in subsidiary year-end and other -- 6,158
--------- --------
Net cash provided by financing activities 62,975 8,896
--------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (169) (217)
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,976 (1,730)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 57,255 42,645
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 69,231 $ 40,915
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 3,930 $ 2,981
Cash paid for income taxes $ 23,779 $ 23,596
The accompanying notes are an integral part of these
consolidated condensed financial statements.
3
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(unaudited)
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
1998 1997 1998 1997
-------- -------- -------- ---------
Net income $28,146 $15,772 $55,741 $35,582
Other comprehensive income:
Foreign currency translation adjustments (2,630) 1,915 (772) (3,035)
------- ------- ------- -------
Comprehensive income $25,516 $17,687 $54,969 $32,547
======= ======= ======= =======
The accompanying notes are an integral part of these
consolidated condensed financial statements.
4
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of Camco International Inc. and subsidiaries ("Camco" or
the "Company") management, the accompanying unaudited consolidated condensed
financial statements include all adjustments necessary to present fairly the
Company's financial position as of June 30, 1998, and its results of operations
and cash flows for the three months and six months ended June 30, 1998 and 1997.
Although the Company believes that the disclosures are adequate to make the
information presented not misleading, certain information and footnote
disclosures normally included in annual consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. These consolidated condensed financial statements should be
read in conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 1997. The results of operations for the three months and six
months ended June 30, 1998 may not be indicative of the results for the full
year.
Merger with Production Operators Corp
On June 13, 1997, Camco acquired Production Operators Corp ("Production
Operators"), a market leader in total responsibility gas compression services.
The business combination was accounted for using the pooling-of-interests method
of accounting. Accordingly, these financial statements have been prepared as if
Camco and Production Operators were combined as of the beginning of the earliest
period presented.
Other Comprehensive Income
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," in the first quarter of
1998. The only current difference between net income and comprehensive income is
the change in the cumulative translation adjustment for foreign currency, a
separate component of stockholders' equity in the accompanying consolidated
condensed balance sheets.
Earnings Per Share
SFAS No. 128, "Earnings Per Share," was adopted by the Company in the
fourth quarter of 1997 and all earnings per share previously reported have been
restated. Basic earnings per share is computed by dividing net income by the
weighted average common shares outstanding. Diluted earnings per share is
computed by dividing net income by the weighted average number of common and
common equivalent shares outstanding. The computation of diluted earnings per
share includes the dilutive effects of options to purchase common stock and
restricted stock grants, which aggregated 858,000 and 1,028,000 for the three
months ended June 30, 1998 and 1997, respectively, and 858,000 and 1,025,000 for
the six months ended June 30, 1998 and 1997, respectively.
2. PROPOSED MERGER WITH SCHLUMBERGER LIMITED
On June 18, 1998, Camco entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Schlumberger Technology Corporation ("STC"), and
Schlumberger OFS, Inc., a wholly-owned subsidiary of STC ("Sub"), providing for
the merger of Sub with and into Camco, with Camco surviving as a wholly-owned
subsidiary of STC (the "Merger"). STC is a wholly-owned subsidiary of
Schlumberger Limited, a publicly traded Netherlands Antilles corporation
("Schlumberger"). Pursuant to the Merger Agreement, the stockholders of Camco
will receive 1.18 shares of common stock of Schlumberger ("Schlumberger Common
Stock") for each share of common stock of Camco ("Camco Common Stock"). In
addition, outstanding options to acquire shares of Camco Common Stock will be
converted into options to acquire 1.18 times as many shares of Schlumberger
Common Stock at an exercise price per share equal to the former exercise price
per share divided by 1.18.
5
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
Closing under the Merger Agreement is conditioned on, among other
things, approval by Camco's stockholders and receipt of all regulatory
approvals. It is intended that the Merger qualify as a tax-free reorganization
for federal income tax purposes and as a pooling-of-interests for accounting
purposes. Camco and STC anticipate closing the transaction on August 31, 1998.
Under the Merger Agreement, Camco must pay a termination fee of $90
million if (1) Camco receives a Superior Proposal (as defined in the Merger
Agreement) prior to approval of the Merger by the Camco stockholders and elects
to terminate the agreement, (2) the Camco Board of Directors recommends or
proposes to recommend an alternate proposal and STC exercises its right to
terminate the agreement, (3) the Camco Board of Directors withdraws, terminates
or modifies its recommendation of the agreement in an adverse manner, STC
terminates the agreement and Camco consummates an alternative transaction on or
before September 30, 1999 or (4) an alternate acquisition proposal is made and
publicly announced, the Camco stockholders do not approve the Merger and Camco
consummates an alternative proposal on or before September 30, 1999.
Pursuant to a related Transaction Agreement, Schlumberger agreed to
sell to STC such number of shares of Schlumberger Common Stock as are required
to be delivered to stockholders of Camco under the Merger Agreement and to
register those shares with the Securities and Exchange Commission.
3. BUSINESS ACQUISITIONS
During the first six months of 1998, the Company acquired two well
service businesses in the United States, an electric submersible pump business
in Argentina and the remaining interest in an electric submersible pump business
in Colombia for $19.5 million in cash. The results of operations of these
businesses are included in the accompanying financial statements from the dates
of acquisition.
4. INVENTORIES
Consolidated inventories, net of allowances, are summarized as follows
(in thousands):
June 30, December 31,
1998 1997
----------- ------------
(Unaudited)
Raw materials $ 22,969 $ 19,916
Parts and components 64,185 69,656
Work-in-process 25,149 24,079
Finished goods 113,505 92,820
-------- --------
$225,808 $206,471
======== ========
Work-in-process and finished goods inventories include the cost of
materials, labor and plant overhead. The excess of current costs, determined
using the first-in, first-out basis, over the carrying values of those
inventories accounted for on a last-in, first-out basis was approximately $7.8
million and $10.0 million at June 30, 1998 and December 31, 1997, respectively.
5. COMMITMENTS AND CONTINGENCIES - LEGAL PROCEEDINGS
The Company is involved in certain lawsuits and claims arising in the
normal course of business, including claims by federal and local authorities
under various environmental protection laws. In the opinion of management,
uninsured losses, if any, resulting from the ultimate resolution of these
matters will not have a material adverse effect on the financial position or
results of operations of the Company.
6
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in this Current Report on Form 8-K, in Registration Statement No.
333-59961 on Form S-4, as amended by Registration Statement No. 333-62443 on
Form S-4 filed pursuant to Rule 462(b) of the Securities Act of 1933, as
amended, and in Registration Statement No. 333-62545 on Form S-8 of our report
dated February 10, 1998 included in Camco International Inc.'s Form 10-K for the
year ended December 31, 1997, and to all references to our Firm included in such
documents.
ARTHUR ANDERSEN LLP
Houston, Texas
September 15, 1998
EXHIBIT 99.1
For Immediate Release: Monday August 31, 1998
SCHLUMBERGER AND CAMCO MERGER COMPLETED
NEW YORK, August 31 -- Schlumberger Limited (NYSE: SLB) announced that the
merger of Schlumberger Technology Corporation, a wholly owned subsidiary of
Schlumberger, and Camco International, Inc. (NYSE: CAM), has been completed
following today's approval by the stockholders of Camco.
Under the terms of the merger agreement, approximately 38.2 million shares of
Camco common stock will be exchanged for 45.1 million shares of Schlumberger
common stock at the exchange rate of 1.18 shares of Schlumberger stock for each
share of Camco. Based on the Schlumberger closing price of $48-7/8 on Friday,
August 28, the transaction is valued at $2.2 billion, and the combined market
capitalization of the two companies is $26.6 billion.
Camco will be operated as a subsidiary of Schlumberger Technology Corporation
within the Schlumberger Oilfield Services group. Rene Huck is appointed
President of Camco, reporting to Victor Grijalva, Vice Chairman of Schlumberger
Limited. Rene Huck was previously the Oilfield Services Solutions President for
Europe and the Former Soviet Union area.
The merger further enhances the capability of Schlumberger to offer premium
reservoir optimization solutions and systems to our customers worldwide.
Schlumberger and Camco have historically been the most profitable companies in
their peer group. Both companies have extensive international experience,
exhibit an excellent cultural fit and share strengths in relationships with
customers, governments and suppliers. This combination reinforces the leadership
position of Schlumberger in products and services that improve the productivity
of its customers.
Schlumberger is a worldwide leader in technical services with 65,000 employees
and operations in over 100 countries. In 1997, revenue was $10.65 billion.
For more information about this release contact:
Simone Crook Bruce Longaker
Director Investor Relations Vice President, Finance
& Communications Camco International, Inc.-
Schlumberger Limited New York Houston
Phone: (1-212) 350-9432 Phone: (1-713) 747-4000
Email: crook@new-york.sl.slb.com
