EXHIBIT 99.2
WESTERNGECO
COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
WESTERNGECO
INDEX
DECEMBER 31, 2003, 2002 AND 2001
- -------------------------------------------------------------------------------
PAGE(S)
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REPORT OF INDEPENDENT AUDITORS...........................................1
COMBINED FINANCIAL STATEMENTS
Balance Sheets...........................................................2
Statements of Operations and Comprehensive Income........................3
Statements of Owners' Net Investment.....................................4
Statements of Cash Flows.................................................5
Notes to Financial Statements.........................................6-22
REPORT OF INDEPENDENT AUDITORS
To the Shareholders Representatives Committee and Owners of
WesternGeco
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations and comprehensive income, of owners' net
investment and of cash flows present fairly, in all material respects, the
financial position of WesternGeco (the "Venture") at December 31, 2003 and 2002,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Venture's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the combined financial statements, effective January
1, 2002, the Company changed its method of accounting for goodwill in accordance
with Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets.
As discussed in Note 10 and Note 12 to the combined financial statements, the
Venture has significant transactions with related parties.
PricewaterhouseCoopers LLP
Houston, Texas
March 1, 2004
1
WESTERNGECO
COMBINED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
- -------------------------------------------------------------------------------
(in thousands of dollars) 2003 2002
---------- ----------
ASSETS
Current assets
Cash $ 15,797 $ 9,399
Short-term investments 207,840 269,183
Trade receivables, less allowance for doubtful accounts
(2003 - $6,815; 2002 - $16,259) 247,448 269,119
Receivables from affiliates 22,057 9,149
Inventories 20,238 21,261
Prepaid expenses and other current assets 93,065 104,491
---------- ----------
Total current assets 606,445 682,602
Multiclient library, net 505,785 1,018,483
Property, plant and equipment, net 497,559 599,556
Deferred taxes on income 32,348 26,731
Goodwill, net 228,510 228,510
Other intangible assets, net 33,059 37,948
Other assets 5,183 10,866
---------- ----------
Total assets $1,908,889 $2,604,696
========== ==========
LIABILITIES AND OWNERS' NET INVESTMENT
Current liabilities
Accounts payable and accrued liabilities $ 371,396 $ 464,852
Payables to affiliates 33,180 35,479
Income taxes payable 10,086 15,376
Short-term loans 93,391 188,813
---------- ----------
Total current liabilities 508,053 704,520
Long-term debt 119,040 131,829
Employee benefits 32,266 17,793
Other noncurrent liabilities 19,189 10,264
---------- ----------
Total liabilities 678,548 864,406
Commitments and contingencies (Note 9)
Minority interest 1,014 1,152
Owners' net investment 1,229,327 1,739,138
---------- ----------
Total liabilities and owners' net investment $1,908,889 $2,604,696
========== ==========
The accompanying notes are an integral part of
these combined financial statements.
2
WESTERNGECO
COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- -------------------------------------------------------------------------------
(in thousands of dollars) 2003 2002 2001
----------- ----------- -----------
REVENUE
Contract service revenue $ 831,533 $ 1,063,845 $ 1,047,496
Multiclient license revenue 351,459 412,193 653,583
----------- ----------- -----------
Total revenue 1,182,992 1,476,038 1,701,079
----------- ----------- -----------
OPERATING EXPENSES
Costs and expenses 831,023 1,112,689 1,020,598
Multiclient amortization 263,375 171,083 312,370
Research and engineering 51,919 67,957 63,018
Selling, general and administrative 55,353 65,306 53,468
Asset impairments and restructure charges 459,586 305,373 83,812
Other expense and (income), net 10,941 6,051 (738)
----------- ----------- -----------
1,672,197 1,728,459 1,532,528
----------- ----------- -----------
Income (loss) before taxes and minority interest (489,205) (252,421) 168,551
Income tax expense 17,025 23,089 24,879
----------- ----------- -----------
Income (loss) before minority interest (506,230) (275,510) 143,672
Minority interest 138 361 6,370
----------- ----------- -----------
Net (loss) income (506,092) (275,149) 150,042
----------- ----------- -----------
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX OF $0
Translation adjustments (1,740) 2,227 (2,511)
Unrealized (loss) gain on foreign currency hedges (3,790) 3,829 (45)
----------- ----------- -----------
Total other comprehensive (loss)
income, net of tax (5,530) 6,056 (2,556)
----------- ----------- -----------
Comprehensive (loss) income $ (511,622) $ (269,093) $ 147,486
=========== =========== ===========
The accompanying notes are an integral part
of these combined financial statements.
3
WESTERNGECO
COMBINED STATEMENTS OF OWNERS' NET INVESTMENT
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- -------------------------------------------------------------------------------
SCHLUMBERGER BAKER HUGHES
(in thousands of dollars) LIMITED INCORPORATED TOTAL
------------ ------------ -----------
BALANCES AT DECEMBER 31, 2000 $ 1,302,522 $ 558,223 $ 1,860,745
Other comprehensive loss (1,789) (767) (2,556)
Net income 105,029 45,013 150,042
------------ ------------ -----------
BALANCES AT DECEMBER 31, 2001 1,405,762 602,469 2,008,231
Other comprehensive income 4,239 1,817 6,056
Net loss (192,604) (82,545) (275,149)
------------ ------------ -----------
BALANCES AT DECEMBER 31, 2002 1,217,397 521,741 1,739,138
Capital contribution - cash 52 23 75
Capital contribution - employee compensation 1,736 -- 1,736
Other comprehensive loss (3,871) (1,659) (5,530)
Net loss (354,785) (151,307) (506,092)
------------ ------------ -----------
BALANCES AT DECEMBER 31, 2003 $ 860,529 $ 368,798 $ 1,229,327
=========== =========== ===========
The accompanying notes are an integral part
of these combined financial statements.
4
WESTERNGECO
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- -------------------------------------------------------------------------------
(in thousands of dollars) 2003 2002 2001
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $(506,092) $(275,149) $ 150,042
Adjustments to reconcile net loss to net cash provided
by operating activities
Depreciation and amortization 179,954 216,328 174,166
Amortization of multiclient library 263,375 171,083 312,370
Asset impairments 456,590 207,543 83,812
Noncash employee compensation 1,736 -- --
Deferred tax benefit (5,617) (10,371) (1,658)
Minority interest (138) (361) (6,370)
Change in operating assets and liabilities
Decrease (increase) in receivables 21,671 204,911 (260,872)
(Increase) decrease in receivables from affiliates (12,908) (11) 91,620
Decrease (increase) in inventories 1,023 (2,744) 11,202
(Increase) decrease in prepaid expenses and other
current assets (56,827) 177,614 (193,384)
(Decrease) increase in accounts payable and accrued
liabilities (6,903) (152,499) 217,307
Decrease in payables to affiliates (2,299) (69,079) (49,101)
(Decrease) increase in income taxes payable (14,414) 11,631 11,352
Other - net 33,586 11,222 (5,339)
--------- --------- ---------
Net cash provided by operating activities 352,737 490,118 535,147
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets (149,899) (170,021) (313,838)
Investment in multiclient library (149,767) (344,705) (458,188)
Sales of fixed assets 8,331 69,689 28,821
Decrease (increase) in short term investments 61,343 (63,918) 11,085
--------- --------- ---------
Net cash used in investing activities (229,992) (508,955) (732,120)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt -- 69,841 106,631
Payments of long-term debt (21,000) (78,389) --
Net change in short-term debt (95,422) 1,252 106,978
Capital contribution 75 -- --
--------- --------- ---------
Net cash (used in) provided by financing activities (116,347) (7,296) 213,609
--------- --------- ---------
Net increase (decrease) in cash 6,398 (26,133) 16,636
CASH
Beginning of period 9,399 35,532 18,896
--------- --------- ---------
End of period $ 15,797 $ 9,399 $ 35,532
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for
Interest $ 8,645 $ 9,992 $ 9,603
Income taxes 25,905 27,996 20,774
The accompanying notes are an integral part
of these combined financial statements.
5
WESTERNGECO
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
(in thousands of dollars)
1. BUSINESS AND ORGANIZATION
WesternGeco is comprised of WesternGeco LLC, a Delaware limited liability
company, WesternGeco Ltd., a United Kingdom limited liability company,
WesternGeco Seismic Holdings ("B.V.I.") Ltd., a British Virgin Islands
company, WesternGeco B.V., a Netherlands company, and WesternGeco Canada,
a Canadian partnership, together with their respective subsidiaries
(collectively, "WesternGeco" or the "Venture").
WesternGeco was formed on December 1, 2000, with the contribution by
Schlumberger Limited ("Schlumberger") and Baker Hughes Incorporated
("BHI") of their seismic operations. Concurrently, Schlumberger paid
$500,000 to BHI in exchange for a 70 percent interest in the Venture.
WesternGeco Canada was formed on November 1, 2003, with a $75 cash
contribution by Schlumberger and BHI. The five entities that comprise
WesternGeco are each 70 percent owned by Schlumberger and affiliated
companies and 30 percent owned by BHI and affiliated companies
(collectively, the "Owners"). Specific terms and conditions of the venture
are included, or referred to, in a Master Formation Agreement dated
September 6, 2000.
WesternGeco provides comprehensive worldwide reservoir imaging,
monitoring, and development services, with extensive seismic crews and
data processing centers, as well as having a multiclient seismic library
available for licensing. Services range from 2D, 3D and time-lapse (4D)
seismic surveys to multicomponent surveys for delineating prospects and
reservoir management.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The combined financial statements include accounts of the Venture and all
majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Individual assets and liabilities initially contributed to the Venture by
Schlumberger, including goodwill contributed to the Venture from previous
transactions, were recorded using their respective historical carrying
values at the date of contribution. Individual assets and liabilities
contributed to the Venture by BHI were recorded using their respective
fair values at the date of contribution. The excess of purchase price over
the estimated fair value of the net assets at contribution was $126,000,
which has been recorded as goodwill and was being amortized over 15 years
prior to the adoption of Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets ("SFAS No. 142") in 2002.
6
WESTERNGECO
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
(in thousands of dollars)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
TRANSLATION OF FOREIGN CURRENCIES
The Venture's foreign subsidiaries predominately have the U.S. dollar
designated as their functional currency. Financial statements of these
foreign subsidiaries are remeasured to U.S. dollars for consolidation
purposes using current rates of exchange for monetary assets and
liabilities and historical rates of exchange for nonmonetary assets and
related elements of expense. Revenue and other expense elements are
remeasured at rates that approximate the rates in effect on the
transaction dates. Remeasurement gains and losses are included in the
Venture's combined statement of operations. Certain foreign subsidiaries
designate the local currency as their functional currency and the related
cumulative translation adjustments are included as a component of
accumulated other comprehensive income.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are recognized at fair value. The Venture
uses derivative financial instruments, such as foreign currency forward
contracts, to mitigate the impact of changes in foreign currency exchange
rates. The accounting for realized and unrealized gains and losses from
derivative financial instruments depends upon the intended use of the
derivative and the resulting designation. For derivative financial
instruments designated as cash flow hedges, gains and losses, to the
extent the hedge is effective, are recognized in other comprehensive
income until the hedged item is recognized in earnings in other income and
expense, net. Any change in fair value resulting from ineffectiveness is
recognized immediately in earnings in other expense and income, net. At
December 31, 2003, no contracts designated as cash flow hedges were
outstanding. At December 31, 2002, contracts with a notional value of
$22,572 were outstanding for the Norwegian kroner and U.K. pound. At
December 31, 2003 and 2002, $0 and $2,417 were deferred in accumulated
other comprehensive income, respectively. For derivative financial
instruments entered to offset the change in foreign currency exchange
rates related to the future settlement of assets and liabilities
denominated in other than the functional currency, gains and losses are
recognized when the currency exchange rates fluctuate, resulting in an
offset to the currency gains or losses on those foreign currency
denominated assets or liabilities. At December 31, 2003, contracts with a
notional value of $128,617 were outstanding for the U.K. pound, Norwegian
kroner, Euro, Singapore dollar and Japanese yen. At December 31, 2002,
contracts with a notional value of $118,895 were outstanding for the U.K.
pound, Norwegian kroner, Australian dollar and Swedish krona.
At December 31, 2003 and 2002, $3,991 and $5,829, respectively, was
included in other assets relating to derivate financial instruments.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The reported amounts of financial instruments such as cash, short-term
investments, receivables and accounts payable approximate fair value
because of their short maturities. The reported amounts of debt
approximate fair values because of their variable interest rates.
7
WESTERNGECO
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
(in thousands of dollars)
RISKS AND UNCERTAINTIES
Since the Venture operates in many countries, the business is subject to
varying degrees of risk and uncertainty. The Venture insures its business
and assets against insurable risks in a manner that it deems appropriate.
Because of its diversity, the Venture believes that the risk of loss from
uninsured events in any one country would not have a material, adverse
effect on its operations as a whole. Additionally, management believes
there is no material concentration of risk within any single customer or
supplier, or small group of customers or suppliers, whose failure or
nonperformance would materially affect the Venture's financial position.
For the year ended December 31, 2003, revenue from one customer accounted
for 12 percent of total revenue. For the years ended December 31, 2002 and
2001, no customer accounted for more than 10 percent of total revenue. At
December 31, 2003, the Company had receivables outstanding from two
customers that comprised 13 percent and 10 percent of total trade
receivables, respectively. At December 31, 2002, no customer had an
outstanding balance greater than 10 percent of total trade receivables.
REVENUE RECOGNITION
Revenues from contract services performed on a dayrate basis are
recognized as the service is performed. Revenues from other contract
services are recognized as the seismic data is acquired or processed.
Multiclient data surveys are licensed to customers on a nontransferable
basis. Revenues on completed multiclient data surveys are recognized upon
obtaining a signed license agreement and providing customers access to
such data. Revenues on in-process multiclient data surveys are recognized
after obtaining a signed licensing agreement as the seismic data is
acquired and processed, similar to other contract services.
RESEARCH AND ENGINEERING COSTS
Research and engineering costs are expensed as incurred.
CASH
Cash includes cash on hand and demand deposits with banks.
SHORT-TERM INVESTMENTS
Short-term investments are held to maturity and stated at cost plus
accrued interest, which approximates market value, and comprise primarily
certificates of deposit and time deposits. Short-term investments include
certain time deposits that are held through an affiliate in the amounts of
$119,544 and $174,984 at December 31, 2003 and 2002, respectively.
INVENTORIES
Inventories consist of parts and raw materials and are stated at the lower
of cost or market, cost being determined on the average cost basis.
MULTICLIENT LIBRARY
The multiclient library consists of completed and in-process seismic
surveys that are licensed on a nonexclusive basis. All capitalizable costs
associated with acquiring and processing the data are capitalized into the
multiclient library. Costs capitalized during the years ended December 31,
2003, 2002 and 2001, were $149,767, $344,705 and $458,188, respectively.
Such costs are charged to multiclient amortization based on the percentage
of the total costs to estimated total revenue that the Venture expects to
receive from multiclient surveys. Additionally, each survey is amortized
over a maximum of 4 years. No individual survey carries a net book value
above the straight-line amortized value.
8
WESTERNGECO
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
(in thousands of dollars)
The carrying value of the multiclient library is periodically reviewed to
determine whether there has been a permanent impairment of value.
Adjustments to the value are recorded when it is determined that estimated
sales would not be sufficient to recover the carrying value of the asset
(Note 3).
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets which are as follows:
YEARS
-----
Buildings and improvements 5 - 50
Field technical and drilling equipment 3 - 15
Vessels 12 - 18
Other equipment 2 - 15
Furniture, fixtures and office equipment 5 - 12
Maintenance and repairs are charged to operating expenses as incurred.
TAXES ON INCOME
The Venture accounts for income taxes using the asset and liability
approach. The asset and liability approach requires the recognition of
deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying amounts and the
tax basis of certain assets and liabilities. The income tax provision and
related accounts in the accompanying combined financial statements are
primarily related to operations outside the United States ("U.S."). The
Owners or their affiliates are directly responsible for U.S. income taxes
on WesternGeco LLC earnings and Canadian income taxes on WesternGeco
Canada earnings. Therefore, no such taxes are provided on the U.S.
earnings of WesternGeco LLC and the Canadian earnings of WesternGeco
Canada in the combined financial statements. Valuation allowances are
recorded to reduce deferred tax assets when it is more likely than not
that a deferred tax asset will not be realized by the Venture.
GOODWILL
The excess purchase price over the fair value of assets acquired is
recorded as goodwill. Beginning in 2002 with the adoption of SFAS No. 142,
goodwill is no longer amortized, but is tested for impairment annually and
when an event occurs or circumstances change that would cause the fair
value of a reporting unit to be below its carrying amount. Prior to 2002,
goodwill was amortized using the straight-line method over its estimated
period of benefit of 15-25 years. Accumulated amortization was $9,896 at
December 31, 2003 and 2002.
9
WESTERNGECO
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
(in thousands of dollars)
The proforma effect of implementing SFAS No. 142 is as follows:
(in thousands of dollars) DECEMBER 31,
2001
------------
Net income as reported $ 150,042
Goodwill amortization 8,801
----------
Pro forma net income $ 158,843
==========
OTHER INTANGIBLE ASSETS
Other intangible assets, which are stated at cost less accumulated
amortization, consist primarily of purchased software. The purchased
software is amortized over 15 years, which is the expected useful life.
Other intangible assets are amortized over 5 to 20 years. Accumulated
amortization was $16,010, $9,806 and $3,946 at December 31, 2003, 2002 and
2001, respectively. Amortization expense for the years ended December 31,
2003, 2002 and 2001 was $6,204, $5,860 and $6,085, respectively.
Amortization expense for the next five years is estimated to be:
(in thousands of dollars)
2004 $ 4,302
2005 3,732
2006 3,028
2007 2,466
2008 2,466
IMPAIRMENT OF LONG LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No.
144"), the Venture assesses potential impairments of long-lived assets and
identifiable intangible assets when there is evidence that events or
changes in circumstances may have made recovery of an asset's carrying
value uncertain. For assets held and used, an impairment loss is
recognized when the sum of the expected, future undiscounted net cash flow
is less than the carrying amount of the asset.
MOBILIZATION COSTS
Transportation and other expenses incurred prior to commencement of
seismic operations where a customer contract already exists are deferred
and amortized over the term of the related contract. Transportation or
other expenses incurred prior to commencement of seismic operations for a
multiclient project are capitalized as a part of the multiclient library.
Expenses incurred to relocate seismic units not under contract are
expensed as incurred.
10
WESTERNGECO
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
(in thousands of dollars)
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 146, Accounting for Exit
or Disposal Activities ("Statement No. 146"). Statement No. 146 addresses
issues regarding the recognition, measurement and reporting of costs that
are associated with exit and disposal activities, including restructuring
activities. The scope of Statement No. 146 also includes (1) costs related
to terminating a contract that is not a capital lease and (2) termination
benefits that employees who are involuntarily terminated receive under the
terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred compensation contract. Statement No.
146 was effective for exit or disposal activities that were initiated
after December 31, 2002. The Company adopted Statement No. 146 effective
January 1, 2003, with no impact upon its financial position or results of
operations.
In December 2003, the FASB issued Statement of Financial Accounting
Standards No. 132 (revised 2003) Employers' Disclosures About Pensions and
Other Postretirement Benefits ("Statement No. 132R"). Statement No. 132R
requires additional disclosures to those in the original Statement 132
about the assets, obligations, cash flows, and net periodic benefit cost
of defined benefit pension plans and other defined benefit postretirement
plans. The Venture adopted Statement No. 132R for the year ended December
31, 2003.
In January 2004, the FASB issued FSP No. FAS 106-1 (Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug
Improvement and Modernization Act of 2003). The statement permits the
deferral of accounting related to the effects of the legislation until the
earlier of issuance of final accounting guidance by the FASB or a
significant plan amendment/curtailment event requiring remeasurement,
occurring after January 31, 2004. The Venture is assessing the impact of
the new legislation upon future postretirement medical costs.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current
year presentation.
3. ASSET IMPAIRMENTS AND RESTRUCTURE CHARGES
During the years ended December 31, 2003, 2002 and 2001, the Company
recognized asset impairments and restructuring charges as follows:
2003 2002 2001
---------- ---------- ----------
Multiclient impairment $ 399,090 $ 184,091 $ 50,393
Asset impairment 57,500 23,452 33,419
Employee separation costs 2,996 42,017 --
Other exit costs -- 55,813 --
---------- ---------- ----------
$ 459,586 $ 305,373 $ 83,812
========== ========== ==========
11
WESTERNGECO
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
(in thousands of dollars)
During the year ended December 31, 2002, the Venture's management approved
a restructuring plan to reduce infrastructure and overhead, remove several
marine vessels from service, cease all U.S. land acquisition activity and
writedown certain assets. Employee separation costs were for approximately
1,700 employees, impacting the majority of business functions, job classes
and geographic regions. Employee separation benefits included severance,
medical and other benefits. Other exit costs consisted of vessel stacking,
de-rigging costs, lease cancellation and other costs primarily related to
the removal from service of nine vessels and all U.S. land crews. The
activity related to the restructure action is as follows:
BALANCE 2002 BALANCE
DECEMBER 31, CHARGES TO DECEMBER 31,
2001 EXPENSE EXPENDITURES 2002
------------ ---------- ------------ ------------
Employee separation costs $ -- $ 42,017 $ (17,438) $ 24,579
Other exit costs -- 55,813 (14,911) 40,902
--------- --------- --------- ---------
$ -- $ 97,830 $ (32,349) $ 65,481
========= ========= ========= =========
BALANCE 2003 BALANCE
DECEMBER 31, CHARGES TO DECEMBER 31,
2002 EXPENSE EXPENDITURES 2003
------------ ---------- ------------ ------------
Employee separation costs $ 24,579 $ 11,552 $ (33,627) $ 2,504
Other exit costs 40,902 (8,556) (32,346) --
--------- --------- --------- ---------
65,481 $ 2,996 $ (65,973) $ 2,504
========= ========= ========= =========
During the year ended December 31, 2003, the Venture recorded an
additional charge of $9,552 related to the restructure action for employee
separation costs. The charge related to 730 additional employees that were
separated. Additionally, the Venture recorded employee separation costs of
$2,000 during the year ended December 31, 2003, relating to 80 employees
separated for a reduction of data processing operations and overhead
expenses.
4. UNBILLED TRADE RECEIVABLES
Unbilled amounts of approximately $76,043 and $59,526 are included in
trade receivables at December 31, 2003 and 2002, respectively. Such
amounts generally will be billed to the customers in one to three months
in accordance with the provisions of the related contracts.
12
WESTERNGECO
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
(in thousands of dollars)
5. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are summarized as follows
at December 31, 2003 and 2002:
(in thousands of dollars) 2003 2002
----------- -----------
Land $ 600 $ 823
Buildings and improvements 57,052 45,049
Field technical and drilling equipment 979,828 1,024,316
Vessels 336,262 376,945
Furniture, fixtures and office equipment 40,416 35,932
Other equipment 110,865 115,761
Construction in progress 48,861 62,900
----------- -----------
1,573,884 1,661,726
Accumulated depreciation 1,076,325 1,062,170
----------- -----------
Property, plant and equipment, net $ 497,559 $ 599,556
=========== ===========
Depreciation expense, including amounts capitalized into the multiclient
library, totaled $175,065, $210,468 and $162,609 for the years ended
December 31, 2003, 2002 and 2001, respectively. No interest was
capitalized during the periods presented.
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
At December 31, 2003 and 2002, accounts payable and accrued liabilities
consisted of the following:
(in thousands of dollars) 2003 2002
----------- -----------
Trade payables $ 124,666 $ 174,103
Payroll, vacation and employee benefits 74,244 70,899
Taxes, other than income 10,872 22,477
Deferred revenue 48,299 27,093
Restructure reserves 2,504 65,481
Multiclient commissions and brokerages 22,488 22,176
Other 88,323 82,623
----------- -----------
$ 371,396 $ 464,852
=========== ===========
7. DEBT
Based on working capital requirements, the Venture draws short-term loans
with various international banks.
13
WESTERNGECO
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
(in thousands of dollars)
Short-term loans were $93,391 and $188,813 as of December 31, 2003 and
2002, respectively. The debt is primarily in U.S. dollars, at interest
rates based on specified margins over selected interbank offering rates.
The weighted-average interest rate of the short-term loans outstanding at
December 31, 2003 and 2002, was 1.6 percent and 1.9 percent, respectively.
A summary of long-term debt by currency follows:
(in thousands of dollars) 2003 2002
---------- ----------
U.K. pound $ 78,153 $ 70,400
U.S. dollar 29,000 50,000
Norwegian kroner 11,887 11,429
---------- ----------
$ 119,040 $ 131,829
========== ==========
The majority of the long-term debt is at variable interest rates available
from revolving credit agreements with a syndicate of banks. The
weighted-average interest rate of the long-term debt outstanding at
December 31, 2003 and 2002, was 3.9 percent and 3.3 percent, respectively.
Such rates are reset every three months or sooner. The carrying value of
long-term debt on December 31, 2003 and 2002, approximates the aggregate
fair market value.
The above facilities were arranged through the Schlumberger treasury
group. All long-term debt at December 31, 2003, is due after 2008.
8. INCOME TAXES
Income before taxes and minority interest for the years ended December
31 was as follows:
(in thousands of dollars) 2003 2002 2001
---------- ---------- ----------
United States $ (309,950) $ 67,378 $ 200,740
Foreign (179,255) (319,799) (32,189)
---------- ---------- ----------
$ (489,205) $ (252,421) $ 168,551
========== ========== ==========
The components of income tax expense for the years ended December 31, are
presented in the table below. All amounts are attributable to foreign
operations.
(in thousands of dollars) 2003 2002 2001
---------- ---------- ----------
Current provision $ 22,642 $ 33,460 $ 26,537
Deferred benefit (5,617) (10,371) (1,658)
---------- ---------- ----------
Total provision $ 17,025 $ 23,089 $ 24,879
========== ========== ==========
14
WESTERNGECO
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
(in thousands of dollars)
The difference between the U.S. federal statutory income tax rate of 35
percent and the Venture's effective tax rate for the years ended
December 31 was as follows:
(in thousands of dollars) 2003 2002 2001
---------- ---------- ----------
Computed tax provision at the applicable
statutory income tax rate $ (171,222) $ (88,347) $ 58,993
Foreign operations 79,764 135,018 36,145
Tax effect of U.S. results benefited by/
(taxable to) the Owners 108,483 (23,582) (70,259)
---------- ---------- ----------
Income tax expense $ 17,025 $ 23,089 $ 24,879
========== ========== ==========
Total effective tax rate (3.5)% (9.1)% 14.8%
========== ========== ==========
The impact of foreign operations upon the effective tax rate is due to
taxes paid by the Venture in certain foreign jurisdictions on a deemed
profit basis, income/losses in jurisdictions with tax rates different from
the U.S. statutory income tax rate and unbenefitted foreign losses of the
Venture.
The tax effects of temporary differences and carryforwards that give rise
to deferred tax assets as of December 31 consisted of the following:
(in thousands of dollars) 2003 2002
--------- ---------
Net operating loss carryforwards $ 13,919 $ 8,733
Property, plant and equipment 14,248 12,221
Other 4,181 5,777
--------- ---------
Deferred tax asset $ 32,348 $ 26,731
========= =========
The net operating loss carryforwards and property, plant and equipment
temporary differences recognized by the Company are in the United Kingdom.
The net operating loss carryforwards have an indefinite carryforward
period.
9. COMMITMENTS AND CONTINGENCIES
Rent expense for the years ended December 31, 2003, 2002 and 2001, was
$68,391, $83,341 and $96,771, respectively. Rent expense on facilities
leased from BHI for the years ended December 31, 2003, 2002 and 2001, was
$6,845, $6,631 and $6,969, respectively (Note 10).
15
WESTERNGECO
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
(in thousands of dollars)
Commitments for future minimum rental payments under noncancelable
leases are:
(in thousands of dollars)
2004 $ 53,720
2005 30,338
2006 24,172
2007 20,932
2008 12,661
Thereafter 23,332
Rental payments to be made to BHI included in the above table are:
(in thousands of dollars)
2004 $ 5,482
2005 6,473
2006 5,598
2007 8,150
2008 7,122
Thereafter 16,325
Future minimum rental payments guaranteed by Schlumberger are:
(in thousands of dollars)
2004 $ 4,404
2005 4,404
2006 4,404
2007 4,625
2008 2,313
Thereafter --
In the course of its business affairs and operations, the Venture is
subject to possible loss contingencies arising from local laws and
regulations. Additionally, the Venture is subject to certain litigation
matters arising from the normal course of business. Management has
recorded a reserve for these matters to the extent management has
concluded these matters are probable and can be reasonably estimated. In
the opinion of management, there are no other matters which could have a
material adverse effect on the financial position, results of operations
or cash flows of the Venture.
The Department of Commerce, Department of the Navy and Department of
Justice (the "U.S. Agencies") are investigating compliance with certain
export licenses first issued to Western Geophysical in 1994 for export of
seismic equipment to the People's Republic of China. BHI acquired Western
Geophysical in August 1998 and subsequently transferred the related assets
to the
16
WESTERNGECO
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
(in thousands of dollars)
Venture in December 2000. Under the master formation agreement, BHI
indemnifies the Venture for this matter. The Venture is cooperating fully
with the U.S. Agencies and with BHI.
10. RELATED PARTY TRANSACTIONS
The combined financial statements include costs for certain functions and
services such as treasury services, information technology services, rent
and other corporate and infrastructure costs performed or incurred by
Schlumberger's centralized organizations and directly charged to the
Venture based on usage. These allocations, which are based on the
assumptions that Schlumberger's and the Venture's management believes are
reasonable under the circumstances, resulted in charges of $28,354,
$26,279 and $21,375 for 2003, 2002 and 2001, respectively.
The Venture leases certain properties from BHI. Payments made under the
lease during the years ended December 31, 2003, 2002 and 2001, were
$4,992, $5,503 and $4,592, respectively. Additionally, certain of the
Venture's leases are guaranteed by Schlumberger.
The payables to affiliates balance includes amounts due to Schlumberger
affiliates relating to asset purchases and direct operating costs.
During the years ended December 31, 2003, 2002 and 2001, Schlumberger
granted options to purchase common stock to Venture employees and issued
common shares to Venture employees under a direct stock purchase program
(Note 12).
Certain of the Venture's excess cash funds are held by an affiliated
entity and are included in the combined balance sheet as short-term
investments. The balances held by the affiliate on behalf of the Venture
at December 31, 2003 and 2002, were $119,544 and $174,984, respectively.
The combined financial statements also include interest expense of $235,
$1,202 and $1,010 associated with debt payable to associated companies and
interest income of $1,352, $1,642 and $2,950 associated with receivables
from associated companies for the years ended December 31, 2003, 2002 and
2001, respectively.
11. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Venture sponsors a defined benefit pension plan and a postretirement
plan in the United States while Schlumberger sponsors a defined benefit
pension plan in the United Kingdom (U.K.) that covers Venture employees.
The benefits associated with these benefit plans are based on years of
service with the Venture combined with years of service with either
Schlumberger or BHI affiliates and compensation on a career-average pay
basis. Charges to expense are based upon costs of the plans, as computed
by independent actuaries. In addition, the Venture has statutory pension
plans in various other foreign countries. The Venture's total pension
expense was $16,206, $14,844 and $7,186 for 2003, 2002 and 2001,
respectively.
17
WESTERNGECO
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
(in thousands of dollars)
U.S. PENSION PLAN
The components of net periodic benefit cost for the years ended December
31 are as follows:
(in thousands of dollars) 2003 2002 2001
--------- --------- ---------
Service cost - benefits earned during the period $ 6,817 $ 6,446 $ 1,358
Interest cost on projected benefit obligation 453 99 --
Expected return on plan assets (274) -- --
--------- --------- ---------
Net periodic benefit cost $ 6,996 $ 6,545 $ 1,358
========= ========= =========
The following assumptions were used in determining the Venture's U.S.
Pension Plan expense:
2003 2002 2001
------ ------ ------
Discount rate 6.75% 7.25% 7.50%
Rate of compensation increase 3.00 3.00 4.50
Rate of return on plan assets 8.50 -- --
18
WESTERNGECO
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
(in thousands of dollars)
The plan's funded status at December 31, 2003 and 2002, was as follows
(based on valuations as of December 31):
(in thousands of dollars) 2003 2002
---------- ----------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 8,611 $ 1,358
Service cost 6,817 6,446
Contributions paid by participants -- --
Interest cost 453 99
Actuarial (gain) loss 923 708
Benefits paid (2,374) --
---------- ----------
Benefit obligation at end of year $ 14,430 $ 8,611
========== ==========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ -- $ --
Actual return on plan assets 383 --
Employer contributions 9,883 --
Contributions paid by participants -- --
Benefits paid (2,374) --
---------- ----------
Fair value of plan assets at end of year $ 7,892 $ --
========== ==========
Funded status of plan $ (6,538) $ (8,611)
Unrecognized actuarial loss 1,521 708
---------- ----------
Net amount recognized $ (5,017) $ (7,903)
========== ==========
AMOUNTS RECOGNIZED IN THE CONSOLIDATED
BALANCE SHEET
Accrued benefit liability $ (5,017) $ (7,903)
Accumulated other comprehensive income -- --
---------- ----------
Net amount recognized $ (5,017) $ (7,903)
========== ==========
The following assumptions were used in determining the Venture's U.S.
Pension Plan obligation:
2003 2002
---------- ----------
Discount rate 6.25% 6.75%
Rate of compensation increase 3.00 3.00
Rate of return on plan assets 8.50 --
The Venture expects to contribute $4,514 to the plan in 2004.
Plan assets are included within the Schlumberger Pension Trust. The assets
of the Schlumberger Pension Trust are invested as follows:
Equity Based Funds 63%
Fixed Income Based Funds 33
Other 4
19
WESTERNGECO
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
(in thousands of dollars)
The asset allocation objectives are to diversify the portfolio among
several asset classes to reduce volatility while maintaining an asset mix
that provides the highest rate of return consistent with an acceptable
level of risk. The investment strategies include a rebalancing of the
asset mix as necessary to the previously defined levels and reassessing
funding levels and asset allocation strategy at least annually.
The expected long-term rate of return on assets is 8.5%. This assumption
represents the rate of return on plan assets reflecting the average rate
of earnings expected on the funds invested or to be invested to provide
for the benefits included in the projected benefit obligation. The
assumption has been determined by reflecting expectations regarding future
rates of return for the portfolio considering the asset distribution and
related historical rates of return. The appropriateness of the assumption
is reviewed at least annually.
U.K. PENSION PLAN
Schlumberger sponsors a pension plan in the United Kingdom which covers
certain WesternGeco employees. Charges to expense recognized by the
Venture of $4,243, $2,459 and $4,721 for the years ended December 31,
2003, 2002 and 2001, are based upon the costs of the plan, in total, and
are allocated to the Venture by Schlumberger. For purposes of determining
Schlumberger's U.K. pension expense, the following assumptions were used:
2003 2002 2001
---- ---- ----
Discount rate 5.70% 5.75% 6.00%
Rate of compensation increase 3.75 4.00 4.00
Rate of return on plan assets 8.50 9.00 9.00
U.S. POSTRETIREMENT PLAN
The components of net periodic benefit cost for the years ended December
31 were as follows:
(in thousands of dollars) 2003 2002 2001
------- ------- -------
Service cost - benefits earned
during the period $ 3,613 $ 3,461 $ 585
Interest cost 4,359 3,784 440
Expected return on plan assets -- -- --
Gain recognized -- -- (25)
Prior service cost recognized 4,008 4,008 (5)
------- ------- -------
$11,980 $11,253 $ 995
======= ======= =======
20
WESTERNGECO
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
(in thousands of dollars)
The following assumptions were used in determining the Venture's U.S.
Postretirement Plan expense:
2003 2002 2001
------------ ------------ ------------
Discount rate 6.75 % 7.25 % 7.50 %
Mortality 1994 GAM 1994 GAM 1983 GAM
Rate of compensation increase 3.00 3.00 4.50
Medical trend rates Varies based Varies based Varies based
on age and on age and on age and
year year year
The plan's funded status at December 31 was as follows (based on
valuations as of December 31):
(in thousands of dollars) 2003 2002
-------- --------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 59,952 $ 1,412
Service cost 3,613 3,461
Contributions paid by participants -- --
Interest cost 4,359 3,784
Actuarial (gain) loss 6,883 7,924
Plan amendments (addition of joint
venture employees) -- 43,502
Benefits paid (342) (131)
-------- --------
Benefit obligation at end of year $ 74,465 $ 59,952
======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ -- $ --
Actual return on plan assets -- --
Employer contributions 342 131
Contributions paid by participants -- --
Benefits paid (342) (131)
-------- --------
Fair value of plan assets at end of year $ -- $ --
======== ========
Funded status of plan $(74,465) $(59,952)
Unrecognized prior service cost 35,426 39,434
Unrecognized actuarial loss 14,311 7,428
-------- --------
Net amount recognized $(24,728) $(13,090)
======== ========
AMOUNTS RECOGNIZED IN THE CONSOLIDATED
BALANCE SHEET
Accrued benefit liability (24,728) (13,090)
Accumulated other comprehensive income -- --
-------- --------
Net amount recognized $(24,728) $(13,090)
======== ========
The assumed discount rate used to determine the Venture's U.S.
Postretirement Plan obligation was 6.25% for 2003 and 6.75% for 2002.
21
WESTERNGECO
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
(in thousands of dollars)
If the assumed medical cost trend rate was increased by one percentage
point, health care cost in 2003 would have been $10,085, and the
accumulated postretirement benefit obligation would have been $94,445 on
December 31, 2003.
If the assumed medical cost trend rate was decreased by one percentage
point, health care cost in 2003 would have been $6,371, and the
accumulated postretirement benefit obligation would have been $59,170 on
December 31, 2003.
12. STOCK-BASED COMPENSATION AND OTHER EMPLOYEE BENEFITS
In addition to the pension and other postretirement benefit plans, the
Venture has other deferred benefit programs, primarily profit sharing.
Expenses for these programs for 2003, 2002 and 2001 were $3,259, $8,300
and $21,790, respectively.
The Venture's employees are eligible to participate in Schlumberger's
employee discounted stock purchase plan under which an employee can choose
each year to have up to 10 percent of their annual earnings withheld to
purchase Schlumberger common stock. The purchase price of the stock is 85
percent of the lower of its beginning or end of the plan year market
price. During the year ended December 31, 2003, Schlumberger recognized
stock-based compensation expense of approximately $1,536 related to
Venture employees' participation in the stock purchase plan. As a result,
the Venture recognized stock-based compensation of $1,536 as selling,
general and administrative expense during the year ended December 31,
2003. The expense was treated as a capital investment from Schlumberger
and was allocated to Schlumberger's owners' net investment balance. Since
Schlumberger did not record compensation expense for stock purchased by
employees of the Venture under the stock purchase plan during the years
ended December 31, 2002 and 2001, no compensation expense has been
recorded in the Venture's combined financial statements for the years
ended December 31, 2002 and 2001.
The Venture's employees may be awarded options to purchase Schlumberger
common stock on a periodic basis. In January and July 2003, Schlumberger
granted options to purchase 9,000 and 184,250 shares of Schlumberger
common stock, respectively, to Venture employees at exercise prices of
$41.30 and $46.02 per share, respectively. In April 2002, 220,250
Schlumberger stock options were granted to Venture employees at an
exercise price of $55.75. In January and October 2001, Schlumberger
granted options to purchase 177,750 and 33,500 shares of Schlumberger
common stock, respectively, to Venture employees at exercise prices of
$77.06 and $46.25 per share, respectively. For all of the stock options
granted, the exercise price equals the market price of Schlumberger common
stock on the date of grant. Each option's maximum term is ten years, and
options generally vest in 20 percent increments over five years. During
the year ended December 31, 2003, Schlumberger recognized stock-based
compensation expense of approximately $200 related to options to purchase
Schlumberger common stock granted to Venture employees. As a result, the
Venture recognized stock-based compensation of $200 as selling, general
and administrative expense during the year ended December 31, 2003. The
expense was treated as a capital investment from Schlumberger and was
allocated to Schlumberger's owners' net investment balance. Since
Schlumberger did not record compensation expense for any of the options
granted to employees of the Venture during the years ended December 31,
2002 and 2001, no compensation expense has been recorded in the Venture's
combined financial statements during these years.
22