item 14 exhibits financial statement schedules reports form 8k list documents filed part report incorporated herein reference 1 financial statements following financial statements registrant set forth part ii item 8 report form 10k pages indicated 2 financial statement schedule financial statement schedules omitted absence conditions required material information required reported included consolidated financial statements notes thereto b company file reports form 8k fourth quarter fiscal 1995 3 exhibits filed herewith management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized bj services company jw stewart jw stewart president chief executive officer date december 21 1995 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated bj services company schedule ii valuation qualifying accounts years ended september 30 1993 1994 1995 thousands 1 deductions allowance doubtful accounts principally reflect writeoff previously reserved accounts 2 deductions reserve inventory obsolescence adjustment principally reflect sale disposal related inventory 3 additions reserve resulting acquisition index exhibits filed herewith management contract compensatory plan arrangementitem 14 exhibits financial statement schedules reports form 8k list documents filed part report incorporated herein reference 1 financial statements following financial statements registrant set forth part ii item 8 report form 10k pages indicated bj services company usa bj service international inc bj services company middle east subsidiary guarantors jointly severally fully unconditionally guaranteed companys 7 notes due 2006 consolidating condensed financial information subsidiary guarantors included notes consolidated financial statements subsidiary guarantors wholly owned subsidiaries company separate financial statements subsidiary guarantors presented company determined material investors 2 financial statement schedule financial statement schedules omitted absence conditions required material information required reported included consolidated financial statements notes thereto b company file reports form 8k fourth quarter fiscal 1996 3 exhibits filed herewith management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized bj services company j w stewart j w stewart president chief executive officer date december 20 1996 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated bj services company schedule ii valuation qualifying accounts years ended september 30 1994 1995 1996 thousands 1 deductions allowance doubtful accounts principally reflect writeoff previously reserved accounts 2 deductions reserve inventory obsolescence adjustment principally reflect sale disposal related inventory 3 additions reserve resulting acquisitions businesses index exhibits filed herewith management contract compensatory plan arrangementitem 14 exhibits financial statement schedules reports form 8k list documents filed part report incorporated herein reference 1 financial statements following financial statements registrant set forth part ii item 8 report form 10k pages indicated 2 financial statement schedules financial statement schedules omitted absence conditions required material information required reported included consolidated financial statements notes thereto b company file reports form 8k fourth quarter fiscal 1997 3 exhibits filed herewith signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized bj services company jw stewart jw stewart president chief executive officer date december 19 1997 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated bj services company schedule ii valuation qualifying accounts years ended september 30 1995 1996 1997 thousands 1 deductions allowance doubtful accounts principally reflect writeoff previously reserved accounts 2 deductions reserve inventory obsolescence adjustment principally reflect sale disposal related inventory 3 additions reserve resulting acquisitions businesses 4 additions reserve resulting recoveries accounts previously writtenoff index exhibits filed herewithitem 14 exhibits financial statement schedules reports form 8k list documents filed part report incorporated herein reference 1 financial statements following financial statements registrant set forth part ii item 8 report form 10k pages indicated 2 financial statement schedules financial statement schedules omitted absence conditions required material information required reported included consolidated financial statements notes thereto b report form 8k filed october 291999 reporting events item 5 regarding private financing arrangement structured around expected exercise companys outstanding warrants april 2000 attaching exhibit item 7 related press release 3 exhibits filed herewith signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date december 20 1999 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated bj services company schedule iivaluation qualifying accounts years ended september 30 1997 1998 1999 thousands 1 deductions allowance doubtful accounts principally reflect writeoff previously reserved accounts 2 deductions reserve inventory obsolescence adjustment principally reflect sale disposal related inventory 3 additions reserve resulting acquisitions businesses 4 additions reserve resulting recoveries accounts previously writtenoffitem 14 exhibits financial statement schedules reports form 8k list documents filed part report incorporated herein reference 1 financial statements following financial statements registrant set forth part ii item 8 report form 10k pages indicated 2 financial statement schedules financial statement schedules omitted absence conditions required material information required reported included consolidated financial statements notes thereto b company file reports form 8k fourth quarter fiscal 2000 3 exhibits filed herewith signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized bj services company jw stewart jw stewart president chief executive officer date december 18 2000 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated bj services company schedule iivaluation qualifying accounts years ended september 30 1998 1999 2000 thousands 1 deductions allowance doubtful accounts principally reflect writeoff previously reserved accounts 2 deductions reserve inventory obsolescence adjustment principally reflect sale disposal related inventory 3 additions reserve principally resulting acquisitions businessesitem 14 exhibits financial statement schedules reports form 8k list documents filed part report incorporated herein reference 1 financial statements following financial statements registrant set forth part ii item 8 report form 10k pages indicated 2 financial statement schedules financial statement schedules omitted absence conditions required material information required reported included consolidated financial statements notes thereto b company file reports form 8k fourth quarter fiscal 2001 3 exhibits filed herewith management contract compensatory plan arrangement signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized bj services company jw stewart jw stewart president chief executive officer date december 18 2001 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated bj services company schedule iivaluation qualifying accounts years ended september 30 1999 2000 2001 thousands 1 deductions allowance doubtful accounts principally reflect writeoff previously reserved accounts 2 deductions reserve inventory obsolescence adjustment principally reflect sale disposal related inventory 3 additions reserve principally resulting acquisitions businessesitem 14 controls procedures evaluation disclosure controls procedures based evaluation companys disclosure controls procedures date within 90 days filing report chief executive officer chief financial officer company concluded disclosure controls procedures effective b changes internal controls significant changes companys internal controls factors could significantly affect controls subsequent date evaluation part iv item 15item 14 principal accountant fees services information item set forth section entitled “independent auditors” proxy statement company annual meeting stockholders held january 22 2004 sections incorporated herein reference part iv item 15item 14 principal accountant fees services information item set forth section entitled “independent auditors” proxy statement company annual meeting stockholders held march 24 2005 sections incorporated herein reference part iv item 15item 14 principal accountant fees services information item set forth section entitled “independent auditor” proxy statement company annual meeting stockholders held january 31 2006 section incorporated herein reference part iv item 15item 14 principal accountant fees services information item set forth section entitled “independent auditor” proxy statement company annual meeting stockholders held january 30 2007 section incorporated herein reference part iv item 15item 14 principal accountant fees services information item set forth section entitled “fees paid deloitte touche” proxy statement company annual meeting stockholders held february 7 2008 section incorporated herein reference part iv item 15item 14 principal accountant fees services information item set forth section entitled “fees paid deloitte touche” proxy statement company annual meeting stockholders held january 29 2009 section incorporated herein reference part iv item 15item 14 principal accountant fees services information item provided later january 28 2010 120 days end fiscal year via amendment proxy statement 2010 annual meeting stockholders part iv item 15item 14 exhibits financial statement schedules reports form 8k list documents filed part report incorporated herein reference 1 financial statements following financial statements registrant set forth part ii item 8 report form 10k pages indicated 2 financial statement schedules financial statement schedules omitted absence conditions required material information required reported included consolidated financial statements notes thereto b company file reports form 8k fourth quarter fiscal 1998 3 exhibits filed herewith signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date december 21 1998 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated bj services company schedule iivaluation qualifying accounts years ended september 30 1996 1997 1998 thousands 1 deductions allowance doubtful accounts principally reflect writeoff previously reserved accounts 2 deductions reserve inventory obsolescence adjustment principally reflect sale disposal related inventory 3 additions reserve resulting acquisitions businesses 4 additions reserve resulting recoveries accounts previously writtenoff item 7 managements discussion analysis financial condition results operations companys operations primarily driven number oil gas wells drilled depth drilling conditions wells number well completions level workover activity worldwide drilling activity turn largely dependent price oil natural gas especially true united states company generates approximately 60 revenues giving effect acquisition due weak energy prices lowercost sources oil internationally drilling activity united states declined 75 peak 1981 record low drilling activity levels experienced 1986 1992 result pumping service companies unable recapitalize aging united states fleets due inability current market conditions generate adequate returns new capital investments company believes important operate greater critical mass key us markets improve returns environment conclusion led decision withdraw certain low activity areas past several years consolidate remaining operations acquired april 1995 western larger presence united states rig count united states averaged 739 active drilling rigs 1995 6 2 decline compared 1994 1993 respectively second lowest count record activity decline result reduction drilling natural gas average rig count rigs drilling natural gas 5 1995 8 recent quarter anticipated natural gas drilling activity remain weak least next quarter international excluding canada drilling activity historically less volatile domestic drilling activity international active rig count declined last four years prior fiscal 1995 due weak oil prices economic political instability certain overseas countries significant declines international drilling activity occurred north sea italy nigeria mexico activity decline leveled somewhat active rig count 1995 slightly 1994 management expects international drilling activity increase 1996 strength development work latin america especially argentina venezuela renewed exploration programs uk north sea us internationally continuing trend oil gas companies toward alliances service companies alliances take various forms including packaged integrated services single source suppliers turnkey agreements 1995 approximately 117 million companys revenues generated alliances expansions acquisitions management believes primary opportunities geographic product expansion remain international markets result acquisition companys capital spending expansion efforts primarily focused outside us companys expansion efforts past three years included expansion pumping services several key international markets including saudi arabia qatar vietnam expanding tubular services commissioning leak detection services geographic regions outside north sea adding additional pumping service capacity key latin american markets acquisitions norsk bronnservice nbs april 1993 italog spa siat july 1993 remaining 50 ownership joint venture egypt february 1994 april 13 1994 company completed acquisition total purchase price 5114 million including transaction costs 72 million paid approximately half cash half shares company common stock warrants purchase common stock acquisition provides company greater critical mass compete us international markets opportunity realize significant consolidation benefits acquisition expected add revenues 7080 companys previous revenue base doubled companys us revenue base beginning june 1995 quarter addition estimated least 40 million overhead redundant operating costs eliminated annually combining two companies results operations following table sets forth selected key operating statistics reflecting industry rig count companys financial results 1 industry estimate average active rigs published baker hughes incorporated 2 gross profit represents company revenue less cost sales services research engineering expenses revenue increased 10 1994 46 1995 third consecutive yearly increase 1994 driven primarily companys international expansion program increase us natural gas drilling stimulation activity 1995 increase due primarily continued growth international expansion increased activity latin america acquisition us revenues increased 6 67 1994 1995 respectively 1994 increase due primarily 12 increase active rig count gasrelated drilling partially offset 4 decline rig count oilrelated drilling addition customer alliances contributed additional 145 million revenues year first six months 1995 prior acquisition companys revenues increased 5 period 1994 due primarily increased placement cementing units addition stimulation vessel gulf mexico acquisition companys us revenues balance year doubled accounting remainder 67 increase 1995 last quarter 1995 continued weak natural gas prices caused many companys customers significantly curtail drilling activity period management believes retained key customers company western however since former western operations heavily concentrated natural gas regions united states decline natural gas drilling activity significantly impacted companys operations pricing companys us pumping services remained relatively stable 1995 pricing remains depressed compared levels realized past management expects competitive pricing conditions remain significant increase drilling activity occurs international revenues increased 14 27 1994 1995 respectively increases primarily attributable three factors continued geographic expansion companys tubular services commissioning leak detection service lines b significant increase latin america business c acquisitions tubular services commissioning leak detection product lines expanded 13 countries including parts middle east africa south america southeast asia australia revenue growth latin america 36 46 1994 1995 respectively result increased cementing stimulation activity private national oil gas companies argentina addition stimulation vessel 1994 coiled tubing barge 1995 service lake maracaibo venezuela market acquisitions contributed companys revenue growth nbs april 1993 siat july 1993 former egypt joint venture february 1994 western april 1995 added international operations indonesia hungary nigeria acquisitions added approximately 14 million 30 million international revenue 1994 1995 respectively compared 1993 operating income operating income decreased 11 million 1994 increased 16 million 1995 1994 decrease due primarily lower margins companys north sea stimulation business caused lower activity pricing decline us pricing 1995 increase primarily due revenue increases described partially offset 172 million unusual charge incurred 1995 unusual charge taken conjunction consolidation program designed improve efficiencies reduce costs resulting acquisition included unusual charge adjustment carrying value duplicate operating facilities severance related benefit costs benefits due agreements covering companys executives triggered result acquisition legal costs would incurred acquisition occurred cost sales services percentage revenue decreased 830 1995 compared 849 834 1994 1993 respectively increase 1993 1994 due primarily decline us pricing negatively impacted margins 55 million lower margins companys north sea stimulation business caused lower activity pricing reduction 1995 primarily result cost reduction efforts implemented acquisition economies scale larger us operation operating expenses excluding unusual charge goodwill amortization increased 1 47 1994 1995 respectively 1994 increase attributable higher marketing expenses international expansion efforts corporate marketing alliance programs partially offset lower research engineering general administrative expenses due companys continued overhead reduction efforts 1995 increase primarily attributable overhead former western operations along increased marketing expenses related international expansions marketing expenses expected increase percentage sales due higher concentration westerns revenues earned united states requires relatively greater marketing effort increase goodwill amortization resulted aforementioned acquisitions significantly western result annual goodwill amortization expense 44 million interest expense increased 20 million 78 million 1994 1995 respectively 1994 increase resulted higher interest rates increased borrowings fund companys international expansions acquisitions interest rates continued increase marginally 1995 additional interest expense primarily attributed borrowings incurred finance acquisition see financial condition capital resources liquidity notes 4 5 notes consolidated financial statements income net gain 1994 1995 due nonrecurring gains asset sales 1995 14 million royalty income one companys proprietary products royalty income expected decline 1996 due reduction use licensee primarily result profitability international jurisdictions statutory rate us rate availability tax benefits companys reorganization pursuant initial public offering 1990 companys effective tax rate remained us statutory rate 1995 additionally certain nonrecurring benefits reduced companys effective tax rate including 13 million 1993 resulting change valuation reserve net operating losses changes tax laws us countries 19 million 1994 change valuation reserve net operating losses 15 million 1995 favorable settlement tax audit tax losses attributable foreign exchange fluctuations certain international jurisdictions minority interest expense declined 1994 1995 result lower profitability companys southeast asian joint venture losses companys nigerian joint venture results 1994 include 160 million 104 million tax charge cumulative effect accounting change retiree health benefits see note 9 notes consolidated financial statements financial condition capital resources liquidity cash flows operating activities increased 263 million 1994 394 1995 compared cash used operating activities 3 million 1993 1994 improvement resulted primarily smaller increase receivables current assets liabilities compared 1993 1995 cash flows operating activities increased primarily result higher profitability higher noncash expenses period management strives maintain low cash balances utilizing available credit facilities meet companys capital needs excess cash generated used pay outstanding borrowings april 14 1995 company replaced existing credit facility bank credit facility executed accommodate acquisition bank credit facility consists fiveyear 1750 million revolving credit facility sixyear 2250 million term loan providing aggregate 4000 million available principal borrowings company september 30 1994 borrowings outstanding bank credit facility amounted 2750 million consisting 2250 million term loan 500 million borrowed revolver outstanding balance companys 92 notes issued 1991 180 million september 30 1995 principal reductions 60 million required annually august maturity august 1 1998 companys interestbearing debt represented 389 total capitalization september 30 1995 compared 363 previous fiscal yearend increase reflects borrowings used acquire western companys bank credit facility 92 notes contain various customary covenants including maintenance certain profitability solvency ratios restriction dividend payments management believes bank credit facility combined discretionary credit facilities cash flow operations provide company sufficient capital resources liquidity manage routine operations fund projected capital expenditures september 30 1995 company approximately 512 million us tax net operating loss carryforwards expiring 2000 2010 acquisition company acquired approximately 375 million tax net operating loss carryforwards subject certain limitations expiring 2000 2008 statement financial accounting standards 109 accounting income taxes sfas 109 company required record deferred tax asset future tax benefit tax net operating loss carryforwards well items realization likely previously discussed acquisition gives company greater critical mass compete us doubled companys us revenue base addition combination company western company expects realize significant consolidation benefits management estimates approximately 40 million overhead redundant operating costs eliminated annually result combination two companies based weight available evidence management concluded companys future us taxable income sufficient remaining carryforward periods realize tax benefits represented approximately 332 million tax net operating loss carryforwards acquired western generated companys operations prior acquisition tax benefits resulting acquisition included 84 million net deferred tax asset recognized purchase price allocation acquisition date valuation allowances established benefits tax net operating loss carryforwards estimated expire prior utilization requirements capital excluding acquisitions capital expenditures 1995 310 million 84 million 1994 spending current years spending relates primarily offshore operations united states abroad international growth opportunities including geographic expansions services prior years spending included approximately 11 million construction two offshore stimulation vessels investing activities fiscal year ended september 30 1995 included 54 million proceeds sale duplicate facility disposals assets capital expenditures fiscal 1996 projected approximately 45 million excluding acquisitions expected include spending continued geographic expansions service lines construction upgrading least two offshore vessels additional capacity certain high margin locations normal levels replacement capital actual amount fiscal 1996 capital expenditures primarily dependent upon availability expansion opportunities funded cash flows operating activities available credit facilities management believes cash flows operating activities available lines credit necessary sufficient fund projected capital expenditures item 8item 7 managements discussion analysis financial condition results operations general companys operations primarily driven number oil gas wells drilled depth drilling conditions wells number well completions level workover activity worldwide drilling activity turn largely dependent price oil natural gas especially true united states company expected generate approximately onehalf revenues next twelve months due aging oilfields lowercost sources oil internationally drilling activity united states declined 75 peak 1981 record low drilling activity levels experienced 1986 1992 result pumping service companies unable recapitalize aging us fleets due inability current market conditions generate adequate returns new capital investments company believes important operate greater critical mass key us markets improve returns environment conclusion led decision april 1995 consolidate us operations western company north america western larger presence united states companys us critical mass increased acquisition nowsco well service ltd nowsco june 1996 added operations midcontinental northeastern us latter area company existing presence rig count united states averaged 759 active drilling rigs year ended september 30 1996 lower 1994 drilling levels rig count increased 3 1995 due increased natural gas related drilling natural gas increased 13 1996 declining 5 1995 oil related drilling activity declined 1996 1995 due relatively stronger oil natural gas prices currently realized however management expects us drilling activity levels fiscal 1997 1996 levels exception canada international drilling activity historically less volatile domestic drilling activity active international drilling rigs increased 1 4 1995 1996 respectively strength development work latin america especially venezuela renewed exploration programs uk north sea united states internationally continuing trend oil gas companies toward alliances service companies alliances take various forms including packaged integrated services single source suppliers turnkey agreements approximately 20 companys revenues generated alliances fiscal 1996 expansions acquisitions companys expansion acquisition efforts past several years focused adding critical mass us operations international geographic expansions existing product lines company completed two major acquisitions period acquisition western april 1995 western acquisition nowsco june 1996 nowsco acquisition western acquisition completed total purchase price 5114 million including transaction costs 72 million paid approximately half cash half shares companys common stock warrants purchase common stock western acquisition provided company greater critical mass compete domestic international markets realization significant consolidation benefits western acquisition increased companys existing total revenue base approximately 75 doubled companys domestic revenue base beginning june 1995 quarter addition excess 40 million overhead redundant operating costs eliminated annually combining two companies nowsco acquisition completed total purchase price 5826 million including transaction costs 62 million cash nowsco acquisition accomplished three primary objectives gives company number one pumping services market position canada company operated since 1992 adds companys existing market positions several key us international markets ii provides technological leadership position highgrowth coiled tubing service line iii provides opportunity cost savings consolidation redundant overhead operating bases nowsco acquisition added approximately 40 companys existing revenue base companys expansion efforts past three years included expansion pumping services several key markets including brazil acquisition shares joint venture partner saudi arabia qatar vietnam expanding tubular services process pipeline services geographic regions outside north sea adding additional pumping service capacity key latin american markets results operations following table sets forth selected key operating statistics reflecting industry rig count companys financial results 1 industry estimate average active rigs 2 gross profit represents revenue less cost sales services research engineering expenses revenue companys revenue increased fourth consecutive year increasing 46 52 1995 1996 respectively increases driven primarily companys western acquisition 1995 nowsco acquisition 1996 international expansions increased activity latin america uk north sea southeast asia us revenue increased 66 58 1995 1996 respectively 1995 increase primarily due addition western operations beginning april 1995 first six months 1995 prior acquisition western companys revenues increased 5 period 1994 due primarily increased placement cementing units addition stimulation vessel gulf mexico acquisition western companys us revenues doubled accounting remainder 66 increase 1995 1996 us revenue increase reflects continued benefit western acquisition well effects nowsco acquisition added approximately 1520 companys us revenues beginning fourth fiscal quarter revenue also increased due stronger natural gas drilling activity 1996 significantly companys south texas gulf mexico operations management believes company retained key customers western nowsco us market share loss may experienced nowscos prices generally companys us overall pricing companys us pumping services remained relatively stable past two years however pricing may improve somewhat fiscal 1997 expected increase drilling activity results tightening capacity industry company implemented 6 price book increase us effective july 1 1996 international revenues increased 27 45 1995 1996 respectively increases primarily attributable three factors continued geographic expansion companys service lines b significant increase latin america uk north sea southeast asia business c acquisitions pressure pumping international expansions included qatar vietnam 1995 saudi arabia azerbaijan 1996 tubular services commissioning leak detection service lines expanded 14 countries including parts middle east africa south america far east australia revenue growth latin america 46 28 1995 1996 respectively result increased cementing stimulation activity private national oil gas companies argentina addition stimulation vessel 1994 coiled tubing barges 1995 1996 service lake maracaibo venezuela market acquisition remaining 60 companys joint venture brazil november 1995 growth latin america however expected slow somewhat 1997 result recent activity decline argentina acquisitions contributed companys international revenue growth acquisitions company remaining interests joint ventures egypt brazil 1994 1996 respectively western acquisition added international operations nigeria indonesia hungary nowsco acquisition generated approximately twothirds revenue outside us result nowsco acquisition company currently largest pressure pumping operation canada company operated since 1992 operating income operating income increased 16 million 546 million 1995 1996 respectively increases due revenue increases described partially offset unusual charges 172 million 1995 74 million 1996 unusual charges taken conjunction consolidation programs associated acquisitions western nowsco respectively included unusual charges adjustments carrying value duplicate operating facilities severance related benefit costs benefits due agreements covering companys executives triggered result western acquisition legal costs would incurred acquisitions occurred unusual charge associated nowsco acquisition significantly lower western acquisition company fewer overlapping operations nowsco see also note 4 notes consolidated financial statements cost sales services percentage revenue declined last two years 849 1994 830 808 1995 1996 respectively primarily result cost reduction efforts acquisitions western nowsco economies scale larger operating bases combining respective operations operating expenses excluding unusual charges increased 1995 1996 primarily result addition western nowsco operations addition marketing expenses increased somewhat due international expansions higher revenues operations require agency commission payments us result expansion program places companys engineers customer offices acquisitions western nowsco resulted additional annual goodwill amortization 44 million 101 million respectively operating expenses expected increase 1997 reflect full year adding nowsco operations interest expense increased 78 million 118 million 1995 1996 respectively increases result increased borrowing fund acquisitions western 1995 nowsco 1996 companys effective interest rates borrowing remained relatively constant periods presented see also financial condition capital resources liquidity notes 3 6 notes consolidated financial statements income net gain 1995 1996 due nonrecurring gains asset sales royalty income years royalty income declined 8 million 1996 14 million 1995 due reduction use licensee primarily result profitability international jurisdictions statutory tax rate us rate availability certain nonrecurring tax benefits availability tax benefits companys reorganization pursuant initial public offering 1990 companys effective tax rate remained us statutory rate 1994 1996 nonrecurring benefits reduced companys effective tax rate include 19 million 1994 change valuation reserve net operating losses 15 million 1995 19 million 1996 favorable settlement tax audits tax losses attributable foreign exchange fluctuations certain international jurisdictions see note 8 notes consolidated financial statements results 1994 include 160 million 104 million tax charge cumulative effect accounting change retiree health benefits see note 10 notes consolidated financial statements capital resources liquidity cash flows operating activities increased 131 million 1995 118 million 1996 increases primarily result larger profitable operations due acquisitions partially offsetting increased profitability 1996 higher receivable balances payment merger related items management strives maintain low cash balances utilizing available credit facilities meet companys capital needs excess cash generated used pay outstanding borrowings june 1996 company replaced existing credit facility committed unsecured credit facility new bank credit facility executed accommodate acquisition nowsco borrowers guarantors new bank credit facility amended restated august company three subsidiaries bj services company usa bj service international inc bj services company middle east nowsco well service ltd companys canadian subsidiary borrower canadian dollars new bank credit facility consists canadian 320 million approximately us 234 million sixyear term loan repayable 22 quarterly installments beginning march 1997 five year us 325 million revolving facility september 30 1996 borrowings outstanding new bank credit facility totaled 4164 million consisting 2345 million term loan 1819 borrowed revolver february 20 1996 transaction exempt registration requirements securities act 1933 company issued 1250 million unsecured 7 notes due 2006 three companys subsidiaries obligors respect new bank credit facility companys 92 notes due august 1 1998 92 notes bj services company usa bj service international inc bj services company middle east guarantors 7 notes august 1996 7 notes exchanged 7 series b notes due 2006 7 series b notes form terms 7 series b notes identical material respects form terms 7 notes except 7 series b notes issued transaction registered securities act net proceeds issuance 7 notes 1233 million used company repay indebtedness outstanding term loan portion companys existing bank credit facility outstanding balance 92 notes issued 1991 120 million september 30 1996 principal reductions 60 million required annually august maturity august 1 1998 result borrowings fund nowsco acquisition companys interestbearing debt represented 398 total capitalization september 30 1996 compared 389 september 30 1995 new bank credit facility 92 notes include various customary covenants provisions substantially similar previous bank credit facility including maintenance certain profitability solvency ratios restrictions dividend payments 92 notes amended conform terms new bank credit facility management believes new bank credit facility combined discretionary credit facilities cash flow operations provides company sufficient capital resources liquidity manage routine operations fund projected capital expenditures excluding acquisitions capital expenditures year ended september 30 1996 542 million 232 million 148 million higher capital spending 1995 1994 respectively current years spending related primarily international expansion opportunities primarily latin america offshore cementing skids normal level replacement capital investing activities 1996 included acquisition remaining 60 interest companys joint venture brazil total consideration 54 million consisting 37 million cash 17 million debt assumed company nowsco acquisition 5826 million cash nowsco acquisition financed proceeds sale 98 million shares common stock july 1996 generated net proceeds 3231 million remainder borrowings new bank credit facility investing activities 1995 included western acquisition 2033 million cash 54 million proceeds sale duplicate facility disposals assets september 30 1996 company approximately 585 million united states tax net operating loss carryforwards expiring 2000 2011 nowsco acquisition company acquired approximately 30 million us tax net operating loss carryforwards subject certain limitations expiring 2000 2011 approximately 75 million nonus tax net operating loss carryforwards expiring varying amounts beginning 1997 approximately 7 million nonus tax credits expire varying amounts 1999 2009 statement financial accounting standards 109 accounting income taxes sfas 109 company required record deferred tax asset future tax benefit tax net operating loss carryforwards well items realization likely 1995 western acquisition provided company greater critical mass compete united states doubled companys united states revenue base addition combination nowsco western company realized significant consolidation benefits management estimates excess 64 million overhead redundant operating costs eliminated annually result combination three companies management concluded companys future taxable income sufficient remaining carryforward periods realize tax benefits represented approximately 450 million tax net operating loss carryforwards acquired acquisitions nowsco western generated companys operations prior acquisitions net tax benefits resulting acquisitions approximate 120 million included deferred tax asset recognized purchase price allocation valuation allowances established benefits tax net operating loss carryforwards estimated expire prior utilization capital expenditures fiscal 1997 projected approximately 7580 million excluding acquisitions expected include spending continued geographic expansions service lines construction additional coiled tubing vessel additional capacity certain highmargin locations normal levels replacement capital december 1996 company completed acquisition remaining 51 interest companys joint venture argentina 135 million actual amount fiscal 1997 capital expenditures primarily dependent upon availability expansion opportunities funded cash flows operating activities available credit facilities management believes cash flow operating activities available lines credit necessary sufficient fund projected capital expenditures document contains forwardlooking statements within meaning private securities litigation reform act 1995 concerning among things companys prospects developments business strategies operations subject certain risks uncertainties assumptions forwardlooking statements identified use terms phrases expect estimate project believe similar terms phrases one risks uncertainties materialize underlying assumptions prove incorrect actual results may vary materially expected estimated projected item 8item 7 managements discussion analysis financial condition results operations general companys operations primarily driven number oil gas wells drilled depth drilling conditions wells number well completions level workover activity worldwide drilling activity turn largely dependent price oil natural gas especially true united states company generated approximately onehalf revenues fiscal 1997 due aging oilfields lowercost sources oil internationally drilling activity united states declined 75 peak 1981 record low drilling activity levels experienced 1986 1992 recently excess capacity among pumping service companies resulted inability generate adequate returns new capital investments improve returns environment company believes important operate greater critical mass key us markets conclusion led decision april 1995 consolidate operations western company north america western larger presence united states companys us operations increased acquisition nowsco well service ltd nowsco june 1996 added operations midcontinental northeastern us latter area company existing presence relatively stronger oil gas prices improved oilfield technology equipment recently led favorable drilling conditions united states result august 1997 us active rig count exceeded 1000 rigs first time since 1991 us active rig count averaged 906 rigs fiscal year ended september 30 1997 increase 19 23 fiscal years ended september 30 1996 1995 respectively increases activity occurred drilling oil natural gas us drilling activity expected continue relatively strong fiscal 1998 current oil gas prices rate increase expected decline beginning companys second fiscal quarter exception canada international drilling activity historically less volatile domestic drilling activity active international drilling rigs averaged 1147 1997 increase 11 15 1996 1995 respectively primarily strength development work canada calendar 1997 expected record year terms number wells drilled canada canadian drilling activity expected remain strong next several years due completion additional pipeline capacity united states internationally continuing trend oil gas companies toward alliances service companies alliances take various forms including packaged integrated services single source suppliers turnkey agreements 20 companys revenues generated alliances 1997 companys service line offerings comprehensive major competitors management believes trend towards alliances material negative impact companys operating results date expansions acquisitions companys expansion acquisition efforts past several years focused adding critical mass us operations international geographic expansions existing service lines company completed two major acquisitions period acquisition western april 1995 western acquisition nowsco june 1996 nowsco acquisition western acquisition completed total purchase price 5114 million including transaction costs 72 million company paid approximately half cash half shares companys common stock warrants purchase common stock western acquisition provided company greater critical mass compete domestic international markets realization significant consolidation benefits western acquisition increased companys existing total revenue base approximately 75 doubled companys existing domestic revenue base beginning june 1995 quarter addition excess 40 million per year overhead redundant operating costs eliminated combining two companies nowsco acquisition completed total purchase price 5826 million including transaction costs 62 million cash nowsco acquisition accomplished three primary objectives provided company number one pumping services market position canada company operated since 1992 added companys existing market position several key us international markets ii provided technological leadership position highgrowth coiled tubing service line iii provided excess 20 million per year additional cost savings consolidation redundant overhead operating bases nowsco acquisition added approximately 40 companys existing revenue base companys expansion efforts past three years included expanding pumping services several key markets including brazil acquisition majority ownership position joint venture partner saudi arabia qatar vietnam ii expanding tubular services process pipeline services geographic regions outside north sea iii adding additional pressure pumping service capacity key latin american markets results operations following table sets forth selected key operating statistics reflecting industry rig count companys financial results 1 industry estimate average active rigs 2 gross profit represents revenue less cost sales services revenue companys revenue increased fifth consecutive year 1997 increasing 52 past two fiscal years 1997 increase primarily result nowsco acquisition recovery us drilling activity 1996 increase primarily driven western nowsco acquisitions international expansions increased activity latin america uk north sea southeast asia united states companys us revenue increased 41 58 1997 1996 respectively 1997 increase due combination nowsco acquisition improved drilling activity better pricing nowsco acquisition added approximately 15 20 companys us revenues beginning fourth quarter fiscal 1996 therefore providing nine months additional benefit 1997 taking account prior years preacquisition nowsco revenues companys us operations showed pro forma revenue increase 26 activity measured rig count increased 19 period pricing improved approximately 7 8 mainly price book increases implemented july 1996 june 1997 pricing showed stronger improvement 12 13 last quarter year due tightening capacity us pressure pumping market management believes company retained key customers nowsco estimates company may experienced 1 2 market share deterioration pro forma basis 1997 due loss certain lowpriced nowsco business new competitor job turndowns due personnel equipment limitations 1996 revenue increase reflects benefits western nowsco acquisitions exclusive benefits acquisitions revenue also increased due stronger natural gas drilling activity significantly companys south texas gulf mexico operations natural gas activity typically generates higher revenue per well company oil activity international revenues increased 66 45 1997 1996 respectively 1997 increase primarily driven nowsco acquisition approximately twothirds nowscos business generated outside united states mostly canada north sea result nowsco acquisition company largest pressure pumping operation canada pro forma nowsco operations 1997 international pressure pumping revenues increased 18 due primarily strong canadian drilling activity increased 38 1996 international pressure pumping operations showing significant revenue increases year venezuela due increased activity coiled tubing capacity additions middle east reflecting new contracts india egypt expansions saudi arabia bangladesh brazil indonesia partially offsetting increases pro forma revenue declines north sea russia companys international service lines primarily consist tubular services process pipeline services also showed pro forma revenue increases due stronger activity expansions new markets 1996 revenue increase primarily attributable three factors continued geographic expansion companys service lines ii significant increase latin america uk north sea southeast asia business iii acquisitions pressure pumping international expansions included qatar vietnam 1995 saudi arabia azerbaijan 1996 tubular services commissioning leak detection service lines operated companys international regions revenue growth latin america 28 1996 result increased cementing stimulation activity private national oil gas companies argentina addition coiled tubing barge 1995 1996 service lake maracaibo venezuela market acquisition remaining 60 companys joint venture brazil november 1995 western acquisition added international operations nigeria indonesia hungary nowsco acquisition added revenues beginning fourth quarter 1996 operating income operating income doubled 1997 1996 due revenue increases described partially offset increased goodwill amortization unusual charges resulting western nowsco acquisitions although increasing absolute basis operating expenses ie cost sales services research engineering marketing general administrative declined percentage revenues past two years primarily result economies scale obtained consolidating western nowsco operations cost sales services percentage revenue 778 1997 808 830 1996 1995 respectively improvement resulted primarily cost reduction efforts implemented western nowsco acquisitions efficiencies larger operating bases net pricing also improved 1997 mainly latter part year result us price book increase june 1997 discount reductions approximately 3 fourth fiscal quarter 1996 management believes pricing improvement approximately offset inflation increases labor material costs increases research engineering marketing general administrative operating expenses resulted primarily additional overhead former nowsco western operations addition marketing expenses increased somewhat 1997 1996 due international expansions higher revenues operations require agency commission payments us result expansion program places company engineers customer offices general administrative expenses also increased past two years result increased spending information systems information system costs expected continue increase 1998 due new systems recently implemented expected upgrades existing systems costs currently estimated 2 million 4 million related review testing reprogramming necessary make companys systems compliant year 2000 data fields due current shortage qualified personnel especially equipment operators engineers oilfield services industry company also expects greater increase labor costs 1998 compared past several years goodwill amortization increased past two years due acquisitions nowsco western acquisitions resulted additional annual goodwill amortization 1997 95 million 33 million respectively unusual charges taken 1997 1996 taken conjunction consolidation programs associated acquisitions nowsco western respectively included unusual charges adjustments carrying value duplicate operating facilities severance related benefit costs benefits due agreements covering companys executives triggered result western acquisition legal costs would incurred acquisitions occurred unusual charge associated nowsco acquisition significantly lower western acquisition company fewer overlapping operations nowsco see also note 4 notes consolidated financial statements interest expense increased past two years result additional borrowings fund western nowsco acquisitions companys weightedaverage borrowing costs declined 1997 primarily result two major factors utilization lower interest rate facilities ii improvement companys credit ratings see also financial condition capital resources liquidity notes 3 6 notes consolidated financial statements income net gain past three years due primarily gains asset sales rental income royalty income royalty income declined past two years due reduction use licensee income taxes primarily result profitability international jurisdictions statutory tax rate us rate availability certain nonrecurring tax benefits availability tax benefits companys reorganization pursuant initial public offering 1990 companys effective tax rate remained us statutory rate past three years effective tax rate increased 1997 primarily result higher us profitability increasing companys effective tax rate greater us profitability resulted higher cash taxes due existence us net operating loss carryforwards company also recognized nonrecurring tax benefits 19 million 1996 15 million 1995 favorable settlement tax audits tax losses attributable foreign exchange fluctuations certain international jurisdictions see also note 8 notes consolidated financial statements capital resources liquidity net cash provided operating activities increased last two years primarily due larger profitable operations result western nowsco acquisitions 1997 due recovery us drilling activity partially offsetting increased profitability years higher receivable balances payment environmental pension merger related expenses net cash provided investing activities 45 million 1997 net use 6356 million 1996 2289 million 1995 due primarily nowsco western acquisitions respectively companys 1997 property additions totaled 1022 million increasing 542 million 1996 310 million 1995 current years spending included two additional pumping service vessels operating latin america expansion cementing stimulation capacity gulf mexico latin america improvements companys information systems major items included 1996 spending related international expansion opportunities primarily latin america offshore cementing skids net cash used 1997 investing activities impacted transaction involving transfer certain pumping service equipment assets subsequent transfer equipment company received 1000 million used repay outstanding bank debt result reduced debt company realize reduction future interest expense approximately 6 million per year equipment used provide services company customers company pay service fee period least eight fourteen years transaction generated deferred gain book purposes approximately 38 million amortized twelve years taxable gain approximately 91 million completely offset net operating loss carryforwards available company result western acquisition expected tax benefit net operating loss utilization recorded reduction goodwill net cash used 1997 investing activities also impacted receipt 203 million sale idle stimulation vessel renaissance partially offset higher property additions acquisitions top tool company inc remaining 51 ownership companys previously unconsolidated joint venture argentina acquired nowsco investing activities 1996 included acquisition remaining 60 interest companys joint venture brazil total consideration 54 million consisting 37 million cash 17 million debt assumed company nowsco acquisition 5826 million cash investing activities 1995 included western acquisition 2033 million cash 54 million proceeds sale duplicate facility disposals assets projected capital expenditures fiscal 1998 expected substantially exceed 1997 levels expected include spending coiled tubing growth opportunities additional capacity certain high margin locations higher levels replacement capital actual amount 1998 capital expenditures excluding acquisitions primarily dependent upon availability expansion opportunities expected funded cash flows operating activities available credit facilities management believes cash flows operating activities available lines credit necessary sufficient fund projected capital expenditures net cash flows operating activities exceeded companys capital requirements company able reduce existing borrowings 1500 million 1997 1996 nowsco acquisition financed proceeds sale 98 million shares companys common stock generated net proceeds 3231 million remainder provided borrowings credit facility 1995 financing activities used primarily fund western acquisition management strives maintain low cash balances utilizing available credit facilities meet companys capital needs excess cash generated used pay outstanding borrowings june 1996 company replaced existing credit facility committed unsecured credit facility bank credit facility executed accommodate acquisition nowsco well service ltd companys canadian subsidiary borrower canadian dollars bank credit facility consists canadian 320 million approximately us 232 million sixyear term loan repayable 22 quarterly installments began march 1997 five year us 325 million revolving facility october 1997 company reduced commitment revolving facility 100 million 225 million september 30 1997 borrowings outstanding bank credit facility totaled 206 million consisting wholly borrowings term loan 1996 company issued 1250 million unsecured 7 notes due 2006 registered securities act 1933 net proceeds issuance 7 notes 1233 million used company repay indebtedness outstanding term loan portion companys existing bank credit facility outstanding balance 92 notes 60 million september 30 1997 company repaid december 1997 companys interestbearing debt represented 295 total capitalization september 30 1997 compared 398 september 30 1996 bank credit facility includes various customary covenants provisions including maintenance certain profitability solvency ratios restrictions dividend payments management believes bank credit facility combined discretionary credit facilities cash flow operations provides company sufficient capital resources liquidity manage routine operations fund projected capital expenditures september 30 1997 company approximately 506 million united states tax net operating loss carryforwards expiring 2000 2011 statement financial accounting standards 109 accounting income taxes sfas 109 company required record deferred tax asset future tax benefit tax net operating loss carryforwards well items realization likely 1995 western acquisition provided company greater critical mass compete united states doubled companys united states revenue base addition combination nowsco western company realized significant consolidation benefits management estimates excess 60 million per year overhead redundant operating costs eliminated result combination three companies management concluded companys future taxable income sufficient remaining caryforward periods realize tax benefits represented approximately 565 million tax net operating loss carryforwards acquired acquisitions nowsco western generated companys operations prior acquisitions net tax benefits resulting acquisitions approximate 165 million included deferred tax asset recognized purchase price allocation valuation allowances established benefits tax net operating loss carryforwards estimated expire prior utilization document contains forwardlooking statements within meaning private securities litigation reform act 1995 concerning among things companys prospects developments business strategies operations subject certain risks uncertainties assumptions forwardlooking statements identified use terms phrases expect estimate project believe similar terms phrases one risks uncertainties materialize underlying assumptions prove incorrect actual results may vary materially expected estimated projected item 8item 7 managements discussion analysis financial condition results operations general companys operations primarily driven number oil natural gas wells drilled depth drilling conditions wells number well completions level workover activity worldwide drilling activity turn largely dependent price oil natural gas situation often leads volatility companys revenues profitability especially united states canada company historically generated excess 50 revenues volatility particularly evident last year result low oil prices falling 11 per barrel industry experienced lowest worldwide oilfield drilling activity levels recorded history however recent recovery oil prices 20 per barrel led recovery north american drilling activity last half 1999 due aging oilfields lowercost sources oil internationally drilling activity united states declined 75 peak 1981 record low drilling activity levels experienced 1986 1992 early 1999 us drilling activity temporarily rebounded 1997 exceeding 1000 active rigs first time since 1991 however subsequently retracted due weak oil prices although drilling activity begun recover somewhat toward end fiscal year us average fiscal 1999 active rig count represented lowest history 34 average level fiscal 1997 1998 decline occurred number rigs drilling oil 62 twoyear period drilling activity outside north america historically less volatile domestic drilling activity due low oil prices year international drilling activity also reached record low levels 1999 companys international regions experienced double digit activity declines canadian drilling activity began recover latter part fiscal year activity international regions expected recover least middle fiscal 2000 acquisition june 28 1999 company completed acquisition selected assets subsidiaries fracmaster ltd fracmaster oilfield services company based calgary alberta operations canada united states russia china acquisition completed total purchase price 784 million fracmaster generated worldwide revenue 2091 million recent fiscal year ended december 31 1998 nearterm acquisition fracmaster expected primarily impact companys operations canada results operations following table sets forth selected key operating statistics reflecting industry rig count companys financial results 1 industry estimate drilling activity measured average active rigs 2 gross profit represents revenue less cost sales services revenue six consecutive years revenue growth companys 1999 revenue declined first time since 1992 overall 1999 revenues declined 26 compared 1998 companys service linespressure pumping process pipeline services tubular services specialty chemicalsexperiencing revenue decreases largest revenue declines occurred companys us canadian pressure pumping operations revenues increased 4 1998 companys major service lines increasing year despite 2 decline worldwide drilling activity companys revenues reached lowest level fiscal 1999 third quarter rebounded fourth quarter 24 sequential increase management expects company show yearoveryear revenue increases beginning first quarter fiscal 2000 usmexico pressure pumping revenue companys usmexico pressure pumping revenues declined 38 1999 increasing 1 1998 1999 revenue decline result lower activity pricing caused record low drilling levels fiscal 1999 average active rig count 34 previous year lowest recorded history workover activity also weak 32 year excluding mexico companys us regions experienced revenue declines oil producing regions texas oklahoma severely impacted pricing declined approximately 16 1999 compared previous year revenue companys mexico operations increased result new contract expansion operations northeast mexico 1998 revenue increase due approximately 810 better pricing partially offset slight decline market share us activity flat year fiscal 1998 also showed continuation shift away oilfield drilling toward drilling natural gas international pressure pumping revenue international revenues decreased 17 1999 compared 1998 increasing 5 previous year exception russia operations companys international regions experienced revenue declines 1999 canadian latin american operations showing largest declines revenue declines result lower drilling activity lower pricing regions subsequent 1999 spring breakup period april june however canadian activity increased substantially management expects canadian drilling activity continue strong winter drilling season increase least 2030 2000 excluding canadian operations management expect experience recovery international operations least second half fiscal 2000 exception canadian operations companys international pressure pumping regions generated revenue increases 1998 largest increases occurred far east middle east regions due growth stimulation coiled tubing services expansions saudi arabia bangladesh partially offsetting increases revenue declines canada venezuela due lower oil drilling activity 150 million decline international equipment sales revenue companys service lines consist specialty chemicals tubular services process pipeline services total 8 1999 increasing previous two years drilling activity declines mostly offset expansions new markets service lines greater concentration revenues nondrilling oilfield activities greatly impacted decline active rig count operating income loss company incurred operating loss 1999 improved operating income 1998 1997 1999 operating loss primarily result company recording pretax unusual charge 397 million 36 per diluted share aftertax comprised 128 million severance costs 231 million asset writedowns 38 million costs associated downturn oilfield services industry addition operating loss includes 167 million recorded third fiscal quarter costs resulting acquisition fracmaster additional severance costs asset writedowns primarily associated companys international operations included cost sales excluding items operating income decline primarily result decline north latin american drilling workover activity lower pricing discussed revenue section response downturn activity company consolidated worldwide pressure pumping operations resulting 2000 personnel reductions closure several operating locations additionally idle equipment moved us operating locations central location portion equipment sold salvaged spare parts remainder redistributed operating locations need arises addition 1999 writedown company also recorded 266 million 22 per diluted share aftertax unusual charge 1998 reflect employee severance asset writedowns costs associated downturn industry began later part 1998 research engineering marketing general administrative expenses total decreased 138 million 1999 due implementation three phases cost reduction programs beginning july 1998 increase operating expenses 1998 reflective increased support costs higher activity levels beginning fiscal year well increased spending coiled tubing downhole tool research international commissions information systems reductions operating expenses expected realized nearterm cost reduction programs substantially implemented company process hiring additional equipment operators field personnel address current increase drilling activity occurring north america interest expense increased 57 million 1999 due primarily additional borrowings finance companys stock repurchase program implemented december 1997 company repurchased equivalent 60 million shares totaling 1966 million program interest expense decreased 50 million 1998 due strong operating cash flows year see capital resources liquidity effects equipment financing transaction occurred near end fiscal 1997 interest expense expected decline 2000 reduction debt resulting 1440 million received private placement common stock october 1999 stock issued financing arrangement structured around expected exercise companys outstanding warrants april 2000 see also capital resources liquidity income taxes companys effective tax rate remained us statutory rate past three years primarily result profitability international jurisdictions statutory tax rate us rate availability certain nonrecurring tax benefits availability tax benefits companys reorganization pursuant initial public offering 1990 effective tax rate increased 34 1999 32 30 1998 1997 respectively majority operating losses occurred us capital resources liquidity net cash provided operating activities decreased 644 million 1999 primarily result lower profitability addition tax benefit us operating losses noncash due cumulative net operating loss position partially offset additional liquidation working capital balances reduction activity increase cash provided operating activities 1998 result higher profitability majority 1998 unusual charge noncash liquidation working capital balances primarily receivables slowdown business last half year net cash used investing activities 1999 1767 million increase 157 million compared 1998 increase due acquisition fracmaster june 1999 net cash consideration 734 million excluding acquisition investing activities declined 578 million primarily due curtailment capital spending caused depressed business environment 1999 capital spending related primarily upgrades companys us fracturing fleet already process beginning fiscal year expansion tomball manufacturing research development facility 1998 capital spending related primarily additional fracturing coiled tubing capacity companys international growth initiatives upgrades companys us pumping fleet upgrades companys information systems 1997 property additions include two additional pumping service vessels operating latin america expansion cementing stimulation capacity gulf mexico latin america upgrades companys information systems net cash used 1997 investing activities offset transaction involving transfer certain pumping service equipment assets subsequent transfer equipment company received 1000 million used repay outstanding bank debt result reduced debt company realized reduction annual interest expense approximately 6 million equipment used provide services company customers company paying service fee period least eight fourteen years transaction generated deferred gain book purposes approximately 38 million amortized twelveyear period taxable gain 910 million completely offset net operating loss carryforwards available company result western acquisition 1995 net cash used 1997 investing activities also impacted receipt 203 million sale idle stimulation vessel renaissance acquisitions top tool company inc remaining 51 ownership companys previously unconsolidated joint venture argentina projected capital expenditures fiscal 2000 currently expected approximately 75 million expected decline 1999 maintenance level actual amount 2000 capital expenditures primarily dependent maintenance capital levels availability expansion opportunities expected funded cash flows operating activities available credit facilities management believes cash flows operating activities available lines credit necessary sufficient fund projected capital expenditures cash flows provided financing activities 1999 1146 million compared usage cash financing activities 1998 1256 million 1999 proceeds borrowings used fund fracmaster acquisition companys capital spending program 1998 company used 1966 million purchase common stock repurchase program approved companys board directors december 1997 due reduced profitability resulting reduction cash flows operating activities company repurchase common stock 1999 subsequent fiscal year end october 1999 company received 1440 million private placement 4027972 shares common stock certain financial institutions proceeds private placement used pay outstanding debt company also entered privately negotiated option agreements pursuant currently intends repurchase equivalent number shares april 2000 total 1490 million company expects utilize proceeds approximately 144 million exercise outstanding warrants exercised borrowing new existing credit facilities fund repurchase outstanding warrants expire april 2000 exercise price 15 per share management strives maintain low cash balances utilizing available credit facilities meet companys capital needs excess cash generated historically used pay outstanding borrowings fund companys stock repurchase program company committed unsecured bank credit facility bank credit facility consists sixyear term loan approximately 1211 million currently drawn partially canadian dollars provision renewable annually option banks repayable 22 quarterly installments began march 1997 five year us 2250 million revolving facility available june 2001 september 30 1999 borrowings outstanding bank credit facility totaled 3411 million consisting 1211 million term loan 2200 million borrowings revolver principal reductions term loans bank credit facility due aggregate annual installments 441 million 441 million 329 million years ending september 30 2000 2001 2002 respectively addition committed facility company 2020 million various unsecured discretionary lines credit september 30 1999 expire various dates 2000 requirements commitment fees compensating balances connection lines credit interest borrowings based prevailing market rates september 30 1999 1060 million outstanding borrowings lines credit company issued outstanding 1250 million unsecured 7 notes due 2006 net proceeds issuance 7 notes 1233 million august 1996 used company repay indebtedness outstanding term loan portion companys existing bank credit facility companys interestbearing debt increased 395 total capitalization september 30 1999 compared 341 september 30 1998 due borrowings fund fracmaster acquisition companys capital spending bank credit facility includes various customary covenants provisions including maintenance certain profitability solvency ratios restrictions dividend payments certain circumstances none materially restrict companys activities management believes bank credit facility combined discretionary credit facilities cash flows operations provides company sufficient capital resources liquidity manage routine operations meet debt service obligations fund projected capital expenditures discretionary lines credit renewed borrowings lines credit otherwise become unavailable company expects refinance debt arranging additional committed bank facilities longterm borrowings alternatives year 2000 compliance historically many computer programs written using two digits rather four define applicable year programming practice could result certain computerized applications failing properly recognize year begins 20 instead 19 turn could result major system failures miscalculations generally referred year 2000 issue july 1997 company established formal program assess global impact year 2000 issues companys internal systems primary area focus program systems include limited data processing financial reporting software applications computerized job monitoring hardware software used wellsite companys labs embedded control systems telecommunications support equipment addition program addresses companys reliance third party suppliers determine extent company vulnerable third parties failure remediate year 2000 issues companys year 2000 program comprised four primary phases inventory existing equipment systems ii assessment equipment systems identify year 2000 ready prioritize critical systems equipment iii remediation replacement nonyear 2000 ready equipment systems iv testing certification year 2000 readiness company completed worldwide inventory systems equipment september 1997 company substantially completed remediation replacement noncompliant systems equipment critical operations remainder calendar 1999 focused testing certification new modified programs certain noncritical systems may addressed january 2000 however company believes systems disrupt companys operations material way company contacted critical external suppliers goods services assess compliance efforts companys exposure event failure third party compliance efforts company received favorable response majority critical suppliers situations remaining suppliers compliant respond company process developing contingency plans including utilizing alternative suppliers comprehensive plan designed achieve uninterrupted transition calendar year 2000 cost company approximately 23 million 22 million incurred september 30 1999 addition program resulted acceleration approximately 14 million hardware software expenditures replace noncompliant systems cost project dates company believes complete year 2000 modifications based managements best estimates june 28 1999 company acquired certain assets fracmaster ltd hardware software retained thoroughly inventoried assessment year 2000 related issues completed remediation testing activities progress prior december 31 1999 company either upgrade replace remove service fracmaster assets year 2000 related risks failure completely remedy year 2000 issues including critical internal systems infrastructure third party suppliers mentioned could result business disruption could materially affect companys operations effort minimize business interruptions company process developing contingency plans event circumstances prevent company third party suppliers meeting portion year 2000 program schedules contingency plans expected completed place end december 1999 forward looking statements document contains forwardlooking statements within meaning private securities litigation reform act 1995 section 21e securities exchange act 1934 concerning among things companys prospects expected revenues expenses profits developments business strategies operations year 2000 readiness subject certain risks uncertainties assumptions forwardlooking statements identified use terms phrases expect estimate project believe similar terms phrases statements based certain assumptions analyses made company light experience perception historical trends current conditions expected future developments factors believes appropriate circumstances statements subject general economic business conditions oil natural gas industry business opportunities may presented pursued company changes law regulations factors many beyond control company one risks uncertainties materialize underlying assumptions prove incorrect actual results may vary materially expected estimated projected item 7aitem 7 managements discussion analysis financial condition results operations general companys operations primarily driven number oil natural gas wells drilled depth drilling conditions wells number well completions level workover activity worldwide drilling activity turn largely dependent price oil natural gas situation often leads volatility companys revenues profitability especially united states canada company historically generated excess 50 revenues due aging oilfields lowercost sources oil internationally drilling activity united states declined 75 peak 1981 record low drilling activity levels experienced 1986 1992 early 1999 despite recovery latter half fiscal 1999 us average fiscal 1999 active rig count represented lowest history 34 previous fiscal year recovery us drilling continued fiscal 2000 active us rig count averaged 842 rigs 40 increase fiscal 1999 increase occurred number rigs drilling gas increased 48 previous fiscal year average number rigs drilling oil increased 16 recovery continued fiscal 2001 due exceptionally strong oil natural gas prices drilling activity outside north america historically less volatile domestic drilling activity due low oil prices year international drilling activity also reached record low levels 1999 canadian drilling activity began recover latter part fiscal 1999 activity international regions expected significantly recover least middle fiscal 2001 active international drilling rigs excluding canada averaged 617 rigs fiscal 2000 little changed fiscal 1999 due primarily improvement oil natural gas prices however canadian drilling activity continued recovery begun late 1999 averaging 335 active drilling rigs fiscal 2000 58 previous fiscal year acquisition june 28 1999 company completed acquisition selected assets subsidiaries fracmaster ltd fracmaster oilfield services company based calgary alberta operations canada united states russia china acquisition completed total purchase price 784 million fracmaster generated worldwide revenue 2091 million fiscal year ended december 31 1998 acquisition fracmaster primarily impacted companys operations canada russia results operations following table sets forth selected key operating statistics reflecting industry rig count companys financial results 1 industry estimate drilling activity measured average active rigs 2 gross profit represents revenue less cost sales services revenue due primarily increased north american drilling workover activity well benefits acquisition fracmaster june 1999 companys revenue fiscal 2000 reached record level 156 billion increase 38 fiscal 1999 revenues reflect strong recovery 1999 six consecutive years revenue growth companys revenue declined 26 companys service linespressure pumping process pipeline services tubular services specialty chemicals experienced revenue decreases fiscal 1999 management expects companys revenues fiscal 2001 increase excess 15 2000 north american drilling market remains strong company begun see signs international recovery several new contracts awarded pending operating income loss year ended september 30 2000 companys operating income 1952 million compared operating loss 148 million fiscal 1999 companys gross profit margins fiscal 2000 increased 222 139 fiscal 1999 margin improvement primarily result increased north american drilling workover activity pricing improvement us impact cost reduction programs implemented 1999 efficiencies reflected increase revenue per rig revenue per employee fiscal 2000 partially offsetting improved margins increases research engineering marketing general administrative expenses totaling 174 million due primarily higher accruals incentive plans based upon companys earnings stock price overhead resulting fracmaster acquisition operating expenses however declined percentage revenues 1999 operating loss primarily result company recording pretax unusual charge 397 million 36 per diluted share aftertax comprised 128 million severance costs 231 million asset writedowns 38 million costs associated downturn oilfield services industry addition 1999 operating loss included 167 million costs resulting acquisition fracmaster additional severance costs asset writedowns primarily associated companys international operations included cost sales excluding items 1999 operating income decline primarily result decline north latin american drilling workover activity lower pricing research engineering marketing general administrative expenses total decreased 138 million 1999 compared 1998 due implementation three phases cost reduction programs beginning july 1998 lower incentive provision year addition 1999 writedown company also recorded 266 million 22 per diluted share aftertax unusual charge 1998 reflect employee severance asset writedowns costs associated downturn industry began later part 1998 interest expense 2000 decreased 114 million compared previous year due lower borrowings resulting improved cash flow operations well proceeds equipment refinancing transaction private placement common stock completed companys first fiscal quarter see also capital resources liquidity interest expense increased 57 million 1999 compared 1998 due primarily additional borrowings finance companys stock repurchase program implemented december 1997 company repurchased shares cost totaling 1966 million program september 30 1999 purchased additional 228 million near end fiscal 2000 management expects continue share repurchases fiscal 2001 despite share repurchases interest expense expected continue decrease 2001 due reduced outstanding borrowings result continued strong cash flow operations income taxes companys effective tax rate remained us statutory rate past three years primarily result profitability international jurisdictions statutory tax rate us rate availability certain nonrecurring tax benefits availability tax benefits companys reorganization pursuant initial public offering 1990 effective tax rate decreased 327 2000 339 1999 following increase 318 1998 usmexico pressure pumping segment companys usmexico pressure pumping revenues fiscal 2000 reached record 7438 million 64 increase 1999 increase primarily due increased drilling workover activity increased 40 25 respectively prior year along improvement us revenue per active rig improvement occurred independent oil companies company strong market position contributed increase us drilling activity also larger fracturing treatments also contributing increased us revenues 2000 increase prices approximately 16 company implemented new price books november 1999 september 2000 companys usmexico pressure pumping revenues declined 38 1999 compared 1998 result lower activity pricing caused record low drilling levels fiscal 1999 average active rig count 34 previous year lowest recorded history workover activity 1999 also weak 32 year excluding mexico companys us regions experienced revenue declines 1999 oil producing regions texas oklahoma severely impacted addition 1999 pricing declined approximately 16 compared previous year revenue companys mexico operations increased result new contract expansion operations northeast mexico result price increases fiscal 2000 expected continuation strong drilling workover activity levels management believes fiscal 2001 revenue generated usmexico pressure pumping operations exceed fiscal 2000 excess 25 operating income companys usmexico pressure pumping operations 1418 million fiscal 2000 compared operating loss 39 million fiscal 1999 improvement due primarily increased drilling workover business better utilization personnel equipment result cost reduction measures implemented fiscal 1999 better pricing yearoveryear basis pricing improved approximately 16 result aforementioned price book increases implemented november 1999 september 2000 operating loss fiscal 1999 primarily caused deceased revenues resulting severe decline drilling workover activity corresponding lower prices companys products services market contracted international pressure pumping segment revenue companys international pressure pumping operations 6292 million fiscal 2000 increase 24 compared previous fiscal year increase due mostly addition former fracmaster operations canada russia 58 increase drilling activity canada excluding canada revenues increased 93 fiscal 2000 international pressure pumping revenues increased 6 despite average drilling activity flat prior year levels increased revenues companys latin america region mostly offset impact continued weakness drilling activity international areas significantly companys asia pacific operations result new contracts improving activity selected locations management expects international regions show revenue increases fiscal 2001 compared fiscal 2000 revenue companys international pressure pumping operations 5056 million fiscal 1999 decrease 17 compared fiscal 1998 exception russia operations companys international regions experienced revenue declines 1999 canadian latin american operations showing largest declines revenue declines result lower drilling activity pricing regions operating income companys international pressure pumping operations 685 million fiscal 2000 compared 398 million fiscal 1999 improvement primarily due improved canadian business nonrecurring charge relating primarily asset writedowns reduced operating margins companys international pressure pumping operations 95 million third quarter fiscal 1999 operating income canada increased result efficiencies gained better equipment personnel utilization throughout year full year former fracmaster operations gains however partially offset lower pricing outside north america margin decreases companys europeafrica region due reduced north sea activity companys operations relatively high fixed cost base shutdown costs incurred closing facility germany early 2000 additionally operating income margins companys middle east region negatively impacted startup costs incurred delayed projects operating income fiscal 1999 declined 577 million 975 million generated companys international pressure pumping operations fiscal 1998 decrease primarily result lower drilling activity lower pricing companys international regions combined 95 million nonrecurring charge made third quarter fiscal 1999 services segment revenue companys service lines consist specialty chemicals tubular services process pipeline services increased 7 fiscal 2000 compared prior year due primarily recovery drilling activity levels revenue service lines declined 8 1999 1998 increasing previous two years 1999 decrease due primarily drilling activity declines mostly offset expansions new markets service lines greater concentration revenues nondrilling oilfield activities greatly impacted decline active rig count operating income service lines declined 179 million 98 revenue fiscal 2000 compared 190 million 111 revenue 1999 operating income margins companys tubular services line suffered drop drilling activity north sea unable make corresponding reduction fixed cost base also contributing operating income decline job delays higher startup costs process pipeline services group new projects began late fiscal year operating income 1999 declined 276 million 149 revenue 1998 primarily result startup costs incurred expanding service lines geographically replaced revenues lost due reduced drilling activity capital resources liquidity net cash provided operating activities fiscal 2000 2047 million increase 1403 million prior year due primarily higher profitability noncash us tax expense due loss carryforwards partially offset increases working capital particularly accounts receivable inventories result rapid revenue growth north america net cash provided operating activities 644 million 1999 decrease 2199 million 1998 primarily result lower profitability addition tax benefit 1999 us operating losses noncash due companys cumulative net operating loss position partially offset additional liquidation working capital balances reduction activity noncash portion unusual charge net cash provided investing activities fiscal 2000 437 million compared net cash used investing activities 1999 1767 million increase due primarily proceeds received transaction involving transfer certain pumping service equipment assets first quarter fiscal 2000 subsequent transfer equipment company received 1200 million used repay outstanding bank debt equipment used provide services company customers company paying service fee period least six thirteen years transaction generated deferred gain book purposes approximately 63 million carried longterm liabilities amortized thirteenyear period taxable gain 797 million completely offset net operating loss carryforwards excluding transaction cash used investing activities declined 1005 million due curtailment capital spending beginning midyear 1999 1999s investing activities included acquisition fracmaster 2000 capital spending related primarily maintenance capital us offshore international expansion 1999 increase cash used investing activities 157 million due primarily acquisition fracmaster june 1999 net cash consideration 734 million excluding acquisition investing activities 1999 declined 578 million primarily due curtailment capital spending caused depressed business environment 1999 capital spending related primarily upgrades companys us fracturing fleet expansion tomball manufacturing research development facility 1998 capital spending related primarily additional fracturing coiled tubing capacity companys international growth initiatives upgrades companys us pumping fleet upgrades companys information systems projected capital expenditures fiscal 2001 expected increase significantly 2000 currently expected approximately 150165 million 2001 capital program expected used primarily replacement enhancement us fracturing equipment stimulation expansion internationally actual amount 2001 capital expenditures primarily dependent availability external manufacturing capacity expected funded cash flows operating activities available credit facilities management believes cash flows operating activities available lines credit necessary sufficient fund projected capital expenditures cash flows used financing activities fiscal 2000 2459 million compared cash flows provided financing activities fiscal 1999 1146 million financing activities fiscal 2000 included private placement 40 million shares common stock october 1999 generated proceeds 1440 million used pay outstanding debt connection private placement company also entered privately negotiated option agreements pursuant repurchased equivalent number shares april 2000 total 1490 million april 2000 company utilized proceeds 1435 million exercise outstanding warrants combined borrowings existing credit facilities fund repurchase total 4787852 warrants exercise price 15 per share warrant represented right purchase two shares exercised expiration date april 13 2000 exercise warrants resulted issuance 9575704 shares common stock september 2000 company also repurchased 400000 shares common stock cost 228 million share repurchase program initially approved companys board directors december 1997 share repurchase program initially authorized purchases 150 million subsequently increased 300 million may 1998 450 million september 2000 subsequent end fiscal 2000 company purchased additional 1413400 shares common stock cost 810 million financing activities along proceeds exercise stock options cash provided operating investing activities allowed company reduce 2000 outstanding borrowings 3971 million cash flows provided financing activities 1999 1146 million compared usage cash financing activities 1998 1256 million 1999 proceeds borrowings used fund fracmaster acquisition companys capital spending program 1998 company used 1966 million purchase common stock repurchase program approved companys board directors december 1997 due reduced profitability resulting reduction cash flows operating activities company repurchase common stock 1999 management strives maintain low cash balances utilizing available credit facilities meet companys capital needs excess cash generated historically used pay outstanding borrowings fund companys stock repurchase program company committed unsecured bank credit facility bank credit facility consists sixyear term loan approximately 468 million currently drawn canadian dollars provision renewable annually option banks repayable 22 quarterly installments began march 1997 five year us 2250 million revolving facility available june 2001 september 30 2000 borrowings outstanding bank credit facility totaled 468 million consisting solely borrowings term loan principal reductions term loans bank credit facility due aggregate annual installments 304 million 164 million years ending september 30 2001 2002 respectively addition committed facility company 1494 million various unsecured discretionary lines credit september 30 2000 expire various dates 2001 requirements commitment fees compensating balances connection lines credit interest borrowings based prevailing market rates september 30 2000 34 million outstanding borrowings lines credit companys total interestbearing debt decreased 131 total capitalization september 30 2000 compared 395 september 30 1999 due repayment borrowings cash flows operations proceeds received equipment transfer private placement common stock warrant exercises stock option exercises bank credit facility includes various customary covenants provisions including maintenance certain profitability solvency ratios restrictions dividend payments certain circumstances none materially restrict companys activities management believes bank credit facility combined discretionary credit facilities cash flows operations provides company sufficient capital resources liquidity manage routine operations meet debt service obligations fund projected capital expenditures discretionary lines credit renewed borrowings lines credit otherwise become unavailable company expects refinance debt arranging additional committed bank facilities longterm borrowing alternatives accounting pronouncements june 1998 financial accounting standards board issued statement 133 accounting derivative instruments hedging activities sfas 133 sfas 133 establishes accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities statement requires entity recognize derivatives either assets liabilities statement financial position measure instruments fair value statement effective fiscal quarters fiscal years beginning june 15 2000 therefore used preparing companys 2000 financial statements adoption sfas 133 beginning fiscal year 2001 material impact companys financial position results operations forward looking statements document contains forwardlooking statements within meaning private securities litigation reform act 1995 section 21e securities exchange act 1934 concerning among things companys prospects expected revenues expenses profits developments business strategies operations subject certain risks uncertainties assumptions forwardlooking statements identified use terms phrases expect estimate project believe achievable similar terms phrases statements based certain assumptions analyses made company light experience perception historical trends current conditions expected future developments factors believes appropriate circumstances statements subject general economic business conditions oil natural gas industry weather conditions affect conditions oil natural gas industry business opportunities may presented pursued company changes law regulations factors many beyond control company one risks uncertainties materialize underlying assumptions prove incorrect actual results may vary materially expected estimated projected item 7aitem 7 managements discussion analysis financial condition results operations general companys worldwide operations primarily driven number oil natural gas wells drilled depth drilling conditions wells number well completions level workover activity drilling activity turn largely dependent price crude oil natural gas situation often leads volatility companys revenues profitability especially united states canada company historically generated excess 50 revenues due aging oilfields lowercost sources oil internationally drilling activity united states declined 75 peak 1981 record low drilling activity levels experienced 1986 1992 early 1999 despite recovery latter half fiscal 1999 us average fiscal 1999 rig count 601 active rigs represented lowest history recovery us drilling continued throughout fiscal 2000 2001 due exceptionally strong oil natural gas prices 12 months ended september 30 2001 active us rig count averaged 1172 rigs 39 increase fiscal 2000 95 increase fiscal 1999 much increase occurred number rigs drilling natural gas fiscal 2001 increased 42 previous fiscal year average number rigs drilling oil increased 30 crude oil natural gas prices lowered past several months however north american drilling activity begun decline companys management believes activity decline next three six months drilling activity outside north america historically less volatile domestic drilling activity international drilling activity also reached record low levels 1999 due low oil prices year canadian drilling activity began recover latter part fiscal 1999 activity international regions begin significantly recover latter half fiscal 2001 active international drilling rigs excluding canada averaged 736 rigs fiscal 2001 increase 19 fiscal 2000 due primarily strong oil natural gas prices throughout fiscal 2001 canadian drilling activity continued recovery begun late 1999 averaging 365 active drilling rigs fiscal 2001 9 previous fiscal year company expects canadian drilling activity fiscal 2002 moderately lower fiscal 2001 expects drilling activity outside north america relatively flat yearoveryear acquisition june 28 1999 company completed acquisition selected assets subsidiaries fracmaster ltd fracmaster oilfield services company based calgary alberta operations canada united states russia china see note 3 notes consolidated financial statements additional information regarding acquisition fracmaster primarily impacted companys operations canada russia results operations following table sets forth selected key operating statistics reflecting industry rig count companys financial results 1 industry estimate drilling activity measured average active rigs 2 gross profit represents revenue less cost sales services revenue due continued improvement us drilling activity pricing along gradually increasing international drilling activity companys revenue fiscal 2001 reached record level 223 billion increase 44 fiscal 2000 revenues fiscal 2000 156 billion increase 38 fiscal 1999 due primarily increased north american drilling workover activity well benefits acquisition fracmaster june 1999 management expects companys revenues fiscal 2002 decrease approximately 1015 record levels 2001 recent relative weakness natural gas crude oil prices expected negatively impact north american drilling activity operating income loss operating income fiscal year 2001 5362 million increase 3410 million previous fiscal year companys gross profit margins fiscal 2001 increased 320 222 fiscal 2000 margin improvement primarily result pricing improvement us better equipment utilization labor efficiencies reflected increase revenue per rig revenue per employee fiscal 2001 compared fiscal 2000 partially offsetting improved margins increases research engineering marketing general administrative expenses totaling 275 million due increased costs support higher revenue level higher employee incentive costs based upon companys earnings stock price performance operating expenses however declined percentage revenues year ended september 30 2000 companys operating income 1952 million compared operating loss 148 million fiscal 1999 companys gross profit margins fiscal 2000 increased 222 139 fiscal 1999 margin improvement primarily result increased north american drilling workover activity pricing improvement us impact cost reduction programs implemented 1999 operating loss primarily result company recording pretax unusual charge 397 million 18 per diluted share aftertax comprised 128 million severance costs 231 million asset writedowns 38 million costs associated downturn oilfield services industry addition unusual charge 1999 operating loss also included 167 million costs resulting acquisition fracmaster additional severance costs asset writedowns primarily associated companys international operations included cost sales research engineering marketing general administrative expenses total increased 174 million 2000 compared 1999 due primarily higher employee incentive costs overhead resulting fracmaster acquisition interest expense 2001 decreased 67 million compared previous year due repayment 827 million debt improved cash flow operations interest expense 2000 decreased 114 million 1999 due repayment debt improved cash flow operations combined proceeds equipment refinancing transaction private placement common stock completed companys first fiscal quarter 2000 see also capital resources liquidity interest income 2001 26 million compared 16 million fiscal 2000 6 million fiscal 1999 increase interest income due overnight investing excess cash operations income net 2001 37 million compared expense net fiscal 2000 16 million included income 2001 nonrecurring 129 million gain realized sale joint venture operation russia partially offsetting minority interest expense year 68 million 17 million premium associated repurchase retirement 46 million companys 7 notes maturing 2006 expense net fiscal 2000 consisted primarily minority interest expense 33 million partially offset settlement gain 15 million recognized conversion pension plan canada income taxes companys effective tax rate remained us statutory rate past three years primarily result profitability international jurisdictions statutory tax rate less us rate availability certain nonrecurring tax benefits availability tax benefits companys reorganization pursuant initial public offering 1990 effective tax rate increased 340 2001 327 2000 following decrease 339 1999 usmexico pressure pumping segment companys usmexico pressure pumping revenues fiscal 2001 record 123 billion 65 increase previous year increase primarily due increased drilling workover activity increased 39 18 respectively prior year along improvement us pricing companys products services approximately 20 addition revenue companys mexico operations increased 169 million fiscal 2001 compared 2000 result new contract fiscal year 2000 revenues 7438 million represented 64 increase 1999 improvement occurred independent oil companies company strong market position contributed increase us drilling activity year also contributing increased us revenues 2000 increase prices approximately 16 company implemented new price books november 1999 september 2000 result recent weakness natural gas prices resulting slowdown us drilling activity management believes fiscal 2002 revenue generated usmexico pressure pumping operations decline fiscal 2001 approximately 2025 operating income companys usmexico pressure pumping operations 4302 million increase 2883 million fiscal 2000 improvement due primarily increased activity improved pricing better equipment utilization labor efficiencies operating income companys usmexico pressure pumping operations 1418 million fiscal 2000 compared operating loss 39 million fiscal 1999 improvement due primarily increased drilling workover activity better utilization personnel equipment result cost reduction measures implemented fiscal 1999 better pricing companys products services operating loss fiscal 1999 primarily caused decreased revenues resulting severe decline drilling workover activity corresponding lower prices companys products services market contracted international pressure pumping segment revenue companys international pressure pumping operations 7947 million fiscal 2001 increase 26 compared previous fiscal year result increase canadian gas drilling increased stimulation activity several international regions contributions geographic expansions companys international regions showed yearoveryear revenues increases fiscal 2001 russiachina region 57 middle east region 50 asia pacific region 38 latin america region 25 europeafrica region 22 canada region 16 revenue companys international pressure pumping operations 6292 million fiscal 2000 increase 24 compared fiscal 1999 increase due mostly 1999 addition former fracmaster operations canada russia 58 increase drilling activity canada excluding canada revenues increased 93 fiscal 2000 international pressure pumping revenues increased 6 despite average drilling activity comparable prior year levels increased revenues companys latin america region mostly offset impact continued weakness drilling activity international areas significantly companys asia pacific operations revenues companys international pressure pumping operations expected decline slightly fiscal 2002 2001 levels due primarily effects expected slowdown canadian drilling activity result improved activity operating income companys international pressure pumping operations 1268 million fiscal 2001 increase 595 million previous year addition increased activity operating margins percentage revenues improved 11 fiscal 2000 16 fiscal 2001 due mostly startup costs selected international locations negatively impacted operating margins fiscal 2000 operating income companys international pressure pumping operations 673 million fiscal 2000 compared 473 million fiscal 1999 improvement primarily due improved canadian business nonrecurring charge relating primarily asset writedowns reduced operating margins companys international pressure pumping operations 95 million third quarter fiscal 1999 operating income canada 2000 increased result efficiencies gained better equipment personnel utilization throughout year full year former fracmaster operations gains however partially offset lower pricing outside north america margin decreases companys europeafrica region due reduced north sea activity companys operations relatively high fixed cost base shutdown costs incurred closing facility germany early 2000 additionally operating income margins companys middle east region negatively impacted startup costs incurred delayed projects services segment revenue companys service lines consist specialty chemicals tubular services process pipeline services 2072 million fiscal 2001 14 increase previous year process pipeline inspection service line grew 13 increased projects several regions tubular service revenues increased 33 activity improvements expansions far east west africa revenue companys specialty chemicals service line increased 5 fiscal 2001 compared previous year revenues services lines increased 7 fiscal 2000 compared prior year due primarily recovery drilling activity levels operating income companys service lines increased 113 million fiscal 2000 figures reach 293 million 141 related revenue year ended september 30 2001 operating income margins companys tubular services process pipeline services lines benefited increased revenue better able cover relatively high fixed cost base operating income service lines declined 179 million 98 related revenue fiscal 2000 compared 190 million 111 related revenue 1999 fiscal 2000 operating income margins companys tubular services line suffered drop drilling activity north sea unable make corresponding reduction fixed cost base also contributing operating income decline fiscal 2000 job delays higher startup costs process pipeline services group new projects began late fiscal year capital resources liquidity net cash provided operating activities fiscal 2001 5176 million increase 3128 million prior year due primarily higher profitability 1300 million cash benefit resulting utilization us tax loss carryforwards partially offset increases working capital particularly accounts receivable result rapid revenue growth north america net cash provided operating activities 2047 million 2000 increase 1403 million 1999 due primarily higher profitability noncash us tax expense net cash used investing activities fiscal 2001 1887 million compared net cash provided investing activities 2000 437 million fiscal 2001 capital spending 1834 million largest portion net cash used investing activities capital expenditures fiscal 2001 increased 1029 million 2000 used replace enhance us fracturing equipment expand stimulation resources internationally previous years net cash provided investing activities due primarily proceeds received transaction involving transfer certain pumping service equipment assets first quarter fiscal 2000 subsequent transfer equipment company received 1200 million used repay outstanding bank debt fiscal 2000 capital spending related primarily maintenance capital us offshore international expansion capital expenditures fiscal 2002 expected comparable fiscal 2001 spending levels approximately 170 185 million 2002 capital program expected used primarily enhancement us fracturing equipment stimulation expansion internationally actual amount 2002 capital expenditures primarily dependent availability external manufacturing capacity expansion opportunities expected funded cash flows operating activities available credit facilities management believes cash flows operating activities available lines credit necessary sufficient fund projected capital expenditures cash flows used financing activities fiscal 2001 2512 million compared cash flows used financing activities fiscal 2000 2459 million connection june 2001 replacement existing credit facility company prepaid remaining 303 million borrowings outstanding term loan portion credit facility also june 2001 company repurchased retired 46 million 7 notes maturing 2006 recorded associated debt extinguishment costs 17 million classified expense consisting mainly 13 million early payment premium addition repayment debt fiscal 2001 company purchased 70 million shares common stock cost 1775 million september 2000 company also repurchased 800000 shares common stock cost 228 million share repurchase program initially approved companys board directors december 1997 share repurchase program amended authorizes purchases 600 million 2031 million available future purchase september 30 2001 subsequent end fiscal year company purchased additional 40 million shares cost 910 million also following fiscal year end board directors approved increase authorized amount share repurchase program 750 million financing activities fiscal 2000 included private placement 81 million shares common stock october 1999 generated proceeds 1440 million used pay outstanding debt connection private placement company also entered privately negotiated option agreements pursuant repurchased equivalent number shares april 2000 total 1490 million april 2000 company utilized proceeds 1435 million exercise outstanding warrants combined borrowings existing credit facilities fund repurchase cash flows provided financing activities 1999 1146 million 1999 proceeds borrowings used fund fracmaster acquisition companys capital spending program management strives maintain low cash balances utilizing available credit facilities meet companys capital needs excess cash generated historically used pay outstanding borrowings fund companys stock repurchase program june 2001 company replaced existing credit facility new 400 million committed line credit committed credit facility committed credit facility consists 200 million 364day commitment renews annually option lenders 200 million threeyear commitment outstanding borrowings committed credit facility september 30 2001 addition committed credit facility company 1198 million various unsecured discretionary lines credit september 30 2001 expire various dates 2002 requirements commitment fees compensating balances connection lines credit interest borrowings based prevailing market rates september 30 2001 140 million outstanding borrowings lines credit due repayment borrowings cash flows operations companys total interestbearing debt decreased 64 total capitalization september 30 2001 compared 131 september 30 2000 committed credit facility includes various customary covenants provisions including maintenance certain profitability solvency ratios none materially restrict companys activities management believes committed credit facility combined discretionary credit facilities cash flows operations provides company sufficient capital resources liquidity manage routine operations meet debt service obligations fund projected capital expenditures discretionary lines credit renewed borrowings lines credit otherwise become unavailable company expects refinance debt arranging additional committed bank facilities longterm borrowing alternatives accounting pronouncements june 1998 financial accounting standards board fasb issued statement 133 accounting derivative instruments hedging activities sfas 133 sfas 133 amended establishes accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities statement requires entities recognize derivatives either assets liabilities statement financial position measure instruments fair value adoption sfas 133 beginning fiscal year 2001 material impact companys financial position results operations july 20 2001 fasb issued statement 141 business combinations sfas 141 statement 142 goodwill intangible assets sfas 142 sfas 141 requires business combinations initiated june 30 2001 accounted using purchase method use poolingofinterest method longer permitted sfas 142 requires goodwill longer amortized earnings instead reviewed possible impairment goodwill amortization ceases upon adoption sfas 142 effective fiscal years beginning december 15 2001 early adoption permitted companies fiscal years beginning march 15 2001 company currently intends adopt sfas 142 effective october 1 2001 beginning next fiscal year companys cessation goodwill amortization guidelines sfas 142 result reduction approximately 14 million annual operating expenses assuming impairment goodwill company still process determining effects implementing sfas 142 august 2001 fasb issued sfas 143 accounting asset retirement obligations sfas 143 sfas 143 requires fair value liability asset retirement legal obligation recognized period incurred liability initially recorded associated costs capitalized increasing carrying amount related longlived asset time liability accreted present value period capitalized cost depreciated useful life related asset sfas 143 effective fiscal years beginning june 15 2002 earlier application encouraged sfas 143 requires entities record cumulative effect change accounting principle income statement period adoption company plans adopt sfas 143 october 1 2002 process determining effect adoption consolidated financial statements august 2001 fasb issued sfas 144 accounting impairment disposal longlived assets sfas 144 sfas 144 provides new guidance recognition impairment losses long lived assets held used disposed also broadens definition constitutes discontinued operation results discontinued operation measured presented sfas 144 supercedes sfas 121 accounting impairment longlived assets longlived assets disposed apb opinion 30 retaining many requirements two statements sfas 144 assets held sale component entity included discontinued operations cash flows eliminated ongoing operations entity significant continuing involvement operations prospectively sfas 144 effective fiscal years beginning december 15 2001 early adoption encouraged sfas 144 expected materially change methods used company measure impairment losses longlived assets may result future dispositions reported discontinued operations greater extent currently permitted company plans adopt sfas 144 october 1 2002 forward looking statements document contains forwardlooking statements within meaning private securities litigation reform act 1995 section 21e securities exchange act 1934 concerning among things companys prospects expected revenues expenses profits developments business strategies operations subject certain risks uncertainties assumptions forwardlooking statements identified use terms phrases expect estimate project believe achievable similar terms phrases statements based certain assumptions analyses made company light experience perception historical trends current conditions expected future developments factors believes appropriate circumstances statements subject general economic business conditions oil natural gas industry fluctuating prices crude oil natural gas weather conditions affect conditions oil natural gas industry business opportunities may presented pursued company changes law regulations factors many beyond control company one risks uncertainties materialize underlying assumptions prove incorrect actual results may vary materially expected estimated projected item 7aitem 7 managements discussion analysis financial condition results operations general companys worldwide operations primarily driven number oil natural gas wells drilled depth drilling conditions wells number well completions level workover activity drilling activity turn largely dependent price crude oil natural gas situation often leads volatility companys revenues profitability especially united states canada company historically generated excess 50 revenues due aging oilfields lowercost sources oil internationally drilling activity united states declined 75 peak 1981 record low drilling activity levels experienced 1986 1992 early 1999 despite recovery latter half fiscal 1999 us average fiscal 1999 rig count 601 active rigs represented lowest history recovery us drilling occurred fiscal 2000 2001 due exceptionally strong oil natural gas prices yet drilling activity retreated fiscal 2002 12 months ended september 30 2002 active us rig count averaged 870 rigs 26 decrease fiscal 2001 3 increase fiscal 2000 much decrease occurred number rigs drilling natural gas fiscal 2002 decreased 23 previous fiscal year crude oil natural gas prices stabilized past several months us drilling activity leveled companys management believes activity remain flat next six months increase moderately second half fiscal 2003 drilling activity outside north america historically less volatile domestic drilling activity international drilling activity also reached record low levels 1999 due low oil prices year canadian drilling activity began recover latter part fiscal 1999 activity international regions begin significantly recover latter half fiscal 2001 active international drilling rigs excluding canada averaged 730 rigs fiscal 2002 decrease 1 fiscal 2001 canadian drilling activity declined fiscal 2002 averaging 265 active drilling rigs 27 previous fiscal year company expects international drilling activity including canada fiscal 2003 consistent levels experienced fiscal 2002 critical accounting policies company defined critical accounting policy one important portrayal companys financial condition results operations requires management company make difficult subjective complex judgments estimates assumptions future events effects cannot perceived certainty company bases estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments estimates may change new events occur experience acquired additional information obtained companys operating environment changes company believes following critical accounting policies used preparation companys consolidated financial statements significant judgments uncertainties affecting application policies information concerning companys significant accounting policies see note 2 notes consolidated financial statements accounts receivable perform ongoing credit evaluations customers adjust credit limits based upon payment history customers current credit worthiness determined review current credit information continuously monitor collections payments customers maintain provision estimated uncollectible accounts based upon historical experience specific customer collection issues identified credit losses historically within expectations provisions established cannot give assurances continue experience credit loss rates past cyclical nature industry may affect customers operating performance cash flows could impact ability collect obligations addition many customers located certain international areas inherently subject risks economic political civil instabilities may impact ability collect accounts receivables inventory company records inventory lower cost market company regularly reviews inventory quantities hand records provisions excess obsolete inventory based primarily estimated forecast product demand market conditions production requirements technological developments significant unanticipated changes companys forecasts could require additional provisions excess obsolete inventory income taxes provide income taxes accordance statement financial accounting standards sfas 109 accounting income taxes standard takes account differences financial statement treatment tax treatment certain transactions deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect change tax rates recognized income expense period includes enactment date calculation requires us make certain estimates future operations changes state federal foreign tax laws well changes financial condition could affect estimates valuation allowance deferred tax assets record valuation allowance reduce deferred tax assets likely portion deferred tax assets expire realization benefit future deductibility probable ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character future impairment longlived assets longlived assets include property plant equipment goodwill intangibles assets comprise significant amount companys total assets company makes judgments estimates conjunction carrying value assets including amounts capitalized depreciation amortization methods useful lives additionally carrying values assets periodically reviewed impairment whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires company make longterm forecasts future revenues costs related assets subject review forecasts require assumptions demand companys products services future market conditions technological developments significant unanticipated changes assumptions could require provision impairment future period self insurance accruals company selfinsured certain losses relating workers compensation general liability property damage employee medical benefits company makes judgements based historical experience current events estimate liability claims significant unanticipated changes future actual payouts could result additional increases decreases recorded accruals purchased stoploss coverage order limit extent feasible aggregate exposure certain claims assurance coverage adequately protect company liability potential consequences contingencies accounted accordance financial accounting standards boards sfas 5 accounting contingencies sfas 5 sfas 5 requires record estimated loss contingency information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements amount loss reasonably estimated accounting contingencies environmental legal income tax matters requires us use judgment believe accruals matters adequate actual loss contingency significantly different estimated loss results operations may understated acquisition may 31 2002 company completed acquisition osca inc osca completion services pressure pumping completion tools completion fluids company based lafayette louisiana operations primarily us gulf mexico brazil venezuela total purchase price 4706 million see note 3 notes consolidated financial statements additional information regarding acquisition results operations following table sets forth selected key operating statistics reflecting industry rig count companys financial results 1 industry estimate drilling activity measured average active drilling rigs 2 gross profit represents revenue less cost sales services 3 operating income segment excludes goodwill amortization see note 8 notes consolidated financial statements revenue due declines us canadian drilling activity pricing companys revenue fiscal 2002 declined 16 187 billion record revenues recorded fiscal 2001 223 billion fiscal 2001 revenues increased 44 fiscal 2000 reflected significant improvements us market activity pricing management expects companys fiscal 2003 revenues increase approximately 10 reflecting fiscal 2002 acquisition osca otherwise flat market operating income operating income fiscal 2002 2631 million decrease 2732 million previous fiscal year companys gross profit 4303 million fiscal 2002 decrease 40 fiscal 2001 gross profit decline primarily due activity pricing declines us canadian markets addition increases research engineering marketing general administrative expenses 34 million primarily result acquisition osca offset 137 million decline goodwill amortization result companys adoption sfas 142 described note 2 notes consolidated financial statements year ended september 30 2001 operating income 5362 million increase 3410 million previous fiscal year companys gross profit 7138 million fiscal 2001 increase 1068 fiscal 2000 margin improvement primarily result pricing improvement us better equipment utilization labor efficiencies partially offsetting improved margins increases research engineering marketing general administrative expenses totaling 275 million due increased costs support higher revenue level higher employee incentive costs based upon companys earnings stock price performance operating expenses however declined percentage revenues interest expense 2002 decreased 43 million compared previous year due lower average debt levels throughout year interest expense 2001 decreased 67 million compared 2000 due repayment 827 million debt improved cash flow operations interest income 2002 20 million compared 26 million fiscal 2001 16 million fiscal 2000 income derived overnight investing excess cash operations expense net 34 million 2002 compared income net 37 million fiscal 2001 expense 2002 consists primarily minority interest expense 49 million offset partially 15 million gain resulting insurance recovery russian assets destroyed fire included income 2001 nonrecurring 129 million gain realized sale joint venture operation russia partially offsetting gain minority interest expense year 68 million 17 million premium associated repurchase retirement 46 million companys 7 notes maturing 2006 expense net fiscal 2000 consisted primarily minority interest expense 33 million partially offset settlement gain 15 million recognized conversion pension plan canada income taxes companys effective tax rate remained us statutory rate past three years primarily result profitability international jurisdictions statutory tax rate less us rate availability certain nonrecurring tax benefits availability tax benefits companys reorganization pursuant initial public offering 1990 effective tax rate 341 2002 340 2001 327 2000 usmexico pressure pumping segment companys usmexico pressure pumping revenues declined 3207 million 26 fiscal 2002 8987 million previous years record 122 billion decline primarily due decreased drilling workover activity declined 26 14 respectively prior year lower prices us market weakened fiscal 2001 revenues represented 66 increase 2000 revenues increase occurred primarily due increased drilling workover activity increased 39 18 respectively prior year along average improvement us pricing companys products services approximately 20 addition revenue companys mexico operations increased 169 million fiscal 2001 compared 2000 result new contract management believes fiscal 2003 revenues generated usmexico pressure pumping operations increase slightly activity levels expected improve second half fiscal 2003 operating income companys usmexico pressure pumping operations decreased 2359 million 56 prior year 1891 million fiscal 2002 decrease due primarily decreased revenues resulting decline drilling workover activity corresponding lower prices companys products services market weakened companys average us pricing declined approximately 7 previous fiscal year also contributing decline increased labor costs percentage revenue higher depreciation resulting us fleet recapitalization initiative program began late 1998 rebuild upgrade companys core fleet fracturing pumping units us operating income companys usmexico pressure pumping operations 4251 million fiscal 2001 increase 2884 million fiscal 2000 improvement due primarily increased activity improved pricing better equipment utilization labor efficiencies operating income companys usmexico pressure pumping operations 1367 million fiscal 2000 international pressure pumping segment revenue companys international pressure pumping operations 7126 million fiscal 2002 decrease 821 million 10 compared previous fiscal year revenue decrease largely attributable companys canadian operations 27 decrease revenue corresponding 27 drop drilling activity previous year company also decrease revenues latin america 19 compared prior year due primarily activity declines argentina venezuela result political uncertainties economic declines revenue operations eastern hemisphere includes companys operations europe africa middle east asia pacific russia china increased 5 yearoveryear led increases middle east increased activity levels india kazakstan main contributors middle east growth fiscal 2001 revenue companys international pressure pumping operations 7947 million increase 26 compared fiscal 2000 result increase canadian gas drilling increased stimulation activity several international regions contributions international geographic expansions revenue companys international pressure pumping operations 6292 million fiscal 2000 based expected drilling activity levels revenues companys international pressure pumping operations expected improve slightly fiscal 2003 2002 levels operating income companys international pressure pumping operations 721 million fiscal 2002 decrease 548 million 43 prior year primarily due reduced activity canada political uncertainties economic declines argentina venezuela combined approximately 4 million combined costs devaluation argentinas currency severance costs incurred connection reductions personnel canada latin america second quarter fiscal 2002 eastern hemisphere experienced 4 decrease operating income fiscal 2001 primarily due decreased profitability europe africa region result improved activity fiscal 2001 operating income companys international pressure pumping operations 1268 million increase 595 million previous year addition increased activity operating margins percentage revenues improved 11 fiscal 2000 16 fiscal 2001 due mostly startup costs selected international locations negatively impacted operating margins fiscal 2000 operating income companys international pressure pumping operations 673 million fiscal 2000 oilfield services segment revenue companys oilfield service lines consist specialty chemicals tubular services process pipeline services completion tools completion fluids 2537 million fiscal 2002 increase 347 million 16 previous year approximately 32 million increase relates completion fluids completion tools service lines acquired osca effective may 31 2002 oilfield services revenues excluding completion fluids completion tools increased 3 fiscal 2002 compared prior year tubular service revenues increased 15 activity improvements expansion west africa middle east process pipeline specialty chemicals division revenues flat yearoveryear operating income companys oilfield service lines decreased 42 million 12 fiscal 2001 despite yearoveryear revenue increase due reduced profit margins process pipeline services operations combined 17 million costs associated acquisition osca consisting primarily disposal completion tools deemed obsolete result combination operating income companys oilfield service lines increased 114 million fiscal 2000 figures reach 344 million 157 related revenue year ended september 30 2001 operating income margins companys tubular services process pipeline services lines benefited increased revenue better able cover relatively high fixed cost base operating income service lines 230 million 119 related revenue fiscal 2000 capital resources liquidity september 30 2002 cash equivalents equaled 847 million compared 841 million 65 million end fiscal years 2001 2000 respectively net cash provided operating activities fiscal 2002 totaled 3439 million decrease 1737 million compared 2001 primarily due reduced profitability partially offset liquidation working capital particularly accounts receivable net cash provided operating activities fiscal 2001 increased 3128 million fiscal 2000 due primarily higher profitability 1300 million cash benefit resulting utilization us tax loss carryforwards partially offset increases working capital particularly accounts receivable result revenue growth north america fiscal 2002 cash flows used investing activities totaled 6476 million primarily attributable amounts required fund acquisitions well companys capital expenditure needs 2002 capital spending 1790 million used primarily replacement enhancement us fracturing equipment expansion stimulation cementing services internationally net cash used investing activities fiscal 2001 1887 million compared net cash provided investing activities 2000 437 million fiscal 2001 capital spending 1834 million largest portion net cash used investing activities capital expenditures fiscal 2001 increased 1029 million 2000 used replace enhance us fracturing equipment expand stimulation resources internationally capital expenditures fiscal 2003 expected level consistent fiscal 2002 spending approximately 180 million 2003 capital program expected consist primarily spending enhancement companys existing pressure pumping equipment investment us fracturing fleet recapitalization initiative stimulation expansion internationally actual amount 2003 capital expenditures primarily dependent availability expansion opportunities expected funded cash flows operating activities available credit facilities management believes cash flows operating activities available lines credit necessary sufficient fund projected capital expenditures cash flows required fund investing activities fiscal 2002 exceeded cash flows operations incremental cash requirements company funded 4001 million proceeds net transaction costs generated issuance convertible senior notes april 24 2002 financing activities fiscal 2002 include purchase 44 million shares companys common stock cost 1021 million share repurchase program initially approved companys board directors december 1997 share repurchase program amended authorizes purchases 750 million 2510 million available future purchase september 30 2002 cash flows used financing activities fiscal 2001 2512 million compared cash flows 2459 million used financing activities fiscal 2000 connection june 2001 replacement existing credit facility company prepaid 303 million borrowings outstanding term loan portion credit facility also june 2001 company repurchased retired 46 million 7 notes maturing 2006 recorded associated debt extinguishment costs 17 million classified expense consisting mainly 13 million early payment premium addition repayment debt fiscal 2001 company purchased 70 million shares common stock cost 1775 million september 2000 company also repurchased 800000 shares common stock cost 228 million financing activities fiscal 2000 included private placement 81 million shares common stock october 1999 generated proceeds 1440 million used pay outstanding debt connection private placement company also entered privately negotiated option agreements pursuant repurchased equivalent number shares april 2000 total 1490 million april 2000 company utilized proceeds 1435 million exercise outstanding warrants combined borrowings existing credit facilities fund repurchase shares management strives maintain low cash balances utilizing available credit facilities meet companys capital needs excess cash generated historically used pay outstanding borrowings fund companys share repurchase program june 2001 company replaced existing credit facility new 400 million committed line credit committed credit facility committed credit facility consists 200 million 364day commitment renews annually option lenders 200 million threeyear commitment 364day commitment expired june 2002 renewed additional 364 days outstanding borrowings committed credit facility september 30 2002 addition committed credit facility company 1290 million various unsecured discretionary lines credit september 30 2002 expire various dates 2003 requirements commitment fees compensating balances connection lines credit interest borrowings based prevailing market rates 35 million 140 million outstanding borrowings lines credit september 30 2002 2001 respectively april 24 2002 company sold convertible senior notes face value maturity 5164 million gross proceeds 4084 million notes unsecured senior obligations rank equally right payment companys existing future senior unsecured indebtedness company used aggregate net proceeds 4001 million fund substantial portion purchase price acquisition osca closed may 31 2002 general corporate purposes notes mature 20 years cannot called company three years issuance redemption price must paid cash notes called holders notes require company repurchase notes third fifth tenth fifteenth anniversaries issuance company option pay repurchase price cash stock issue price notes 79076 1000 face value represents yield maturity 1625 annual yield maturity 050 per year issue price paid semiannually cash life security notes convertible bj services common stock initial rate 149616 shares 1000 face amount note rate results initial conversion price 5285 per share based purchasers original issue discount represents premium 45 april 18 2002 closing sale price companys common stock new york stock exchange 3645 per share company option settle notes surrendered conversion using cash generally except upon occurrence specified events including credit rating downgrade investment grade holders notes entitled exercise conversion rights companys stock price greater specified percentage beginning 120 declining 110 maturity notes accreted conversion price per share september 30 2002 accreted conversion price per share would 5311 fiscal 2002 company entered two longterm vessel charter operating lease agreements annual commitments agreements years ending september 30 2003 2004 2005 2006 2007 60 million 61 million 63 million 60 million 36 million respectively 273 million aggregate thereafter december 1999 company completed transaction involving transfer certain pumping service equipment assets received 1200 million used pay outstanding bank debt equipment used provide services customers company pays service fee period least six 13 years transaction generated deferred gain included longterm liabilities approximately 63 million amortized 13 years 1997 company completed transaction involving transfer certain pumping service equipment assets received 1000 million used pay outstanding bank debt equipment used provide services companys customers company pays service fee period least eight 14 years transaction generated deferred gain included longterm liabilities approximately 38 million amortized 12 years due primarily april 2002 issuance convertible senior notes companys total interestbearing debt increased 258 total capitalization total capitalization equals sum interestbearing debt stockholders equity september 30 2002 compared 64 september 30 2001 committed credit facility includes various customary covenants provisions including maintenance certain profitability solvency ratios none materially restrict companys activities management believes committed credit facility combined discretionary credit facilities cash flows operations provides company sufficient capital resources liquidity manage routine operations meet debt service obligations fund projected capital expenditures discretionary lines credit renewed borrowings lines credit otherwise become unavailable company expects refinance debt arranging additional committed bank facilities longterm borrowing alternatives following table summarizes companys contractual cash obligations commercial commitments september 30 2002 thousands accounting pronouncements effective october 1 2001 company adopted financial accounting standards board statement 142 goodwill intangible assets sfas 142 sfas 142 requires goodwill longer amortized earnings instead must reviewed possible impairment company ceased amortization goodwill beginning october 1 2001 according requirements sfas 142 company performed transitional fair value based impairment test goodwill determined fair value exceeded recorded amount october 1 2001 therefore impairment loss recorded companys net goodwill balance september 30 2002 assessed management fully recoverable august 2001 financial accounting standards board fasb issued sfas 143 accounting asset retirement obligations sfas 143 sfas 143 requires fair value liability asset retirement legal obligation recognized period incurred liability initially recorded associated costs capitalized increasing carrying amount related longlived asset time liability accreted present value period capitalized cost depreciated useful life related asset sfas 143 effective fiscal years beginning june 15 2002 sfas 143 requires entities record cumulative effect change accounting principle income statement period adoption company adopt sfas 143 october 1 2002 expect adoption standard material impact companys financial position results operations august 2001 fasb issued sfas 144 accounting impairment disposal longlived assets sfas 144 sfas 144 provides new guidance recognition impairment losses longlived assets held used disposed also broadens definition constitutes discontinued operation results discontinued operation measured presented sfas 144 supercedes sfas 121 accounting impairment longlived assets longlived assets disposed apb opinion 30 retaining many requirements two statements sfas 144 assets held sale component entity included discontinued operations cash flows eliminated ongoing operations reporting entity significant continuing involvement discontinued operations prospectively sfas 144 effective fiscal years beginning december 15 2001 sfas 144 expected materially change methods used company measure impairment losses longlived assets may result future dispositions reported discontinued operations greater extent currently permitted company adopt sfas 144 october 1 2002 april 2002 fasb issued sfas 145 rescission sfas statements 4 44 64 amendment sfas 13 technical corrections purpose statement update clarify simplify existing accounting standards adopted statement effective april 30 2002 determined significant impact financial statements july 2002 fasb issued sfas 146 accounting costs associated exit disposal activities sfas 146 standard requires companies recognize costs associated exit disposal activities incurred rather date commitment exit disposal plan examples costs covered standard include lease termination costs certain employee severance costs associated restructuring discontinued operation plant closing exit disposal activity sfas 146 replaces accounting guidance provided eitf issue 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring sfas 146 applied prospectively exit disposal activities initiated december 31 2002 october 2002 financial accounting standards board issued exposure draft accounting stockbased compensation transition disclosure would amend fasb statement 123 accounting stockbased compensation sfas 123 purpose proposed amendment enable companies choose adopt fair value based method report full effect employee stock options financial statements immediately upon adoption make available investors better frequent disclosure cost employee stock options fasb intends issue amendment end 2002 final rules debated remain uncertain company continues disclosureonly provisions sfas 123 see note 12 notes consolidated financial statements additional information regarding companys treatment stock options forward looking statements document contains forwardlooking statements within meaning private securities litigation reform act 1995 section 21e securities exchange act 1934 concerning among things companys prospects expected revenues expenses profits developments business strategies operations subject certain risks uncertainties assumptions forwardlooking statements identified use terms phrases expect estimate project believe achievable anticipate similar terms phrases statements based certain assumptions analyses made company light experience perception historical trends current conditions expected future developments factors believes appropriate circumstances statements subject general economic business conditions international political security conditions oil natural gas industry including drilling activity fluctuating prices crude oil natural gas weather conditions affect conditions oil natural gas industry business opportunities may presented pursued company companys ability expand businesses osca outside us changes law regulations factors many beyond control company one risks uncertainties materializes underlying assumptions prove incorrect actual results may vary materially expected estimated projected required securities laws company assume duty update forward looking statements please see risk factors included elsewhere companys 2002 annual report form 10k item 7aitem 7 management’s discussion analysis financial condition results operations general company’s worldwide operations primarily driven number oil natural gas wells drilled depth drilling conditions wells number well completions level workover activity drilling activity turn largely dependent price crude oil natural gas situation often leads volatility company’s revenue profitability especially united states canada company historically generated excess 50 revenue twelve months ended september 30 2003 active us rig count averaged 966 rigs 11 increase fiscal 2002 twelve months ended september 30 2002 active us rig count averaged 870 rigs 26 decrease fiscal 2001 much decrease occurred number rigs drilling natural gas fiscal 2002 decreased 23 previous fiscal year company’s management believes average us rig count fiscal 2004 approximately 14 higher fiscal 2003 essentially flat current levels approximately 1100 rigs drilling activity outside north america historically less volatile drilling activity us canada active international drilling rigs excluding canada averaged 761 rigs fiscal 2003 increase 4 fiscal 2002 active international drilling rigs excluding canada averaged 730 rigs decrease 1 fiscal 2001 canada drilling activity averaged 341 rigs fiscal 2003 increase 29 fiscal 2002 canadian drilling activity declined fiscal 2002 averaging 265 active drilling rigs 27 previous fiscal year company expects international drilling activity outside canada remain relatively flat fiscal 2004 compared fiscal 2003 drilling activity canada expected increase approximately 5 fiscal 2004 fiscal 2003 critical accounting policies may 2002 sec issued proposed rule “disclosure management’s discussion analysis application critical accounting policies” although sec issued final rule following discussion prepared basis guidelines sec rule proposal proposed rule would require disclosures critical accounting estimates accounting policy deemed critical accounting policy must first include estimate requires company make assumptions matters highly uncertain time accounting estimate made second different estimates company reasonably could used accounting estimate current period changes accounting estimate reasonably likely occur period must material impact presentation company’s financial condition results operations estimates assumptions future events effects cannot perceived certainty company bases estimates historical experience assumptions believed reasonable circumstances results form basis making judgments estimates may change new events occur experience acquired additional information obtained company’s operating environment changes materially different results occur circumstances change additional information becomes known including estimates deemed “critical” proposed rule sec company believes following critical accounting policies used preparation company’s consolidated financial statements significant judgments uncertainties affecting application policies selection accounting estimates including deemed “critical” associated disclosures discussion discussed management audit committee board directors critical accounting policies read conjunction disclosures elsewhere notes consolidated financial statements significant accounting policies discussed note 2 consolidated financial statements goodwill effective october 1 2001 company adopted statement financial accounting standards 142 “goodwill intangible assets” “sfas 142” sfas 142 requires goodwill longer amortized earnings sfas 142 requires goodwill reviewed possible impairment using fair value measurement techniques annual basis circumstances indicate impairment may exist specifically goodwill impairment determined using twostep process first step goodwill impairment test compares fair value reporting unit net book value including goodwill fair value reporting unit exceeds net book value impairment required second step unnecessary fair value reporting unit less net book value second step performed determine amount impairment fair value measures include quoted market price present value technique estimate future cash flows valuation technique based multiples earnings revenue second step compares implied fair value reporting unit net book value reporting unit net book value reporting unit exceeds implied fair value impairment loss shall recognized amount equal excess implied fair value determined manner amount goodwill recognized business combination fair value reporting unit allocated assets liabilities reporting unit acquired business combination fair value reporting unit purchase price paid acquire reporting unit determining fair value implied fair value reporting unit judgmental often involves use significant estimates assumptions estimates assumptions could significant impact whether impairment charge recognized also magnitude impairment charge company’s estimates fair value primarily determined using discounted cash flows approach uses significant assumptions discount rate growth rate rig count company price book increases decreases inflation rate first fiscal quarter 2002 company performed transitional fair value based impairment test utilizing discounted estimated cash flows evaluate possible impairment goodwill determined fair value exceeded net book value october 1 2001 therefore impairment loss recorded impairment adjustment necessary company’s 8797 million goodwill balance september 30 2003 see notes 2 8 notes consolidated financial statements information goodwill segments pension plans pension expense determined accordance provisions sfas 87 “employers’ accounting pensions” accordance sfas 87 company utilizes estimated longterm rate return plan assets difference actual return unrecognized gainloss amortized earnings future periods company determines annual net periodic pension expense pension plan liabilities annual basis using thirdparty actuary determining annual estimate net periodic pension cost company required make evaluation critical assumptions discount rate expected longterm rate return expected increase compensation levels assumptions may effect amount timing future contributions discount rates based high quality corporate fixed income investments longterm rate return assumptions based actuarial review company’s asset allocation returns earned similar investments rate increase compensation levels reviewed actuaries based upon historical salary experience effects actual results differing assumptions accumulated amortized future periods therefore generally affect recognized expense future periods many companies 2002 actual asset returns company’s pension assets adversely impacted continued deterioration equity markets declining interest rates negative asset returns declining discount rates unfavorably affected company’s funded status result calendar year 2004 company minimum pension funding requirement 111 million expect fund amount cash flows operating activities accordance sfas 87 company’s balance noncurrent liabilities us minimum pension liability adjustments 233 million 232 million september 30 2003 2002 respectively company’s balance noncurrent liabilities foreign minimum pension liability adjustments 229 million 213 million september 30 2003 2002 respectively previously unrecognized prior service costs september 30 2003 2002 full amount adjustments net related deferred tax benefit reflected within accumulated comprehensive income reduction stockholders’ equity see note 9 consolidated financial statements information company’s pension plans income taxes effective income tax rates 317 341 340 years ended september 30 2003 2002 2001 respectively rates vary primarily due fluctuations taxes mix domestic versus foreign income deferred tax assets liabilities recognized differences book basis tax basis net assets company providing deferred taxes management considers current tax laws estimates future taxable income available tax planning strategies process also involves making forecasts current future years’ united states taxable income unforeseen events industry conditions may impact forecasts turn affect carrying value deferred tax assets liabilities impact future reported earnings self insurance accruals loss contingencies company selfinsured certain losses relating workers’ compensation general liability property damage employee medical benefits claims filed claims incurred reported management reviews liability quarterly basis liability estimated undiscounted basis using individual casebased valuations statistical analysis based upon judgment historical experience however final cost many claims may known five years longer estimate subject trends loss development factors historical average claim volume average cost settled claims current trends claim costs significant unanticipated changes trends future actual payouts could result additional increases decreases recorded accruals purchased stoploss coverage order limit extent feasible aggregate exposure certain claims assurance coverage adequately protect company liability potential consequences september 30 2003 september 30 2002 selfinsurance accruals totaled 148 million 123 million respectively discussed note 10 consolidated financial statements legal proceedings covering wide range matters pending threatened company possible predict outcome litigation pending company litigation subject many uncertainties possible could adverse developments cases company records provisions consolidated financial statements pending litigation determine unfavorable outcome probable amount loss reasonably estimated believe accruals matters adequate actual loss contingency significantly different estimated loss results operations may understated acquisitions may 31 2002 company completed acquisition osca completion services pressure pumping completion tools completion fluids company based lafayette louisiana operations primarily us gulf mexico brazil venezuela total purchase price 4706 million june 24 2002 company completed 91 million acquisition coiled tubing assets business maritima petroleo e engenharia ltda “maritima” leading provider coiled tubing services brazil see note 3 notes consolidated financial statements additional information regarding acquisitions november 26 2003 company completed acquisition cajun tubular services inc “cajun” total purchase price 81 million net cash cajun located lafayette louisiana provides tubular running testing torque monitoring services gulf mexico market acquisition accounted using purchase method accounting december 2 2003 company acquired assets business petrodrive division grant prideco inc total purchase price 7 million petrodrive located lafayette louisiana leading provider hydraulic diesel hammer services gulf mexico market select markets internationally acquisition accounted using purchase method accounting results operations following table sets forth selected key operating statistics reflecting industry rig count company’s financial results 1 estimate drilling activity measured average active drilling rigs based baker hughes incorporated rig count information 2 includes mexico rig count 87 65 54 2003 2002 2001 respectively mexico included company’s usmexico pressure pumping segment 3 operating income segment excludes goodwill amortization see note 8 notes consolidated financial statements revenue operating income year ended september 30 2003 consolidated revenue increased 15 compared period last year usmexico pressure pumping services revenue increasing 9 international pressure pumping services revenue increasing 13 revenue oilfield services 41 due primarily addition completion fluids completion tools service lines acquired osca may 2002 year ended september 30 2002 consolidated revenue decreased 16 compared year ended september 30 2001 usmexico pressure pumping services revenue decreasing 26 international pressure pumping services decreasing 10 revenue oilfield services 16 due primarily addition completion fluids completion tools service lines acquired osca may 2002 year ended september 30 2003 operating income margins decreased 137 141 reported year ended september 30 2002 due primarily lower us pricing partially offset increased canadian activity year ended september 30 2002 operating income margins declined 141 246 reported year ended september 30 2001 due primarily activity pricing declines us canadian markets see discussion individual segments revenue operating income variance details depreciation expense year ended september 30 2003 depreciation expense increased 153 million compared year ended september 30 2002 primarily result company’s capital spending levels additional depreciation expense certain capital improvements leased equipment year ended september 30 2002 depreciation expense consistent year ended september 30 2001 goodwill amortization result company’s adoption sfas 142 described note 2 notes consolidated financial statements goodwill amortization ceased fiscal 2002 compared 137 million fiscal 2001 research engineering expense marketing expense general administrative expense fiscal 2003 2002 research engineering expense marketing expense general administrative expense remained relatively consistent percentage consolidated revenue fiscal 2002 compared fiscal 2001 expenses total increased 34 million primarily result acquisition osca expenses interest expense increased 70 million year ended september 30 2003 compared year ended september 30 2002 result issuance convertible debt april 2002 used finance portion osca acquisition interest expense decreased 43 million year ended september 30 2002 compared year ended september 30 2001 result lower average debt levels fiscal 2002 interest income increased 01 million year ended september 30 2003 compared year ended september 30 2002 result increased cash equivalents balance interest income fiscal 2002 20 million compared 26 million fiscal 2001 income derived investing excess cash operating activities expense income net year ended september 30 2003 compared year ended september 30 2002 expense net increased 05 million result gains insurance recoveries 2002 year ended september 30 2002 compared year ended september 30 2001 income net decreased 69 million primarily result gain sale equity investment 2001 additional details account see note 12 notes consolidated financial statements income taxes primarily result higher profitability certain international jurisdictions statutory tax rate less us tax rate effective tax rate 317 year ended september 30 2003 compared 341 year ended september 30 2002 effective tax rate relatively constant fiscal 2002 2001 usmexico pressure pumping segment usmexico pressure pumping segment primarily provides stimulation cementing services petroleum industry us mexico stimulation services designed improve flow oil natural gas producing formations cementing services consists pumping cement slurry well casing wellbore isolate fluids might otherwise damage casing andor affect productivity could migrate different zones drilling completion phase well see “business” included elsewhere company’s 2003 annual report form 10k information operations results fiscal 2003 compared fiscal 2002 revenue fiscal 2003 9826 million increase 839 million 93 compared fiscal 2002 revenue increased due primarily 11 increase us drilling activity increased market share partially offset lower us prices fiscal 2003 compared fiscal 2002 operating income fiscal 2003 1903 million increase 12 million 06 fiscal 2002 operating income increased result activity increases market share increases labor equipment efficiencies increases mostly offset deterioration prices received company pressure pumping services compared fiscal 2002 decline resulting prices pumping services occurred primarily first quarter fiscal 2003 results fiscal 2002 compared fiscal 2001 revenue 8987 million decrease 3207 million 26 compared fiscal 2001 decline primarily due decreased drilling workover activity declined 26 compared fiscal 2001 addition prices company’s pressure pumping services us market weakened fiscal 2002 operating income 1891 million decrease 2360 million 555 compared fiscal 2001 decrease due primarily decreased revenue resulting decline drilling workover activity along corresponding decline prices company’s products services company’s average us pricing declined approximately 7 fiscal 2001 also contributing decline increased labor costs percentage revenue higher depreciation resulting us fleet recapitalization initiative program began late 1998 rebuild upgrade company’s core fleet fracturing pumping units us outlook company’s management believes average us rig count fiscal 2004 approximately 14 higher fiscal 2003 essentially flat current levels approximately 1100 rigs international pressure pumping segment international pressure pumping segment primarily provides stimulation cementing services petroleum industry outside us mexico stimulation services designed improve flow oil natural gas producing formations cementing services consists pumping cement slurry well casing wellbore isolate fluids might otherwise damage casing andor affect productivity could migrate different zones drilling completion phase well see “business” included elsewhere company’s 2003 annual report form 10k information results fiscal 2003 compared fiscal 2002 revenue fiscal 2003 8018 million increase 892 million 13 fiscal 2002 canada revenues increased 29 compared fiscal 2002 corresponding 29 increase average active drilling rigs canada fiscal 2002 first quarter fiscal 2003 activity increase primarily shallow drilling areas southern canada warm weather delayed rig movement north area historically higher revenue per job addition canada favorable exchange rate effect us dollar weakened canadian dollar compared fiscal 2002 revenues russia increased 24 fiscal 2002 due revenues associated service rigs acquired third quarter fiscal 2002 partially offset activity delays result extremely cold weather first quarter fiscal 2003 asia pacific revenue increased 8 prior fiscal year result activity market share increases malaysia new zealand europe africa revenue increased 12 fiscal 2002 due strong coiled tubing cementing activity norway africa revenue latin america increased 2 fiscal 2002 primarily result increased market share brazil acquisition maritima june 2002 commissioning blue shark stimulation vessel april 2002 increases latin america mostly offset declines venezuela result national labor strike addition declines india resulting activity declines operating income 907 million increase 186 million 26 2002 fiscal year favorable foreign exchange rates canada increased revenue minimal impact operating income expenses also denominated canadian dollars increase operating income primarily due activity increases improved labor equipment utilization efficiencies headcount year ended september 30 2003 decreased 1 compared fiscal 2002 revenue increasing 892 million 13 results fiscal 2002 compared fiscal 2001 revenue fiscal 2002 7126 million decrease 821 million 103 fiscal 2001 revenue decrease largely attributable company’s canadian operations 27 decrease revenue corresponding 27 decline drilling activity fiscal 2001 company also decrease revenue latin america 19 compared fiscal 2001 due primarily activity declines argentina venezuela result political uncertainties economic declines revenue operations eastern hemisphere includes company’s operations europe africa middle east asia pacific russia china increased 5 fiscal 2001 led increases middle east increased activity india kazakhstan main contributors middle east growth operating income 721 million decrease 547 million 43 fiscal 2001 primarily due reduced activity canada political uncertainties economic declines argentina venezuela addition approximately 4 million combined costs devaluation argentina’s currency severance costs incurred connection reductions personnel canada latin america second quarter fiscal 2002 eastern hemisphere experienced 4 decrease operating income fiscal 2001 primarily due decreased profitability europe africa region outlook company expects international drilling activity outside canada remain relatively flat fiscal 2004 compared fiscal 2003 drilling activity canada expected increase approximately 5 fiscal 2004 fiscal 2003 effective july 1 2003 company implemented price book increase 5 canada phased next several quarters degree customer acceptance price book increase depend activity levels competitive pressures currently canadian revenue generated new price book oilfield services segment oilfield services segment consists production chemicals casing tubular services process pipeline services acquisition osca may 31 2002 completion tools completion fluids services us select markets internationally see “business” included elsewhere company’s 2003 annual report form 10k information results fiscal 2003 compared fiscal 2002 revenue 3585 million increase 1048 million 41 compared fiscal 2002 increase due primarily addition completion fluids completion tools service lines acquired osca may 31 2002 oilfield services revenue excluding completion fluids completion tools increased 9 primarily result geographic expansion casing tubular services process pipeline services operating income company’s oilfield services segment 499 million increase 197 million 65 prior year increase due primarily addition completion fluids completion tools service lines acquired osca may 31 2002 oilfield services operating income excluding completion fluids completion tools increased 125 primarily result geographic expansion casing tubular services process pipeline services consistent increase revenue mentioned results fiscal 2002 compared fiscal 2001 revenue 2537 million increase 347 million 16 compared fiscal 2001 approximately 32 million increase relates completion fluids completion tools service lines acquired osca effective may 31 2002 oilfield services revenue excluding completion fluids completion tools increased 3 fiscal 2002 compared fiscal 2001 casing tubular service revenue increased 15 activity improvements expansion west africa middle east process pipeline production chemicals division revenue flat compared fiscal 2001 operating income company’s oilfield services segment 302 million decrease 42 million 12 prior year despite increase revenue reduced profit margins process pipeline services operations combined 17 million costs associated acquisition osca consisting primarily disposal completion tools deemed obsolete result combination oilfield services operating income excluding completion fluids completion tools decreased 11 due reduced profit margins process pipeline service operations outlook expect revenue segment increase modestly fiscal 2004 primarily attributable expanded markets completion tools completion fluids business financial position liquidity financial position company’s working capital increased 1787 million september 30 2003 compared september 30 2002 cash equivalents increased 1929 million driven primarily positive cash flow operations company’s longterm debt consists fixed term instruments therefore cash equivalents used pay debt fiscal 2003 accounts receivable increased 1054 million accounts payable increased 512 million result increased activity result higher taxable income 2003 utilizing net operating loss carryforwards current tax liability increased 405 million second fiscal quarter 2002 company sold convertible senior notes received gross proceeds 4084 million see discussion liquidity capital resources company used 4001 million aggregate net proceeds fund substantial portion purchase price acquisition osca may 31 2002 capital expenditures company anticipates spending approximately 200 million fiscal 2004 compared 167 million spent 2003 179 million spent 2002 2004 capital expenditure program expected consist primarily spending enhancement company’s existing pressure pumping equipment continued investment us fracturing fleet recapitalization initiative stimulation expansion internationally company made significant progress us fleet recapitalization initiative approximately 65 complete actual amount 2004 capital expenditures depend primarily maintenance requirements expansion opportunities expected funded cash flows operating activities liquidity capital resources june 2001 company replaced existing credit facility new 400 million committed line credit “committed credit facility” committed credit facility consists 200 million 364day commitment renews annually option lenders 200 million threeyear commitment current committed credit facility expires june 2004 company expects replace facility year outstanding borrowings committed credit facility september 30 2003 addition committed credit facility company 1197 million various unsecured discretionary lines credit september 30 2003 expire bank’s discretion requirements commitment fees compensating balances connection lines credit interest borrowings based prevailing market rates 59 million 35 million outstanding borrowings lines credit september 30 2003 september 30 2002 respectively june 2001 company repurchased retired 46 million 7 notes maturing 2006 recorded associated debt extinguishment costs 17 million classified expense consisting mainly 13 million early payment premium september 30 2003 september 30 2002 company issued outstanding 789 million 7 notes april 24 2002 company sold convertible senior notes face value maturity 5164 million gross proceeds 4084 million notes unsecured senior obligations rank equally right payment company’s existing future senior unsecured indebtedness company used aggregate net proceeds 4001 million fund substantial portion purchase price acquisition osca closed may 31 2002 general corporate purposes 4149 million 4102 million outstanding convertible senior notes september 30 2003 september 30 2002 respectively notes mature 2022 cannot called company three years issuance company exercises right call notes redemption price must paid cash holders notes require company repurchase notes third fifth tenth fifteenth anniversaries issuance company option pay repurchase price cash stock issue price notes 79076 1000 face value represents annual yield maturity 1625 yield maturity 050 per year issue price paid semiannually cash life security notes convertible bj services common stock initial rate 149616 shares 1000 face amount note rate results initial conversion price 5285 per share based purchaser’s original issue discount represents premium 45 april 18 2002 closing sale price company’s common stock new york stock exchange 3645 per share company option currently ability intent settle notes surrendered conversion using cash generally except upon occurrence specified events including credit rating downgrade investment grade holders notes entitled exercise conversion rights company’s stock price greater specified percentage beginning 120 declining 110 maturity notes accreted conversion price per share september 30 2003 accreted conversion price per share would 5356 calendar year 2004 company minimum pension funding requirement 111 million expected funded cash flows operating activities company’s total debt net cash 119 total capitalization total capitalization equals sum debt net cash stockholders’ equity september 30 2003 compared 223 september 30 2002 committed credit facility includes various customary covenants provisions including maintenance certain profitability solvency ratios none materially restrict company’s activities company currently compliance covenants imposed terms indebtedness management believes committed credit facility combined discretionary credit facilities cash flows operations provide company sufficient capital resources liquidity manage routine operations meet debt service obligations fund projected capital expenditures discretionary lines credit renewed borrowings lines credit otherwise become unavailable company expects refinance debt arranging additional committed bank facilities longterm borrowing alternatives balance sheet transactions december 1999 company contributed certain pumping service equipment limited partnership equipment used provide services company’s customers company pays service fee period least six years 13 years approximately 12 million annually accounted operating lease included “obligations equipment financing arrangements” contractual obligations section company owns 1 interest limited partnership transaction resulted gain deferred amortized 13 years balance deferred gain 339 million 478 million september 30 2003 september 30 2002 respectively agreement permits substitution equipment within partnership long implied fair value new property transferred date substitution equals exceeds implied fair value defined current property partnership replaced company received partnership approval september 2003 substitute certain pumping service equipment accounted exchange likekind assets earnings impact since earnings process yet culminated result substitutions deferred gain reduced 92 million september 30 2003 september 2010 company option obligation purchase pumping service equipment approximately 32 million 1997 company contributed certain pumping service equipment limited partnership equipment used provide services company’s customers company pays service fee period least eight years 14 years approximately 10 million annually accounted operating lease included “obligations equipment financing arrangements” contractual obligations section company owns 1 interest limited partnership transaction resulted gain deferred amortized 12 years balance deferred gain 160 million 188 million september 30 2003 september 30 2002 respectively agreement permits substitution equipment within partnership long implied fair value new property transferred date substitution equals exceeds implied fair value defined current property partnership replaced company received partnership approval october 2003 substitute certain pumping service equipment accounted exchange likekind assets earnings impact since earnings process yet culminated result substitutions deferred gain reduced 141 million subsequent september 30 2003 june 2009 company option obligation purchase pumping service equipment approximately 27 million contractual obligations following table summarizes company’s contractual cash obligations commercial commitments september 30 2003 thousands accounting pronouncements august 2001 fasb issued sfas 143 “accounting asset retirement obligations” “sfas 143” sfas 143 requires fair value liability asset retirement legal obligation recognized period incurred liability initially recorded associated costs capitalized increasing carrying amount related longlived asset time liability accreted present value period capitalized cost depreciated useful life related asset sfas 143 effective fiscal years beginning june 15 2002 sfas 143 requires entities record cumulative effect change accounting principle income statement period adoption company adopted sfas 143 october 1 2002 company asset retirement obligation “aro” respect machinery equipment permanently affixed decks certain leased vessels company obligated remove machinery equipment restore vessel original condition upon returning vessel owner company determined fair value aro using “expected cash flow” approach probability weighting multiple scenarios related outcomes cumulative effect adoption sfas 143 effect earnings per share aro 31 million october 1 2002 due immaterial effects new standard cumulative basis october 1 2002 presenting pro forma aro disclosures based aro’s october 1 2003 annual basis expect depreciation expense increase approximately 01 million incur accretion expense approximately 02 million result adopting sfas 143 august 2001 fasb issued sfas 144 “accounting impairment disposal longlived assets” “sfas 144” sfas 144 provides new guidance recognition impairment losses longlived assets held used disposed also broadens definition constitutes discontinued operation results discontinued operation measured presented sfas 144 supercedes sfas 121 “accounting impairment longlived assets longlived assets disposed of” apb opinion 30 retaining many requirements two statements sfas 144 assets held sale component entity included discontinued operations cash flows eliminated ongoing operations reporting entity significant continuing involvement discontinued operations prospectively sfas 144 effective fiscal years beginning december 15 2001 sfas 144 materially change methods used company measure impairment losses longlived assets may result future dispositions reported discontinued operations greater extent currently permitted company adopted sfas 144 october 1 2002 july 2002 fasb issued sfas 146 “accounting costs associated exit disposal activities “sfas 146” standard requires companies recognize costs associated exit disposal activities incurred rather date commitment exit disposal plan examples costs covered standard include lease termination costs certain employee severance costs associated restructuring discontinued operation plant closing exit disposal activity sfas 146 replaces accounting guidance provided eitf issue 943 “liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring” sfas 146 applied prospectively exit disposal activities initiated december 31 2002 november 2002 fasb interpretation 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others interpretation fasb statements 5 57 107 rescission fasb interpretation 34” “fin 45” issued interpretation requires upon issuance guarantee entity must recognize liability fair value obligation assumes obligation interpretation intended improve comparability financial reporting requiring identical accounting guarantees issued separately identified consideration guarantees issued without separately identified consideration fin 45’s provisions initial recognition measurement applied prospective basis guarantees issued modified december 31 2002 irrespective guarantor’s fiscal yearend guarantor’s previous accounting guarantees issued date fin 45’s initial application may revised restated reflect effect recognition measurement provisions fin 45 company adopted fin 45 january 1 2003 liabilities required recognized upon adoption company’s current guarantees disclosed note 10 notes consolidated financial statements december 2002 fasb issued sfas 148 “accounting stockbased compensationtransition disclosure amendment fasb statement 123 accounting stockbased compensation” “sfas 148” statement amends sfas 123 provide alternative methods transition voluntary change fair valuebased method accounting stockbased employee compensation addition statement amends disclosure requirements sfas 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results statement also requires effects disclosed prominently specifying form content location disclosures sfas 148 intended improve prominence clarity pro forma disclosures required sfas 123 prescribing specific tabular format requiring disclosure “summary significant accounting policies” equivalent addition statement intended improve timeliness disclosures requiring inclusion financial reports interim periods sfas 148 also amends certain disclosure requirements apb 25 statement effective financial statements fiscal years ending december 15 2002 effective financial reports containing condensed financial statements interim periods beginning december 15 2002 company adopt fair value based method accounting stockbased employee compensation therefore adoption sfas 148 january 1 2003 impacted disclosures financial results company january 2003 fasb issued fasb interpretation 46 “fin 46” “consolidation variable interest entities” fin 46 clarifies application accounting research bulletin 51 “consolidated financial statements” certain entities equity investors characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support parties fin 46 applies immediately variable interest entities created january 31 2003 variable interest entities enterprise obtains interest date applies first fiscal year interim period beginning june 15 2003 variable interest entities enterprise holds variable interest acquired february 1 2003 fin 46 applies public enterprises beginning applicable interim annual period company adopted fin 46 july 1 2003 adoption provisions fin 46 material impact company’s financial position results operations september 2003 fasb issued exposure draft regarding “employers’ disclosures pensions postretirement benefits” would change measurement recognition plans required existing accounting pronouncements however would replace sfas 132 “employers’ disclosures pensions postretirement benefits” “sfas 132” implemented proposed would retain disclosure requirements sfas 132 would require additional disclosures assets obligations cash flows net periodic benefit cost defined benefit pension plans postretirement benefit plans proposed effective date would fiscal years december 15 2003 addition would additional disclosure requirements interimperiod financial reports first fiscal quarter year following initial application annual disclosure requirements since exposure draft revises disclosure requirements material impact company’s financial position results operations nongaap financial measures nongaap financial measure numerical measure registrant’s historical future financial performance financial position cash flows 1 excludes amounts subject adjustments effect excluding amounts included directly comparable measure calculated presented accordance gaap statement income balance sheet statement cash flows 2 includes amounts subject adjustments effect including amounts excluded directly comparable measure calculated presented time company utilizes nongaap financial measures common nongaap financial measures used company include ebitda margin free cash flow net debt net interest expense ebitda earnings interest taxes depreciation amortization computed starting net income adding income tax expense adding interest expense deducting interest income adding depreciation amortization comparable gaap measure cash flow operating activities depicted consolidated statement cash flows ebitda less income tax expense less interest expense plus interest income plus minus changes working capital plus minority interest plus unearned compensation plus deferred taxes reconciles cash flow operating activities ebitda margin simply ebitda percentage revenue management believes ebitda margin provide useful information investors represent measure pretax cash flow company prior debt service requirements free cash flow computed starting net income adding depreciation amortization deducting capital expenditures comparable gaap measure cash flow operating activities free cash flow plus capital expenditures plus changes working capital plus minority interest plus unearned compensation plus deferred taxes reconciles cash flow operating activities management believes free cash flow provides useful information investors represents cash excess capital commitments available company operate business meet nondiscretionary expenditures net debt net interest expense easily calculated gaap measures net debt computed adding shortterm longterm debt less cash net interest expense computed subtracting interest income interest expense forward looking statements document contains forwardlooking statements within meaning private securities litigation reform act 1995 section 21e securities exchange act 1934 concerning among things company’s prospects expected revenue expenses profits developments business strategies operations subject certain risks uncertainties assumptions forwardlooking statements identified use terms phrases “expect” “estimate” “project” “believe” “achievable” “anticipate” similar terms phrases statements based certain assumptions analyses made company light experience perception historical trends current conditions expected future developments factors believes appropriate circumstances statements subject • fluctuating prices crude oil natural gas • conditions oil natural gas industry including drilling activity • reduction prices demand products services • general global economic business conditions • international political instability security conditions hostilities • company’s ability expand products services including acquires new geographic markets • ability generate technological advances compete basis advanced technology • risks operating hazards fire explosion blowouts oil spills • unexpected litigation insurance customer agreements provide protection • changes currency exchange rates • weather conditions affect conditions oil natural gas industry • business opportunities may presented pursued company • competition consolidation company’s business • changes law regulations factors many beyond control company one risks uncertainties materialize underlying assumptions prove incorrect actual results may vary materially expected estimated projected required securities laws company assume duty update forward looking statements list risk factors intended comprehensive see “risk factors” included elsewhere company’s form 10k fiscal year ending september 30 2003 item 7aitem 7 management’s discussion analysis financial condition results operations business company engaged providing pressure pumping services oilfield services oil natural gas industry worldwide services provided three segments usmexico pressure pumping international pressure pumping oilfield services usmexico international pressure pumping segments provide stimulation cementing services petroleum industry throughout world stimulation services designed improve flow oil natural gas producing formations cementing services consists pumping cement slurry well casing wellbore isolate fluids might otherwise damage casing andor affect productivity could migrate different zones primarily drilling completion phase well see “business” included elsewhere annual report form 10k information operations oilfield services segment consists production chemical services casing tubular services process pipeline services completion tools completion fluids services us select markets internationally recent developments october 2004 company received report whistleblower alleging asia pacific region controller misappropriated company funds fiscal 2001 company began internal investigation misappropriation whether inappropriate actions occurred region controller admitted multiple misappropriations 30month period ended april 2002 employment terminated misappropriations identified date total approximately 90 million repaid company misappropriated funds recorded expense consolidated statement operations prior periods therefore restatement misappropriation required result company expects record 90 million income consolidated condensed statement operations quarter ending december 31 2004 company conducted comprehensive review asia pacific region’s balance sheet determined excess liabilities accumulated period years still existed september 30 2004 amount 122 million following adjustments recorded accordance gaap company policy net effect adjustments reported income consolidated statement operations year ended september 30 2004 based review facts circumstances surrounding accounting adjustments believe amounts identified quantitatively qualitatively material financial statements presented annual report form 10k recorded correction amounts fiscal 2004 since individually aggregate material prior periods current year based results investigation date misappropriations accounting adjustments depicted possible internal control operating deficiencies including approval procedures followed required company policy respect cash disbursements proper support accounting entries asiapacific region followed unauthorized practice maintaining supply blank checks presigned managers otherwise responsible reviewing appropriate documentation support approved disbursements addition certain employees responsible ensuring payment disbursements properly documented approved prior authorizing initiation check electronic funds transfer comply company policies performance function operating effectiveness controls compromised asiapacific region personnel responsible ensuring compliance company policies aware unapproved payments lacked proper support take appropriate action report practice company believes operating control deficiencies constitute significant control deficiency discussed operating deficiencies well corrective actions plans audit committee fiscal 2002 company implemented policy changes worldwide disbursements corporate officer authorization required disbursements specified thresholds agreements established banks specifying signing limits regional managers transactions excess designated limits authority require approval corporate officer prior banks’ processing transactions october 2004 company’s management conducted discussions senior accounting personnel worldwide basis misappropriation occurred reminding company’s policies procedures disbursing funds company’s management also required positive written affirmation practice maintaining signed blank checks contravention company policy conducted elsewhere company assigned acting controller asia pacific region taking necessary action ensure review approval processes followed contemplated documented policies procedures company reviewing control policies procedures considering enhancements internal control system company continuing investigate whether additional funds misappropriated beyond 9 million identified date investigate possible inappropriate actions company continues investigation adjustments may recorded consolidated statements operations material adjustments known time october 2004 company also received whistleblower allegations illegal payments foreign officials made asia pacific region audit committee board directors engaged independent counsel conduct separate investigation determine whether illegal payments made investigation continuing found information indicating illegal payments government officials asia pacific region aggregating excess 15 million may made several years market conditions company’s worldwide operations primarily driven number oil natural gas wells drilled depth drilling conditions wells number well completions level workover activity drilling activity turn largely dependent price crude oil natural gas market factors often lead volatility company’s revenue profitability especially united states canada company historically generated excess 50 revenue historical market conditions reflected table twelve months ended september 30 1 estimate drilling activity measured average active drilling rigs based baker hughes incorporated rig count information 2 includes mexico average rig count 110 87 65 fiscal years ended september 30 2004 2003 2002 respectively us rig count demand company’s pressure pumping services us primarily driven oil natural gas drilling activity tends extremely volatile depending current anticipated prices oil natural gas last 10 years lowest us rig count averaged 601 fiscal 1999 highest us rig count averaged 1172 fiscal 2001 company’s management estimates average us rig count fiscal 2005 approximately 6 higher average rig count fiscal 2004 international rig count many countries operate subject political social economic risks may cause volatility within given country however company’s revenue less volatile operate approximately 49 countries provides somewhat balance due significant investment complexity international projects management believes drilling decisions relating projects tend evaluated monitored longerterm perspective regard oil natural gas pricing additionally international market dominated major oil companies national oil companies tend different objectives operating stability typical independent producer north america last 10 years lowest international rig count including canada averaged 828 fiscal 1999 highest international rig count averaged 1184 fiscal 2004 fiscal 2004 active international drilling rigs excluding canada drilling activity averaged 818 compared 761 rigs fiscal 2003 730 rigs fiscal 2002 company expects international drilling activity outside canada remain relatively flat fiscal 2005 compared fiscal 2004 canadian drilling activity averaged 366 active drilling rigs fiscal 2004 compared 341 rigs fiscal 2003 265 rigs fiscal 2002 company anticipates canadian revenue increase based expected 5 increase average rig count fiscal 2005 fiscal 2004 acquisitions november 26 2003 company completed acquisition cajun tubular services inc “cajun” total purchase price 83 million net cash cajun located lafayette louisiana provides tubular running testing torque monitoring services gulf mexico market business complements company’s casing tubular services business oilfield services segment december 2 2003 company acquired assets business petrodrive division grant prideco inc total purchase price 7 million petrodrive located lafayette louisiana leading provider hydraulic diesel hammer services gulf mexico market select markets internationally business complements company’s casing tubular services business oilfield services segment company process completing review determination fair values assets acquired accordingly allocation purchase price subject revision based final determination asset values pro forma financial information acquisitions included annual report form 10k material company may 31 2002 company completed acquisition osca completion services pressure pumping completion tools completion fluids company based lafayette louisiana operations primarily us gulf mexico brazil venezuela total purchase price 4706 million june 24 2002 company completed 91 million acquisition coiled tubing assets business maritima petroleo e engenharia ltda “maritima” leading provider coiled tubing services brazil see note 3 notes consolidated financial statements additional information regarding acquisitions results operations following table sets forth selected key operating statistics reflecting company’s financial results twelve months ended september 30 millions consolidated revenue operating income increased drilling activity us canada pricing improvement us improved revenue service lines oilfield services segment primary reasons increase revenue fiscal 2004 compared fiscal 2003 increased activity international geographic expansion acquisitions primary reasons increase oilfield services segment revenue increases partially offset activity decreases international locations fiscal 2004 operating income also benefited increased revenue described hindered activity declines higher margin locations decreased pricing change product mix certain international markets fiscal 2004 consolidated operating income margins improved 169 137 reported fiscal 2003 fiscal 2003 increase consolidated revenue primarily increased drilling activity us canada revenue oilfield services 41 due primarily addition completion fluids completion tools service lines acquired osca may 2002 fiscal 2003 operating income margins decreased 137 141 reported fiscal 2002 due primarily lower us pricing partially offset increased canadian activity see discussion individual segments revenue operating income variance details usmexico pressure pumping segment results fiscal 2004 compared fiscal 2003 increase revenue primarily result increase combined us mexico drilling activity 20 fiscal 2003 improved pricing us september 30 2004 approximately 62 customers new us price book became effective may 1 2004 increase operating income primarily due increases revenue described coupled labor efficiency gains labor efficiencies achieved increase activity without proportional increase headcount thereby increasing employee utilization per job headcount fiscal 2004 increased 6 compared fiscal 2003 revenue increasing 29 labor efficiencies also obtained utilization newer efficient modern equipment see “business” section information us fleet recapitalization initiative addition pricing increase described directly increases operating income without associated cost results fiscal 2003 compared fiscal 2002 revenue increased primarily due 11 increase us drilling activity partially offset lower us prices fiscal 2003 compared fiscal 2002 operating income increased result activity increases labor efficiencies noted previously headcount fiscal 2003 decreased 2 compared fiscal 2002 revenue increasing 9 increases mostly offset deterioration prices company received pressure pumping services compared fiscal 2002 deterioration prices occurred primarily first quarter fiscal 2003 outlook fiscal 2005 company estimates average us rig count approximately 6 higher average rig count fiscal 2004 determining forecasted rig activity management reviews proprietary projected rig count data provided third party discussions customers regarding expectations upcoming service requirements management analyzes data obtained internal rig count projection determined normal circumstances depending geographic mix types services provided increase rig count usually result increase company’s revenue company also anticipates increasing headcount 1015 us fiscal 2005 expect market disruption mexico compared activity levels experienced 2004 customer mexico resolves budget management issues addition much price competition mexico recently result anticipate mexico revenue decline 2530 fiscal 2005 compared revenue fiscal 2004 company issued price book increase us pressure pumping operations increase averages 7 former price book us effective may 1 2004 degree customer acceptance price book increase depend activity levels competitive pressures international pressure pumping segment results fiscal 2004 compared fiscal 2003 canadian operations primary reason increase revenue canadian revenue increased 31 compared period prior year drilling activity 7 canadian increase revenue attributed activity related gains 16 price improvement 3 favorable foreign exchange translation 12 countries contributing revenue increase include russia india company’s stimulation vessel north sea russia revenue increased 25 increased stimulation activity increases india resulted 49 increase revenue increases revenue partially offset decreased revenue saudi arabia norway nigeria colombia fracturing activity suspended saudi arabia first four months fiscal 2004 addition pricing pressure norway revenue declined 29 result decrease coiled tubing activity change services required customers activity declines nigeria resulted 31 decrease revenue colombia major customers curtailed drilling programs primarily result revenue decreased 27 operating income increased result improved revenues russia india canada described weakening us dollar increased canadian revenue minimal impact operating income expenses denominated canadian dollars increase operating income canada primarily due activity increases also resulted improved labor utilization efficiencies labor efficiencies achieved increasing revenue generated per employee 14 compared period fiscal 2003 operating income increases mostly offset impact activity declines saudi arabia norway colombia company historically enjoyed higher margins addition operating income africa negatively impacted primarily result activity reductions nigeria major customers cost reductions africa norway latin america initiated accommodate current activity levels resulting restructuring costs incurred fiscal 2004 occur fiscal 2003 segment also decline operating profit margins due events causing stimulation vessel north sea temporarily idle addition emergency maintenance experienced fourth fiscal quarter 2004 customer contracted vessel shut operations north sea two months quarter ended june 30 2004 since significant fixed costs associated operating stimulation vessel decline operating profit result two events latter half fiscal 2004 results fiscal 2003 compared fiscal 2002 fiscal 2003 revenue canada russia europe africa asia pacific middle east improved compared fiscal 2002 canadian operations primary contributor increase revenue canada revenues increased 29 compared fiscal 2002 corresponding 29 increase average active drilling rigs canada fiscal 2002 first quarter fiscal 2003 activity increase primarily shallow drilling areas southern canada warm weather delayed rig movement north area historically higher revenue per job addition canada favorable exchange rate effect us dollar weakened canadian dollar compared fiscal 2002 revenues russia increased 24 fiscal 2002 due revenues associated service rigs acquired third quarter fiscal 2002 partially offset activity delays result extremely cold weather first quarter fiscal 2003 asia pacific revenue increased 8 prior fiscal year result activity market share increases malaysia new zealand europe africa revenue increased 12 fiscal 2002 due strong coiled tubing cementing activity norway africa revenue latin america increased 2 fiscal 2002 primarily result increased market share brazil acquisition coiled tubing company maritima june 2002 commissioning blue shark stimulation vessel april 2002 increases latin america mostly offset declines venezuela result national labor strike addition revenue lower india resulting activity declines although favorable foreign exchange rates canada increased revenue minimal impact operating income expenses also denominated canadian dollars increase operating income primarily due activity increases improved labor utilization efficiencies headcount fiscal 2003 decreased 1 compared fiscal 2002 revenue increasing 13 outlook compared levels experienced fiscal 2004 company expects international revenue outside canada remain relatively constant fiscal 2005 company anticipates canadian revenue increase based expected 5 increase average rig count fiscal 2005 fiscal 2004 company issued price book increase canadian pressure pumping operations increase averages 5 former price book canada effective august 1 2004 degree customer acceptance price book increase depend activity levels competitive pressures oilfield services segment results fiscal 2004 compared fiscal 2003 excluding impact cajun petrodrive acquisitions revenue would increased 19 fiscal 2004 revenue service line within oilfield services increased fiscal 2004 due high oil prices experienced fiscal 2003 many refineries deferred maintenance shutdowns last year fiscal 2004 even though oil prices remained high result process pipeline services perform many process services fiscal 2003 fiscal 2004 increase completion tools business line primarily achieved increase customer activity gulf mexico international expansion reason increase revenue completion fluids casing tubular service business lines excluding impact cajun petrodrive acquisitions operating income would increased 7 fiscal 2004 increase primarily attributable completion tools tubular business lines reasons described increase partially offset decreased margins process pipeline service business completion fluids business process pipeline service business higher margin projects fiscal 2003 compared fiscal 2004 revenue increased norway completion fluids business increased activity lower margin product sales compared prior year results fiscal 2003 compared fiscal 2002 increase revenue due primarily addition completion fluids completion tools service lines acquired osca may 31 2002 oilfield services revenue excluding completion fluids completion tools increased 9 primarily result geographic expansion casing tubular services process pipeline services increase operating income due primarily addition completion fluids completion tools service lines acquired osca may 31 2002 oilfield services operating income excluding completion fluids completion tools increased 13 primarily result geographic expansion casing tubular services process pipeline services consistent increase revenue mentioned outlook expect revenue completion tools completion fluids increase 1015 fiscal 2005 tubular services increase 510 estimate primarily attributable expansion completion tools new international markets expansion casing tubular services us internationally process pipeline services revenue expected decline 10 company focus efforts obtaining projects better margins expenses depreciation expense depreciation expense included cost sales services consolidated statement operations fiscal 2004 depreciation expense increased 55 million compared fiscal 2003 fiscal 2003 depreciation expense increased 153 million compared fiscal 2002 increases depreciation expense primarily result company’s increased capital spending levels additional depreciation expense certain capital improvements leased equipment research engineering marketing general administrative expenses aggregate expenses increased 13 fiscal 2004 compared fiscal 2003 percent revenue expenses consistent periods prior year following table sets forth company’s operating expenses percentage revenue interest expense interest income interest expense increased 70 million fiscal 2003 compared fiscal 2002 result issuance convertible debt april 2002 used finance portion osca acquisition interest income increased 39 million fiscal 2004 compared fiscal 2003 increase resulted increased cash equivalents balance expense income net fiscal 2004 company recorded gain 864 million halliburton award see note 10 notes consolidated financial statements addition 122 million recorded reversal excess liabilities asiapacific region see recent developments note 16 notes consolidated financial statements fiscal 2003 compared fiscal 2002 expense net increased 05 million increase result gains insurance recoveries 2002 additional details account see note 12 notes consolidated financial statements income taxes effective tax rate 307 fiscal 2004 317 experienced fiscal 2003 primarily due business tax credits realized third quarter fiscal 2004 primarily result higher profitability certain international jurisdictions statutory tax rate less us tax rate effective tax rate 317 fiscal 2003 compared 341 fiscal 2002 liquidity capital resources historical cash flow following table sets forth historical cash flows twelve months ended september 30 millions fiscal company’s working capital increased 428 million september 30 2004 compared september 30 2003 primarily result increase cash equivalents shortterm investments accounts receivable partially offset increase accounts payable reclassification convertible senior notes shortterm see note 5 notes consolidated financial statements cash equivalents plus shortterm investments increased 3770 million since september 30 2003 result increased activity resulted positive cash flow operations proceeds exercise stock options 864 million connection halliburton award see note 10 notes consolidated financial statements accounts receivable increased 780 million accounts payable increased 315 million primarily result increase us revenue decrease cash flow investing primarily attributable purchase us treasury bills notes 2299 million may 2004 maturities six ten months fiscal 2004 due poor market performance pension plan investments fiscal 2001 2002 company made required pension contributions 104 million made discretionary contribution additional 9 million july 22 2004 company announced initiation regular quarterly cash dividend declared dividend 08 per common share paid october 15 2004 stockholders record close business september 15 2004 aggregate amount 129 million fiscal 2003 company’s working capital increased 1787 million september 30 2003 compared september 30 2002 cash equivalents increased 1929 million driven primarily positive cash flow operations accounts receivable increased 1108 million accounts payable increased 564 million result increased activity result higher taxable income fiscal 2003 utilizing net operating loss carryforwards current tax liability increased 498 million decreases cash flow used investing cash flow provided financing fiscal 2003 compared fiscal 2002 primarily issuance senior convertible notes fund acquisition osca inc fiscal 2002 addition company repurchased treasury stock fiscal 2002 see note 14 notes consolidated financial statements liquidity capital resources cash flow operations expected primary source liquidity fiscal 2005 sources liquidity also include cash equivalents 4247 million september 30 2004 shortterm investments us treasury securities 2299 million available financing facilities listed millions june 2004 company replaced existing credit facility revolving credit facility “revolving credit facility” permits borrowings 400 million principal amount revolving credit facility includes 50 million sublimit issuance standby letters credit 20 million sublimit swingline loans swingline loans shortterm maturities remaining amounts outstanding revolving credit facility become due payable june 2009 interest outstanding borrowings charged based prevailing market rates company charged various fees connection revolving credit facility including commitment fee based average daily unused portion commitment totalling 05 million fiscal 2004 addition revolving credit facility charges utilization fee outstanding loans letters credit usage revolving credit facility exceeds 33 though charges fiscal 2004 outstanding borrowings revolving credit facility september 30 2004 revolving credit facility includes various customary covenants provisions including maintenance certain profitability solvency ratios none materially restrict company’s activities december 29 2004 company gave notice default lenders revolving credit facility failure comply covenants timely provide lenders annual audited financial statements certain reports similar default notices given entities obligations owed equipment financing partnerships referenced january 13 2005 however debt instruments earliest date event default permitting acceleration indebtedness termination credit facilities lenders could occur result delay furnishing financial statements reports january 29 2005 since company expects furnish financial statements reports date defaults cured event default occur debt instruments result delay january 26 2005 company compliance financial covenants borrowings revolving credit facility cash equivalents shortterm investments excess indebtedness addition revolving credit facility company 942 million various unsecured discretionary lines credit september 30 2004 expire various dates within next 12 months requirements commitment fees compensating balances connection lines credit interest borrowings based prevailing market rates 38 million 59 million outstanding borrowings lines credit september 30 2004 september 30 2003 respectively management believes cash flow operations combined cash equivalents shortterm investments revolving credit facility discretionary credit facilities provide company sufficient capital resources liquidity manage routine operations meet debt service obligations fund projected capital expenditures repurchase common stock pay regular quarterly dividend support development shortterm longterm operating strategies discretionary lines credit renewed borrowings lines credit otherwise become unavailable company expects refinance debt arranging additional committed bank facilities longterm borrowing alternatives september 30 2004 september 30 2003 company issued outstanding 789 million unsecured 7 series b notes due february 1 2006 net discount april 24 2002 company sold convertible senior notes face value maturity 5164 million gross proceeds 4084 million notes unsecured senior obligations rank equally right payment company’s existing future senior unsecured indebtedness company used aggregate net proceeds 4001 million fund substantial portion purchase price acquisition osca closed may 31 2002 general corporate purposes 4196 million 4149 million outstanding convertible senior notes september 30 2004 september 30 2003 respectively notes mature 2022 cannot called company three years issuance company exercises right call notes redemption price must paid cash holders notes require company repurchase notes april 2005 fifth tenth fifteenth anniversaries issuance company option pay repurchase price cash stock issue price notes 79076 1000 face value represents annual yield maturity 1625 yield maturity 050 per year issue price paid semiannually cash life security notes convertible bj services common stock initial rate 149616 shares 1000 face amount note rate results initial conversion price 5285 per share based purchaser’s original issue discount represents premium 45 april 18 2002 closing sale price company’s common stock new york stock exchange 3645 per share company option currently ability intent settle notes surrendered conversion using cash generally except upon occurrence specified events including credit rating downgrade investment grade holders notes entitled exercise conversion rights company’s stock price greater specified percentage beginning 120 declining 110 maturity notes accreted conversion price per share september 30 2004 accreted conversion price per share would 5417 cash requirements described earlier holders convertible senior notes require company repurchase notes april 2005 company option settle repurchase price cash stock holders call notes company ability intent satisfy obligation using cash company anticipates capital expenditures 270 290 million fiscal 2005 compared 201 million 2004 167 million 2003 179 million 2002 2005 capital expenditure program expected consist primarily spending enhancement company’s existing pressure pumping equipment continued investment us fracturing fleet recapitalization initiative stimulation expansion internationally 1998 company embarked program replace aging us fracturing pump fleet new efficient higher horsepower pressure pumping equipment company made significant progress program approximately 83 complete fiscal 2004 company expanded us fleet recapitalization initiative include additional equipment cementing nitrogen acidizing begin recapitalizing pressure pumping equipment canada fiscal 2005 actual amount 2005 capital expenditures depend primarily maintenance requirements expansion opportunities fiscal 2005 company’s minimum pension postretirement funding requirements anticipated approximately 90 million due expiration favorable tax provisions depreciation useage tax credits tax attributes fiscal 2004 expect incremental increase cash paid income taxes least 45 million fiscal 2005 company anticipates paying cash dividends amount 08 per common share quarterly basis fiscal 2005 based shares outstanding september 30 2004 aggregate annual amount would 520 million however board directors must approve dividend quarter ability change dividend policy time following table summarizes company’s contractual cash obligations september 30 2004 thousands 1 net original issue discounts 2 includes agreements purchase goods services approved specify significant terms pricing quantity timing company policy require purchase order completed items 200 miscellaneous items office supplies 3 includes expected cash payments longterm liabilities reflected consolidated balance sheet amounts timing payment known amounts include asset retirement obligations known pension funding requirements postretirement benefit obligation management compensation agreements environmental accruals miscellaneous longterm obligations amounts exclude deferred gains see “off balance sheet transactions” pension obligations funding requirements uncertain longterm contingent liabilities company expects cash equivalents shortterm investments maturing fiscal 2005 cash flow operations generate sufficient cash flow fund cash requirements described balance sheet transactions december 1999 company contributed certain pumping service equipment limited partnership company owns 1 interest limited partnership equipment used provide services company’s customers company pays service fee period least six years 13 years approximately 12 million annually accounted operating lease included “obligations equipment financing arrangements” contractual cash obligations table company assessed terms agreement determined variable interest entity defined fin 46 consolidation variable interest entities however company deemed primary beneficiary therefore consolidation required transaction resulted gain deferred amortized 13 years balance deferred gain 266 million 339 million september 30 2004 september 30 2003 respectively agreement permits substitution equipment within partnership long implied fair value new property transferred date substitution equals exceeds implied fair value defined current property partnership replaced company received partnership approval july 2004 substitute certain pumping service equipment accounted exchange likekind assets earnings impact since earnings process yet culminated result substitutions deferred gain reduced 33 million september 2010 company option obligation purchase pumping service equipment approximately 32 million 1997 company contributed certain pumping service equipment limited partnership company owns 1 interest limited partnership equipment used provide services company’s customers company pays service fee period least eight years 13 years approximately 10 million annually accounted operating lease included “obligations equipment financing arrangements” contractual cash obligations table company assessed terms agreement determined variable interest entity defined fin 46 consolidation variable interest entities however company deemed primary beneficiary therefore consolidation required transaction resulted gain deferred amortized 12 years balance deferred gain 04 million 160 million september 30 2004 september 30 2003 respectively agreement permits substitution equipment within partnership long implied fair value new property transferred date substitution equals exceeds implied fair value defined current property partnership replaced company received partnership approval october 2003 july 2004 substitute certain pumping service equipment accounted exchange likekind assets earnings impact since earnings process yet culminated result substitutions deferred gain reduced 141 million october 2003 13 million july 2004 june 2009 company option obligation purchase pumping service equipment approximately 27 million contractual obligations company routinely issues parent company guarantees “pcg’s” connection service contracts entered company’s subsidiaries issuance pcg’s frequently condition bidding process imposed company’s customers work countries outside north america pcg’s typically provide company guarantees performance services company’s local subsidiary term pcg’s varies length service contract company arranges issuance variety bank guarantees performance bonds standby letters credit vast majority issued connection contracts company subsidiary entered customers customer right call bank guarantee performance bond standby letter credit event company subsidiary defaults performance services instruments required condition company subsidiary awarded contract typically released upon completion contract balance instruments predominantly standby letters credit issued connection variety company’s financial obligations support fronted insurance programs claims administration funding certain employee benefit plans temporary importation bonds following table summarizes company’s commercial commitments september 30 2004 thousands critical accounting policies may 2002 sec issued proposed rule “disclosure management’s discussion analysis application critical accounting policies” although sec issued final rule following discussion prepared basis guidelines proposal proposed rule would require disclosures critical accounting estimates accounting policy deemed critical accounting policy must first include estimate requires company make assumptions matters highly uncertain time accounting estimate made second different estimates company reasonably could used accounting estimate current period changes accounting estimate reasonably likely occur period must material impact presentation company’s financial condition results operations estimates assumptions future events effects cannot perceived certainty company bases estimates historical experience assumptions believed reasonable circumstances results form basis making judgments estimates may change new events occur experience acquired additional information obtained company’s operating environment changes materially different results occur circumstances change additional information becomes known including estimates deemed “critical” proposed rule sec company believes following critical accounting policies used preparation company’s consolidated financial statements significant judgments uncertainties affecting application policies selection accounting estimates including deemed “critical” associated disclosures discussion discussed management audit committee board directors critical accounting policies read conjunction disclosures elsewhere notes consolidated financial statements significant accounting policies discussed note 2 consolidated financial statements goodwill company accounts goodwill accordance statement financial accounting standards 142 “goodwill intangible assets” “sfas 142” sfas 142 requires goodwill reviewed possible impairment using fair value measurement techniques annual basis circumstances indicate impairment may exist specifically goodwill impairment determined using twostep process first step goodwill impairment test compares fair value reporting unit net book value including goodwill fair value reporting unit exceeds net book value impairment required second step unnecessary fair value reporting unit less net book value second step performed determine amount impairment fair value measures include quoted market price present value technique estimate future cash flows valuation technique based multiples earnings revenue second step compares implied fair value reporting unit net book value reporting unit net book value reporting unit exceeds implied fair value impairment loss shall recognized amount equal excess implied fair value determined manner amount goodwill recognized business combination fair value reporting unit allocated assets liabilities reporting unit acquired business combination fair value reporting unit purchase price paid acquire reporting unit determining fair value implied fair value reporting unit judgmental often involves use significant estimates assumptions estimates assumptions could significant impact whether impairment charge recognized also magnitude impairment charge company’s estimates fair value primarily determined using discounted cash flows approach uses significant assumptions discount rate growth rate terminal value multiples rig count company price book increases decreases inflation rate impairment adjustment necessary company’s 8859 million goodwill balance september 30 2004 see note 2 notes consolidated financial statements information goodwill pension plans pension expense determined accordance provisions sfas 87 “employers’ accounting pensions” accordance sfas 87 company utilizes estimated longterm rate return plan assets difference actual return unrecognized gainloss amortized earnings future periods company determines annual net periodic pension expense pension plan liabilities annual basis using thirdparty actuary determining annual estimate net periodic pension cost company required make evaluation critical assumptions discount rate expected longterm rate return plan assets expected increase compensation levels assumptions may effect amount timing future contributions discount rates based high quality corporate fixed income investments longterm rate return assumptions based actuarial review company’s asset allocation returns earned similar investments rate increase compensation levels reviewed actuaries based upon historical salary experience effects actual results differing assumptions accumulated amortized future periods therefore generally affect recognized expense future periods fiscal 2005 company minimum pension funding requirement 90 million expect fund amount cash flows operating activities see note 9 consolidated financial statements information company’s pension plans income taxes effective income tax rates 307 317 341 years ended september 30 2004 2003 2002 respectively rates vary primarily due fluctuations taxes mix domestic versus foreign income deferred tax assets liabilities recognized differences book basis tax basis net assets company providing deferred taxes management considers current tax laws estimates future taxable income available tax planning strategies process also involves making forecasts current future years’ united states taxable income unforeseen events industry conditions may impact forecasts turn affect carrying value deferred tax assets liabilities impact future reported earnings self insurance accruals loss contingencies company selfinsured certain losses relating workers’ compensation general liability property damage employee medical benefits claims filed claims incurred reported management reviews liability quarterly basis liability estimated undiscounted basis using individual casebased valuations statistical analysis based upon judgment historical experience however final cost many claims may known five years longer estimate subject trends loss development factors historical average claim volume average cost settled claims current trends claim costs significant unanticipated changes trends future actual payouts could result additional increases decreases recorded accruals purchased stoploss coverage order limit extent feasible aggregate exposure certain claims assurance coverage adequately protect company liability potential consequences discussed note 10 consolidated financial statements legal proceedings covering wide range matters pending threatened company possible predict outcome litigation pending company litigation subject many uncertainties possible could adverse developments cases company records provisions consolidated financial statements pending litigation determine unfavorable outcome probable amount loss reasonably estimated believe accruals matters adequate actual loss contingency significantly different estimated loss results operations may understated accounting pronouncements december 2004 fasb issued sfas 123revised 2004 “sfas 123r” sharebased payment revision sfas 123 accounting stockbased compensation supersedes apb 25 accounting stock issued employees noted employee stockbased compensation accounting policy described company record compensation expense stockbased compensation sfas 123r company required measure cost employee services received exchange stock based grantdate fair value limited exceptions cost recognized period employee required provide service exchange award usually vesting period fair value estimated using optionpricing model excess tax benefits defined sfas 123r recognized addition paidin capital effective beginning first interim annual reporting period begins june 15 2005 company currently process evaluating impact sfas 123r financial statements including different optionpricing models pro forma table note 2 notes consolidated financial statements illustrates effect net income earnings per share company applied fair value recognition provisions sfas 123 december 2003 financial accounting standards board “fasb” issued exposure draft amending fasb statement 128 earnings per share “sfas 128” exposure draft would amend computational guidance sfas 128 applying treasury stock method yeartodate diluted earnings per share “eps” sfas 128 requires number incremental shares included denominator determined computing yeartodate weighted average number incremental shares included quarterly diluted eps computation proposed statement number incremental shares included yeartodate diluted eps would computed using average market price common shares yeartodate period proposed statement also would eliminate provisions sfas 128 allow entity rebut presumption contracts option settling either cash stock settled cash addition proposed statement would require shares issued upon conversion mandatorily convertible security included computation basic eps date conversion becomes mandatory current sfas 128 excluded convertible senior notes diluted eps calculation ability intent settle obligation cash instead stock implemented proposed would required include convertible senior notes diluted eps calculation could material effect diluted eps provisions final statement could differ disclosure result actual application final statement could result effects different discussed december 2003 fasb issued fasb statement 132revised 2003 “sfas 132r” employers’ disclosures pensions postretirement benefits standard increases existing disclosure requirements requiring details pension plan assets benefit obligations cash flows benefit costs related information companies required segregate plan assets category debt equity real estate provide certain expected rates return informational disclosures sfas 132r also requires companies disclose various elements pension postretirement benefit costs interimperiod financial statements quarters beginning december 15 2003 see note 9 notes consolidated financial statements complied disclosure requirements sfas 132r january 2003 fasb issued fasb interpretation 46 “fin 46” “consolidation variable interest entities” fin 46 clarifies application accounting research bulletin 51 “consolidated financial statements” certain entities equity investors characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support parties december 2003 fasb issued fin 46r revised certain provisions original interpretation permitted multiple effective dates based upon nature formation date variable interest entity adoption provisions fin 46 material impact company’s financial position results operations see note 10 notes consolidated financial statements october 2004 american jobs creation act 2004 “act” signed law act contains new provisions may impact company’s us income tax liability future years fasb proposed accounting guidance certain act’s provisions issuing two draft fasb staff positions fsps 109a 109b dealing deduction act offers domestic manufacturers temporary lower tax rate repatriated foreign earnings drafted fsps would effective immediately upon final issuance company currently analyzing provisions reflect tax effect period effect becomes probable nongaap financial measures nongaap financial measure numerical measure registrant’s historical future financial performance financial position cash flows 1 excludes amounts subject adjustments effect excluding amounts included directly comparable measure calculated presented accordance gaap statement income balance sheet statement cash flows 2 includes amounts subject adjustments effect including amounts excluded directly comparable measure calculated presented time company utilizes nongaap financial measures common nongaap financial measure used company free cash flow free cash flow computed starting net income adding depreciation amortization deducting capital expenditures comparable gaap measure cash flow operating activities free cash flow plus capital expenditures plus changes working capital plus minority interest plus unearned compensation plus deferred taxes reconciles cash flow operating activities management believes free cash flow provides useful information investors represents cash excess capital commitments available company operate business meet nondiscretionary expenditures forward looking statements document contains forwardlooking statements within meaning private securities litigation reform act 1995 section 21e securities exchange act 1934 concerning among things company’s prospects expected revenue expenses profits developments business strategies operations subject certain risks uncertainties assumptions forwardlooking statements identified use terms phrases “expect” “estimate” “project” “believe” “achievable” “anticipate” similar terms phrases statements based certain assumptions analyses made company light experience perception historical trends current conditions expected future developments factors believes appropriate circumstances statements subject • fluctuating prices crude oil natural gas • conditions oil natural gas industry including drilling activity • reduction prices demand products services • general global economic business conditions • international political instability security conditions hostilities • company’s ability expand products services including acquires new geographic markets • ability generate technological advances compete basis advanced technology • risks operating hazards fire explosion blowouts oil spills • unexpected litigation insurance customer agreements provide protection • changes currency exchange rates • weather conditions affect conditions oil natural gas industry • business opportunities may presented pursued company • competition consolidation company’s business • changes law regulations factors many beyond control company one risks uncertainties materialize underlying assumptions prove incorrect actual results may vary materially expected estimated projected required securities laws company assume duty update forward looking statements list risk factors intended comprehensive see “risk factors” included elsewhere annual report form 10k item 7aitem 7 management’s discussion analysis financial condition results operations business company engaged providing pressure pumping services oilfield services oil natural gas industry worldwide services provided three segments usmexico pressure pumping international pressure pumping oilfield services usmexico international pressure pumping segments provide stimulation cementing services petroleum industry throughout world stimulation services designed improve flow oil natural gas producing formations cementing services consists pumping cement slurry well casing wellbore isolate fluids might otherwise damage casing andor affect productivity could migrate different zones primarily drilling completion phase well see “business” included elsewhere annual report form 10k information operations oilfield services segment consists production chemical services casing tubular services process pipeline services completion tools completion fluids services us select markets internationally investigations regarding misappropriation possible illegal payments october 2004 company received report whistleblower alleging asia pacific region controller misappropriated company funds fiscal 2001 company began internal investigation misappropriation whether inappropriate actions occurred region controller admitted multiple misappropriations totaling approximately 90 million 30month period ended april 2002 misappropriations approximately 90 million repaid company region controller’s employment terminated although unauthorized misappropriations expense company form theft recorded consolidated statement operations periods prior april 2002 90 million repayment represents gain contingency reflected income consolidated condensed statement operations quarter ended december 31 2004 accordance sfas 5 accounting contingencies prior filing report form 10k fiscal 2004 company conducted review asia pacific region’s balance sheet determined net excess accrued liabilities accumulated period years still existed september 30 2004 amount 122 million based comprehensive analysis company identified 95 million excess accrued liabilities asia pacific region reversed fourth quarter fiscal 2005 following adjustments recorded accordance gaap company policy net effect adjustments reported income consolidated statement operations years ended september 30 2005 2004 company continuing investigate whether additional funds misappropriated beyond 90 million originally identified investigate possible inappropriate actions date company identified additional 17 million believes stolen former region controller although unauthorized additional 17 million likely theft expense company recorded consolidated statement operations periods prior april 2002 company continues investigation adjustments may recorded consolidated statements operations material adjustments known time october 2004 company also received whistleblower allegations illegal payments foreign officials made asia pacific region audit committee board directors engaged independent counsel conduct separate investigation determine whether illegal payments made investigation continuing found information indicating significant likelihood payments may illegal made government officials asia pacific region aggregating approximately 26 million several years company voluntarily disclosed information found investigation us department justice “doj” us securities exchange commission “sec” engaged ongoing discussions authorities review matter company special investigation audit committee continuing investigate payments approximately 10 million asia pacific region beyond referenced cases company yet able establish legitimacy transactions reflected underlying documents cases questions adequacy underlying documents support accounting entries payments may prove proper due circumstances surrounding payments company continues investigate determine whether theft improprieties may involved payments previously expensed therefore company believes additional expense required recorded payments connection discussions regarding possible illegal payments asia pacific region us government officials raised question whether company made illegal payments contractor intermediary obtain business country central asia audit committee investigating question company voluntarily disclosed information found investigation doj sec engaged ongoing discussions authorities review matter doj sec authorities broad range civil criminal sanctions us foreign corrupt practices act laws may seek impose corporations individuals appropriate circumstances including limited injunctive relief disgorgement fines penalties modifications business practices compliance programs agencies authorities entered agreements obtained range sanctions several public corporations individuals arising allegations improper payments deficiencies books records internal controls whereby civil criminal penalties imposed including cases multimillion dollar fines sanctions discussions doj sec regarding certain matters described possible accurately predict time matters resolved based current information cannot predict outcome investigations whether reach resolution discussions actions may taken doj sec authorities effect may consolidated financial statements discussed annual report form 10k period ended september 30 2004 misappropriations related accounting adjustments asia pacific region possible certain internal control operating deficiencies fiscal 2002 company implemented policy changes worldwide disbursements march 2005 company assigned new controller asia pacific region enhanced controller’s department addition put place control process improvement managers six regional bases worldwide document enhance test control processes company also made several enhancements accounting policies procedures 2005 company adopted new policies procedures retention international commercial agents company still process reviewing control policies procedures may make enhancements market conditions company’s worldwide operations primarily driven number oil natural gas wells drilled depth drilling conditions wells number well completions level workover activity drilling activity turn largely dependent price crude oil natural gas market factors often lead volatility company’s revenue profitability especially united states canada company historically generated excess 50 revenue historical market conditions reflected table twelve months ended september 30 1 estimate drilling activity measured average active drilling rigs based baker hughes incorporated rig count information 2 includes mexico average rig count 111 110 87 fiscal years ended september 30 2005 2004 2003 respectively us rig count demand company’s pressure pumping services us primarily driven oil natural gas drilling activity tends extremely volatile depending current anticipated prices oil natural gas last 10 years lowest us rig count averaged 601 fiscal 1999 highest us rig count averaged 1323 fiscal 2005 international rig count many countries operate subject political social economic risks may cause volatility within given country however operating approximately 48 countries provides protection volatility risk individual countries due significant investment complexity international projects management believes drilling decisions relating projects tend evaluated monitored longerterm perspective regard oil natural gas pricing additionally international market dominated major oil companies national oil companies tend different objectives operating stability typical independent producer north america last 10 years lowest international rig count including canada averaged 828 fiscal 1999 highest international rig count averaged 1311 fiscal 2005 fiscal 2005 active international drilling rigs excluding canada drilling activity averaged 894 compared 818 rigs fiscal 2004 761 rigs fiscal 2003 canadian drilling activity averaged 417 active drilling rigs fiscal 2005 compared 366 rigs fiscal 2004 341 rigs fiscal 2003 acquisitions november 26 2003 company completed acquisition cajun tubular services inc “cajun” total purchase price 81 million net cash cajun located lafayette louisiana provides tubular running testing torque monitoring services gulf mexico market business complements company’s casing tubular services business oilfield services segment december 2 2003 company acquired assets business petrodrive division grant prideco inc total purchase price 7 million petrodrive located lafayette louisiana leading provider hydraulic diesel hammer services gulf mexico market select markets internationally business complements company’s casing tubular services business oilfield services segment acquisitions resulted total goodwill 62 million pro forma financial information presented annual report form 10k acquisitions material company results operations following table sets forth selected key operating statistics reflecting company’s financial results twelve months ended september 30 millions consolidated revenue operating income increased drilling activity pricing improvement us canada along activity improvements middle east latin america led increase fiscal 2005 revenue compared fiscal 2004 increases experienced fiscal 2005 revenue slightly offset revenue decreases mexico stimulation vessel north sea fiscal 2005 operating income also benefited increased revenue described hindered decrease activity stimulation vessel north sea fiscal 2005 consolidated operating income margins improved 196 169 reported fiscal 2004 fiscal 2004 increased drilling activity us canada pricing improvement us improved revenue service lines oilfield services segment primary reasons increase revenue compared fiscal 2003 increased activity international geographic expansion acquisitions primary reasons increase oilfield services segment revenue increases partially offset activity decreases international locations fiscal 2004 operating income also benefited increased revenue described hindered activity declines higher margin locations decreased pricing change product mix certain international markets fiscal 2004 consolidated operating income margins improved 169 137 reported fiscal 2003 see discussion individual segments revenue operating income variance details usmexico pressure pumping segment results fiscal 2005 compared fiscal 2004 increased us drilling activity 15 fiscal 2004 well improved pricing us led increase revenue september 30 2005 approximately 60 customers new us price book became effective may 1 2005 declines mexico activity reduced revenue 36 mexico slightly offset gains experienced us decrease mexico activity specifically burgos area caused primary customer mexico curtailing spending contract area increases revenue described coupled labor efficiency gains contributed increase operating income labor efficiencies achieved increase activity without proportional increase headcount thereby increasing employee utilization per job headcount fiscal 2005 increased 11 compared fiscal 2004 revenue increasing 33 utilization newer efficient modern equipment also contributed increase operating income see “business” section information us fleet recapitalization initiative addition pricing improvement described directly increased operating income without associated cost revenue increase us operating income slightly offset decrease mexico operations described results fiscal 2004 compared fiscal 2003 increase revenue primarily result increase combined us mexico drilling activity 20 fiscal 2003 improved pricing us increase operating income primarily due increases revenue described coupled labor efficiency gains headcount fiscal 2004 increased 6 compared fiscal 2003 revenue increasing 29 outlook company recently issued price book increase us pressure pumping operations increase averages 11 previous price book us effective november 1 2005 degree customer acceptance price book increase depend activity levels competitive pressures based forecasted increase rig activity price book increase discussed company expects revenue increase 2025 fiscal 2006 compared fiscal 2005 determining forecasted rig activity management reviews proprietary projected rig count data provided third party discussions customers regarding expectations upcoming service requirements management analyzes data obtained internal rig count projection determined normal circumstances depending geographic mix types services provided increase rig count usually result increase company’s revenue company also anticipates increasing headcount approximately 10 us fiscal 2006 international pressure pumping segment results fiscal 2005 compared fiscal 2004 following table summarizes increase revenue fiscal 2005 compared fiscal 2004 operating segments international pressure pumping canadian middle eastern latin american operations primary contributors revenue increase canadian revenue increased result 14 increase activity improved pricing company issued new price book canadian operation june 1 2005 new price book averaged 9 increase previous price book increased fracturing coiled tubing activity india saudi arabia well control work bangladesh major contributions increase middle east average drilling activity latin america increased 19 compared fiscal 2004 primarily enhancing revenue argentina brazil revenue argentina appreciably result increased stimulation coiled tubing activity north sea activity gains uk norway almost entirely offset decreased stimulation vessel activity throughout fiscal 2005 primary customer vessel experienced delays well delivery schedule resulting 53 decline revenue compared fiscal 2004 improvements thailand vietnam mostly offset declines malaysia major customers reduced drilling workover programs leading 29 revenue decline russian revenue increased overall market increase operating income increased result improved revenues described similar usmexico pressure pumping segment labor efficiencies achieved headcount fiscal 2005 increased 5 compared fiscal 2004 revenue increasing 17 operating income increases partially offset lower activity levels company’s stimulation vessel north sea since significant fixed costs associated operating stimulation vessel decline operating profit results fiscal 2004 compared fiscal 2003 following table summarizes change revenue fiscal 2004 compared fiscal 2003 operating segments international pressure pumping canadian operations primary reason increase revenue canadian revenue increased 31 compared period prior year drilling activity 7 canadian increase revenue attributed activity related gains 16 price improvement 3 favorable foreign exchange translation 12 countries contributing revenue increase include russia india company’s stimulation vessel north sea russia revenue increased 25 increased stimulation activity increases india resulted 49 increase revenue increases revenue partially offset decreased revenue saudi arabia norway nigeria colombia fracturing activity suspended saudi arabia first four months fiscal 2004 addition pricing pressure norway revenue declined 29 result decrease coiled tubing activity change services required customers activity declines nigeria resulted 31 decrease revenue colombia major customers curtailed drilling programs primarily result revenue decreased 27 operating income increased result improved revenues russia india canada described weakening us dollar increased canadian revenue minimal impact operating income expenses denominated canadian dollars increase operating income canada primarily due activity increases also resulted improved labor utilization efficiencies labor efficiencies achieved increasing revenue generated per employee 14 compared period fiscal 2003 operating income increases mostly offset impact activity declines saudi arabia norway colombia company historically enjoyed higher margins addition operating income africa negatively impacted primarily result activity reductions nigeria major customers cost reductions africa norway latin america initiated accommodate current activity levels resulting restructuring costs incurred fiscal 2004 occur fiscal 2003 segment also decline operating profit margins due events causing stimulation vessel north sea temporarily idle addition emergency maintenance experienced fourth fiscal quarter 2004 customer contracted vessel shut operations north sea two months quarter ended june 30 2004 since significant fixed costs associated operating stimulation vessel decline operating profit result two events latter half fiscal 2004 outlook company issued price book increase canadian pressure pumping operations increase averages 9 previous price book canada effective june 1 2005 degree customer acceptance price book increase depend activity levels competitive pressures compared levels experienced fiscal 2005 company expects revenue canada increase 2025 international revenue outside canada increase 510 fiscal 2006 estimated increase based forecasted increase rig activity price book increase discussed oilfield services segment results fiscal 2005 compared fiscal 2004 following table summarizes change revenue fiscal 2005 compared fiscal 2004 operating segments oilfield services revenue service line within oilfield services increased fiscal 2005 however increase revenue completion tools minimal due severe hurricane activity experienced gulf mexico company’s fourth fiscal quarter decrease offset increases revenue internationally revenue increase completion fluids result increased product sales us mexico norway tubular services’ revenue benefited increased activity north sea asia pacific fiscal 2005 operating income margins consistent fiscal 2004 service lines operating income improved reasons described however additional costs worker’s compensation write uncollectible accounts receivable results fiscal 2004 compared fiscal 2003 following table summarizes change revenue fiscal 2004 compared fiscal 2003 operating segments oilfield services excluding impact cajun petrodrive acquisitions revenue would increased 19 fiscal 2004 revenue service line within oilfield services increased fiscal 2004 due high oil prices experienced fiscal 2003 compared prior years many refineries deferred maintenance shutdowns 2003 fiscal 2004 result process pipeline services perform many process services fiscal 2003 fiscal 2004 increase completion tools business line primarily achieved increase customer activity gulf mexico international expansion primary reason increase revenue completion fluids casing tubular service business lines excluding impact cajun petrodrive acquisitions operating income would increased 7 fiscal 2004 increase primarily attributable completion tools tubular business lines reasons described increase partially offset decreased margins process pipeline service business completion fluids business process pipeline service business higher margin projects fiscal 2003 compared fiscal 2004 revenue increased norway completion fluids business increased activity lower margin product sales compared prior year outlook fiscal 2006 expect revenue oilfield services increase 510 fiscal 2005 primarily attributable expansion international markets expenses depreciation expense depreciation expense included cost sales services consolidated statement operations fiscal 2005 depreciation expense increased 112 million compared fiscal 2004 fiscal 2004 depreciation expense increased 55 million compared fiscal 2003 increases depreciation expense primarily result company’s increased capital spending levels loss disposal assets rig count experienced double digit growth last three years company’s equipment perform currently working result yearend procedures determined remaining equipment able operate would written fair value usable major components fair value assets based market prices similar assets result 117 million impairment recorded company’s fourth fiscal quarter 2005 reflected corporate results following table sets forth company’s operating expenses percentage revenue research engineering marketing expenses aggregate expenses increased 13 fiscal 2005 compared fiscal 2004 percent revenue expenses relatively consistent periods prior year general administrative expenses legal costs 62 million associated ongoing investigation asia pacific region see “investigations regarding misappropriation possible illegal payments” well fees 109 million related preparations first year section 404 sarbanesoxley act led increases general administrative expenses fiscal 2005 addition due increased activity levels labor costs incentive compensation costs increased fiscal 2005 following table shows interest income interest expense income expense net fiscal 2005 2004 2003 thousands interest expense interest income interest income increased fiscal 2005 result increases average cash equivalents april 2005 company redeemed outstanding convertible senior notes due 2022 4224 million see note 5 notes consolidated financial statements result interest expense decreased fiscal 2005 interest income increased 39 million fiscal 2004 compared fiscal 2003 increase resulted increased average cash equivalents balance expense income net income increased fiscal 2005 due company recording gain 90 million relating recovery misappropriated funds see “investigations regarding misappropriation possible illegal payments” first quarter addition 95 million recorded fourth quarter reflect reversal excess accrued liabilities asia pacific region additional details account see note 12 notes consolidated financial statements fiscal 2004 company recorded gain 864 million halliburton award see note 10 notes consolidated financial statements addition 122 million recorded reversal excess liabilities asia pacific region additional details account see note 12 notes consolidated financial statements income taxes consistent fiscal 2004 fiscal 2005 effective tax rate 307 effective tax rate 307 fiscal 2004 317 experienced fiscal 2003 rates vary primarily due fluctuations taxes mix domestic versus foreign income liquidity capital resources historical cash flow following table sets forth historical cash flows twelve months ended september 30 millions fiscal 2005 company’s working capital increased 1368 million september 30 2005 compared september 30 2004 accounts receivable increased 1547 million inventory increased 532 million accounts payable accrued employee compensation increased 818 million 269 million respectively primarily result increase us canadian activity april 2005 company redeemed outstanding convertible senior notes 4224 million see note 5 notes consolidated financial statements thereby reducing cash equivalents current debt addition outstanding unsecured 7 series b notes amount 790 million classified current fiscal 2005 see note 5 notes consolidated financial statements cash flow provided investing primarily attributable company’s investment us treasury notes maturing 2005 amount 2298 million offset capital expenditures 3238 million fiscal 2005 cash flows used financing primarily result redemption outstanding convertible senior notes referred repurchases company’s common stock totaling 984 million payment dividends amount 519 million fiscal 2005 fiscal 2004 company’s working capital increased 428 million september 30 2004 compared september 30 2003 primarily result increase cash equivalents shortterm investments accounts receivable partially offset increase accounts payable reclassification convertible senior notes shortterm see note 5 notes consolidated financial statements cash equivalents plus shortterm investments increased 3770 million since september 30 2003 result increased activity resulted positive cash flow operations proceeds exercise stock options 864 million connection halliburton award see note 10 notes consolidated financial statements accounts receivable increased 780 million accounts payable increased 315 million primarily result increase us activity decrease cash flow investing primarily attributable purchase us treasury bills notes 2299 million may 2004 maturities six ten months fiscal 2004 due poor market performance pension plan investments fiscal 2001 2002 company made required pension contributions 104 million made discretionary contribution additional 9 million july 22 2004 company announced initiation regular quarterly cash dividend declared dividend 04 per common share paid october 15 2004 stockholders record close business september 15 2004 aggregate amount 129 million liquidity capital resources cash flow operations expected primary source liquidity fiscal 2006 sources liquidity also include cash equivalents 3565 million september 30 2005 available financing facilities listed millions june 2004 company replaced existing credit facility revolving credit facility “revolving credit facility” permits borrowings 400 million principal amount revolving credit facility includes 50 million sublimit issuance standby letters credit 20 million sublimit swingline loans swingline loans shortterm maturities remaining amounts outstanding revolving credit facility become due payable june 2009 interest outstanding borrowings charged based prevailing market rates company charged various fees connection revolving credit facility including commitment fee based average daily unused portion commitment totaling 05 million fiscal 2005 addition revolving credit facility charges utilization fee outstanding loans letters credit usage revolving credit facility exceeds 33 though charges fiscal 2005 date fiscal 2004 outstanding borrowings revolving credit facility september 30 2005 2004 revolving credit facility includes various customary covenants provisions including maintenance certain profitability solvency ratios none materially restrict company’s activities company currently compliance covenants imposed terms revolving credit facility addition revolving credit facility company 443 million available various unsecured discretionary lines credit september 30 2005 expire various dates within next 12 months requirements commitment fees compensating balances connection lines credit interest borrowings based prevailing market rates 34 million 38 million outstanding borrowings lines credit september 30 2005 september 30 2004 respectively management believes cash flow operations combined cash equivalents revolving credit facility discretionary credit facilities provide company sufficient capital resources liquidity manage routine operations meet debt service obligations fund projected capital expenditures repurchase common stock pay regular quarterly dividend support development shortterm longterm operating strategies discretionary lines credit renewed borrowings lines credit otherwise become unavailable company expects refinance debt arranging additional committed bank facilities longterm borrowing alternatives september 30 2005 september 30 2004 company issued outstanding 790 million unsecured 7 series b notes due february 1 2006 net discount classified current september 30 2005 based maturity date based company’s current liquidity company ability pay debt available cash upon maturity however company believes could refinance obligation circumstances warrant april 24 2002 company sold convertible senior notes due 2022 face value maturity 5164 million gross proceeds 4084 million notes unsecured senior obligations ranked equally right payment company’s existing future senior unsecured indebtedness company used aggregate net proceeds 4001 million fund substantial portion purchase price acquisition osca closed may 31 2002 general corporate purposes march 25 2005 company called redemption outstanding convertible senior notes redemption date april 25 2005 aggregate redemption price 4224 million redemption notes funded cash requirements described earlier company’s unsecured 7 series b notes become due february 1 2006 company currently ability pay debt available cash upon maturity company anticipates capital expenditures approximately 450 million fiscal 2006 compared 324 million fiscal 2005 2006 capital expenditure program expected consist primarily spending enhancement company’s existing pressure pumping equipment continued investment us fleet recapitalization initiative stimulation expansion internationally 1998 company embarked program replace aging us fracturing pump fleet new efficient higher horsepower pressure pumping equipment company made significant progress adding new equipment however much older equipment still remains operations due increases market activity us fiscal 2004 company expanded us fleet recapitalization initiative include additional equipment cementing nitrogen acidizing equipment approximately 30 equipment replaced fiscal 2005 recapitalization company’s pressure pumping equipment canada began fiscal 2005 approximately 25 complete fiscal 2005 actual amount fiscal 2006 capital expenditures depend primarily maintenance requirements expansion opportunities company’s ability execute budgeted capital expenditures fiscal 2006 company’s pension postretirement funding requirements anticipated approximately 78 million company anticipates paying cash dividends amount 05 per common share quarterly basis fiscal 2006 based shares outstanding september 30 2005 aggregate annual amount would 647 million however dividends subject approval company’s board directors quarter board ability change dividend policy time company expects cash equivalents cash flow operations generate sufficient cash fund cash requirements described following table summarizes company’s contractual cash obligations september 30 2005 thousands 1 net original issue discounts 2 discussed company option obligation purchase pumping service equipment two partnerships approximately 27 million 32 million 2009 2010 respectively currently company expects purchase pumping service equipment therefore included table 3 includes agreements purchase goods services approved specify significant terms pricing quantity timing company policy require purchase order completed items 200 miscellaneous items office supplies 4 includes expected cash payments longterm liabilities reflected consolidated balance sheet amounts timing payment known amounts include asset retirement obligations known pension funding requirements postretirement benefit obligation environmental accruals miscellaneous longterm obligations amounts exclude deferred gains see “off balance sheet transactions” pension obligations funding requirements uncertain longterm contingent liabilities company expects cash equivalents cash flow operations generate sufficient cash flow fund cash requirements described balance sheet transactions december 1999 company contributed certain pumping service equipment limited partnership company owns 1 interest limited partnership equipment used provide services company’s customers company pays service fee period least six years 13 years approximately 12 million annually accounted operating lease included “equipment financing arrangements” contractual cash obligations table company assessed terms agreement determined variable interest entity defined fin 46 consolidation variable interest entities “fin 46” however company deemed primary beneficiary therefore consolidation required transaction resulted gain deferred amortized 13 years balance deferred gain 221 million 266 million september 30 2005 september 30 2004 respectively agreement permits substitution equipment within partnership long implied fair value new property transferred date substitution equals exceeds implied fair value defined current property partnership replaced company received partnership approval april 2005 july 2004 substitute certain pumping service equipment accounted exchange likekind assets earnings impact since earnings process yet culminated result substitutions deferred gain reduced 11 million 33 million respectively october 2005 company received another partnership approval substitute certain pumping services equipment reducing deferred gain 14 million september 2010 company option obligation purchase pumping service equipment approximately 32 million currently company expects purchase pumping service equipment 2010 1997 company contributed certain pumping service equipment limited partnership company owns 1 interest limited partnership equipment used provide services company’s customers company pays service fee period least eight years 13 years approximately 10 million annually accounted operating lease included “equipment financing arrangements” contractual cash obligations table company assessed terms agreement determined variable interest entity defined fin 46 however company deemed primary beneficiary therefore consolidation required transaction resulted gain deferred amortized 12 years balance deferred gain 03 million 04 million september 30 2005 september 30 2004 respectively agreement permits substitution equipment within partnership long implied fair value new property transferred date substitution equals exceeds implied fair value defined current property partnership replaced company received partnership approval october 2003 july 2004 substitute certain pumping service equipment accounted exchange likekind assets earnings impact since earnings process yet culminated result substitutions deferred gain reduced 141 million october 2003 13 million july 2004 june 2009 company option obligation purchase pumping service equipment approximately 27 million currently company expects purchase pumping service equipment 2009 contractual obligations company routinely issues parent company guarantees “pcg’s” connection service contracts entered company’s subsidiaries issuance pcg’s frequently condition bidding process imposed company’s customers work countries outside north america pcg’s typically provide company guarantees performance services company’s local subsidiary represent financial obligation company term pcg’s varies length service contract company arranges issuance variety bank guarantees performance bonds standby letters credit vast majority issued connection contracts company subsidiary entered customers customer right call bank guarantee performance bond standby letter credit event company subsidiary defaults performance services instruments required condition company subsidiary awarded contract typically released upon completion contract balance instruments predominantly standby letters credit issued connection variety company’s financial obligations support fronted insurance programs claims administration funding certain employee benefit plans temporary importation bonds following table summarizes company’s commercial commitments september 30 2005 thousands critical accounting policies accounting policy deemed critical accounting policy must first include estimate requires company make assumptions matters highly uncertain time accounting estimate made second different estimates company reasonably could used accounting estimate current period changes accounting estimate reasonably likely occur period must material impact presentation company’s financial condition results operations estimates assumptions future events effects cannot perceived certainty company bases estimates historical experience assumptions believed reasonable circumstances results form basis making judgments estimates may change new events occur experience acquired additional information obtained company’s operating environment changes materially different results occur circumstances change additional information becomes known including estimates deemed “critical” proposed rule sec company believes following critical accounting policies used preparation company’s consolidated financial statements significant judgments uncertainties affecting application policies selection accounting estimates including deemed “critical” associated disclosures discussion discussed management audit committee board directors critical accounting policies read conjunction disclosures elsewhere notes consolidated financial statements significant accounting policies discussed note 2 consolidated financial statements goodwill company accounts goodwill accordance statement financial accounting standards 142 “goodwill intangible assets” “sfas 142” sfas 142 requires goodwill reviewed possible impairment using fair value measurement techniques annual basis circumstances indicate impairment may exist specifically goodwill impairment determined using twostep process first step goodwill impairment test compares fair value reporting unit net book value including goodwill fair value reporting unit exceeds net book value impairment required second step unnecessary fair value reporting unit less net book value second step performed determine amount impairment fair value measures include quoted market price present value technique estimate future cash flows valuation technique based multiples earnings revenue second step compares implied fair value reporting unit net book value reporting unit net book value reporting unit exceeds implied fair value impairment loss shall recognized amount equal excess implied fair value determined manner amount goodwill recognized business combination fair value reporting unit allocated assets liabilities reporting unit acquired business combination fair value reporting unit purchase price paid acquire reporting unit determining fair value implied fair value reporting unit judgmental often involves use significant estimates assumptions estimates assumptions could significant impact whether impairment charge recognized also magnitude impairment charge company’s estimates fair value primarily determined using discounted cash flows approach uses significant assumptions discount rate growth rate terminal value multiples rig count company price book increases decreases inflation rate impairment adjustment necessary company’s 8852 million goodwill balance september 30 2005 see note 2 notes consolidated financial statements information goodwill pension plans pension expense determined accordance provisions sfas 87 “employers’ accounting pensions” accordance sfas 87 company utilizes estimated longterm rate return plan assets difference actual return unrecognized gainloss amortized earnings future periods company determines annual net periodic pension expense pension plan liabilities annual basis using thirdparty actuary determining annual estimate net periodic pension cost company required make evaluation critical assumptions discount rate expected longterm rate return plan assets expected increase compensation levels assumptions may effect amount timing future contributions discount rates based high quality corporate fixed income investments longterm rate return assumptions based actuarial review company’s asset allocation returns earned similar investments rate increase compensation levels reviewed actuaries based upon historical salary experience effects actual results differing assumptions accumulated amortized future periods therefore generally affect recognized expense future periods fiscal 2006 company pension postretirement funding requirement 78 million expect fund amount cash flows operating activities see note 9 notes consolidated financial statements information company’s pension plans income taxes effective income tax rates 307 317 years ended september 30 2005 2004 2003 respectively rates vary primarily due fluctuations taxes mix domestic versus foreign income deferred tax assets liabilities recognized differences book basis tax basis net assets company providing deferred taxes management considers current tax laws estimates future taxable income available tax planning strategies process also involves making forecasts current future years’ united states taxable income unforeseen events industry conditions may impact forecasts turn affect carrying value deferred tax assets liabilities impact future reported earnings tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities potentially courts resolution situations inevitably includes degree uncertainty accordingly provide taxes amounts believe ultimately result proceedings addition aforementioned assessments received various taxing authorities provide taxes certain situations assessments received situations accrue income taxes consider probable taxes ultimately payable exceed amounts reflected filed tax returns accordingly taxes provided situations guidance statement financial accounting standards “sfas” 5 accounting contingencies self insurance accruals loss contingencies company selfinsured certain losses relating workers’ compensation general liability property damage employee medical benefits claims filed claims incurred reported management reviews liability quarterly basis liability estimated undiscounted basis using individual casebased valuations statistical analysis based upon judgment historical experience however final cost many claims may known five years longer estimate subject trends loss development factors historical average claim volume average cost settled claims current trends claim costs significant unanticipated changes trends future actual payouts could result additional increases decreases recorded accruals purchased stoploss coverage order limit extent feasible aggregate exposure certain claims assurance coverage adequately protect company liability potential consequences discussed note 10 notes consolidated financial statements legal proceedings covering wide range matters pending threatened company possible predict outcome litigation pending company litigation subject many uncertainties possible could adverse developments cases company records provisions consolidated financial statements pending litigation determine unfavorable outcome probable amount loss reasonably estimated believe accruals matters adequate actual loss contingency significantly different estimated loss results operations may understated accounting pronouncements may 2005 fasb issued sfas 154 “sfas 154” accounting changes error corrections replacement apb opinion 20 accounting changes sfas 3 reporting accounting changes interim financial statements sfas 154 voluntary changes accounting principle well changes pursuant accounting pronouncements include specific transition requirements must applied retrospectively prior periods’ financial statements retrospective application requires cumulative effect change reflected carrying value assets liabilities first period presented offsetting adjustments recorded beginning retained earnings period presented must adjusted reflect period specific effects applying change also new statement change accounting estimate continues accounted period change future periods necessary corrections errors continue reported restating prior period financial statements beginning first period presented material statement effective accounting changes corrections errors made fiscal years beginning december 15 2005 company adopt sfas 154 october 1 2006 adoption material impact company’s financial position results operations since sfas 154 applied prospectively december 2004 fasb issued sfas 123revised 2004 “sfas 123r” sharebased payment revision sfas 123 accounting stockbased compensation “sfas 123” supersedes apb 25 accounting stock issued employees september 30 2005 company recorded compensation expense stock purchase plan stock option plan sfas 123r company required measure cost employee services received exchange stock based grantdate fair value limited exceptions cost recognized period employee required provide service exchange award usually vesting period fair value estimated using optionpricing model excess tax benefits defined sfas 123r recognized addition paidin capital effective october 1 2005 company adopt sfas 123r using modified prospective method modified prospective method company recognize expense beginning october 1 2005 unvested awards granted prior adoption date october 1 2005 remaining vesting period awards new awards granted adoption date expensed vesting period award company currently uses blackscholes option pricing model disclosures stockbased compensation information plans continuing use model sfas 123r determining expense awards stock option plan stock purchase plan company historically expensed fair value awards granted stock incentive plan adoption sfas 123r require company utilize binomial model value stock incentive plan awards anticipate valuation methodology required sfas 123r materially change compensation expense associated awards company historically recognized consolidated statement operations following table summarizes impact adoption sfas 123r plans estimates future grants table based level grants awarded fiscal 2005 actual number awards types awards granted may change respect consolidated statement financial position increase unearned compensation approximately 40 million equally offsetting decrease capital excess par stockholders’ equity information regarding plans see note 13 notes consolidated financial statements october 2004 american jobs creation act 2004 “act” signed law act contains new provisions may impact company’s us income tax liability future years act provides deduction income qualified domestic production activities phased 2005 2010 guidance fasb staff position 1091 application fasb statement 109 “accounting income taxes” tax deduction qualified production activities provided american jobs creation act 2004 deduction treated “special deduction” described fasb statement 109 special deduction effect deferred tax assets liabilities existing enactment date rather impact deduction reported period deduction claimed tax return expect deduction material impact effective tax rate future years act applicable company beginning october 1 2005 december 2004 fasb issued fasb staff position 1092 “fsp 1092” accounting disclosure guidance foreign repatriation provision within american jobs creation act 2004 provides guidance sfas 109 respect recording potential impact repatriation provisions act company’s income tax expense deferred tax liability fsp 1092 states company allowed time beyond financial reporting period enactment evaluate effect act plan reinvestment repatriation foreign earnings purposes applying sfas 109 company considering possibility remitting dividends excess 20 million perhaps materially excess 20 million next fiscal year claim benefits new provision furthermore company believes residual us tax liability possible repatriation would fully offset excess foreign tax credits company nongaap financial measures nongaap financial measure numerical measure registrant’s historical future financial performance financial position cash flows 1 excludes amounts subject adjustments effect excluding amounts included directly comparable measure calculated presented accordance gaap statement income balance sheet statement cash flows 2 includes amounts subject adjustments effect including amounts excluded directly comparable measure calculated presented time company utilizes nongaap financial measures nongaap financial measures used company posted company’s website wwwbjservicescom forward looking statements document contains forwardlooking statements within meaning private securities litigation reform act 1995 section 21e securities exchange act 1934 concerning among things company’s prospects expected revenue expenses profits developments business strategies operations subject certain risks uncertainties assumptions forwardlooking statements identified statements described “outlook” use terms phrases “expect” “estimate” “project” “forecast” “believe” “achievable” “anticipate” similar terms phrases statements based certain assumptions analyses made company light experience perception historical trends current conditions expected future developments factors believes appropriate circumstances statements subject • fluctuating prices crude oil natural gas • conditions oil natural gas industry including drilling activity • reduction prices demand products services level acceptance price book increases markets • general global economic business conditions • international political instability security conditions hostilities declines customer activity due adverse local regional conditions • company’s ability expand products services including acquires new geographic markets • ability generate technological advances compete basis advanced technology • risks operating hazards fire explosion blowouts oil spills • litigation insurance customer agreements provide protection • adverse consequences may found result ongoing internal investigations including potential financial business consequences governmental actions proceedings charges penalties • changes currency exchange rates • severe weather conditions including hurricanes affect conditions oil natural gas industry • business opportunities may presented pursued company • competition consolidation company’s business • changes law regulations factors many beyond control company • risks ongoing investigations one risks uncertainties materialize underlying assumptions prove incorrect actual results may vary materially expected estimated projected required securities laws company assume duty update forward looking statements list risk factors intended comprehensive see “risk factors” included elsewhere annual report form 10k item 7aitem 7 management’s discussion analysis financial condition results operations business engaged providing pressure pumping services oilfield services oil natural gas industry worldwide services provided four business segments usmexico pressure pumping international pressure pumping canada pressure pumping oilfield services group usmexico international pressure pumping canada pressure pumping segments provide stimulation cementing services petroleum industry throughout world stimulation services designed improve flow oil natural gas producing formations cementing services consists pumping cement slurry well casing wellbore isolate fluids might otherwise damage casing andor affect productivity could migrate different zones primarily drilling completion phase well see “business” included elsewhere annual report form 10k information operations oilfield services group consists production chemical services casing tubular services process pipeline services completion tools completion fluids services us select markets internationally market conditions worldwide operations primarily driven number oil natural gas wells drilled depth drilling conditions wells number well completions level workover activity drilling activity turn largely dependent price crude oil natural gas market factors often lead volatility revenue profitability especially united states canada historically generated excess 50 revenue historical market conditions reflected table twelve months ended september 30 1 estimate drilling activity measured average active drilling rigs based baker hughes inc rig count information 2 includes mexico rig count 85 111 110 fiscal years ended september 30 2006 2005 2004 respectively 3 quarter ended june 30 2006 baker hughes inc began excluding iran sudan rig counts published rig count information international rig count fiscal 2005 2004 adjusted exclude iran sudan comparability us rig count demand pressure pumping services us primarily driven oil natural gas drilling activity tends extremely volatile depending current anticipated prices crude oil natural gas last 10 years lowest annual us rig count averaged 601 fiscal 1999 highest annual us rig count averaged 1587 fiscal 2006 international rig count many countries operate subject political social economic risks may cause volatility within given country however international revenue total less volatile operate approximately 50 countries provides reduction exposure one country due significant investment complexity international projects believe drilling decisions relating projects tend evaluated monitored longerterm perspective regard oil natural gas pricing additionally international market dominated major oil companies national oil companies tend different objectives operating stability typical independent producer north america last 10 years lowest annual international rig count excluding canada averaged 616 fiscal 1999 highest annual international rig count averaged 905 fiscal 2006 canadian rig count demand pressure pumping services canada primarily driven oil natural gas drilling activity similar us tends extremely volatile last 10 years lowest annual rig count averaged 212 fiscal 1999 highest annual rig count averaged 502 fiscal 2006 acquisitions june 25 2006 acquired additional 2 interest algerian joint venture societe algerienne de stimulation de puits productures d’hydrocarbures “bjsp” 46 million increasing total ownership bjsp 51 l’enterprise de services aux puits “ensp” indirect subsidiary sonatrach petroleum corp owns remaining 49 bjsp provides coiled tubing cementing services algerian market prior obtaining controlling interest bjsp accounted investment using cost method could exercise significant influence entity following transaction accounted stepacquisition control bjsp consolidate entity accordance accounting principles board “apb” 18 equity method accounting investments common stock accounting research bulletin “arb” 51 consolidated financial statements retroactively adjusted beginning retained earnings adopt equity method accounting ownership interest previous periods adjustment resulted 83 million increase beginning retained earnings reflected consolidated statement stockholders’ equity comprehensive income statement operations restated impact adopting equity method material given period following transaction assets liabilities results operations bjsp included consolidated results international pressure pumping segment consolidation resulted increase 424 million total current assets including approximately 141 million cash 121 million total current liabilities 193 million minority interest 02 million goodwill process completing purchase price allocation step acquisition pro forma financial information acquisition included material consolidated financial statements august 15 2006 purchased substantially operating assets dyna coil south texas ltd dyna coil injection systems inc dynochem ltd collectively “dynacoil” 617 million cash dynacoil focused production optimization services particularly installation service capillary injection systems associated products production chemicals mostly us canada included production chemicals business oilfield services segment acquisition resulted increase 82 million total current assets 34 million property equipment 71 million technology based intangibles 429 million goodwill process completing purchase price allocation pro forma financial information acquisition included material consolidated financial statements results operations consolidated 1 estimate drilling activity measured average active drilling rigs based baker hughes inc rig count information results fiscal 2006 compared fiscal 2005 consolidated revenue fiscal 2006 benefited increased worldwide drilling activity pricing improvements us canada latin america revenue growth surpassed increase exhibited worldwide drilling activity period consolidated operating income also experienced significant growth fiscal 2006 result increased revenue described business segments showed strong increases operating income period prior year fiscal 2006 consolidated operating income margins improved 27 20 reported fiscal 2005 margin enhancements largely due higher revenue improved pricing us canada addition equipment labor efficiencies see discussion individual segments revenue operating income variance details results fiscal 2005 compared fiscal 2004 increased drilling activity pricing improvement us canada along activity improvements middle east latin america led increase fiscal 2005 revenue compared fiscal 2004 increases experienced fiscal 2005 revenue slightly offset revenue decreases mexico stimulation vessel north sea fiscal 2005 operating income also benefited increased revenue described hindered decrease activity stimulation vessel north sea fiscal 2005 consolidated operating income margins improved 20 17 reported fiscal 2004 usmexico pressure pumping segment 1 estimate drilling activity measured average active drilling rigs based baker hughes inc rig count information results fiscal 2006 compared fiscal 2005 usmexico pressure pumping revenue increased result increased drilling activity improved pricing us market operating regions providing revenue growth include permian basin east texas rocky mountain areas slightly offset lower revenue mexico activity every operating region within us experienced considerable revenue growth due 20 increase us drilling activity period prior year us revenue improvement partially offset lower revenue mexico due lower levels drilling activity average rig count mexico decreased 23 compared prior fiscal year price improvement us supported issuance three price book increases since may 2005 us price book 15 average price increase issued may 1 2005 another price book issued november 1 2005 averaging 11 price increase finally may 1 2006 us issued latest price book increase september 30 2006 52 customers may 1 2006 price book degree acceptance price book increase described varies customer depends activity levels competitive pressures improvement usmexico pressure pumping operating income largely result increase us revenue described us pricing improvements increased operating income without associated cost addition operating income gained labor efficiencies activity increases occurred without proportional increase headcount average headcount increased 12 fiscal 2006 revenue increasing 40 cost efficiencies also obtained utilization newer efficient modern equipment see “business” included elsewhere annual report form 10k information us fleet recapitalization initiative results fiscal 2005 compared fiscal 2004 increased us drilling activity 15 fiscal 2004 well improved pricing us led increase revenue september 30 2005 approximately 60 customers us price book became effective may 1 2005 lower mexico activity resulted 36 revenue reduction mexico slightly offset gains experienced us operations decrease mexico activity specifically burgos area caused primary customer mexico curtailing spending contract area increases revenue described coupled labor efficiency gains contributed increase operating income labor efficiencies achieved increase activity without proportional increase headcount thereby increasing employee utilization per job headcount fiscal 2005 increased 11 compared fiscal 2004 revenue increasing 33 utilization newer efficient modern equipment also contributed increase operating income see “business” section information us fleet recapitalization initiative addition pricing improvement described directly increased operating income without associated cost revenue increase us operating income slightly offset decrease mexico operations described international pressure pumping segment 1 estimate drilling activity measured average active drilling rigs based baker hughes inc rig count information results fiscal 2006 compared fiscal 2005 following table summarizes change revenue fiscal 2006 compared fiscal 2005 operating segments international pressure pumping operating segments contributed revenue increase fiscal 2006 activity growth argentina venezuela columbia brazil well markets within region led latin american revenue increase latin america’s revenue increase 31 surpassed average rig count increase 16 middle east revenue increased largely due strong rig activity kazakhstan overall activity increases saudi arabia average drilling activity middle east increased 17 contributions slightly affected lower revenue due conclusion bangladesh blowout work prior year activity increases north sea africa contributed revenue improvement europeafrica new zealand vietnam asia pacific also added overall increase revenue fiscal 2006 noted previously acquired controlling interest bjsp accordingly consolidate revenue beginning july 1 2006 excluding bjsp revenue would increased 24 europeafrica operating income increased result improved revenues latin america middle east described well improved margins asia pacific operations also contributing improved operating income higher equipment utilization well labor efficiencies labor efficiencies achieved increase activity without proportional increase headcount thereby increasing employee utilization per job headcount increased 7 compared period prior year revenue increased 28 consequently operating income margins improved 16 11 fiscal 2006 compared prior fiscal year results fiscal 2005 compared fiscal 2004 following table summarizes change revenue fiscal 2005 compared fiscal 2004 operating segments international pressure pumping middle eastern latin american operations primary contributors revenue increase increased fracturing coiled tubing activity india saudi arabia well control work bangladesh major contributions increase middle east average drilling activity latin america increased 19 compared fiscal 2004 primarily enhancing revenue argentina brazil revenue argentina appreciably result increased stimulation coiled tubing activity north sea activity gains uk norway almost entirely offset lower stimulation vessel activity europeafrica operations throughout fiscal 2005 primary customer stimulation vessel experienced delays well delivery schedule resulting 53 decline revenue compared fiscal 2004 asia pacific revenue growth improvements thailand vietnam mostly offset declines malaysia major customers reduced drilling workover programs leading 29 revenue decline russian revenue increased overall market increase operating income increased result improved revenues described similar usmexico pressure pumping segment labor efficiencies achieved headcount fiscal 2005 increased 5 compared fiscal 2004 revenue increasing 16 operating income increases partially offset lower activity levels stimulation vessel north sea since significant fixed costs associated operating stimulation vessel decline operating profit canada pressure pumping 1 estimate drilling activity measured average active drilling rigs based baker hughes inc rig count information results fiscal 2006 compared fiscal 2005 geographic expansion price improvement increased average rig count contributed revenue improvement canada fiscal 2006 opened two new bases active oil gas producing areas canada compared period prior year canadian operations generated 38 increase revenue average active drilling rigs increasing 20 revenues primarily denominated canadian dollars weakening us dollar compared canadian dollar also improved revenue 10 operating income improved result revenue increases described coupled labor efficiencies headcount increased 10 revenue increasing 38 favorable foreign exchange rates canada increased revenue minimal impact operating income expenses also denominated canadian dollars results fiscal 2005 compared fiscal 2004 canadian revenue increased result 15 increase activity improved pricing issued new price book canadian operation june 1 2005 new price book averaged 9 higher previous price book operating income improved result revenue increases described coupled labor efficiencies headcount increased 6 revenue increasing 19 oilfield services group results fiscal 2006 compared fiscal 2005 following table summarizes change revenue fiscal 2006 compared fiscal 2005 operating segments oilfield services group increase revenue fiscal 2006 largely due contributions completion fluids chemical services process pipeline services overall activity increases primarily us canada boosted process pipeline services revenue completion fluids chemical services revenue increase attributable increased us market activity operating income margins oilfield services group increased 20 fiscal 2006 compared 13 fiscal 2005 revenue increases described primary contributor increase results fiscal 2005 compared fiscal following table summarizes change revenue fiscal 2005 compared fiscal 2004 operating segments oilfield services group revenue service line within oilfield services group increased fiscal 2005 however increase revenue completion tools minimal due severe hurricane activity experienced gulf mexico fourth fiscal quarter 2005 decrease offset increases revenue internationally revenue increase completion fluids result increased product sales us mexico norway tubular services’ revenue benefited increased activity north sea asia pacific fiscal 2005 operating income margins consistent fiscal 2004 service lines operating income improved reasons described however additional costs worker’s compensation write uncollectible accounts receivable outlook stated “market conditions” worldwide operations primarily driven number oil natural gas wells drilled depth drilling conditions wells number well completions level workover activity drilling activity turn largely dependent price crude oil natural gas worldwide drilling activity fiscal 2006 highest since 1985 prices crude oil natural gas fiscal 2007 remains consistent average prices commodities fiscal 2006 expect activity fiscal 2007 surpass fiscal 2006 activity levels us international markets results operations also depend heavily pricing fiscal 2006 experienced improved pricing us canadian select markets internationally based forecasted increase rig activity improved pricing expect continued improvement results operations fiscal 2007 expect revenue improvement business segments expenses following table sets forth operating expenses millions research engineering marketing expense total expenses increased 14 fiscal 2006 compared fiscal 2005 increase due primarily higher activity levels experienced throughout business however expenses lower percent revenue compared periods prior fiscal year due revenue increasing higher rate expenses related research engineering marketing aggregate expenses increased 13 fiscal 2005 compared fiscal 2004 percent revenue expenses relatively consistent periods prior year general administrative expense expenses increased 19 fiscal 2006 compared 2005 due primarily overall increase salaries incentive expense caused increased personnel average headcount area increased 9 compared fiscal 2005 addition stock based compensation expense increased 25 million related adoption statement financial accounting standards “sfas” 123r october 1 2005 see note 13 notes consolidated financial statements legal costs associated ongoing investigation asia pacific region see “investigations regarding misappropriation possible illegal payments” well fees 109 million related preparations first year section 404 sarbanesoxley act led higher general administrative expenses fiscal 2005 occur fiscal 2004 addition due increased activity levels labor costs incentive compensation costs increased fiscal 2005 compared fiscal 2004 following table shows comparison interest expense interest income expense net millions interest expense interest income increase interest expense 36 million fiscal 2006 compared fiscal 2005 due public offering 5000 million aggregate principal amount senior notes june 2006 well borrowing 1600 million revolving credit facility period see “liquidity capital resources” discussion debt issuance revolving credit facility agreement result interest expense net interest income fiscal 2007 increase projected approximately 29 million april 2005 redeemed outstanding convertible senior notes due 2022 4224 million result interest expense decreased fiscal 2005 interest income increased 36 million fiscal 2006 compared prior year result increased cash equivalents balances well favorable interest rates interest income increased fiscal 2005 compared fiscal 2004 result increases average cash equivalents income expense net fiscal 2006 received 28 million recovery misappropriated funds see “investigations regarding misappropriation possible illegal payments” offset expenses income increased fiscal 2005 due recording gain 90 million relating recovery misappropriated funds first quarter 95 million recorded fourth quarter reflect reversal excess accrued liabilities asia pacific region fiscal 2004 recorded gain 864 million halliburton award see note 12 notes consolidated financial statements addition 122 million recorded reversal excess liabilities asia pacific region additional details account see note 12 notes consolidated financial statements liquidity capital resources historical cash flow following table sets forth historical cash flows years ended september 30 millions fiscal 2006 cash flow operations increased principally result increased activity levels working capital decreased 1398 million september 30 2006 compared september 30 2005 largely result utilizing cash repurchase treasury stock accounts receivable increased 2150 million inventory increased 1112 million accounts payable increased 1058 million primarily result increase worldwide activity levels also result increased activity increased number employees therefore employee compensation benefits liability increased 268 million cash flow used investing almost entirely due 4600 million purchases property plant equipment fiscal 2006 used 522 million make two acquisitions see note 3 notes consolidated financial statements fiscal 2006 spent 11333 million repurchase 317 million shares stock year cash flow financing activities included proceeds additional longterm debt amount 4997 million senior notes proceeds primarily used repurchase treasury stock also 1600 million borrowings revolving credit facility paid dividends 643 million fiscal working capital increased 1368 million september 30 2005 compared september 30 2004 accounts receivable increased 1547 million inventory increased 532 million accounts payable accrued employee compensation increased 818 million 269 million respectively primarily result increase us canadian activity april 2005 redeemed outstanding convertible senior notes 4224 million see note 5 notes consolidated financial statements thereby reducing cash equivalents current debt addition outstanding unsecured 7 series b notes amount 790 million classified current fiscal 2005 see note 5 notes consolidated financial statements cash flow provided investing primarily attributable investment us treasury notes maturing 2005 amount 2298 million offset capital expenditures 3238 million fiscal 2005 cash flows used financing primarily result redemption outstanding convertible senior notes referred repurchases common stock totaling 984 million payment dividends amount 519 million fiscal 2005 fiscal 2004 increased activity resulted positive cash flow operations well 864 million cash received connection halliburton award see note 12 notes consolidated financial statements accounts receivable increased 780 million accounts payable increased 315 million primarily result increase us activity cash flow investing primarily attributable purchase us treasury bills notes 2299 million may 2004 maturities six ten months cash flow financing activities included proceeds stock option exercises amount 614 million fiscal 2004 due poor market performance pension plan investments fiscal 2001 2002 made required pension contributions 104 million made discretionary contribution additional 9 million july 22 2004 announced initiation regular quarterly cash dividend declared dividend 04 per common share paid october 15 2004 stockholders record close business september 15 2004 aggregate amount 129 million liquidity capital resources cash flows operations expected primary source liquidity fiscal 2007 sources liquidity also include cash equivalents 924 million september 30 2006 available financing facilities listed millions june 8 2006 completed public offering 5000 million aggregate principal amount senior notes consisting 2500 million floating rate senior notes due 2008 annual interest rate threemonth libor plus 17 basis points 2500 million 575 senior notes due 2011 net proceeds offering approximately 4971 million deducting underwriting discounts commissions expenses used primarily repurchase outstanding shares common stock also repay indebtedness fund capital expenditures corporate purposes september 30 2006 2500 million senior notes due 2008 issued outstanding 2497 million net discount 575 senior notes due 2011 issued outstanding june 2004 replaced existing credit facility revolving credit facility “revolving credit facility” permits borrowings 400 million principal amount revolving credit facility includes 50 million sublimit issuance standby letters credit 20 million sublimit swingline loans swingline loans shortterm maturities remaining amounts outstanding revolving credit facility become due payable june 2009 interest outstanding borrowings charged based prevailing market rates charged various fees connection revolving credit facility including commitment fee based average daily unused portion commitment totaling 05 million fiscal 2006 2005 addition revolving credit facility charges utilization fee outstanding loans letters credit usage revolving credit facility exceeds 33 though charges fiscal 2005 material fees fiscal 2006 september 30 2006 1600 million borrowings outstanding borrowings revolving credit facility september 30 2005 senior notes revolving credit facility include various customary covenants provisions including maintenance certain profitability solvency ratios none materially restrict activities currently compliance covenants addition revolving credit facility 644 million unsecured discretionary lines credit september 30 2006 expire bank’s discretion requirements commitment fees compensating balances connection lines credit interest prevailing market rates 03 million 34 million outstanding borrowings lines credit september 30 2006 2005 respectively weighted average interest rates shortterm borrowings outstanding september 30 2006 2005 595 775 respectively management believes cash flows operations combined cash equivalents revolving credit facility discretionary credit facilities provide us sufficient capital resources liquidity manage routine operations meet debt service obligations fund projected capital expenditures repurchase common stock pay regular quarterly dividend support development shortterm longterm operating strategies discretionary lines credit renewed borrowings lines credit otherwise become unavailable expect refinance debt arranging additional committed bank facilities longterm borrowing alternatives september 30 2005 issued outstanding 790 million unsecured 7 series b notes due february 1 2006 net discount debt obligation repaid available cash maturity date february 1 2006 cash requirements anticipate capital expenditures 690 million 700 million fiscal 2007 compared 460 million fiscal 2006 2007 capital expenditure program expected consist primarily capital facilities new pressure pumping equipment new equipment oilfield services group capital extend useful life existing assets made significant progress adding new equipment however much older equipment still remains operation due increases market activity us fiscal 2004 expanded us fleet recapitalization initiative include additional equipment cementing nitrogen acidizing equipment recapitalization pressure pumping equipment canada began fiscal 2005 actual amount fiscal 2007 capital expenditures depend primarily maintenance requirements expansion opportunities ability execute budgeted capital expenditures fiscal 2007 minimum pension postretirement funding requirements anticipated approximately 81 million contributed 92 million fiscal 2006 paid cash dividends amount 05 per common share quarterly basis fiscal 2006 totaling 643 million fiscal 2006 anticipate paying quarterly dividend fiscal 2007 however dividends subject approval board directors quarter board ability change dividend policy time september 30 2006 2500 million senior notes due 2008 issued outstanding 2497 million 575 senior notes due 2011 issued outstanding net discount collectively “the notes” expect cash paid net interest expense net interest income approximately 29 million fiscal 2007 subsequent september 30 2006 purchased 668889 shares 200 million november 30 2006 stock repurchase program discussed note 14 notes consolidated financial statements authority remaining purchase additional 4493 million stock november 30 2006 following table summarizes contractual cash obligations commercial commitments september 30 2006 thousands 1 discussed option obligation purchase pumping service equipment two partnerships approximately 27 million 32 million 2009 2010 respectively currently expect purchase pumping service equipment therefore included option payments table 2 includes agreements purchase goods services approved specify significant terms pricing quantity timing policies require purchase order completed items 200 miscellaneous items office supplies 3 entered agreements certain suppliers ensure certain level materials maintained us canada 4 includes expected cash payments longterm liabilities reflected consolidated balance sheet amounts timing payment known amounts include asset retirement obligations known pension funding requirements postretirement benefit obligation environmental accruals miscellaneous longterm obligations amounts exclude deferred gains see “off balance sheet transactions” pension obligations funding requirements uncertain longterm contingent liabilities expect cash equivalents cash flows operations generate sufficient cash flows fund cash requirements described balance sheet transactions 1999 contributed certain pumping service equipment limited partnership 1 interest limited partnership equipment used provide services customers pay service fee period least six years 13 years approximately 12 million annually accounted operating lease assessed terms agreement determined variable interest entity defined fin 46 consolidation variable interest entities however deemed primary beneficiary therefore consolidation required transaction resulted gain deferred amortized 13 years balance deferred gain 161 million 221 million september 30 2006 september 30 2005 respectively agreement permits substitution equipment within partnership long implied fair value new property transferred date substitution equals exceeds implied fair value defined current property partnership replaced result substitutions deferred gain reduced 28 million fiscal 2006 11 million fiscal 2005 september 2010 option obligation purchase pumping service equipment approximately 32 million currently intent exercise option 1997 contributed certain pumping service equipment limited partnership 1 interest limited partnership equipment used provide services customers pay service fee period least eight years 13 years approximately 10 million annually accounted operating lease assessed terms agreement determined variable interest entity defined fin 46 consolidation variable interest entities however deemed primary beneficiary therefore consolidation required transaction resulted gain deferred amortized 12 years deferred gain september 30 2006 deferred gain balance september 30 2005 03 million agreement permits substitution equipment within partnership long implied fair value new property transferred date substitution equals exceeds implied fair value defined current property partnership replaced result substitutions deferred gain reduced 03 million fiscal 2006 june 2009 option obligation purchase pumping service equipment approximately 27 million currently intent exercise option prices purchase equipment partnerships depend part fair market value equipment held partnerships time option exercised well factors specified agreements contractual obligations routinely issue parent company guarantees “pcgs” connection service contracts entered subsidiaries issuance pcgs frequently condition bidding process imposed customers work countries outside north america pcgs typically provide guarantee performance services local subsidiary term pcgs varies length service contract date parent company called upon perform pcgs arrange issuance variety bank guarantees performance bonds standby letters credit vast majority issued connection contracts subsidiary entered customers customer right call bank guarantee performance bond standby letter credit event subsidiary default performance services instruments required condition awarded contract typically released upon completion contract balance instruments predominantly standby letters credit issued connection variety financial obligations support fronted insurance programs claims administration funding certain employee benefit plans temporary importation bonds following table summarizes commercial commitments september 30 2006 thousands investigations regarding misappropriation possible illegal payments october 2004 company received report whistleblower alleging asia pacific region controller misappropriated company funds fiscal 2001 company began internal investigation misappropriation whether inappropriate actions occurred region controller admitted multiple misappropriations totaling approximately 90 million 30month period ended april 2002 misappropriations approximately 90 million repaid company region controller’s employment terminated misappropriations expense company form theft recorded consolidated statement operations periods prior april 2002 90 million repayment represents gain contingency reflected income consolidated condensed statement operations quarter ended december 31 2004 accordance sfas 5 accounting contingencies company continuing investigate whether additional funds misappropriated beyond 90 million originally identified company identified additional 17 million believes misappropriated former region controller additional 17 million likely misappropriations expenses company recorded consolidated statement operations periods prior april 2002 possible additional information could emerge resulting adjustments consolidated statements operations material adjustments known time october 2004 company also received whistleblower allegations illegal payments foreign officials made asia pacific region audit committee board directors engaged independent counsel conduct separate investigation determine whether illegal payments made investigation found information indicating significant likelihood payments made company entity asia pacific region company certain contractual relationships used make payments government officials asia pacific region information included information indicating certain employees company asia pacific region believed funds paid entity would used make payments government officials payments may illegal aggregated approximately 26 million made fiscal 1999 2004 thereafter december 2005 company received payment approximately 28 million entity referenced entity said funds represented 26 million funds described plus interest amount 26 million misappropriated benefit certain entity’s employees used make payments government officials audit committee’s investigation able verify claim 28 million payment represents gain contingency reflected income consolidated condensed statement operations quarter ended december 31 2005 accordance sfas 5 accounting contingencies company audit committee also investigated large volume payments made company period fiscal 1998 2004 asia pacific region respect approximately 10 million payments investigations date either able establish legitimacy transactions reflected underlying documents able resolve questions adequacy underlying documents support accounting entries payments may proper due circumstances surrounding payments investigations able determine whether theft illegal payments improprieties may involved payments previously expensed therefore company believes additional expense required recorded payments company voluntarily disclosed information found special audit committee investigation well related information company’s theft investigation us department justice “doj” us securities exchange commission “sec” engaged ongoing discussions authorities review matter company cannot predict whether investigative efforts may required initiated authorities connection discussions regarding possible illegal payments asia pacific region us government officials raised question whether company made illegal payments contractor intermediary obtain business country central asia audit committee investigated question company voluntarily disclosed information found investigation doj sec engaged ongoing discussions authorities review matter doj sec authorities broad range civil criminal sanctions us foreign corrupt practices act laws may seek impose corporations individuals appropriate circumstances including limited injunctive relief disgorgement fines penalties modifications business practices compliance programs agencies authorities entered agreements obtained range sanctions several public corporations individuals arising allegations improper payments deficiencies books records internal controls whereby civil criminal penalties imposed including cases multimillion dollar fines sanctions discussions doj sec regarding certain matters described possible accurately predict time matters resolved based current information cannot predict outcome investigations whether reach resolution discussions actions may taken doj sec authorities effect foregoing may consolidated financial statements misappropriations related accounting adjustments asia pacific region possible certain internal control operating deficiencies fiscal 2002 company implemented policy changes worldwide disbursements significant personnel changes also made asia pacific region company assigned new region manager new region controller assistant controller replaced several accountants asia pacific region company also took disciplinary action personnel region addition put place internal control process improvement function led internal control manager corporate office supported managers five regional bases worldwide document enhance test control processes critical accounting policies accounting policy deemed critical accounting policy must first include estimate requires company make assumptions matters highly uncertain time accounting estimate made second different estimates company reasonably could used accounting estimate current period changes accounting estimate reasonably likely occur period must material impact presentation company’s financial condition results operations estimates assumptions future events effects cannot perceived certainty base estimates historical experience assumptions believed reasonable circumstances results form basis making judgments estimates may change new events occur experience acquired additional information obtained operating environment changes materially different results occur circumstances change additional information becomes known including estimates deemed “critical” proposed rule sec believe following critical accounting policies used preparation consolidated financial statements significant judgments uncertainties affecting application policies selection accounting estimates including deemed “critical” associated disclosures discussion discussed management audit committee board directors critical accounting policies read conjunction disclosures elsewhere notes consolidated financial statements significant accounting policies discussed note 2 consolidated financial statements goodwill account goodwill accordance sfas 142 goodwill intangible assets sfas 142 requires goodwill reviewed possible impairment using fair value measurement techniques annual basis circumstances indicate impairment may exist specifically goodwill impairment determined using twostep process first step goodwill impairment test compares fair value reporting unit net book value including goodwill fair value reporting unit exceeds net book value impairment required second step unnecessary fair value reporting unit less net book value second step performed determine amount impairment fair value measures include quoted market price present value technique estimate future cash flows valuation technique based multiples earnings revenue second step compares implied fair value reporting unit net book value reporting unit net book value reporting unit exceeds implied fair value impairment loss shall recognized amount equal excess implied fair value determined manner amount goodwill recognized business combination fair value reporting unit allocated assets liabilities reporting unit acquired business combination fair value reporting unit purchase price paid acquire reporting unit determining fair value implied fair value reporting unit judgmental often involves use significant estimates assumptions estimates assumptions could significant impact whether impairment charge recognized also magnitude impairment charge estimate fair value primarily determined using discounted cash flows approach uses significant assumptions discount rate growth rate terminal value multiples rig count price book increases decreases inflation rate impairment adjustment necessary 9283 million goodwill balance september 30 2006 see note 11 notes consolidated financial statements information goodwill pension plans pension expense determined accordance provisions sfas 87 employers’ accounting pensions accordance sfas 87 utilize estimated longterm rate return plan assets difference actual return unrecognized gainloss amortized earnings future periods determine annual net periodic pension expense pension plan liabilities annual basis using thirdparty actuary determining annual estimate net periodic pension cost required make evaluation critical assumptions discount rate expected longterm rate return plan assets expected increase compensation levels assumptions may effect amount timing future contributions discount rates based high quality corporate fixed income investments longterm rate return assumptions based actuarial review asset allocation returns earned similar investments rate increase compensation levels reviewed actuaries based upon historical salary experience effects actual results differing assumptions accumulated amortized future periods therefore generally affect recognized expense future periods fiscal 2007 pension postretirement funding requirement 81 million expect fund amount cash flows operating activities see note 9 notes consolidated financial statements information pension plans september 2006 entered agreement settle obligation respect us defined benefit plan assets approximately 72 million plus contribution 15 million used purchase insurance contract used fund benefits settle plan proposed settlement requires approval pension benefit guaranty corporation internal revenue service relieve us primary responsibility pension benefit obligation regulatory approval obtained expected fiscal 2007 expense approximately 233 million prepaid pension cost 233 million asset represents difference amounts funded time amount required expensed sfas 87 relieving us obligation expense would otherwise recognized remaining plan life accelerated period approval received result actions reclassified pension asset recorded payment annuity current assets income taxes effective income tax rates 314 307 years ended september 30 2006 2005 2004 respectively rates vary primarily due fluctuations taxes mix domestic versus foreign income deferred tax assets liabilities recognized differences book basis tax basis net assets company providing deferred taxes management considers current tax laws estimates future taxable income available tax planning strategies process also involves making forecasts current future years’ united states taxable income unforeseen events industry conditions may impact forecasts turn affect carrying value deferred tax assets liabilities impact future reported earnings tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities potentially courts resolution situations inevitably includes degree uncertainty accordingly provide taxes amounts believe ultimately result proceedings addition aforementioned assessments received various taxing authorities provide taxes certain situations assessments received situations accrue income taxes consider probable taxes ultimately payable exceed amounts reflected filed tax returns accordingly taxes provided situations guidance sfas 5 self insurance accruals loss contingencies selfinsured certain losses relating workers’ compensation general liability property damage employee medical benefits claims filed claims incurred reported management reviews liability quarterly basis liability based primarily actuarial undiscounted basis using individual casebased valuations statistical analysis based upon judgment historical experience however final cost many claims may known five years longer estimate subject trends loss development factors historical average claim volume average cost settled claims current trends claim costs significant unanticipated changes trends future actual payouts could result additional increases decreases recorded accruals purchased stoploss coverage order limit extent feasible aggregate exposure certain claims assurance coverage adequately protect us liability potential consequences discussed note 10 notes consolidated financial statements legal proceedings covering wide range matters pending threatened company possible predict outcome litigation pending company litigation subject many uncertainties possible could adverse developments cases record provisions consolidated financial statements pending litigation determine unfavorable outcome probable amount loss reasonably estimated believe accruals matters adequate actual loss contingency significantly different estimated loss results operations may understated accounting pronouncements september 2006 fasb issued sfas 158 employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r “sfas 158” require companies recognize overfunded underfunded status defined benefit postretirement plan multiemployer plan asset liability statement financial position recognize changes funded status year changes occur comprehensive income business entity also requires companies measure funded status plan date yearend statement financial position additionally companies need recognize funded status benefit plan measured difference plan assets fair value limited exceptions benefit obligation statement financial position pension plan benefit obligation projected benefit obligation postretirement benefit plan retiree health care plan benefit obligation accumulated postretirement benefit obligation b recognize component comprehensive income net tax gains losses prior service costs credits arise period recognized components net periodic benefit cost c measure defined benefit plan assets obligations date employer’s fiscal yearend statement financial position disclose notes financial statements additional information certain effects net periodic benefit cost next fiscal year arise delayed recognition gains losses prior service costs credits transition asset obligation recognition asset liability related funded status pension plan disclosures effective fiscal years ending december 15 2006 required changes measurement date effective fiscal years ending december 15 2008 currently measure defined benefit plan assets obligations fiscal yearend portion sfas 158 impact financial statements currently process evaluating impact financial statements requirements sfas 158 september 2006 fasb issued sfas 157 “sfas 157” fair value measurements effective financial statements issued fiscal years beginning november 15 2007 sfas 157 introduces new definition fair value fair value hierarchy requiring market based assumptions used available new disclosures assets liabilities measured fair value based level hierarchy currently process evaluating impact sfas 157 financial statements july 2006 fasb issued interpretation 48 “fin 48” accounting uncertainty income taxes effective fiscal years beginning december 15 2006 fin 48 prescribes recognition threshold measurement attribute well criteria subsequently recognizing derecognizing measuring tax positions financial statement purposes requires companies make disclosures uncertain income tax positions including detailed rollforward tax benefits taken qualify financial statement recognition currently process evaluating impact fin 48 financial statements may 2005 fasb issued sfas 154 accounting changes error corrections replacement apb opinion 20 accounting changes sfas 3 reporting accounting changes interim financial statements sfas 154 voluntary changes accounting principle well changes pursuant accounting pronouncements include specific transition requirements must applied retrospectively prior periods’ financial statements retrospective application requires cumulative effect change reflected carrying value assets liabilities first period presented offsetting adjustments recorded beginning retained earnings period presented must adjusted reflect period specific effects applying change also sfas 154 change accounting estimate continues accounted period change future periods necessary corrections errors continue reported restating prior period financial statements beginning first period presented material sfas 154 effective accounting changes corrections errors made fiscal years beginning december 15 2005 adopted sfas 154 october 1 2006 adoption material impact financial position results operations since sfas 154 applied prospectively october 2004 american jobs creation act 2004 “act” signed law act contains new provisions may impact us income tax liability beginning current fiscal year act provides deduction income qualified domestic production activities phased 2005 2010 guidance fasb staff position 1091 application fasb statement 109 “accounting income taxes” tax deduction qualified production activities provided american jobs creation act 2004 deduction treated “special deduction” described fasb statement 109 special deduction effect deferred tax assets liabilities existing enactment date rather impact deduction reported period deduction incurred december 2004 fasb issued fasb staff position 1092 “fsp 1092” accounting disclosure guidance foreign repatriation provision within american jobs creation act 2004 provides guidance respect recording potential impact repatriation provisions act sfas 109 company’s income tax expense deferred tax liability fsp 1092 states company allowed time beyond financial reporting period enactment evaluate effect act plan reinvestment repatriation foreign earnings purposes applying sfas 109 remitted qualifying dividends foreign subsidiaries amount 67 million fiscal year claim benefits provision act furthermore believe residual us tax liability planned repatriation would fully offset usable excess foreign tax credits forward looking statements document contains forwardlooking statements within meaning private securities litigation reform act 1995 section 21e securities exchange act 1934 concerning among things prospects expected revenue expenses profits developments business strategies operations subject certain risks uncertainties assumptions forwardlooking statements identified statements described “outlook” use terms phrases “expect” “estimate” “project” “forecast” “believe” “achievable” “anticipate” “should” similar terms phrases statements based certain assumptions analyses made us light experience perception historical trends current conditions expected future developments factors believe appropriate circumstances statements subject • fluctuating prices crude oil natural gas • conditions oil natural gas industry including drilling activity • reduction prices demand products services level acceptance price book increases markets • general global economic business conditions • international political instability security conditions hostilities declines customer activity due adverse local regional conditions • ability expand products services including acquire new geographic markets • ability generate technological advances compete basis advanced technology • risks operating hazards fire explosion blowouts oil spills • litigation insurance customer agreements provide protection • adverse consequences may found result internal investigations including potential financial business consequences governmental actions proceedings charges penalties • changes currency exchange rates • severe weather conditions including hurricanes affect conditions oil natural gas industry • business opportunities may presented pursued us • competition consolidation business • changes law regulations factors many beyond control • risks uncertainties detailed time filings securities exchange commission one risks uncertainties materialize underlying assumptions prove incorrect actual results may vary materially expected estimated projected required securities laws assume duty update forward looking statements list risk factors intended comprehensive see “risk factors” included elsewhere annual report form 10k item 7aitem 7 management’s discussion analysis financial condition results operations business engaged providing pressure pumping services oilfield services oil natural gas industry worldwide services provided four business segments usmexico pressure pumping international pressure pumping canada pressure pumping oilfield services group usmexico international pressure pumping canada pressure pumping segments provide stimulation cementing services petroleum industry throughout world stimulation services designed improve flow oil natural gas producing formations cementing services consists pumping cement slurry well casing wellbore isolate fluids might otherwise damage casing andor affect productivity could migrate different zones primarily drilling completion phase well see “business” included elsewhere annual report form 10k information operations oilfield services group consists chemical services casing tubular services process pipeline services completion tools completion fluids services us select markets internationally market conditions worldwide operations primarily driven number oil natural gas wells drilled depth drilling conditions wells number well completions level workover activity drilling activity turn largely dependent price crude oil natural gas market factors often lead volatility revenue profitability especially united states canada historically generated excess 50 revenue historical market conditions reflected table twelve months ended september 30 1 estimate drilling activity measured average active drilling rigs based baker hughes inc rig count information 2 includes mexico rig count 90 85 111 fiscal years ended september 30 2007 2006 2005 respectively us rig count demand pressure pumping services us primarily driven oil natural gas drilling activity tends extremely volatile depending current anticipated prices crude oil natural gas last 10 years lowest annual us rig count averaged 601 fiscal 1999 highest annual us rig count averaged 1749 fiscal 2007 international rig count many countries operate subject political social economic risks may cause volatility within given country however international revenue total less volatile operate approximately 50 countries provides reduction exposure one country due significant investment complexity international projects believe drilling decisions relating projects tend evaluated monitored longerterm perspective regard oil natural gas pricing additionally international market dominated major oil companies national oil companies tend different objectives operating stability typical independent producer north america last 10 years lowest annual international rig count excluding canada including mexico averaged 616 fiscal 1999 highest annual international rig count averaged 989 fiscal 2007 canadian rig count demand pressure pumping services canada primarily driven oil natural gas drilling activity similar us tends extremely volatile last 10 years lowest annual rig count averaged 212 fiscal 1999 highest annual rig count averaged 502 fiscal 2006 acquisitions fiscal 2007 november 3 2006 completed acquisition profile international ltd “profile” total purchase price 25 million resulted 22 million goodwill profile located newcastle england provides caliper inspection tools pipeline integrity assessment markets worldwide business complements pipeline inspection business oilfield services group segment december 20 2006 purchased substantially operating assets tekcor technology ltd “tekcor” 83 million resulted increase 36 million total current assets 07 million property equipment 40 million technology based intangible assets tekcor provides specialty chemicals related services oil gas well drilling industry located houston texas tekcor services markets along texas louisiana gulf coast included completion fluids business oilfield services group segment march 1 2007 acquired aberdeenbased norson services ltd “norson” division norson group ltd substantially assets norson group’s united states subsidiary norson services llc total purchase price paid acquisitions 290 million including legal fees resulted increase 74 million total current assets 59 million property equipment 18 million intangible assets 54 million current liabilities 193 million goodwill acquisition strengthens service capabilities addition norson’s hydraulic electrical umbilical testing services provided norson’s subsea units include remote pigging flooding subsea hydro testing subsea data logging business complements process pipeline business oilfield services group segment june 30 2007 completed acquisition substantially capillary tubing assets allischalmers total purchase price 163 million resulted increase 15 million current assets 18 property equipment 130 million goodwill assets used installation service capillary injection systems primarily us mexico assets complement dynacoil acquisition occurred fourth quarter fiscal 2006 enhance chemical services operation oilfield services group segment fiscal 2006 june 25 2006 acquired additional 2 interest algerian joint venture societe algerienne de stimulation de puits productures d’hydrocarbures “bjsp” 46 million increasing total ownership bjsp 51 l’enterprise de services aux puits “ensp” indirect subsidiary sonatrach petroleum corp owns remaining 49 bjsp provides coiled tubing fracturing cementing services algerian market prior obtaining controlling interest bjsp accounted investment using cost method could exercise significant influence entity following transaction accounted stepacquisition control bjsp consolidate entity accordance accounting principles board “apb” 18 equity method accounting investments common stock accounting research bulletin “arb” 51 consolidated financial statements 2006 retroactively adjusted beginning retained earnings adopt equity method accounting ownership interest previous periods adjustment resulted 83 million increase beginning retained earnings following transaction assets liabilities results operations bjsp included consolidated results international pressure pumping segment consolidation resulted increase 424 million total current assets including approximately 141 million cash 121 million total current liabilities 193 million minority interest 02 million goodwill august 15 2006 purchased substantially operating assets dyna coil south texas ltd dyna coil injection systems inc dynochem ltd collectively “dynacoil” 617 million cash dynacoil focused production optimization services particularly installation service capillary injection systems associated products production chemicals mostly us canada included chemical services business oilfield services group segment acquisition resulted increase 82 million total current assets 34 million property equipment 71 million technology based intangibles 429 million goodwill currently process completing review determination fair values assets acquired norson allischalmers accordingly allocation purchase price subject revision based final determination asset values pro forma financial information fiscal 2007 fiscal 2006 acquisitions included material individually aggregate financial statements results operations consolidated millions 1 estimate drilling activity measured average active drilling rigs based baker hughes inc rig count information results fiscal 2007 compared fiscal 2006 reportable segments except canada contributed increase revenue fiscal 2007 compared fiscal 2006 increase primarily relates higher activity major markets except canada depressed market conditions present throughout fiscal 2007 worldwide average active drilling rigs fiscal 2007 increased 4 compared prior year fiscal 2007 consolidated operating income 24 2 decrease compared fiscal 2006 operating income margin negatively impacted 68 decline operating income canada well price reductions us market results fiscal 2006 compared fiscal 2005 consolidated revenue fiscal 2006 benefited increased worldwide drilling activity pricing improvements us canada latin america revenue growth surpassed increase exhibited worldwide drilling activity period consolidated operating income also experienced significant growth fiscal 2006 result increased revenue described business segments showed strong increases operating income period prior year fiscal 2006 consolidated operating income margins improved 27 20 reported fiscal 2005 margin enhancements largely due higher revenue improved pricing us canada addition equipment labor efficiencies see discussion individual segments revenue operating income variance details usmexico pressure pumping segment millions 1 estimate drilling activity measured average active drilling rigs based baker hughes inc rig count information results fiscal 2007 compared fiscal 2006 fiscal 2007 usmexico revenue increased compared prior year result activity increases notably east texas permian basin northeast regions united states mexico region also benefited improved revenues attributable expansion business southern mexico increases slightly offset decline activity pacific region usmexico average active drilling rigs increased 10 fiscal 2007 revenue negatively impacted lower prices received products services stemming competitive pressures market operating income margin declined 34 compared 38 prior fiscal year primarily due lower pricing increased material labor costs increased depreciation expense results fiscal 2006 compared fiscal 2005 usmexico pressure pumping revenue increased result increased drilling activity improved pricing us market operating regions providing revenue growth include permian basin east texas rocky mountain areas slightly offset lower revenue mexico activity every operating region within us experienced considerable revenue growth due 20 increase us drilling activity period prior year us revenue improvement partially offset lower revenue mexico due lower levels drilling activity average rig count mexico decreased 23 compared prior fiscal year price improvement us supported three price book increases may 2005 may 2006 us price book 15 average price increase issued may 1 2005 another price book issued november 1 2005 averaging 11 price increase finally may 1 2006 us issued latest price book increase september 30 2006 52 customers may 1 2006 price book degree acceptance price book increase described varies customer depends activity levels competitive pressures improvement usmexico pressure pumping operating income largely result increase us revenue described us pricing improvements increased operating income without associated cost addition operating income gained labor efficiencies activity increases occurred without proportional increase headcount average headcount increased 12 fiscal 2006 revenue increasing 40 cost efficiencies also obtained utilization newer efficient modern equipment see “business” included elsewhere annual report form 10k information us fleet recapitalization initiative international pressure pumping segment millions 1 estimate drilling activity measured average active drilling rigs based baker hughes inc rig count information results fiscal 2007 compared fiscal 2006 operating regions within international pressure pumping except russia showed significant increases revenue fiscal 2007 compared fiscal 2006 europeafrica showed improvement result acquisition bjsp july 2006 acquired controlling interest bjsp consolidate revenue excluding impact bjsp acquisition revenue region increased 10 activity related revenue increases netherlands expansion operations libya also contributed region’s improvement prior year increases slightly offset lower coiled tubing revenue norway average active drilling rig count increased 8 compared prior fiscal year despite significant decline revenue prior year’s nonrepeat blowout work bangladesh middle east showed improved revenues due increased activity introduction vessel operations india increased coiled tubing work saudi arabia average active drilling rig count fiscal 2007 increased 13 compared fiscal year 2006 award contracts malaysia activity increases australia accounted asia pacific’s revenue increase offset decline revenue new zealand due nonrepeat work prior fiscal year average active drilling rig count fiscal 2007 increased 4 asia pacific compared fiscal year 2006 russian revenue declined result divesture workover rig business region second quarter fiscal 2007 well lower margin performance activity excluding revenue workover rig business revenue region increased 10 compared prior year latin american region improvement due primarily increased activity argentina colombia brazil average active drilling rig count increased 10 latin america compared prior year operating income margin 14 fiscal 2007 compared 16 prior year margin contributions asia pacific latin america offset margin declines high margin nonrepeat blowout work bangladesh prior fiscal year activity declines norway results fiscal 2006 compared fiscal 2005 following table summarizes change revenue fiscal 2006 compared fiscal 2005 operating segments international pressure pumping operating segments contributed revenue increase fiscal 2006 activity growth argentina venezuela columbia brazil well markets within region led latin american revenue increase latin america’s revenue increase 31 surpassed average rig count increase 16 middle east revenue increased largely due strong rig activity kazakhstan overall activity increases saudi arabia average drilling activity middle east increased 17 contributions slightly affected lower revenue due conclusion bangladesh blowout work prior year activity increases north sea africa contributed revenue improvement europeafrica new zealand vietnam also added overall increase revenue fiscal 2006 asia pacific acquired controlling interest bjsp accordingly began consolidating revenue effective july 1 2006 excluding bjsp revenue would increased 24 europeafrica operating income increased result improved revenues latin america middle east described well improved margins asia pacific operations also contributing improved operating income higher equipment utilization well labor efficiencies labor efficiencies achieved increase activity without proportional increase headcount thereby increasing employee utilization per job headcount increased 7 compared period prior year revenue increased 28 consequently operating income margins improved 16 11 fiscal 2006 compared prior fiscal year canada pressure pumping millions 1 estimate drilling activity measured average active drilling rigs based baker hughes inc rig count information results fiscal 2007 compared fiscal 2006 lower activity levels influenced lower natural gas prices caused revenue decline compared prior year average active drilling rigs decreased 27 fiscal 2007 revenue exhibiting corresponding decrease 20 region also experienced lower pricing products services operating income margin decreased 8 21 prior year along declining prices products services region also higher depreciation expense material costs labor costs fiscal 2007 results fiscal 2006 compared fiscal 2005 geographic expansion price improvement increased average rig count contributed revenue improvement canada fiscal 2006 opened two new bases active oil gas producing areas canada compared period prior year canadian operations generated 38 increase revenue average active drilling rigs increasing 20 revenues primarily denominated canadian dollars weakening us dollar compared canadian dollar also improved revenue 10 operating income improved result revenue increases described coupled labor efficiencies headcount increased 10 revenue increasing 38 favorable foreign exchange rates canada increased revenue minimal impact operating income expenses also denominated canadian dollars oilfield services group millions results fiscal 2007 compared fiscal 2006 following table summarizes change revenue fiscal 2007 compared fiscal 2006 operating segments oilfield services group operating segments except completion fluids showed revenue improvement fiscal 2007 tubular services’ revenue fiscal 2007 increased largely due international market expansion process pipeline services benefited increased activity uk us operations well acquisition norson march 2007 excluding impact norson acquisition process pipeline services revenue increased 15 chemical services revenue increased largely due acquisitions dynacoil’s allischalmers’ capillary string businesses excluding acquisitions chemical services revenue increased 12 completion tools revenue improvement due international growth well increased domestic deepwater activity revenue completion fluids operations declined due closing low margin operations uk norway previous year fiscal 2007 operating income margin oilfield services group 21 increase 20 reported fiscal year 2006 tubular services largest contributor increase results fiscal 2006 compared fiscal 2005 following table summarizes change revenue fiscal 2006 compared fiscal 2005 operating segments oilfield services group increase revenue fiscal 2006 largely due contributions completion fluids chemical services process pipeline services overall activity increases primarily us canada boosted process pipeline services revenue completion fluids chemical services revenue increase attributable increased us market activity operating income margins oilfield services group increased 20 fiscal 2006 compared 13 fiscal 2005 revenue increases described primary contributor increase outlook stated “market conditions” worldwide operations primarily driven number oil natural gas wells drilled depth drilling conditions wells number well completions level workover activity expect slight increase fiscal 2008 revenue fiscal 2007 revenue usmexico pressure pumping revenue expected increase also expect pricing pressures continue us market canada expect marginal increase drilling activity expect spring break levels less severe experienced fiscal 2007 continue focus labor cost efficiencies well equipment utilization monitoring discretionary spending north america international pressure pumping revenue expected increase fiscal 2008 developed number strategies address lowperforming countries expect margin expansion segment throughout fiscal 2008 revenue oilfield services group expected increase fiscal 2008 divisions within segment continue expand international markets existing pressure pumping infrastructure expenses following table sets forth operating expenses millions research engineering expense expenses decreased percent revenue total expenses increased 6 fiscal 2007 compared fiscal 2006 increase mostly relates increased personnel primary research facility tomball texas certain operating locations support higher activity total expenses increased 18 fiscal 2006 compared fiscal 2005 increase due primarily higher activity levels experienced throughout business however expenses lower percent revenue compared periods prior fiscal year due revenue increasing higher rate expenses related research engineering marketing expense expenses increased 4 fiscal 2007 compared fiscal 2006 result higher commissions certain markets internationally well increased headcount support market growth expenses increased 12 fiscal 2006 compared fiscal 2005 increase largely due higher activity levels experienced throughout business fiscal 2006 general administrative expense expenses remained consistent percent revenue increased 9 fiscal 2007 compared fiscal 2006 increase primarily relates increased personnel stock based compensation expense increase 76 million offset lower compensation expense related annual performance incentive accruals decrease annual performance incentive accruals primary reason decrease corporate expenses fiscal 2007 expenses increased 19 fiscal 2006 compared 2005 due primarily overall increase salaries incentive expense caused increased personnel average headcount area increased 9 compared fiscal 2005 addition stock based compensation expense increased 25 million related adoption statement financial accounting standards “sfas” 123r october 1 2005 see note 13 notes consolidated financial statements following table shows comparison interest expense interest income expense net millions interest expense interest income interest expense net capitalized interest increased 181 million fiscal 2007 compared fiscal 2006 result higher average outstanding debt respective periods result increased average debt balance addition higher manufacturing levels capitalized interest increased 60 million fiscal 2007 compared fiscal 2006 increase interest expense 36 million fiscal 2006 compared fiscal 2005 due public offering 5000 million aggregate principal amount senior notes june 2006 well borrowing 1600 million revolving credit facility period see “liquidity capital resources” discussion debt issuance revolving credit facility agreement interest income decreased 133 million fiscal 2007 compared fiscal 2006 result lower average cash equivalents balance throughout fiscal year interest income increased 36 million fiscal 2006 compared prior year result increased average cash equivalents balances well favorable interest rates income expense net increase expense net fiscal 2007 consisted primarily minority interest expense due acquisition controlling interest bjsp third quarter fiscal 2006 fiscal 2006 received 28 million recovery misappropriated funds offset expenses income increased fiscal 2005 due recording gain 90 million relating recovery misappropriated funds first quarter 95 million recorded fourth quarter reflect reversal excess accrued liabilities asia pacific region additional information see note 12 notes consolidated financial statements liquidity capital resources historical cash flow following table sets forth historical cash flows years ended september 30 millions fiscal 2007 result pricing pressures north america fiscal 2007 experienced modest increase cash flow operations compared fiscal 2006 significant uses cash included increased inventory anticipation increases activity increased accounts receivable result increased revenue days sales outstanding increased prepaid expenses primarily related tax payments increased accounts payable also contributed cash flow operations mostly increased activity levels cash flow used investing fiscal 2007 almost entirely due 7521 million purchases property plant equipment including 478 million paid buyout equipment partnership established 1997 also paid 579 million net cash acquisitions cash flows used financing consisted 110 million net proceeds short term borrowings 746 million repurchases common stock 586 million dividend payments fiscal 2007 also received proceeds amount 224 million employee stock purchases stock option exercises fiscal 2007 fiscal 2006 cash flow operations increased principally result increased activity levels working capital decreased 1398 million september 30 2006 compared september 30 2005 largely result utilizing cash repurchase treasury stock accounts receivable increased 2150 million inventory increased 1112 million accounts payable increased 1058 million primarily result increase worldwide activity levels also result increased activity increased number employees therefore employee compensation benefits liability increased 268 million cash flow used investing almost entirely due 4600 million purchases property plant equipment fiscal 2006 also paid 522 million connection two acquisitions see note 3 notes consolidated financial statements fiscal 2006 spent 11333 million repurchase 317 million shares stock year cash flow financing activities included proceeds additional longterm debt amount 4997 million senior notes proceeds primarily used repurchase treasury stock also 1600 million borrowings revolving credit facility paid dividends 643 million fiscal 2005 working capital increased 1368 million september 30 2005 compared september 30 2004 accounts receivable increased 1547 million inventory increased 532 million accounts payable accrued employee compensation increased 818 million 269 million respectively primarily result increase us canadian activity april 2005 redeemed outstanding convertible senior notes 4224 million thereby reducing cash equivalents current debt cash flow provided investing primarily attributable investment us treasury notes maturing 2005 amount 2298 million offset capital expenditures 3238 million fiscal 2005 cash flows used financing primarily result redemption outstanding convertible senior notes referred repurchases common stock totaling 984 million payment dividends amount 519 million fiscal 2005 liquidity capital resources cash flows operations expected primary source liquidity fiscal 2008 sources liquidity also include cash equivalents 582 million september 30 2007 available financing facilities listed millions june 8 2006 completed public offering 5000 million aggregate principal amount senior notes consisting 2500 million floating rate senior notes due 2008 annual interest rate threemonth libor plus 17 basis points 2500 million 575 senior notes due 2011 net proceeds offering approximately 4971 million deducting underwriting discounts commissions expenses used primarily repurchase outstanding shares common stock also repay indebtedness fund capital expenditures corporate purposes september 30 2007 2500 million senior notes due 2008 issued outstanding 2498 million net discount 575 senior notes due 2011 issued outstanding august 2007 amended restated existing revolving credit facility amended restated revolving credit facility “revolving credit facility” permits borrowings 400 million principal amount revolving credit facility includes 50 million sublimit issuance standby letters credit 20 million sublimit swingline loans swingline loans shortterm maturities remaining amounts outstanding revolving credit facility become due payable august 2012 addition right request additional 200 million permitted borrowings 400 million subject approval lenders time request interest outstanding borrowings charged based prevailing market rates charged various fees connection revolving credit facility including commitment fee based average daily unused portion commitment totaling 03 million fiscal 2007 05 million fiscal 2006 addition revolving credit facility charges utilization fee outstanding loans letters credit usage revolving credit facility exceeds 625 though material fees fiscal 2007 2006 september 30 2007 2006 1470 million 1600 million respectively outstanding borrowings revolving credit facility addition revolving credit facility 1649 million unsecured discretionary lines credit september 30 2007 expire bank’s discretion requirements commitment fees compensating balances connection lines credit interest prevailing market rates 243 million 03 million outstanding borrowings lines credit september 30 2007 2006 respectively weighted average interest rates shortterm borrowings outstanding september 30 2007 2006 540 595 respectively management believes cash flows operations combined cash equivalents revolving credit facility discretionary credit facilities provide us sufficient capital resources liquidity manage routine operations meet debt service obligations fund projected capital expenditures repurchase common stock pay regular quarterly dividend support development shortterm longterm operating strategies discretionary lines credit renewed borrowings lines credit otherwise become unavailable expect refinance debt arranging additional committed bank facilities longterm borrowing alternatives senior notes revolving credit facility include various customary covenants provisions including maintenance certain profitability solvency ratios none materially restrict activities currently compliance covenants imposed cash requirements anticipate capital expenditures approximately 640 million fiscal 2008 compared 7043 million fiscal 2007 excluding 478 million purchase assets equipment partnership 2008 capital expenditure program expected consist primarily capital facilities new pressure pumping equipment new equipment oilfield services group capital extend useful life existing assets 1998 embarked program replace aging us fracturing pump fleet new efficient higher horsepower pressure pumping equipment since expanded us fleet recapitalization initiative include additional equipment cementing nitrogen acidizing equipment made significant progress adding new equipment however much older equipment still remains operation due increases market activity plan continue adding new equipment fleet market activity level time equipment ready use determine new equipment used expansion used replacement assets end fiscal 2007 approximately 20 us fleet remained candidates future replacement part recapitalization initiative actual amount fiscal 2008 capital expenditures depend primarily maintenance requirements expansion opportunities ability execute budgeted capital expenditures fiscal 2008 minimum pension postretirement funding requirements anticipated approximately 190 million contributed 168 million fiscal 2007 paid cash dividends amount 05 per common share quarterly basis fiscal 2007 totaling 586 million anticipate paying quarterly dividend fiscal 2008 however dividends subject approval board directors quarter board ability change dividend policy time september 30 2007 2500 million senior notes due 2008 issued outstanding 2498 million 575 senior notes due 2011 issued outstanding net discount collectively “the notes” intend redeem 2500 million senior notes due 2008 existing cash necessary funds available revolving credit facility expect cash paid net interest expense net interest income approximately 263 million fiscal 2008 following table summarizes contractual obligations commercial commitments september 30 2007 thousands 1 discussed option obligation purchase pumping service equipment partnership approximately 32 million 2010 currently expect purchase pumping service equipment therefore included option payment table 2 includes agreements purchase goods services approved specify significant terms pricing quantity timing policies require purchase order completed items 200 miscellaneous items office supplies 3 entered agreements certain suppliers ensure certain level materials maintained us canada 4 includes expected cash payments longterm liabilities reflected consolidated balance sheet amounts timing payment known amounts include asset retirement obligations known pension funding requirements postretirement benefit obligation environmental accruals miscellaneous longterm obligations amounts exclude deferred gains see “off balance sheet transactions” pension obligations funding requirements uncertain longterm contingent liabilities expect cash equivalents cash flows operations generate sufficient cash flows fund cash requirements described balance sheet transactions 1999 contributed certain pumping service equipment limited partnership 1 interest equipment used provide services customers pay service fee period least six years 13 years approximately 12 million annually accounted operating lease assessed terms agreement determined variable interest entity defined fin 46 consolidation variable interest entities however deemed primary beneficiary therefore consolidation required transaction resulted gain deferred amortized 13 years balance deferred gain 90 million 161 million september 30 2007 september 30 2006 respectively agreement permits substitution equipment within partnership long implied fair value new property transferred date substitution equals exceeds implied fair value defined current property partnership replaced result substitutions deferred gain reduced 08 million fiscal 2007 28 million fiscal 2006 september 2010 option obligation purchase pumping service equipment approximately 32 million currently intent exercise option price purchase equipment partnership depends part fair market value equipment held partnership time option exercised well factors specified agreement 1997 contributed certain pumping service equipment limited partnership owned 1 interest equipment used provide services customers paid service fee february 9 2007 purchased remaining partnership interest 478 million result acquired partnership equipment acquisition partnership controlling interest accounted asset purchase contractual obligations routinely issue parent company guarantees “pcgs” connection service contracts entered subsidiaries issuance pcgs frequently condition bidding process imposed customers work countries outside north america pcgs typically provide guarantee performance services local subsidiary term pcgs varies length service contract date parent company called upon perform pcgs arrange issuance variety bank guarantees performance bonds standby letters credit vast majority issued connection contracts subsidiary entered customers customer right call bank guarantee performance bond standby letter credit event subsidiary default performance services instruments required condition awarded contract typically released upon completion contract balance instruments predominantly standby letters credit issued connection variety financial obligations support fronted insurance programs claims administration funding certain employee benefit plans temporary importation bonds following table summarizes commercial commitments september 30 2007 thousands investigations regarding misappropriation possible illegal payments discussions doj sec regarding internal investigation certain matters described note 12 notes consolidated financial statements possible accurately predict time matters resolved based current information cannot predict outcome investigations whether reach resolution discussions actions may taken doj sec authorities effect foregoing may consolidated financial statements critical accounting policies accounting policy deemed critical accounting policy must first include estimate requires company make assumptions matters highly uncertain time accounting estimate made second different estimates company reasonably could used accounting estimate current period changes accounting estimate reasonably likely occur period must material impact presentation company’s financial condition results operations estimates assumptions future events effects cannot perceived certainty base estimates historical experience assumptions believed reasonable circumstances results form basis making judgments estimates may change new events occur experience acquired additional information obtained operating environment changes materially different results occur circumstances change additional information becomes known including estimates deemed “critical” proposed rule sec believe following critical accounting policies used preparation consolidated financial statements significant judgments uncertainties affecting application policies selection accounting estimates including deemed “critical” associated disclosures discussion discussed management audit committee board directors critical accounting policies read conjunction disclosures elsewhere notes consolidated financial statements significant accounting policies discussed note 2 consolidated financial statements goodwill account goodwill accordance sfas 142 goodwill intangible assets sfas 142 requires goodwill reviewed possible impairment using fair value measurement techniques annual basis circumstances indicate impairment may exist specifically goodwill impairment determined using twostep process first step goodwill impairment test compares fair value reporting unit net book value including goodwill fair value reporting unit exceeds net book value impairment required second step unnecessary fair value reporting unit less net book value second step performed determine amount impairment fair value measures include quoted market price present value technique estimate future cash flows valuation technique based multiples earnings revenue second step compares implied fair value reporting unit goodwill carrying amount goodwill carrying amount reporting unit goodwill exceeds implied fair value goodwill impairment loss shall recognized amount equal excess implied fair value determined manner amount goodwill recognized business combination fair value reporting unit allocated assets liabilities reporting unit acquired business combination fair value reporting unit purchase price paid acquire reporting unit determining fair value implied fair value reporting unit judgmental often involves use significant estimates assumptions estimates assumptions could significant impact whether impairment charge recognized also magnitude impairment charge estimate fair value primarily determined using discounted cash flows approach uses significant assumptions discount rate growth rate terminal value multiples rig count impairment adjustment necessary 9639 million goodwill balance september 30 2007 see note 11 notes consolidated financial statements information goodwill pension postretirement benefit plans pension expense determined accordance provisions sfas 87 employers’ accounting pensions sfas 106 employers’ accounting postretirement benefits pensions determine annual net periodic pension expense pension plan liabilities annual basis using thirdparty actuary determining annual estimate net periodic pension cost required make evaluation critical assumptions discount rate expected longterm rate return plan assets expected increase compensation levels assumptions may effect amount timing future contributions discount rates based high quality corporate fixed income investments longterm rate return assumptions based actuarial review asset allocation returns earned similar investments rate increase compensation levels reviewed actuaries based upon historical salary experience effects actual results differing assumptions accumulated amortized future periods therefore generally affect recognized expense future periods accordance sfas 158 utilize estimated longterm rate return plan assets difference actual return unrecognized gainloss recognized component comprehensive income amounts recorded comprehensive income amortized recognized net periodic pension expense future periods fiscal 2008 pension postretirement funding requirement 190 million expect fund amount cash flows operating activities see note 9 notes consolidated financial statements information pension plans september 2006 entered agreement settle obligation respect us defined benefit plan assets approximately 72 million plus contribution 15 million used purchase insurance contract used fund benefits settle plan proposed settlement requires approval pension benefit guaranty corporation internal revenue service relieve us primary responsibility pension benefit obligation regulatory approval obtained expected fiscal 2008 expense approximately 233 million connection settlement consists 7 million prepaid pension cost 16 million loss currently recognized comprehensive income relieving us obligation expense would otherwise recognized remaining plan life accelerated period approval received income taxes effective income tax rates 323 314 307 years ended september 30 2007 2006 2005 respectively rates vary primarily due fluctuations taxes mix domestic versus foreign income deferred tax assets liabilities recognized differences book basis tax basis net assets company providing deferred taxes management considers current tax laws estimates future taxable income available tax planning strategies process also involves making forecasts current future years’ united states taxable income unforeseen events industry conditions may impact forecasts turn affect carrying value deferred tax assets liabilities impact future reported earnings tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities potentially courts resolution situations inevitably includes degree uncertainty accordingly provide taxes amounts believe ultimately result proceedings addition aforementioned assessments received various taxing authorities provide taxes certain situations assessments received situations accrue income taxes consider probable taxes ultimately payable exceed amounts reflected filed tax returns accordingly taxes provided situations guidance sfas 5 self insurance accruals loss contingencies selfinsured certain losses relating workers’ compensation general liability property damage employee medical benefits claims filed claims incurred reported management reviews liability quarterly basis liability based primarily actuarial undiscounted basis using individual casebased valuations statistical analysis based upon judgment historical experience however final cost many claims may known five years longer estimate subject trends loss development factors historical average claim volume average cost settled claims current trends claim costs significant unanticipated changes trends future actual payouts could result additional increases decreases recorded accruals purchased stoploss coverage order limit extent feasible aggregate exposure certain claims assurance coverage adequately protect us liability potential consequences discussed note 10 notes consolidated financial statements legal proceedings covering wide range matters pending threatened company possible predict outcome litigation pending company litigation subject many uncertainties possible could adverse developments cases record provisions consolidated financial statements pending litigation determine unfavorable outcome probable amount loss reasonably estimated believe accruals matters adequate actual loss contingency significantly different estimated loss results operations may understated accounting pronouncements february 2007 fasb issued sfas 159 “sfas 159” fair value option financial assets financial liabilities including amendment fasb statement 115 statement provides companies option report selected financial assets liabilities fair value sfas 159 companies elect fair value option report unrealized gains losses earnings subsequent reporting date addition sfas 159 establishes presentation disclosure requirements designed facilitate comparisons companies choose different measurement attributes similar types assets liabilities fair value option election irrevocable unless new election date occurs sfas 159 effective beginning entity’s first fiscal year beginning november 15 2007 applied prospectively unless entity elects early adoption currently process evaluating impact sfas 159 financial statements choose elect option september 2006 fasb issued sfas 157 “sfas 157” fair value measurements effective financial statements issued fiscal years beginning november 15 2007 sfas 157 introduces new definition fair value fair value hierarchy requiring market based assumptions used available new disclosures assets liabilities measured fair value based level hierarchy currently process evaluating impact sfas 157 financial statements july 2006 fasb issued interpretation 48 “fin 48” accounting uncertainty income taxes effective fiscal years beginning december 15 2006 fin 48 prescribes recognition threshold measurement attribute well criteria subsequently recognizing derecognizing measuring tax positions financial statement purposes requires companies make disclosures uncertain income tax positions including detailed rollforward tax benefits taken qualify financial statement recognition addition fin 48 requires us disclose classification interest penalties related uncertain tax positions record component income tax expense estimate impact adopting fin 48 reduction retained earnings range 6 million 10 million forward looking statements document contains forwardlooking statements within meaning private securities litigation reform act 1995 section 21e securities exchange act 1934 concerning among things prospects expected revenue expenses profits developments business strategies operations subject certain risks uncertainties assumptions forwardlooking statements identified statements described “outlook” use terms phrases “expect” “estimate” “project” “forecast” “believe” “achievable” “anticipate” “should” similar terms phrases statements based certain assumptions analyses made us light experience perception historical trends current conditions expected future developments factors believe appropriate circumstances statements subject • fluctuating prices crude oil natural gas • conditions oil natural gas industry including drilling activity • reduction prices demand products services level acceptance price book increases markets • general global economic business conditions • international political instability security conditions hostilities declines customer activity due adverse local regional conditions • ability expand products services including acquire new geographic markets • ability generate technological advances compete basis advanced technology • risks operating hazards fire explosion blowouts oil spills • litigation insurance customer agreements provide protection • adverse consequences may found result internal investigations including potential financial business consequences governmental actions proceedings charges penalties • changes currency exchange rates • severe weather conditions including hurricanes affect conditions oil natural gas industry • business opportunities may presented pursued us • competition consolidation business • changes law regulations factors many beyond control • risks uncertainties detailed time filings securities exchange commission one risks uncertainties materialize underlying assumptions prove incorrect actual results may vary materially expected estimated projected required securities laws assume duty update forward looking statements list risk factors intended comprehensive see “risk factors” included elsewhere annual report form 10k item 7aitem 7 management’s discussion analysis financial condition results operations business engaged providing pressure pumping services oilfield services oil natural gas industry worldwide services provided four business segments usmexico pressure pumping canada pressure pumping international pressure pumping oilfield services group usmexico canada international pressure pumping segments provide stimulation cementing services petroleum industry throughout world stimulation services designed improve flow oil natural gas producing formations cementing services consists pumping cement slurry well casing wellbore isolate fluids might otherwise damage casing andor affect productivity could migrate different zones primarily drilling completion phase well see “business” included elsewhere annual report form 10k information operations oilfield services group consists casing tubular services process pipeline services chemical services completion tools completion fluids services united states select markets internationally market conditions worldwide operations primarily driven number oil natural gas wells drilled depth drilling conditions wells number well completions level workover activity drilling activity turn largely dependent price crude oil natural gas volatility expectations future oil natural gas prices results operations also depend heavily pricing receive customers depends activity levels availability equipment resources competitive pressures market factors often lead volatility revenue profitability especially united states canada historically generated excess 50 revenue historical market conditions reflected table fiscal years ended september 30 1 estimate drilling activity measured average active drilling rigs based baker hughes inc rig count information 2 includes mexico rig count 100 90 85 fiscal years ended september 30 2008 2007 2006 respectively oil natural gas prices extremely volatile recent months declined significantly historic highs july 2008 crude oil west texas intermediate natural gas henry hub prices november 17 2008 5495 655 respectively us rig count demand pressure pumping services united states primarily driven oil natural gas drilling activity tends extremely volatile depending current anticipated prices crude oil natural gas last 10 years lowest annual us rig count averaged 601 fiscal 1999 highest annual us rig count averaged 1851 fiscal 2008 retraction oil natural gas prices last months along uncertainty credit markets expect see reduction north america drilling activity 2009 magnitude reduction uncertain ultimately influenced number factors including commodity prices winter demand oil natural gas government policy respect financial credit crisis canadian rig count demand pressure pumping services canada primarily driven oil natural gas drilling activity similar united states tends extremely volatile last 10 years lowest annual rig count averaged 212 fiscal 1999 highest annual rig count averaged 502 fiscal 2006 international rig count many countries operate subject political social economic risks may cause volatility within given country however international revenue total less volatile operate approximately 50 countries provides reduction exposure one country due significant investment complexity international projects believe drilling decisions relating projects tend evaluated monitored longerterm perspective regard oil natural gas pricing additionally international market dominated major oil companies national oil companies tend different objectives operating stability typical independent producer north america last 10 years lowest annual international rig count excluding canada including mexico averaged 616 fiscal 1999 highest annual international rig count averaged 1061 fiscal 2008 results operations consolidated dollars millions 1 estimate drilling activity measured average active drilling rigs based baker hughes inc rig count information results fiscal 2008 compared fiscal 2007 consolidated revenue fiscal 2008 increased 13 compared fiscal 2007 reportable segments showing revenue growth revenue usmexico pressure pumping services increased 8 last year result higher activity levels largely offset lower pricing products services revenue canada international pressure pumping services increased 14 17 respectively canadian increase primarily attributable favorable exchange rates international increase result increased activity middle east asia pacific latin america 2008 oilfield services group’s revenue increased 23 largely result increased international activity lesser extent acquisition innicor subsurface technologies inc may 2008 despite improved revenue reportable segments consolidated operating income margin declined 24 fiscal 2007 17 fiscal 2008 declining prices products services north american market well increased material fuel costs led overall decline operating income margin results fiscal 2007 compared fiscal 2006 reportable segments except canada contributed increase revenue fiscal 2007 compared fiscal 2006 increase primarily relates higher activity major markets except canada depressed market conditions present throughout fiscal 2007 worldwide average active drilling rigs fiscal 2007 increased 4 compared prior year fiscal 2007 consolidated operating income margin 24 27 fiscal 2006 operating income margin negatively impacted 68 decline operating income canada well price reductions us market see discussion individual segments revenue operating income variance details usmexico pressure pumping segment dollars millions 1 estimate drilling activity measured average active drilling rigs based baker hughes inc rig count information results fiscal 2008 compared fiscal 2007 fiscal 2008 revenue usmexico pressure pumping segment increased 8 compared prior fiscal year average active drilling rigs increasing 6 operating regions within usmexico pressure pumping except gulf coast showed improved revenue fiscal 2007 us activity increased fiscal 2008 compared fiscal 2007 prices received products services declined usmexico pressure pumping operating income margin decreased 34 fiscal 2007 22 fiscal 2008 decline prices coupled increased material maintenance fuel costs caused fiscal 2008 decline results fiscal 2007 compared fiscal 2006 fiscal 2007 usmexico revenue increased compared prior year result activity increases notably east texas permian basin northeast regions united states mexico region also benefited improved revenues attributable expansion business southern mexico increases slightly offset decline activity pacific region usmexico average active drilling rigs increased 10 fiscal 2007 revenue negatively impacted lower prices received products services stemming competitive pressures market operating income margin declined 34 compared 38 prior fiscal year primarily due lower pricing increased material labor costs increased depreciation expense canada pressure pumping dollars millions 1 estimate drilling activity measured average active drilling rigs based baker hughes inc rig count information results fiscal 2008 compared fiscal 2007 14 increase revenue canada pressure pumping fiscal 2008 almost entirely due strengthening canadian dollar relative us dollar average canadian dollar exchange rate increased 9 fiscal 2008 compared fiscal 2007 thereby increasing us dollar equivalent revenues earned canada activity levels little impact revenue increase canadian average active drilling rigs fiscal 2008 remained unchanged prior year operating income margin fiscal 2008 8 consistent fiscal 2007 despite improved revenues region operating income margin negatively impacted increased pricing pressures cost increases fiscal 2008 results fiscal 2007 compared fiscal 2006 lower activity levels influenced lower natural gas prices caused revenue decline compared prior year average active drilling rigs decreased 27 fiscal 2007 revenue exhibiting corresponding decrease 20 region also experienced lower pricing products services operating income margin decreased 8 21 prior year along declining prices products services region also higher depreciation expense material costs labor costs fiscal 2007 international pressure pumping segment dollars millions 1 estimate drilling activity measured average active drilling rigs based baker hughes inc rig count information results fiscal 2008 compared fiscal 2007 1 fiscal 2008 revised internal management reporting structure pressure pumping operations africa whose results operations previously reported europeafrica operating segment north africa results including algeria libya included middle east operating segment west africa results south nigeria including angola gabon included latin america operating segment nigeria coastal areas north remain part europe operating segment prior period results revised conform current presentation international pressure pumping revenue increased 17 fiscal 2008 compared fiscal 2007 increased revenue middle east latin american operations significant contributors overall revenue increase middle east operations benefited introduction two stimulation vessels india market well improved revenues algeria activity increases saudi arabia kazakhstan azerbaijan latin american operations experienced significant growth brazil argentina gabon venezuela comparing fiscal 2008 revenue fiscal 2007 primarily result increased drilling completion activity countries average active drilling rigs region increased 6 compared prior year asia pacific revenue increased 15 average active drilling rigs region increasing 11 major markets within region experienced revenue growth declines revenue offshore stimulation vessel north sea due relocation india well revenue decline northern west africa operations caused 11 decrease revenue europe fiscal 2008 decline revenue russia almost entirely due sale workover rig business fiscal 2007 operating income margin remained consistent fiscal 2007 14 declines revenue russia asia pacific operations offsetting positive contribution operating income operating regions fiscal 2008 recognized noncash goodwill impairment charge 61 million related russia operations competitive pressure areas operate russia cost inflation currency risks concerns future activity reductions analysis indicates goodwill associated russia might recoverable results fiscal 2007 compared fiscal 2006 1 fiscal 2008 revised internal management reporting structure pressure pumping operations africa whose results operations previously reported europeafrica operating segment north africa results including algeria libya included middle east operating segment west africa results south nigeria including angola gabon included latin america operating segment nigeria coastal areas north remain part europe operating segment prior period results revised conform current presentation operating regions within international pressure pumping except russia showed increases revenue fiscal 2007 compared fiscal 2006 europe showed improvement due increased activity netherlands increase slightly offset lower coiled tubing revenue norway average active drilling rig count europe increased 8 compared fiscal 2006 despite significant decline revenue prior year’s nonrepeat blowout work bangladesh middle east showed improved revenues due increased activity introduction vessel operations india increased coiled tubing work saudi arabia expansion operations libya acquisition controlling interest algerian joint venture july 2006 average active drilling rig count fiscal 2007 region increased 13 compared fiscal year 2006 award contracts malaysia activity increases australia accounted asia pacific’s revenue increase offset decline revenue new zealand due nonrepeat work prior fiscal year average active drilling rig count fiscal 2007 increased 4 asia pacific compared fiscal year 2006 latin american region improvement due primarily increased activity argentina colombia brazil average active drilling rig count increased 10 latin america compared prior year russian revenue declined result divesture workover rig business region year well lower margin performance activity excluding revenue workover rig business revenue region increased 10 compared fiscal 2006 operating income margin international pressure pumping 14 fiscal 2007 compared 16 fiscal 2006 margin contributions asia pacific latin america offset margin declines high margin nonrepeat blowout work bangladesh prior fiscal year activity declines norway oilfield services group millions results fiscal 2008 compared fiscal 2007 operating segments within oilfield services group except completion fluids negatively impacted decline offshore deepwater activity gulf mexico showed improved revenues fiscal 2008 compared prior year process pipeline services benefited increased international domestic activity chemical services benefited primarily increased revenue capillary services increased us activity levels may 2008 acquired innicor subsurface technologies inc acquisition along increased activity levels international markets accounted completion tools revenue improvement excluding effect innicor acquisition completion tools revenue improved 29 tubular services also showed improved revenue result increased activity international markets operating income margin fiscal 2008 declined 19 21 prior year positive contributions process pipeline services chemical services tubular services groups offset declining operating income margins operating segments within oilfield services group results fiscal 2007 compared fiscal 2006 following table summarizes change revenue fiscal 2007 compared fiscal 2006 operating segments oilfield services group operating segments except completion fluids showed revenue improvement fiscal 2007 tubular services’ revenue fiscal 2007 increased largely due international market expansion process pipeline services benefited increased activity uk us operations well acquisition norson march 2007 excluding impact norson acquisition process pipeline services revenue increased 15 chemical services revenue increased largely due acquisitions dynacoil’s allischalmers’ capillary string businesses excluding acquisitions chemical services revenue increased 12 completion tools revenue improvement due international growth well increased domestic deepwater activity revenue completion fluids operations declined due closing low margin operations uk norway previous year fiscal 2007 operating income margin oilfield services group 21 increase 20 reported fiscal year 2006 tubular services largest contributor increase outlook stated “market conditions” worldwide operations primarily driven number oil natural gas wells drilled depth drilling conditions wells number well completions level workover activity current commodity price credit environment anticipate north american drilling activity lower 2009 compared 2008 would negatively impact demand products services extent duration projected decline uncertain time continue focus labor cost efficiencies monitor discretionary spending respond prevailing activity levels historically international drilling programs tend longerterm nature therefore less affected short term swings oil prices consequently expect see year revenue growth international pressure pumping operations based contracts place current prospects however event crude oil natural gas prices decline significantly current price levels drilling activity consequently activity could experience significant reductions projections oilfield services businesses reported solid growth fiscal 2008 expected continue growth trend fiscal 2009 particularly outside north america product lines expanded established international operations expenses following table sets forth operating expenses dollars millions research engineering expense research engineering expense increased 45 million 7 fiscal 2008 compared fiscal 2007 primarily due increased personnel costs percentage revenue research engineering expense decreased 13 fiscal 2008 compared 14 prior fiscal year fiscal 2007 expenses increased 36 million fiscal 2006 increase mostly relates increased personnel primary research facility tomball texas certain operating locations support higher activity marketing expense increase personnel costs main contributor 135 million 13 increase marketing expense fiscal 2007 fiscal 2008 percentage revenue fiscal 2008 marketing expense remained consistent prior fiscal year fiscal 2007 expenses increased 4 compared fiscal 2006 result higher commissions certain markets internationally well increased headcount support market growth general administrative expense fiscal 2008 general administrative expenses increased 170 million 12 primarily result increased personnel costs depreciation expense percentage revenue general administrative expense 30 fiscal 2008 consistent fiscal 2007 2006 fiscal 2007 expenses remained consistent percent revenue increased 9 compared fiscal 2006 increase primarily relates increased personnel stockbased compensation expense increase 76 million offset lower compensation expense related annual performance incentive accruals decrease annual performance incentive accruals primary reason decrease corporate expenses fiscal 2007 following table shows comparison interest expense interest income expense net millions interest expense interest income interest expense decreased 46 million fiscal 2008 primarily result lower average outstanding borrowings comparing respective periods outstanding debt balances decreased 6710 million september 30 2007 5563 million september 30 2008 fiscal 2007 interest expense increased 181 million compared fiscal 2006 result higher average outstanding debt respective periods interest income decreased 133 million fiscal 2007 compared fiscal 2006 result lower average cash equivalents balance throughout fiscal year fiscal 2008 interest income consistent fiscal 2007 expense net expense net years ended september 30 summarized follows thousands increase expense net fiscal 2008 compared fiscal 2007 relates 61 million noncash charge impair goodwill russia operations also recorded 29 million loss sale interest hungarian joint venture operation received 40 million cash settlement litigation matter increase expense net fiscal 2007 consisted primarily minority interest expense due acquisition controlling interest algerian joint venture third quarter fiscal 2006 additional information see note 12 notes consolidated financial statements liquidity capital resources historical cash flow following table sets forth historical cash flows years ended september 30 millions fiscal 2008 cash flow operations 8988 million fiscal 2008 increased 581 million 7 compared 8407 million cash provided operations fiscal 2007 primarily result lower investment inventories two periods net cash flows changes operating accounts 9887 million fiscal 2008 compared 10293 million fiscal 2007 decrease primarily attributable lower usmexico pressure pumping operating income changes operating accounts accounted 899 million cash usage fiscal 2008 compared 1887 million fiscal 2007 1716 million fiscal 2006 improvement primarily attributable stable inventory levels compared significant increases inventory fiscal 2007 2006 increased receivables accounted 1249 million use cash primarily result increased revenues particularly internationally cash flow used investing fiscal 2008 almost entirely due 6069 million purchases property plant equipment 572 million acquisition businesses principally innicor subsurface technologies inc may 2008 cash flows used financing consisted 1137 million net payments short term borrowings 586 million dividend payments fiscal 2008 also received net proceeds amount 142 million employee stock purchases stock option exercises fiscal 2008 investing activities period included issuance 6 senior notes due 2018 2469 million net proceeds may 2008 payment 2500 million senior notes june 2008 fiscal 2007 result pricing pressures north america fiscal 2007 experienced modest increase cash flow operations compared fiscal 2006 significant uses cash included increased inventory anticipation increases activity increased accounts receivable result increased revenue days sales outstanding increased prepaid expenses primarily related tax payments increased accounts payable also contributed cash flow operations mostly increased activity levels cash flow used investing fiscal 2007 almost entirely due 7521 million purchases property plant equipment including 478 million paid buyout equipment partnership established 1997 also paid 579 million net cash acquisitions cash flows used financing consisted 110 million net proceeds short term borrowings 746 million repurchases common stock 586 million dividend payments fiscal 2007 also received proceeds amount 224 million employee stock purchases stock option exercises fiscal 2007 fiscal 2006 cash flow operations increased prior year principally result increased activity levels working capital decreased 1398 million september 30 2006 compared september 30 2005 largely result utilizing cash repurchase treasury stock accounts receivable increased 2209 million inventory increased 1112 million accounts payable increased 1058 million primarily result increase worldwide activity levels also result increased activity increased number employees therefore employee compensation benefits liability increased 268 million cash flow used investing almost entirely due 4600 million purchases property plant equipment fiscal 2006 also paid 522 million connection two acquisitions fiscal 2006 spent 11333 million repurchase 317 million shares stock year cash flow financing activities also included net proceeds issuance senior notes amount 4968 million proceeds primarily used repurchase treasury stock also 1600 million borrowings revolving credit facility paid dividends 643 million liquidity capital resources cash flows operations expected primary source liquidity fiscal 2009 sources liquidity also include cash equivalents 1503 million september 30 2008 available financing facilities listed millions may 19 2008 completed public offering 2500 million 6 senior notes due 2018 net proceeds offering approximately 2469 million deducting underwriting discounts commissions expenses used retire 2500 million outstanding floating rate senior notes matured june 1 2008 september 30 2008 company 2498 million 575 senior notes due 2011 2489 million 6 senior notes due 2018 issued outstanding net discount amended restated revolving credit facility “revolving credit facility” permits borrowings 400 million principal amount revolving credit facility includes 50 million sublimit issuance standby letters credit 20 million sublimit swingline loans swingline loans shortterm maturities remaining amounts outstanding revolving credit facility become due payable august 2012 addition right request additional 200 million permitted borrowings 400 million subject approval lenders time request depending amount borrowings outstanding facility interest rate applicable borrowings generally ranges 3040 basis points libor charged various fees connection revolving credit facility including commitment fee based average daily unused portion commitment totaling 02 million 03 million 05 million fiscal 2008 2007 2006 respectively addition revolving credit facility charges utilization fee outstanding loans letters credit usage revolving credit facility exceeds 625 although material fees fiscal 2008 2007 borrowings revolving credit facility september 30 2008 1470 million outstanding september 30 2007 may 2008 entered committed credit facility commercial bank finance acquisition innicor subsurface technologies inc commitment fees required facility interest rate based market rates dates amounts borrowed september 30 2008 500 million outstanding borrowings credit facility expire may 2009 addition revolving credit facility committed credit facility available 622 million discretionary lines credit september 30 2008 expire bank’s discretion except 48 million discretionary lines unsecured requirements commitment fees compensating balances connection lines credit interest prevailing market rates 76 million 243 million outstanding borrowings lines credit september 30 2008 2007 respectively weighted average interest rates shortterm borrowings outstanding september 30 2008 2007 523 540 respectively management believes cash flows operations combined cash equivalents revolving credit facility discretionary credit facilities provide us sufficient capital resources liquidity manage routine operations meet debt service obligations fund projected capital expenditures repurchase common stock pay regular quarterly dividend support development shortterm longterm operating strategies discretionary lines credit renewed borrowings lines credit otherwise become unavailable expect refinance debt arranging additional committed bank facilities longterm borrowing alternatives senior notes revolving credit facility committed credit facility include various customary covenants provisions including maintenance certain profitability solvency ratios none materially restrict activities currently compliance covenants imposed cash requirements anticipate capital expenditures approximately 550575 million fiscal 2009 compared 6069 million fiscal 2008 actual amount fiscal 2009 capital expenditures depend primarily maintenance requirements expansion opportunities ability execute budgeted capital expenditures fiscal 2009 minimum pension postretirement funding requirements anticipated approximately 193 million contributed 168 million fiscal 2008 paid cash dividends amount 05 per common share quarterly basis fiscal 2008 totaling 586 million anticipate paying quarterly dividend fiscal 2009 however dividends subject approval board directors quarter board ability change dividend policy time september 30 2008 company 2498 million 575 senior notes due 2011 2489 million 6 senior notes due 2018 issued outstanding net discount 500 million outstanding committed credit facility due may 2009 expect repay committed credit facility becomes due cash hand financing available existing credit facilities new facility bank expect cash paid interest expense approximately 320 million fiscal 2009 contractual obligations balance sheet transactions following table summarizes contractual obligations commercial commitments september 30 2008 thousands 1 discussed option obligation purchase pumping service equipment partnership approximately 46 million 2010 currently expect purchase pumping service equipment therefore included option payment table 2 includes agreements purchase goods services approved specify significant terms pricing quantity timing policies require purchase order completed items 200 miscellaneous items office supplies 3 entered agreements certain suppliers ensure certain level materials maintained united states canada 4 includes expected cash payments longterm liabilities reflected consolidated balance sheet amounts timing payment known amounts include asset retirement obligations known pension funding requirements postretirement benefit obligation environmental accruals miscellaneous longterm obligations amounts exclude deferred gains see “off balance sheet transactions” pension obligations funding requirements uncertain longterm contingent liabilities october 1 2007 adopted fin 48 accounting uncertainty income taxes “fin 48” addresses determination whether tax benefits claimed expected claimed tax return recorded financial statements however timing future cash flows associated fin 48 uncertain unable make reasonably reliable estimates period cash settlement respective taxing authority therefore excluded 592 million unrecognized tax benefits contractual obligations table expect cash equivalents cash flows operations generate sufficient cash flows fund cash requirements described 1999 contributed certain pumping service equipment limited partnership 1 interest equipment used provide services customers pay service fee period least six years 13 years approximately 12 million annually accounted operating lease assessed terms agreement determined variable interest entity defined fin 46 consolidation variable interest entities however deemed primary beneficiary therefore consolidation required transaction resulted gain deferred amortized 13 years balance deferred gain 42 million 90 million september 30 2008 september 30 2007 respectively agreement permits substitution equipment within partnership long implied fair value new property transferred date substitution equals exceeds implied fair value defined current property partnership replaced result substitutions deferred gain reduced 27 million fiscal 2008 08 million fiscal 2007 2010 option obligation purchase pumping service equipment approximately 46 million currently intend exercise option price purchase equipment partnership depends part fair market value equipment held partnership time option exercised well factors specified agreement routinely issue parent company guarantees “pcgs” connection service contracts performance obligations entered subsidiaries issuance pcgs frequently condition bidding process imposed customers work countries outside north america pcgs typically provide guarantee performance services local subsidiary term pcgs varies length service contract date parent company called upon perform pcgs arrange issuance variety bank guarantees performance bonds standby letters credit vast majority issued connection contracts subsidiaries entered customers customer right call bank guarantee performance bond standby letter credit event subsidiaries default performance services instruments required condition awarded contract typically released upon completion contract also issued standby letters credit connection variety financial obligations support fronted insurance programs claims administration funding certain employee benefit plans temporary importation bonds following table summarizes commercial commitments september 30 2008 thousands investigations regarding misappropriation possible illegal payments discussions doj sec regarding internal investigation certain matters described note 12 notes consolidated financial statements possible accurately predict time matters resolved based current information cannot predict outcome investigations whether reach resolution discussions actions may taken doj sec authorities effect foregoing may consolidated financial statements critical accounting policies accounting policy deemed critical accounting policy must first include estimate requires company make assumptions matters highly uncertain time accounting estimate made second different estimates company reasonably could used accounting estimate current period changes accounting estimate reasonably likely occur period must material impact presentation company’s financial condition results operations estimates assumptions future events effects cannot perceived certainty base estimates historical experience assumptions believed reasonable circumstances results form basis making judgments estimates may change new events occur experience acquired additional information obtained operating environment changes materially different results occur circumstances change additional information becomes known including estimates deemed “critical” believe following critical accounting policies used preparation consolidated financial statements significant judgments uncertainties affecting application policies selection accounting estimates including deemed “critical” associated disclosures discussion discussed management audit committee board directors critical accounting policies read conjunction disclosures elsewhere notes consolidated financial statements significant accounting policies discussed note 2 notes consolidated financial statements goodwill account goodwill accordance sfas 142 goodwill intangible assets sfas 142 requires goodwill reviewed possible impairment using fair value measurement techniques annual basis circumstances indicate impairment may exist specifically goodwill impairment determined using twostep process first step goodwill impairment test compares fair value reporting unit net book value including goodwill fair value reporting unit exceeds net book value impairment required second step unnecessary fair value reporting unit less net book value second step performed determine amount impairment fair value measures include quoted market price present value technique estimate future cash flows valuation technique based multiples earnings revenue second step compares implied fair value reporting unit goodwill carrying amount goodwill carrying amount reporting unit goodwill exceeds implied fair value goodwill impairment loss shall recognized amount equal excess implied fair value determined manner amount goodwill recognized business combination fair value reporting unit allocated assets liabilities reporting unit acquired business combination fair value reporting unit purchase price paid acquire reporting unit determining fair value implied fair value reporting unit judgmental often involves use significant estimates assumptions estimates assumptions could significant impact whether impairment charge recognized also magnitude impairment charge estimate fair value primarily determined using discounted cash flows approach uses significant assumptions discount rate growth rate terminal value multiples future rig count pricing trends fiscal 2008 recognized goodwill impairment charge 61 million related russia operations competitive pressure areas operate russia cost inflation currency risks concerns future activity reductions analysis indicates goodwill associated russia might recoverable see note 11 notes consolidated financial statements information goodwill pension postretirement benefit plans pension expense postretirement benefit obligation determined accordance provisions sfas 87 employers’ accounting pensions sfas 106 employers’ accounting postretirement benefits pensions respectively determine annual net periodic pension expense pension plan liabilities annual basis determining annual estimate net periodic pension cost required make evaluation critical assumptions discount rate expected longterm rate return plan assets expected increase compensation levels assumptions may effect amount timing future contributions discount rates based high quality corporate fixed income investments 50 basis point decrease discount rate used fiscal 2008 would resulted recognition approximately 27 million additional expense longterm rate return assumptions based actuarial review asset allocation average annual returns earned similar investments 50 basis point reduction expected rate return assets plans would resulted recognition approximately 07 million additional expense fiscal 2008 rate increase compensation levels reviewed actuaries based upon historical salary experience effects actual results differing assumptions accumulated amortized future periods therefore generally affect recognized expense future periods postretirement medical benefit plan provides credits based years service used purchase coverage retiree plan effectively caps health care inflation rate 4 increase per year increasing assumed health care cost trend rates one percentage point would material impact accumulated postretirement benefit obligation net periodic postretirement benefit cost benefits capped pursuant terms plan accordance sfas 158 changes assumptions differences estimated actual return plan assets compensation levels result unrecognized gainloss recorded component stockholders’ equity accumulated comprehensive income amounts recorded accumulated comprehensive income amortized recognized net periodic pension expense future periods fiscal 2009 pension postretirement funding requirement approximately 193 million expect fund amount cash flows operating activities see note 9 notes consolidated financial statements information pension plans september 2006 entered agreement settle obligation respect us defined benefit pension plan assets approximately 72 million used purchase insurance contract used fund benefits settle plan proposed settlement requires approval pension benefit guaranty corporation internal revenue service relieve us primary responsibility pension benefit obligation regulatory approval obtained expected early fiscal 2009 record noncash charge approximately 216 million connection settlement consists 56 million prepaid pension cost 160 million loss currently recognized accumulated comprehensive income relieving us obligation expense would otherwise recognized remaining plan life accelerated period regulatory approval settlement received income taxes effective income tax rates 298 323 314 years ended september 30 2008 2007 2006 respectively rates vary primarily due fluctuations taxes mix domestic versus foreign income deferred tax assets liabilities recognized differences book basis tax basis net assets company providing deferred taxes consider current tax laws estimates future taxable income available tax planning strategies process also involves making forecasts current future years’ us taxable income unforeseen events industry conditions may impact forecasts turn affect carrying value deferred tax assets liabilities impact future reported earnings tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities potentially courts resolution situations inevitably includes degree uncertainty accordingly provide taxes amounts believe ultimately result proceedings addition aforementioned assessments received various taxing authorities provide taxes certain situations assessments received situations accrue income taxes consider probable taxes ultimately payable exceed amounts reflected filed tax returns accordingly taxes provided situations guidance fin 48 fiscal 2008 guidance sfas 5 prior periods selfinsurance accruals loss contingencies selfinsured certain losses relating workers’ compensation general liability property damage employee medical benefits claims filed claims incurred reported review liability quarterly basis liability based primarily actuarial undiscounted basis using individual casebased valuations statistical analysis based upon judgment historical experience however final cost many claims may known five years longer estimate subject trends loss development factors historical average claim volume average cost settled claims current trends claim costs significant unanticipated changes trends future actual payouts could result additional increases decreases recorded accruals purchased stoploss coverage limit extent feasible aggregate exposure certain claims assurance coverage adequately protect us liability potential consequences discussed note 10 notes consolidated financial statements legal proceedings covering wide range matters pending threatened company possible predict outcome litigation pending company litigation subject many uncertainties possible could adverse developments cases record provisions consolidated financial statements pending litigation determine unfavorable outcome probable amount loss reasonably estimated believe accruals matters adequate actual loss contingency significantly different estimated loss results operations may understated accounting pronouncements april 2008 financial accounting standards board “fasb” issued fasb staff position 1423 determination useful life intangible assets “fsp 1423” fsp 1423 amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset fasb statement 142 goodwill intangible assets “sfas 142” objective fsp 1423 improve consistency useful life recognized intangible asset sfas 142 period expected cash flows used measure fair value asset sfas 141r business combinations us generally accepted accounting principles fsp 1423 effective fiscal years beginning december 15 2008 currently process evaluating impact fsp 1423 financial statements march 2008 fasb issued sfas 161 disclosures derivative instruments hedging activities amendment fasb statement 133 “sfas 161” sfas 161 changes disclosure requirements derivative instruments hedging activities entities required provide enhanced disclosures 1 entity uses derivative instruments 2 derivative instruments related hedged items accounted sfas 133 related interpretations 3 derivative instruments related hedged items affect entity’s financial position financial performance cash flows sfas 161 effective fiscal years interim periods beginning november 15 2008 required adopt sfas 161 second quarter fiscal 2009 currently derivative financial instruments subject accounting disclosure sfas 133 therefore expect adoption sfas 161 affect consolidated statement financial position results operations cash flows december 2007 fasb issued sfas 141 revised 2007 business combinations “sfas 141r” replacing sfas 141 business combinations “sfas 141” sfas 141 r retains fundamental requirements sfas 141 acquisition method accounting used business combinations acquirer identified business combination sfas 141r defines acquirer entity obtains control one businesses business combination establishes acquisition date acquirer achieves control sfas 141r establishes principles requirements acquirer recognizes measures financial statements identifiable assets acquired liabilities assumed noncontrolling interest acquiree b recognizes measures goodwill acquired business combination gain bargain purchase c determines information disclose enable users financial statements evaluate nature financial effects business combination statement effective business combinations occurring beginning first annual reporting period beginning december 15 2008 adopt sfas 141r october 1 2009 acquisitions beginning date december 2007 fasb issued sfas 160 noncontrolling interests consolidated financial statements “sfas 160” amending arb 51 establish accounting reporting standards noncontrolling interest subsidiary deconsolidation subsidiary sfas 160 requires consolidated net income reported amounts include amounts attributable parent noncontrolling interest also requires disclosure face consolidated statement income amounts consolidated net income attributable parent noncontrolling interest requires parent recognize gain loss net income subsidiary deconsolidated sfas 160 requires expanded disclosures consolidated financial statements identify distinguish interests parent’s owners interests noncontrolling owners subsidiary shall applied prospectively beginning fiscal year initially applied except presentation disclosure requirements presentation disclosure requirements shall applied retrospectively periods presented sfas 160 effective fiscal years beginning december 15 2008 significant noncontrolling interests consolidated subsidiaries therefore adoption standard expected significant impact financial statements february 2007 fasb issued sfas 159 fair value option financial assets financial liabilities including amendment fasb statement 115 “sfas 159” statement provides companies option report selected financial assets liabilities fair value sfas 159 companies elect fair value option report unrealized gains losses earnings subsequent reporting date addition sfas 159 establishes presentation disclosure requirements designed facilitate comparisons companies choose different measurement attributes similar types assets liabilities fair value option election irrevocable unless new election date occurs sfas 159 effective beginning entity’s first fiscal year beginning november 15 2007 applied prospectively unless entity elects early adoption consequently adopted sfas 159 effective october 1 2008 elect apply fair value option september 2006 fasb issued sfas 157 fair value measurements “sfas 157” effective financial statements issued fiscal years beginning november 15 2007 february 2008 fasb issued fasb staff position 1572 delaying effective date sfas 157 nonfinancial assets liabilities fiscal years beginning november 15 2008 sfas 157 introduces new definition fair value fair value hierarchy requiring market based assumptions used available new disclosures assets liabilities measured fair value based level hierarchy currently process evaluating impact sfas 157 financial statements forward looking statements document contains forwardlooking statements within meaning private securities litigation reform act 1995 section 21e securities exchange act 1934 concerning among things prospects expected revenue expenses profits developments business strategies operations subject certain risks uncertainties assumptions forwardlooking statements identified statements described “outlook” use terms phrases “expect” “estimate” “project” “forecast” “believe” “achievable” “anticipate” “should” similar terms phrases statements based certain assumptions analyses made us light experience perception historical trends current conditions expected future developments factors believe appropriate circumstances may prove accurate statements subject risks uncertainties including limited general economic business conditions global economic growth activity oil natural gas market conditions political economic uncertainty risks uncertainties described elsewhere report including “item 1a risk factors” one risks uncertainties materialize underlying assumptions prove incorrect actual results may vary materially expected estimated projected forwardlooking statements speak date made except required securities laws assume duty update revise forwardlooking statements item 7aitem 7 management’s discussion analysis financial condition results operations business engaged providing pressure pumping services oilfield services oil natural gas industry worldwide services provided four business segments usmexico pressure pumping canada pressure pumping international pressure pumping oilfield services group usmexico canada international pressure pumping segments provide stimulation cementing services petroleum industry throughout world stimulation services designed improve flow oil natural gas producing formations cementing services consists pumping cement slurry well casing wellbore isolate fluids might otherwise damage casing andor affect productivity could migrate different zones primarily drilling completion phases well see “business” included elsewhere annual report form 10k information operations oilfield services group consists casing tubular services process pipeline services chemical services completion tools completion fluids services united states select markets internationally baker hughes merger agreement august 30 2009 baker hughes incorporated “baker hughes” entered agreement plan merger “merger agreement” pursuant merge whollyowned subsidiary baker hughes share common stock converted right receive 040035 shares baker hughes common stock 269 cash “merger” completion merger subject customary closing conditions including approval merger stockholders ii approval stockholders baker hughes issuance baker hughes common stock execute merger iii applicable regulatory approvals including termination expiration applicable waiting period hartscottrodino antitrust improvements act 1976 amended iv effectiveness registration statement form s4 relating baker hughes common stock issued merger v customary closing conditions merger agreement agreed conduct business ordinary course merger pending generally refrain acquiring new businesses incurring new indebtedness repurchasing treasury shares issuing new common stock equity awards entering new material contracts commitments outside normal course business without consent baker hughes certain circumstances baker hughes may required pay termination fee 175 million party merger completed merger approved completed certain contractual obligations company may triggered accelerated “change control” provisions contractual arrangements examples arrangements include stockbased compensation awards severance retirement plan agreements applicable executive officers directors certain employees equipment partnership described note 11 notes consolidated financial statements baker hughes working comply department justice’s second request additional information documentary material issued october 14 2009 complete merger quickly practicable currently expect merger completed second fiscal quarter fiscal 2010 however cannot predict certainty merger completed completion merger subject conditions within beyond control market conditions worldwide operations primarily driven number oil natural gas wells drilled depth drilling conditions wells number well completions level workover activity drilling workover activity turn largely dependent price crude oil natural gas volatility expectations future oil natural gas prices results operations also depend heavily pricing receive customers depends activity levels availability equipment resources competitive pressures market factors often lead volatility revenue profitability especially united states canada historically generated excess 50 revenue historical market conditions reflected table fiscal years ended september 30 1 estimate drilling activity measured average active drilling rigs based baker hughes inc rig count information 2 excludes canada includes mexico rig count 124 100 90 fiscal years ended september 30 2009 2008 2007 respectively us rig count demand pressure pumping services united states primarily driven oil natural gas drilling activity tends extremely volatile depending current anticipated prices crude oil natural gas last 11 years lowest annual us rig count averaged 601 fiscal 1999 highest annual us rig count averaged 1851 fiscal 2008 retraction oil natural gas prices since peak july 2008 tightening uncertainty credit markets global economic slowdown drilling activity united states rapidly declined peak levels 2031 rigs september 12 2008 recent low 876 rigs june 12 2009 gradually improving fiscal fourth quarter us rig count 1024 rigs october 2 2009 nearterm longer range outlook us drilling activity uncertain ultimately influenced number factors including commodity prices global demand oil natural gas production depletion rates oil natural gas reserves government policy respect financial credit crisis energy environmental issues impacting business canadian rig count demand pressure pumping services canada primarily driven oil natural gas drilling activity similar united states tends extremely volatile last 11 years lowest annual rig count averaged 212 fiscal 1999 highest annual rig count averaged 502 fiscal 2006 similar activity united states drilling rig activity canada declined significantly since late september 2008 rig count canada typically encounters significant seasonal fluctuations decreasing spring breakup period snow ice begin melt heavy equipment permitted roads restricting access well sites therefore resulting lower drilling activity spring breakup period typically begins late february march extends may drilling activity canada generally slow resume spring breakup fiscal 2009 due adverse market conditions october 2 2009 canadian drilling rig count 238 rigs international rig count many countries operate subject political social economic risks may cause volatility within given country however international revenue total less volatile operate approximately 50 countries helps offset exposure one country due significant investment complexity international projects believe drilling decisions relating projects tend evaluated monitored longerterm perspective regard oil natural gas pricing additionally international market dominated major oil companies national oil companies tend different objectives operating stability typical independent producer north america last 11 years lowest annual international rig count excluding canada including mexico averaged 616 fiscal 1999 highest annual international rig count averaged 1061 fiscal 2008 international rig count declined fiscal 2009 compared fiscal 2008 much lower rate north america response prevailing market conditions implemented number cost reduction measures united states canada certain markets outside north america measures include reducing personnel levels managing supply chain reduce material costs reducing capital spending controlling investment working capital results operations consolidated dollars millions 1 estimate drilling activity measured average active drilling rigs based baker hughes inc rig count information results fiscal 2009 compared fiscal 2008 fiscal 2009 impact global economic downturn decreased demand oil natural gas combined intense price competition north america negatively affected reporting segments compared prior year consolidated revenue fiscal 2009 decreased 23 compared fiscal 2008 consolidated operating income decreased 75 primarily result decreased demand intense price competition products services notably united states canada results fiscal 2009 included unusual charges including noncash charge 217 million related settlement us defined benefit pension plan employee severance costs 111 million 154 million noncash charges related excess idle fixed assets 100 million noncash inventory writedowns 53 million costs related pending merger baker hughes unusual charges fiscal 2009 represented 15 consolidated revenue fiscal 2009 consolidated operating income margin decreased 6 17 fiscal 2008 results fiscal 2008 compared fiscal 2007 consolidated revenue fiscal 2008 increased 13 compared fiscal 2007 reportable segments showing sequential revenue growth revenue usmexico pressure pumping services increased 8 fiscal 2007 result higher activity levels largely offset lower pricing products services revenue canada international pressure pumping services increased 14 18 respectively canadian increase primarily attributable favorable exchange rates international increase result increased activity middle east asia pacific latin america 2008 oilfield services group’s revenue increased 22 largely result increased international activity lesser extent acquisition innicor subsurface technologies inc may 2008 despite improved revenue reportable segments consolidated operating income margin declined 24 fiscal 2007 17 fiscal 2008 declining prices products services north american market well increased material fuel costs led overall decline operating income margin see discussion individual reporting segments revenue operating income variance details usmexico pressure pumping segment dollars millions 1 estimate drilling activity measured average active drilling rigs based baker hughes inc rig count information results fiscal 2009 compared fiscal 2008 fiscal 2009 revenue usmexico pressure pumping segment decreased 32 average active drilling rigs us mexico decreasing 28 compared fiscal 2008 revenue decrease primarily result lower pricing decreased demand products services within us market partially offset increased activity mexico usmexico pressure pumping operating income margin decreased 22 fiscal 2008 6 fiscal 2009 increased competition united states resulted lower pricing products services results fiscal 2009 also include 139 million noncash charges related excess idle fixed assets 47 million inventory charges 51 employee severance costs results fiscal 2008 compared fiscal 2007 fiscal 2008 revenue usmexico pressure pumping segment increased 8 compared fiscal 2007 average active drilling rigs increasing 6 operating regions within usmexico pressure pumping segment except gulf coast showed improved revenue fiscal 2007 us activity increased fiscal 2008 compared fiscal 2007 prices received products services declined usmexico pressure pumping operating income margin decreased 35 fiscal 2007 22 fiscal 2008 decline prices coupled increased material maintenance fuel costs caused fiscal 2008 operating income margin decline canada pressure pumping segment dollars millions 1 estimate drilling activity measured average active drilling rigs based baker hughes inc rig count information results fiscal 2009 compared fiscal 2008 canadian pressure pumping revenue decreased 1331 million 30 fiscal 2009 compared fiscal 2008 average drilling rig count canada 31 comparable periods weaker canadian dollar compared us dollar comparable periods accounts approximately 578 million revenue decrease addition decreased demand lower pricing second half fiscal 2009 negatively impacted revenue comparable periods relative us dollar average canadian dollar exchange rate decreased 17 fiscal 2009 compared fiscal 2008 thereby decreasing us dollar equivalent revenues earned canada operating income margin fiscal 2009 declined 6 compared 8 fiscal 2008 decreased drilling activity increased pricing pressures fiscal 2009 contributed operating margin decline results fiscal 2008 compared fiscal 2007 14 increase revenue canada pressure pumping fiscal 2008 almost entirely due strengthening canadian dollar relative us dollar average canadian dollar exchange rate increased 9 fiscal 2008 compared fiscal 2007 thereby increasing us dollar equivalent revenues earned canada activity levels little impact revenue increase canadian average active drilling rigs fiscal 2008 remained unchanged prior year operating income margin fiscal 2008 8 consistent fiscal 2007 despite improved revenues region operating income margin negatively impacted increased pricing pressures cost increases fiscal 2008 international pressure pumping segment dollars millions 1 estimate drilling activity measured average active drilling rigs based baker hughes inc rig count information excluding canada mexico international pressure pumping segment four operating segments europe segment includes north sea continental europe nigeria west africa coastal area north nigeria middle east segment includes arab countries india central asia north africa including algeria libya egypt latin america segment includes south america central america west africa countries south nigeria including angola gabon completed contractual obligations shut pressure pumping operation russia fiscal 2009 consequently russia pressure pumping operations classified discontinued operations results fiscal 2009 compared fiscal 2008 following table summarizes percentage change revenue operating segments within international pressure pumping reportable segment comparing fiscal 2009 fiscal 2008 international pressure pumping revenue 11 billion fiscal 2009 decreased 7 compared fiscal 2008 consistent 7 decline average international drilling rig activity increased revenue asia pacific largely attributable increased activity malaysia thailand offset lower activity china new zealand decline latin america revenue largely result industrywide labor strikes argentina much second half fiscal 2009 partially offset activityrelated increases brazil middle east favorable impact increased activity new service contracts north africa offset lower rig activity saudi arabia india kazakhstan revenues europe decreased fiscal 2009 largely result unfavorable exchange rates primarily early fiscal 2009 caused local currency billings translate fewer us dollars combined lower activity lower pricing north sea operating income margin international pressure pumping operations decreased 15 fiscal 2008 11 fiscal 2009 primarily result lower volume activity lower pricing certain countries within middle east latin america regions fiscal 2009 results international pressure pumping segment included severance costs totaling 24 million associated initiative align workforce current market conditions 42 million charge related denied value added tax refund claim asia pacific charges 45 million unfavorable outcomes tax court ruling customer dispute 15 million fixed asset impairment charges results fiscal 2008 compared fiscal 2007 following table summarizes percentage change revenue operating segments within international pressure pumping reportable segment comparing fiscal 2008 fiscal 2007 international pressure pumping revenue increased 18 fiscal 2008 compared fiscal 2007 increased activity middle east latin american operations primarily accounted overall revenue increase middle east operations benefited introduction two stimulation vessels india market well improved revenues algeria activity increases saudi arabia kazakhstan azerbaijan latin american operations experienced significant growth brazil argentina venezuela gabon comparing fiscal 2008 revenue fiscal 2007 primarily result increased drilling completion activity countries average active drilling rigs region increased 6 compared prior year asia pacific revenue increased 15 average active drilling rigs region increasing 11 major markets within region experienced revenue growth declines revenue offshore stimulation vessel north sea due relocation india well revenue decline northern west africa operations caused 11 decrease revenue europe fiscal 2008 compared fiscal 2007 operating income margin remained consistent fiscal 2007 15 declines revenue asia pacific operations offsetting positive contribution operating income operating regions oilfield services group dollars millions results fiscal 2009 compared fiscal 2008 following table summarizes percentage change revenue operating segments within oilfield services group comparing fiscal 2009 fiscal 2008 revenues oilfield services group decreased 13 8601 million fiscal 2009 compared fiscal 2008 worldwide average drilling rig count declined 22 tubular services declined primarily result lower service activity us gulf mexico asia pacific process pipeline services revenue declined result decreased activity north america conclusion several large international projects fiscal 2008 chemical services revenue declined lower rate oilfield services businesses increased capillary work united states internationally substantially offset revenue impact lower drilling completion activity north america completion tools revenue declined result lower activity us gulf mexico lower international sales impact somewhat offset inclusion full year contribution innicor subsurface technologies business acquired may 2008 completion fluids revenue decreased primarily result lower activity us gulf mexico partially offset new contract work mexico operating income margin oilfield services group fiscal 2009 declined 12 19 prior year primarily result lower activity lesser extent lower pricing unfavorable productservice mix results fiscal 2008 compared fiscal 2007 following table summarizes percentage change revenue operating segments within oilfield services group comparing fiscal 2008 fiscal 2007 operating segments within oilfield services group except completion fluids negatively impacted decline offshore deepwater activity gulf mexico showed improved revenues fiscal 2008 compared fiscal 2007 process pipeline services benefited increased international us activity chemical services benefited primarily increased revenue capillary services increased us activity levels may 2008 acquired innicor subsurface technologies inc acquisition along increased projectoriented sales international markets accounted completion tools revenue improvement excluding effect innicor acquisition completion tools revenue improved 27 tubular services also showed improved revenue result increased activity international markets operating income margin oilfield services group fiscal 2008 declined 19 21 fiscal 2007 positive contributions process pipeline services chemical services tubular services groups offset declining operating income margins completion tools completion fluids operating segments within oilfield services group operating expenses following table sets forth operating expenses dollars millions research engineering research engineering expense decreased 57 million 8 fiscal 2009 compared fiscal 2008 primarily result cost reductions implemented 2009 response prevailing market conditions percentage revenue research engineering expense increased slightly 16 fiscal 2009 compared 13 fiscal 2008 primarily result lower revenue base fiscal 2009 fiscal 2008 research engineering expense increased 45 million 7 fiscal 2007 primarily due increased personnel costs percentage revenue research engineering expense decreased 13 fiscal 2008 compared 14 fiscal 2007 marketing expense decreased 125 million 10 fiscal 2009 compared fiscal 2008 primarily result cost reductions implemented 2009 response prevailing market conditions percentage revenue marketing expense increased 26 fiscal 2009 compared 23 fiscal 2008 primarily result lower revenue base fiscal 2009 increase personnel costs main contributor 135 million 13 increase marketing expense fiscal 2007 fiscal 2008 percentage revenue fiscal 2008 marketing expense increased slightly 23 compared 22 fiscal 2007 general administrative general administrative expense remained flat 1591 million fiscal 2009 compared fiscal 2008 reflecting impact cost reduction measures introduced 2009 offset costs related pending baker hughes merger increased stockbased compensation expense expenses incurred 2009 incurred 53 million costs related merger corporate segment fiscal 2009 primarily including investment banking fees outside legal fees associated merger agreement regulatory approval process stockholder litigation discussed note 11 notes consolidated financial statements percentage revenue general administrative expense 39 fiscal 2009 compared 30 fiscal 2008 primarily result lower revenue base fiscal 2009 fiscal 2008 general administrative expense increased 168 million 12 compared fiscal 2007 primarily result increased personnel costs depreciation expense percentage revenue general administrative expense 30 fiscal 2008 consistent fiscal 2007 loss disposal assets net loss disposal assets net gains increased significantly fiscal 2009 compared fiscal 2008 primarily result noncash fixed asset impairment charges totaling 72 million recorded third quarter 2009 charges related certain cementing stimulation equipment economical repair maintain current market environment pension settlement september 2006 entered agreement insurance company settle obligation respect us defined benefit pension plan assets approximately 72 million used purchase insurance contract fund benefits settle plan december 2008 received approval pension benefit guaranty corporation internal revenue service relieved primary responsibility pension benefit obligation consequently recorded noncash pretax charge 217 million connection settlement first quarter fiscal 2009 corporate segment interest expense interest income following table shows comparison interest expense interest income millions interest expense decreased 09 million fiscal 2009 compared fiscal 2008 decreased 46 million fiscal 2008 compared fiscal 2007 decreases interest expense primarily attributable lower average outstanding borrowings comparing respective periods outstanding debt balances decreased 6710 million september 30 2007 5563 million september 30 2008 5061 million september 30 2009 interest income decreased 07 million fiscal 2009 compared fiscal 2008 result lower prevailing interest rates invested cash balances despite significantly higher average cash equivalents balance throughout fiscal 2009 fiscal 2008 interest income increased slightly compared fiscal 2007 primarily result higher average invested cash balances expense net expense net income fiscal years ended september 30 summarized follows millions increase expense net fiscal 2009 compared fiscal 2008 relates increased minority interest result improved operating results international joint venture operations partially offset fiscal 2008 loss sale hungarian joint venture repeating fiscal 2009 fiscal 2008 recorded 29 million loss sale interest hungarian joint venture operation received 40 million cash settlement litigation matter additional information see note 13 notes consolidated financial statements income tax expense primarily result lower profit north american operations resulting change geographic mix pretax income fiscal 2009 effective tax rate fiscal 2009 decreased 145 pretax income continuing operations fiscal 2009 compared 294 fiscal 2008 earned profits relatively low tax jurisdictions outside north america recorded significant pretax losses relatively high tax jurisdictions united states canada us losses carried back offset taxes paid previous years effective tax rate decreased 323 fiscal 2007 294 fiscal 2008 primarily due effect statutory tax rate decrease canada greater percentage income earned international tax jurisdictions increase domestic production activity deduction section 199 us internal revenue code fiscal 2008 discontinued operations completed work final pressure pumping contract russia july 2009 consequently classified russia pressure pumping unit operating segment within international pumping services segment discontinued operation accordingly assets liabilities business along historical results operations reclassified periods presented soon contractual obligations fulfilled began process redeployment liquidation assets associated business exit activities recorded charges totaling 66 million connection exit activities including employee separation costs fixed asset inventory impairment charges expect incur additional exit costs fiscal 2010 range 34 million complete exit activities associated russia pressure pumping business summarized operating results discontinued operations follows loss discontinued operations increased fiscal 2009 compared fiscal 2008 primarily result completion contractual service obligations subsequent exit activities related russia pressure pumping operations fiscal 2009 results included 27 million inventory impairment 28 million fixed asset impairment 11 million employee termination costs fiscal 2008 included 61 million goodwill impairment charge related russia pressure pumping operations recognized goodwill impairment charge analysis indicated goodwill associated business would likely recoverable result competitive pressure areas operate cost inflation currency risks concerns future activity reductions income tax expense related discontinued operations minimal three year period ending september 30 3009 due accumulated operating losses russia benefit realizable liquidity capital resources historical cash flow following table sets forth historical cash flows years ended september 30 millions fiscal 2009 cash flow operating activities 6541 million fiscal 2009 decreased 2447 million 27 compared 8988 million cash provided operations fiscal 2008 net income continuing operations 1660 million fiscal 2009 4545 million lower fiscal 2008 5878 million lower fiscal 2007 primarily result market downturn corresponding lower demand services products noncash items included net income primarily including depreciation amortization stockbased compensation expense pension settlement net loss disposal impairment assets bad debt reserves deferred income taxes totaled 4386 million fiscal 2009 compared 3797 million fiscal 2008 2767 million fiscal 2007 changes working capital operating accounts generated cash 272 million fiscal 2009 compared using cash 996 million fiscal 2008 1952 million fiscal 2007 primarily result decline market activity led reductions working capital cash used investing decreased 2618 million 40 fiscal 2009 compared fiscal 2008 reflecting decrease capital expenditures primarily result lower expansion capital needed due lower demand products services cash used financing activities decreased 147 million 10 fiscal 2009 compared fiscal 2008 primarily result higher debt repayments fiscal 2008 compared fiscal 2009 partially offset treasury stock purchase 442 million fiscal 2009 addition treasury stock purchase financing activities fiscal 2009 primarily consisted 504 million net payments short term borrowings 585 million dividend payments also received net proceeds amount 167 million employee stock purchases stock option exercises fiscal 2009 fiscal 2008 cash flow operations 8988 million fiscal 2008 increased 581 million 7 compared 8407 million cash provided operations fiscal 2007 primarily result lower investment inventories two periods net cash flows changes operating accounts 10002 million fiscal 2008 compared 10305 million fiscal 2007 decrease primarily attributable lower usmexico pressure pumping operating income changes operating accounts accounted 996 million cash usage fiscal 2008 compared 1952 million usage fiscal 2007 improvement primarily attributable stable inventory levels compared significant increases inventory fiscal 2007 increased receivables accounted 1241 million use cash primarily result increased revenues particularly internationally cash flow used investing fiscal 2008 almost entirely due 6056 million purchases property plant equipment 572 million acquisition businesses principally innicor subsurface technologies inc may 2008 cash flows used financing consisted 1137 million net payments short term borrowings 586 million dividend payments fiscal 2008 also received net proceeds amount 142 million employee stock purchases stock option exercises fiscal 2008 investing activities period included issuance 6 senior notes due 2018 2469 million net proceeds may 2008 repayment 2500 million senior notes june 2008 fiscal 2007 cash flow operations fiscal 2007 8407 million significant uses cash fiscal 2007 included increased inventory anticipation increases activity increased accounts receivable result increased revenue days sales outstanding increased prepaid expenses primarily related tax payments increased accounts payable also contributed cash flow operations mostly increased activity levels cash flow used investing fiscal 2007 almost entirely due 7418 million purchases property plant equipment including 478 million paid buyout equipment partnership established 1997 also paid 579 million net cash acquisitions cash flows used financing consisted 110 million net proceeds short term borrowings 746 million repurchases common stock 586 million dividend payments fiscal 2007 also received proceeds amount 224 million employee stock purchases stock option exercises fiscal 2007 liquidity capital resources cash equivalents balance 2826 million september 30 2009 cash flows operations expected primary source liquidity fiscal 2010 sources liquidity also include available financing facilities listed millions may 19 2008 completed public offering 2500 million 6 senior notes due 2018 net proceeds offering approximately 2469 million deducting underwriting discounts commissions expenses used retire 2500 million outstanding floating rate senior notes matured june 1 2008 september 30 2009 company 2499 million 575 senior notes due 2011 2490 million 6 senior notes due 2018 issued outstanding net discount amended restated revolving credit facility “revolving credit facility” permits borrowings 400 million principal amount revolving credit facility includes 50 million sublimit issuance standby letters credit 20 million sublimit swingline loans swingline loans shortterm maturities remaining amounts outstanding revolving credit facility become due payable august 2012 addition right request additional 200 million permitted borrowings 400 million subject approval lenders time request depending amount borrowings outstanding facility interest rate applicable borrowings generally ranges 3040 basis points libor charged various fees connection revolving credit facility including commitment fee based average daily unused portion commitment totaling 03 million 02 million 03 million fiscal 2009 2008 2007 respectively addition revolving credit facility charges utilization fee outstanding loans letters credit usage revolving credit facility exceeds 625 material utilization fees incurred fiscal 2009 2008 2007 borrowings revolving credit facility september 30 2009 2008 pursuant merger agreement must borrowings outstanding revolving credit facility completion date merger may 2008 entered committed credit facility commercial bank finance acquisition innicor subsurface technologies inc commitment fees required facility interest rate based market rates dates amounts borrowed facility expired may 2009 repaid cash hand addition revolving credit facility available 243 million unsecured discretionary lines credit september 30 2009 expire bank’s discretion requirements commitment fees compensating balances connection lines credit interest prevailing market rates 72 million 76 million 243 million outstanding borrowings lines credit september 30 2009 2008 2007 respectively weighted average interest rates shortterm borrowings outstanding september 30 2009 2008 2007 450 523 540 respectively management believes cash flows operations combined cash equivalents revolving credit facility discretionary credit facilities provide us sufficient capital resources liquidity manage routine operations meet debt service obligations fund projected capital expenditures pay regular quarterly dividend support development shortterm longterm operating strategies discretionary lines credit renewed borrowings lines credit otherwise become unavailable expect refinance debt arranging additional committed bank facilities longterm borrowing alternatives senior notes revolving credit facility include various customary covenants provisions including maintenance certain profitability solvency ratios none materially restrict activities currently compliance covenants imposed cash requirements anticipate capital expenditures approximately 170200 million fiscal 2010 compared 3942 million fiscal 2009 actual amount fiscal 2010 capital expenditures depend primarily maintenance capital requirements expansion opportunities ability execute budgeted capital expenditures fiscal 2010 minimum pension postretirement funding requirements anticipated approximately 150 million funded 134 million pension postretirement plans fiscal 2009 paid cash dividends amount 005 per common share quarterly basis fiscal 2009 totaling 585 million anticipate paying quarterly dividend fiscal 2010 merger completed however dividends subject approval board directors quarter board ability change dividend policy time september 30 2009 company 2499 million 575 senior notes due 2011 2490 million 6 senior notes due 2018 issued outstanding net discount expect cash paid interest expense approximately 30 million fiscal 2010 contractual obligations balance sheet transactions following table summarizes contractual obligations commercial commitments september 30 2009 millions 1 discussed notified partner intent exercise option purchase pumping service equipment partnership approximately 46 million 2010 therefore included option payment table 2 includes agreements purchase goods services approved specify significant terms pricing quantity timing 3 entered agreements certain suppliers ensure certain levels fracturing materials maintained united states canada 4 includes expected cash payments longterm liabilities reflected consolidated balance sheet amounts timing payment known amounts include asset retirement obligations known pension funding requirements postretirement benefit obligation environmental accruals miscellaneous longterm obligations amounts exclude pension obligations funding requirements uncertain longterm contingent liabilities october 1 2007 adopted guidance financial accounting standards board “fasb” accounting standard codification “asc” 740 income taxes addressing determination whether tax benefits claimed expected claimed tax return recorded financial statements however timing future cash flows associated asc 740 uncertain unable make reasonably reliable estimates period cash settlement respective taxing authority therefore excluded 504 million unrecognized tax benefits contractual obligations table expect cash equivalents cash flows operations generate sufficient cash flows fund cash requirements described 1999 contributed certain pumping service equipment limited partnership 1 interest equipment used provide services customers pay service fee period least six years 13 years approximately 12 million annually accounted operating lease assessed terms agreement determined variable interest entity however deemed primary beneficiary therefore consolidation required transaction resulted gain deferred amortized partnership term partnership agreement permits substitution equipment within partnership long implied fair value new property transferred date substitution equals exceeds implied fair value defined current property partnership replaced substitution activity partnership term reduced balance deferred gain zero september 30 2009 compared 42 million september 30 2008 2010 option purchase pumping service equipment approximately 46 million notified partner intent routinely issue parent company guarantees “pcgs” connection service contracts performance obligations entered subsidiaries issuance pcgs frequently condition bidding process imposed customers work countries outside north america pcgs typically provide guarantee performance services local subsidiary term pcgs varies length service contract date parent company called upon perform pcgs arrange issuance variety bank guarantees performance bonds standby letters credit vast majority issued connection contracts subsidiaries entered customers customer right call bank guarantee performance bond standby letter credit event subsidiaries default performance services instruments required condition awarded contract typically released upon completion contract also issued standby letters credit connection variety financial obligations support fronted insurance programs claims administration funding certain employee benefit plans temporary importation bonds following table summarizes commercial commitments september 30 2009 millions investigations regarding misappropriation possible illegal payments discussions doj sec regarding internal investigation certain matters described note 11 notes consolidated financial statements possible accurately predict time matters resolved based current information cannot predict outcome investigations whether reach resolution discussions actions may taken doj sec authorities effect foregoing may consolidated financial statements critical accounting policies accounting policy deemed critical accounting policy must potentially material impact presentation financial condition results operations ii require us make estimates based historical experience assumptions matters highly uncertain time accounting estimate made estimates assumptions future events effects cannot perceived certainty base estimates historical experience assumptions believed reasonable circumstances results form basis making judgments estimates may change new events occur experience acquired additional information obtained operating environment changes materially different results occur circumstances change additional information becomes known including estimates deemed “critical” believe following critical accounting policies used preparation consolidated financial statements significant judgments uncertainties affecting application policies selection accounting estimates including deemed “critical” associated disclosures discussion discussed management audit committee board directors critical accounting policies read conjunction disclosures elsewhere notes consolidated financial statements significant accounting policies discussed note 2 notes consolidated financial statements goodwill account goodwill accordance asc 350 intangibles goodwill asc 350 requires goodwill reviewed possible impairment using fair value measurement techniques annual basis circumstances indicate impairment may exist specifically goodwill impairment determined using twostep process first step goodwill impairment test compares fair value reporting unit net book value including goodwill fair value reporting unit exceeds net book value impairment required second step unnecessary fair value reporting unit less net book value second step performed determine amount impairment fair value measures include quoted market price present value technique estimate future cash flows valuation technique based multiples earnings revenue second step compares implied fair value reporting unit goodwill carrying amount goodwill carrying amount reporting unit goodwill exceeds implied fair value goodwill impairment loss shall recognized amount equal excess implied fair value determined manner amount goodwill recognized business combination fair value reporting unit allocated assets liabilities reporting unit acquired business combination fair value reporting unit purchase price paid acquire reporting unit determining fair value implied fair value reporting unit judgmental often involves use significant estimates assumptions estimates assumptions could significant impact whether impairment charge recognized also magnitude impairment charge estimate fair value primarily determined using discounted cash flows approach uses significant assumptions discount rate growth rate terminal value multiples future rig count pricing trends fiscal 2008 recognized goodwill impairment charge 61 million related russia operations competitive pressure areas operate russia cost inflation currency risks concerns future activity reductions analysis indicated goodwill associated russia would likely recoverable fiscal 2009 reviewed goodwill balance possible impairment determined impairment existed see note 12 notes consolidated financial statements information goodwill pension postretirement benefit plans pension expense postretirement benefit obligation determined accordance provisions asc 715 compensation retirement benefits determine annual net periodic pension expense pension plan liabilities annual basis determining annual estimate net periodic pension cost required make evaluation critical assumptions discount rate expected longterm rate return plan assets expected increase compensation levels assumptions may effect amount timing future contributions discount rates based high quality corporate fixed income investments 50 basis point decrease discount rate used fiscal 2009 would resulted recognition approximately 14 million additional expense longterm rate return assumptions based actuarial review asset allocation average annual returns earned similar investments 50 basis point reduction expected rate return assets plans would resulted recognition approximately 07 million additional expense fiscal 2009 rate increase compensation levels reviewed actuaries based upon historical salary experience effects actual results differing assumptions accumulated amortized future periods therefore generally affect recognized expense future periods postretirement medical benefit plan provides credits based years service used purchase coverage retiree plan effectively caps health care inflation rate 4 increase per year increasing assumed health care cost trend rates one percentage point would material impact accumulated postretirement benefit obligation net periodic postretirement benefit cost benefits capped pursuant terms plan accordance asc 715 changes assumptions differences estimated actual return plan assets compensation levels result unrecognized gainloss recorded component stockholders’ equity accumulated comprehensive income amounts recorded accumulated comprehensive income amortized recognized net periodic pension expense future periods fiscal 2010 pension postretirement funding requirement approximately 150 million expect fund amount cash flows operating activities see note 10 notes consolidated financial statements information pension plans income taxes effective income tax rates applicable continuing operations 145 294 323 years ended september 30 2009 2008 2007 respectively rates vary primarily due fluctuations taxes mix domestic versus foreign income deferred tax assets liabilities recognized differences book basis tax basis net assets company providing deferred taxes consider current tax laws estimates future taxable income available tax planning strategies process also involves making forecasts current future years’ us taxable income unforeseen events industry conditions may impact forecasts turn affect carrying value deferred tax assets liabilities impact future reported earnings tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities potentially courts resolution situations inevitably includes degree uncertainty accordingly provide taxes amounts believe ultimately result proceedings addition aforementioned assessments received various taxing authorities provide taxes certain situations assessments received situations accrue income taxes consider probable taxes ultimately payable exceed amounts reflected filed tax returns accordingly taxes provided situations guidance asc 740 selfinsurance accruals loss contingencies selfinsured certain losses relating workers’ compensation general liability property damage employee medical benefits claims filed claims incurred reported review liability quarterly basis liability based primarily actuarial undiscounted basis using individual casebased valuations statistical analysis based upon judgment historical experience however final cost many claims may known five years longer estimate subject trends loss development factors historical average claim volume average cost settled claims current trends claim costs significant unanticipated changes trends future actual payouts could result additional increases decreases recorded accruals purchased stoploss coverage limit extent feasible aggregate exposure certain claims assurance coverage adequately protect us liability potential consequences discussed note 11 notes consolidated financial statements legal proceedings covering wide range matters pending threatened company possible predict outcome litigation pending company litigation subject many uncertainties possible could adverse developments cases record provisions consolidated financial statements pending litigation determine unfavorable outcome probable amount loss reasonably estimated believe accruals matters adequate actual loss contingency significantly different estimated loss results operations may positively negatively impacted accounting pronouncements june 2009 fasb issued guidance contained asc 105 generally accepted accounting principles establishing authoritative united states gaap superseding preexisting accounting standards literature guidance effective financial statements issued interim annual periods september 15 2009 consequently changed accounting literature references contained report new standard significant impact consolidated financial statements june 2009 fasb issued asc 810 consolidation variable interest entities addresses addition qualified special purpose entities previous guidance concept entities eliminated guidance asc 860 guidance also modifies analysis controlling interest variable interest entity determined thereby requiring controlling interest consolidate variable interest entity controlling interest exists party variable interest entity power direct activities variable interest entity significantly impact entity’s economic performance ii obligation absorb losses receive benefits entity could potentially significant variable interest entity statement could impact way account limited partnership discussed note 11 notes consolidated financial statements lease longterm commitments asc 810 becomes effective beginning first annual reporting period beginning november 15 2009 applied prospectively interim annual periods period going forward adopt guidance asc 810 october 1 2010 yet determined impact consolidated financial statements june 2009 fasb issued guidance asc 860 transfers servicing eliminates concept qualified special purpose entity enhances guidance related derecognition transferred assets asc 860 becomes effective beginning first annual reporting period beginning november 15 2009 applied prospectively interim annual periods period going forward adopt guidance asc 860 october 1 2010 yet determined impact consolidated financial statements june 30 2009 adopted guidance asc 825 financial instruments overall requiring publiclytraded companies disclose fair value financial instruments interim financial statements see note 7 notes consolidated financial statements disclosure may 2009 fasb issued guidance asc 855 subsequent events establish general standards accounting disclosures events occur balance sheet date financial statements issued available issued adopted guidance beginning june 30 2009 condensed consolidated financial statements december 2008 fasb issued guidance asc 715 compensation retirement benefits defined benefit plans requiring disclosure major categories plan assets investment policies strategies fair value measurement plan assets significant concentration credit risks related defined benefit pension postretirement plans guidance effective fiscal years ending december 15 2009 accordingly adopt fiscal 2010 april 2008 fasb issued guidance contained asc 350 intangibles goodwill others general intangibles goodwill amending factors considered developing renewal extension assumptions used determine useful life recognized intangible asset previously existing literature objective guidance improve consistency useful life recognized intangible asset asc 350 period expected cash flows used measure fair value asset asc 805 business combinations asc 350 effective company beginning october 1 2009 expected significant impact consolidated financial statements march 2008 fasb issued guidance asc 815 derivatives hedging changing disclosure requirements derivative instruments hedging activities entities required provide enhanced disclosures 1 entity uses derivative instruments 2 derivative instruments related hedged items accounted asc 815 related interpretations 3 derivative instruments related hedged items affect entity’s financial position financial performance cash flows adopted guidance second quarter fiscal 2009 currently derivative financial instruments subject accounting disclosure asc 815 therefore guidance asc 815 effect consolidated statements financial position results operations cash flows december 2007 fasb issued guidance asc 805 business combinations retains fundamental requirements requiring acquisition method accounting used business combinations acquirer identified business combination asc 805 defines acquirer entity obtains control one businesses business combination establishes acquisition date acquirer achieves control asc 805 establishes principles requirements acquirer recognizes measures financial statements identifiable assets acquired liabilities assumed noncontrolling interest acquiree b recognizes measures goodwill acquired business combination gain bargain purchase c determines information disclose enable users financial statements evaluate nature financial effects business combination guidance effective business combinations occurring beginning first annual reporting period beginning december 15 2008 consequently adopt guidance october 1 2009 december 2007 fasb issued guidance asc 810 consolidation overall transition amending previous guidance establish accounting reporting standards noncontrolling interest subsidiary deconsolidation subsidiary asc 810 requires consolidated net income reported amounts include amounts attributable parent noncontrolling interest also requires disclosure face consolidated statement income amounts consolidated net income attributable parent noncontrolling interest requires parent recognize gain loss net income subsidiary deconsolidated asc 810 requires expanded disclosures consolidated financial statements identify distinguish interests parent’s owners interests noncontrolling owners subsidiary shall applied prospectively beginning fiscal year initially applied except presentation disclosure requirements presentation disclosure requirements shall applied retrospectively periods presented guidance effective fiscal years beginning december 15 2008 fiscal year beginning october 1 2009 significant noncontrolling interests consolidated subsidiaries therefore adoption guidance expected significant impact consolidated financial statements february 2007 fasb issued guidance asc 825 financial instruments providing companies option report selected financial assets liabilities fair value asc 825 companies elect fair value option report unrealized gains losses earnings subsequent reporting date addition guidance establishes presentation disclosure requirements designed facilitate comparisons companies choose different measurement attributes similar types assets liabilities fair value option election irrevocable unless new election date occurs asc 825 effective beginning entity’s first fiscal year beginning november 15 2007 applied prospectively unless entity elects early adoption consequently adopted asc 825 effective october 1 2008 elected apply fair value option september 2006 fasb issued guidance asc 820 fair value measurements disclosures defining fair value outlining fair value hierarchy requiring marketbased assumptions used available setting disclosure requirements assets liabilities measured fair value based level hierarchy october 1 2008 adopted without material impact consolidated financial statements provisions asc 820 related financial assets liabilities adopt provisions asc 820 related nonfinancial assets liabilities october 1 2009 expect adoption provisions materially impact consolidated financial statements forward looking statements document contains forwardlooking statements within meaning private securities litigation reform act 1995 section 21e securities exchange act 1934 concerning among things prospects expected revenue expenses profits developments business strategies operations subject certain risks uncertainties assumptions forwardlooking statements include statements historical fact including identified “outlook” use terms phrases “expect” “estimate” “project” “forecast” “believe” “achievable” “anticipate” “should” similar terms phrases convey uncertainty future events outcomes statements based certain assumptions analyses made us light experience perception historical trends current conditions expected future developments factors believe appropriate circumstances may prove accurate statements subject risks uncertainties including limited general economic business conditions global economic activity oil natural gas market conditions political economic uncertainty risks uncertainties described elsewhere report including “item 1a risk factors” one risks uncertainties materialize underlying assumptions prove incorrect actual results may vary materially expected estimated projected forwardlooking statements speak date made required securities laws assume duty update revise forwardlooking statements item 7aitem 7 managements discussion analysis financial condition results operations general companys operations primarily driven number oil natural gas wells drilled depth drilling conditions wells number well completions level workover activity worldwide drilling activity turn largely dependent price oil natural gas situation often leads volatility companys revenues profitability especially united states canada company generated approximately 60 revenues fiscal 1998 volatility particularly evident latter half 1998 result low oil prices recently falling 11 per barrel industry recently experienced lowest worldwide oilfield drilling activity levels last 50 years due aging oilfields lowercost sources oil internationally drilling activity united states declined 75 peak 1981 record low drilling activity levels experienced 1986 1992 us drilling activity temporarily rebounded 1997 beginning 1998 exceeding 1000 active rigs first time since 1991 since retracted due weak oil prices average active rig count us fiscal year ended september 30 1998 flat prior year averaging 906 rigs last quarter fiscal year averaged 794 active rigs 20 prior years fourth quarter decline occurred rigs drilling oil 41 period us active rig count continued decline subsequent end fiscal year reaching low 669 december 1998 exception canada international drilling activity historically less volatile domestic drilling activity due mainly reduced activity latin america average international rig count excluding canada declined 2 fiscal 1998 canadian average rig count declined 5 fiscal year 49 fourth fiscal quarter compared period prior year continued decline subsequent fiscal year end expansions acquisitions companys expansion acquisition efforts past several years focused adding critical mass us operations international geographic expansions existing service lines company completed two major acquisitions since 1995the acquisition western company north america april 1995 western acquisition nowsco well service ltd june 1996 nowsco acquisition western acquisition completed total purchase price 5114 million including transaction costs 72 million company paid approximately half cash half shares companys common stock warrants purchase common stock western acquisition provided company greater critical mass compete domestic international markets realization significant consolidation benefits western acquisition increased companys existing total revenue base approximately 75 doubled companys domestic revenue base addition excess 40 million annual overhead redundant operating costs eliminated combining two companies nowsco acquisition completed total purchase price 5826 million including transaction costs 62 million cash nowsco acquisition accomplished three primary objectives gave company number one pumping services market position canada company operated since 1992 added companys existing market position several key us international markets ii provided technological leadership position highgrowth coiled tubing service line iii provided excess 20 million additional annual cost savings consolidation redundant overhead operating bases nowsco acquisition added approximately 40 companys existing revenue base companys expansion efforts past three years included expansion pumping services several key international markets including bolivia brazil acquisition shares companys joint venture partners saudi arabia bangladesh vietnam expanding tubular services process pipeline services geographic regions outside north sea adding additional stimulation equipment capacity key latin american markets results operations following table sets forth selected key operating statistics reflecting industry rig count companys financial results 1 industry estimate drilling activity measured average active rigs 2 gross profit represents revenue less cost sales services revenue companys revenue increased sixth consecutive year 1998 albeit slower growth rate previous two fiscal years influenced major acquisitions revenues increased 4 1998 companys major service linespressure pumping process pipeline services tubular services specialty chemicalsincreasing year despite 2 decline worldwide drilling activity 1997 revenue increase 52 primarily result nowsco acquisition recovery us drilling activity united states revenue companys us revenue increased 1 42 1998 1997 respectively 1998 increase due approximately 810 better pricing offset slight decline market share us drilling activity flat year fiscal 1998 also showed continuation shift away oilfield drilling towards drilling natural gas trend expected continue near future oil prices remain weak better drilling prospects appear natural gas regions us addition us pricing declined approximately 5 third fourth fiscal quarter may decline drilling activity continues decline 1997 increase due combination nowsco acquisition improved drilling activity better pricing nowsco acquisition added approximately 1520 companys us revenues beginning fourth quarter fiscal 1996 providing nine months additional benefit fiscal 1997 taking account previous years preacquisition nowsco revenues us operations showed pro forma revenue increase 26 activity measured rig count increased 19 period pricing improved approximately 78 mainly price book increases implemented july 1996 june 1997 pricing showed stronger improvement 1213 last quarter year due tightening capacity us pressure pumping market management believes company retained key customers nowsco estimates company may experienced 12 market share deterioration pro forma basis 1997 due loss certain lowpriced nowsco business new competitor job turndowns due personnel equipment limitations international revenue international revenue increased 8 64 1998 1997 respectively exception canadian operations companys international pressure pumping regions generated revenue increases 1998 largest increases occurred asia pacific middle east regions due growth stimulation coiled tubing services expansions saudi arabia bangladesh partially offsetting increases revenue declines canada venezuela due lower oil drilling activity 15 million decline international equipment sales 1997 increase primarily driven nowsco acquisition approximately twothirds nowscos business generated outside united states mostly canada north sea result nowsco acquisition company largest pressure pumping operation canada pro forma nowsco operations 1997 international pressure pumping revenues increased 18 due primarily strong canadian drilling activity increased 38 1996 international pressure pumping operations showing significant revenue increases year venezuela due increased activity coiled tubing capacity additions middle east reflecting new contracts india egypt expansions saudi arabia bangladesh brazil indonesia partially offsetting increases pro forma revenue declines north sea russia companys international service lines primarily consist tubular services process pipeline services also showed revenue increases 1998 1997 due stronger activity expansions new markets operating income operating income increased 1998 1997 due strong oilfield services activity pricing 1997 first half 1998 improved margins companys service lines 1997 due nowsco acquisition partially offsetting improvement 266 million unusual charge recorded 1998 primarily associated downturn oilfield services industry later part 1998 cost sales services percentage revenue declined 755 1998 782 814 1997 1996 respectively improvement resulted primarily cost reduction efforts implemented nowsco acquisition operating leverage stronger activity levels net pricing also improved 1998 1997 result us price book increases june november 1997 discount reductions 1997 first half 1998 fourth quarter fiscal 1998 however us pricing declined approximately 5 could decline drilling activity continue decline increases operating expenses research engineering marketing general administrative expenses reflective increased support costs higher activity levels well increased spending coiled tubing downhole tool research international commissions information systems addition expenses increased 1997 due additional overhead former nowsco operations higher incentives goodwill amortization increased 1997 due nowsco acquisition resulted additional goodwill amortization 95 million year 1998 unusual charge includes employee severance writedown idle equipment facilities various costs primarily associated 1998 downturn oilfield services industry 1996 unusual charge taken conjunction consolidation programs associated nowsco acquisition included 1996 unusual charge adjustments carrying value duplicate operating facilities severance related benefit costs legal costs would incurred nowsco acquisition occurred details unusual charges see note 4 notes consolidated financial statements interest expense declined 1998 due strong operating cash flows year see capital resources liquidity effects equipment financing transaction occurred near end prior fiscal year items partially offset repurchases companys outstanding stock totaled 1966 million 1998 1997 interest expense increased result additional borrowings fund nowsco acquisition companys weighted average borrowing costs however declined 1997 primarily result two factors utilization lower interest rate facilities ii improvement companys credit ratings see also financial conditioncapital resources liquidity note 6 notes consolidated financial statements income expensenet resulted net expense due higher profitability companys international joint ventures resulting increased amounts payable minority partners previous two years net gain due primarily gains asset sales royalty income see note 12 notes consolidated financial statements income taxes primarily result profitability international jurisdictions statutory tax rate us rate availability certain nonrecurring tax benefits availability tax benefits companys reorganization pursuant initial public offering 1990 companys effective tax rate remained us statutory rate past three years effective tax rate increased 30 1997 32 1998 primarily result higher us profitability reduction mentioned reorganization benefits increasing companys effective tax rate greater us profitability result higher cash taxes due existence us net operating loss carryovers company also recognized nonrecurring tax benefits 19 million 1996 favorable settlement tax audits tax losses attributable foreign exchange fluctuations certain international jurisdictions see note 8 notes consolidated financial statements capital resources liquidity net cash provided operating activities increased last two years primarily due recovery us drilling activity 1997 first half 1998 gains companys international growth initiatives 1997 nowsco acquisition addition 1998 slowdown business last half year resulted liquidation receivable balances 287 million 1997 cash flows operating activities reduced higher receivable balances payment merger related expenses net cash used investing activities 1610 million 1998 compared net cash provided investing activities 45 million 1997 net cash used investing activities 6356 million 1996 capital spending increased 1680 million 1998 compared 1022 million 542 million 1997 1996 respectively 1998 spending related primarily additional fracturing coiled tubing capacity companys international growth initiatives upgrades companys us pumping fleet upgrades companys information systems companys 1997 property additions included two additional pumping service vessels operating latin america expansion cementing stimulation capacity gulf mexico latin america upgrades companys information systems major items included 1996 spending related international expansion opportunities primarily latin america offshore cementing skids net cash used 1997 investing activities offset transaction involving transfer certain pumping service equipment assets subsequent transfer equipment company received 1000 million used repay outstanding bank debt result reduced debt company realized reduction future interest expense approximately 6 million per year equipment used provide services company customers company paying service fee period least eight fourteen years transaction generated deferred gain book purposes approximately 38 million amortized twelveyear period taxable gain 91 million completely offset net operating loss carryforwards available company result western acquisition tax benefit net operating loss utilization recorded reduction goodwill net cash used 1997 investing activities also impacted receipt 203 sale idle stimulation vessel renaissance partially offset higher property additions acquisitions top tool company inc remaining 51 ownership companys previously unconsolidated joint venture argentina acquired nowsco investing activities 1996 included acquisition remaining 60 interest companys joint venture brazil total consideration 54 million consisting 37 million cash 17 million debt assumed company nowsco acquisition 5826 million cash projected capital expenditures fiscal 1999 expected significantly 1998 levels due slowdown worldwide drilling activity levels actual amount 1999 capital expenditures excluding acquisitions primarily dependent upon maintenance capital levels availability expansion opportunities expected funded cash flows operating activities available credit facilities management believes cash flows operating activities available lines credit necessary sufficient fund projected capital expenditures company utilized net cash flows operating financing activities repurchase 1966 million common stock 1998 common stock purchased stock repurchase program approved companys board directors december 1997 increased may 1998 authorizing purchases 300 million discretion companys management net cash flows operating activities exceeded companys capital requirements 1997 company able reduce existing borrowings 1500 million year 1996 nowsco acquisition financed proceeds sale 98 million shares companys common stock generated net proceeds 3231 million remainder borrowings credit facility management strives maintain low cash balances utilizing available credit facilities meet companys capital needs excess cash generated historically used pay outstanding borrowings fund companys stock repurchase program company committed unsecured bank credit facility bank credit facility consists sixyear term loan approximately 1571 million currently drawn us canadian dollars provision renewed annually option banks repayable 22 quarterly installments began march 1997 five year us 2250 million revolving facility available june 2001 september 30 1998 borrowings outstanding bank credit facility totaled 1571 million consisting solely borrowings term loan principal reductions term loans bank credit facility due aggregate annual installments 398 million 426 million 426 million 321 million years ending september 30 1999 2000 2001 2002 respectively addition committed facility company 2463 million various unsecured discretionary lines credit september 30 1998 expire various dates 1999 requirements commitment fees compensating balances connection lines credit interest borrowings based prevailing market rates september 30 1998 september 30 1997 1849 million 598 million respectively outstanding borrowings lines credit company issued outstanding 1250 million unsecured 7 notes due 2006 net proceeds issuance 7 notes 1233 million august 1996 used company repay indebtedness outstanding term loan portion companys existing bank credit facility guarantees 7 notes certain subsidiaries company released accordance terms december 1997 60 million outstanding balance companys 92 notes 22 million outstanding balance companys 12 78 notes repaid december 1997 companys interestbearing debt increased 341 total capitalization september 30 1998 compared 295 september 30 1997 due repurchases companys stock bank credit facility includes various customary covenants provisions including maintenance certain profitability solvency ratios restrictions dividend payments certain circumstances management believes bank credit facility combined discretionary credit facilities cash flow operations provides company sufficient capital resources liquidity manage routine operations fund projected capital expenditures september 30 1998 company approximately 443 million us tax net operating loss carryforwards expiring varying amounts 2000 2011 company also approximately 80 million foreign tax net operating loss carryforwards approximately 10 million foreign investment tax credit carryforwards september 30 1998 foreign tax net operating loss carryforwards approximately 45 million subject annual limitation carryforward indefinitely foreign investment tax credit carryforward remaining loss carryforward used expire varying amounts beginning 1999 potential impact expiration net operating loss investment tax credit carryforwards reflected deferred tax asset valuation allowance balance september 30 1998 1997 year 2000 compliance historically many computer programs written using two digits rather four define applicable year programming practice could result certain computerized applications failing properly recognize year begins 20 instead 19 turn could result major system failures miscalculations generally referred year 2000 issue july 1997 company established formal program assess global impact year 2000 issues companys internal systems primary area focus program internal systems include limited data processing financial reporting software applications computerized job monitoring hardware software used wellsite companys labs embedded control systems telecommunications support equipment addition program addresses companys reliance third party suppliers determine extent company vulnerable third parties failure remediate year 2000 issues companys year 2000 program comprised four primary phases inventory existing equipment systems ii assessment equipment systems identify year 2000 ready prioritize critical systems equipment iii remediation replacement nonyear 2000 ready equipment systems iv testing certification year 2000 readiness company completed worldwide inventory systems equipment september 1997 company also completed assessment phase included testing systems deemed already year 2000 compliant developed plans remediation replacement noncompliant systems critical operations company expects remediated systems equipment critical operations later end june 1999 remainder 1999 focused testing certification new modified programs certain noncritical systems may addressed january 2000 however company believes systems disrupt companys operations material way company contacted critical external suppliers goods services assess compliance efforts companys exposure event failure third party compliance efforts company process reviewing validating responses suppliers products services cases seeking additional information certification situations suppliers compliant respond company planning develop contingency plans including utilizing alternative suppliers comprehensive plan designed achieve uninterrupted transition year 2000 expected cost company approximately 22 million 1998 company expensed 17 million related year 2000 readiness addition program resulted acceleration approximately 30 million hardware software expenditures replace noncompliant systems expenditures related year 2000 initiative expected funded cash flows operations expected materially impact results operations cost project dates company believes complete year 2000 modifications based managements best estimates assurances estimates achieved actual results could differ currently anticipated year 2000 issue pervasive problem companies due interdependence computer systems therefore company continually assessing risks surrounding issue potential impact company failure address year 2000 issues including critical internal systems infrastructure third party suppliers mentioned could result business disruption could materially affect companys operations effort minimize business interruptions company process developing contingency plans event circumstances prevent company third party suppliers meeting portion year 2000 program schedules contingency plans expected completed place end first quarter 1999 forward looking statements document contains forwardlooking statements within meaning private securities litigation reform act 1995 section 21e securities exchange act 1934 concerning among things companys prospects expected revenues expenses profits developments business strategies operations year 2000 readiness subject certain risks uncertainties assumptions forwardlooking statements identified use terms phrases expect estimate project believe similar terms phrases statements based certain assumptions analyses made company light experience perception historical trends current conditions expected future developments factors believes appropriate circumstances statements subject general economic business conditions oil natural gas industry business opportunities may presented pursued company changes law regulations factors many beyond control company one risks uncertainties materialize underlying assumptions prove incorrect actual results may vary materially expected estimated projected item 7a nannannanitem 7a quantitative qualitative disclosures market risk table provides information companys market sensitive financial instruments constitutes forwardlooking statement companys major market risk exposure changing interest rates primarily united states canada companys policy manage interest rates use combination fixed floating rate debt portion companys borrowings denominated foreign currencies exposes company market risk associated exchange rate movements necessary company enters forward foreign exchange contracts hedge impact foreign currency fluctuations material foreign exchange contracts outstanding september 30 1999 items described nontrading stated us dollars item 8item 7a quantitative qualitative disclosures market risk table provides information companys market sensitive financial instruments constitutes forwardlooking statement companys major market risk exposure changing interest rates primarily united states canada companys policy manage interest rates use combination fixed floating rate debt portion companys borrowings denominated foreign currencies exposes company market risk associated exchange rate movements necessary company enters forward foreign exchange contracts hedge impact foreign currency fluctuations one material foreign exchange contract outstanding september 30 2000 amount 506 million contract settled october 1 2000 gain loss items described nontrading stated us dollars item 8item 7a quantitative qualitative disclosures market risk table provides information companys market sensitive financial instruments constitutes forwardlooking statement companys major market risk exposure foreign currency fluctuations internationally changing interest rates primarily united states europe companys policy manage interest rates use combination fixed floating rate debt floating rates increase 10 september 30 2001 rates companys combined interest expense third parties would increase total 7000 month increase continued september 30 2001 company issued fixedrate debt 788 million instruments fixedrate therefore expose company risk loss earnings due changes market interest rates however fair value instruments would increase 18 million interest rates decline 10 rates september 30 2001 portion companys borrowings denominated foreign currencies exposes company market risk associated exchange rate movements necessary company enters forward foreign exchange contracts hedge impact foreign currency fluctuations one foreign exchange contract outstanding september 30 2001 amount 139 million contract settled october 1 2001 gain loss items described nontrading stated us dollars thousands item 8item 7a quantitative qualitative disclosures market risk table provides information companys market sensitive financial instruments constitutes forwardlooking statement companys major market risk exposure foreign currency fluctuations internationally changing interest rates primarily united states europe companys policy manage interest rates use combination fixed floating rate debt floating rates increase 10 september 30 2002 rates companys combined interest expense third parties would increase total 1688 month increase continued september 30 2002 company issued fixedrate debt 4891 million instruments fixedrate therefore expose company risk loss earnings due changes market interest rates however fair value instruments would increase 232 million interest rates decline 10 rates september 30 2002 periodically company borrows funds denominated foreign currencies exposes company market risk associated exchange rate movements borrowings denominated foreign currencies september 30 2002 necessary company enters forward foreign exchange contracts hedge impact foreign currency fluctuations foreign exchange contracts outstanding september 30 2002 items described nontrading stated us dollars thousands item 8item 7a quantitative qualitative disclosures market risk table provides information company’s market sensitive financial instruments constitutes “forwardlooking statement” company’s major market risk exposure foreign currency fluctuations internationally changing interest rates primarily united states canada europe company’s policy manage interest rates use combination fixed floating rate debt floating rates increase 10 september 30 2003 rates company’s combined interest expense third parties would increase total 2453 month increase continued september 30 2003 company issued fixedrate debt 4938 million instruments fixedrate therefore expose company risk loss earnings due changes market interest rates however fair value instruments would increase 209 million interest rates decline 10 rates september 30 2003 periodically company borrows funds denominated foreign currencies exposes company market risk associated exchange rate movements borrowings denominated foreign currencies september 30 2003 company believes prudent company enters forward foreign exchange contracts hedge impact foreign currency fluctuations four forward foreign exchange contracts entered september 30 2003 amount 23 million contracts accounted cash flow hedges future foreign currency denominated obligations beginning november 2003 ending august 2004 one contract settle following four quarters effect cash flow hedges september 30 2003 accumulated comprehensive income immaterial items described nontrading stated us dollars thousands item 8item 7a quantitative qualitative disclosures market risk table provides information company’s market sensitive financial instruments constitutes “forwardlooking statement” company’s major market risk exposure foreign currency fluctuations internationally changing interest rates primarily united states canada europe company’s policy manage interest rates use combination fixed floating rate debt floating rates increase 10 september 30 2004 rates company’s combined interest expense third parties would increase total 1799 month increase continued september 30 2004 company issued fixedrate debt 4985 million instruments fixedrate therefore expose company risk loss earnings due changes market interest rates however fair value instruments would increase approximately 185 million interest rates decline 10 rates september 30 2004 periodically company borrows funds denominated foreign currencies exposes company market risk associated exchange rate movements borrowings denominated foreign currencies september 30 2004 company believes prudent company enters forward foreign exchange contracts hedge impact foreign currency fluctuations forward foreign exchange contracts september 30 2004 expected maturity dates fair value market risk sensitive instruments stated thousands items described nontrading stated us dollars 1 holders convertible notes require company repurchase notes april 2005 2007 2009 event holders require company repurchase convertible notes company expects obligation paid cash see note 5 notes consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk table provides information company’s market sensitive financial instruments constitutes “forwardlooking statement” company’s major market risk exposure foreign currency fluctuations internationally changing interest rates primarily united states canada europe company’s policy manage interest rates use combination fixed floating rate debt floating rates increase 10 september 30 2005 rates company’s combined interest expense third parties would increase total 2 thousand month increase continued september 30 2005 company issued fixedrate debt 790 million instruments fixedrate therefore expose company risk loss earnings due changes market interest rates however fair value instruments would increase approximately 147 thousand interest rates decline 10 rates september 30 2005 periodically company borrows funds denominated foreign currencies exposes company market risk associated exchange rate movements borrowings denominated foreign currencies september 30 2005 company believes prudent company enters forward foreign exchange contracts hedge impact foreign currency fluctuations forward foreign exchange contracts september 30 2005 expected maturity dates fair value market risk sensitive instruments stated thousands items described nontrading stated us dollars item 8item 7a quantitative qualitative disclosures market risk table provides information market sensitive financial instruments constitutes “forwardlooking statement” major market risk exposure foreign currency fluctuations internationally changing interest rates primarily united states canada europe policy manage interest rates use combination fixed floating rate debt floating rates increase 10 september 30 2006 rates combined interest expense third parties would increase total 195 thousand month increase continued september 30 2006 issued fixedrate debt 2497 million net discount instruments fixedrate therefore expose us risk loss earnings due changes market interest rates however fair value instruments would increase approximately 56 million interest rates decline 10 rates september 30 2006 periodically borrow funds denominated foreign currencies exposes us market risk associated exchange rate movements 03 million borrowings denominated foreign currencies september 30 2006 management believes prudent enter forward foreign exchange contracts hedge impact foreign currency fluctuations forward foreign exchange contracts september 30 2006 expected maturity dates fair value market risk sensitive instruments stated thousands items described nontrading stated us dollars item 8item 7a quantitative qualitative disclosures market risk table provides information market sensitive financial instruments constitutes “forwardlooking statement” major market risk exposure foreign currency fluctuations internationally changing interest rates primarily united states canada europe policy manage interest rates use combination fixed floating rate debt floating rates increase 10 september 30 2007 combined interest expense third parties would increase total 197 thousand month increase continued september 30 2007 2006 fixedrate debt outstanding 2498 million 2497 million net discount respectively instruments fixedrate therefore expose us risk loss earnings due changes market interest rates however fair value instruments would increase approximately 45 million interest rates decline 10 rates september 30 2007 periodically borrow funds denominated foreign currencies exposes us market risk associated exchange rate movements 154 million 03 million borrowings denominated foreign currencies september 30 2007 2006 respectively management believes prudent enter forward foreign exchange contracts hedge impact foreign currency fluctuations forward foreign exchange contracts september 30 2007 expected maturity dates fair value market risk sensitive instruments stated millions items described nontrading stated us dollars item 8item 7a quantitative qualitative disclosures market risk table provides information market sensitive financial instruments constitutes “forwardlooking statement” major market risk exposure foreign currency fluctuations internationally changing interest rates primarily united states canada europe policy manage interest rates use combination fixed floating rate debt floating rates increase 10 september 30 2008 combined interest expense third parties would increase total 15 thousand month increase continued september 30 2008 2007 fixedrate debt outstanding 4987 million 2498 million net discount respectively instruments fixedrate therefore expose us risk loss earnings due changes market interest rates however fair value instruments would increase approximately 143 million interest rates decline 10 rates september 30 2008 periodically borrow funds denominated foreign currencies exposes us market risk associated exchange rate movements 76 million 154 million borrowings denominated foreign currencies september 30 2008 2007 respectively management believes prudent enter forward foreign exchange contracts hedge impact foreign currency fluctuations forward foreign exchange contracts september 30 2008 expected maturity dates fair value market risk sensitive instruments stated millions items described stated us dollars item 8item 7a quantitative qualitative disclosures market risk table provides information market sensitive financial instruments constitutes “forwardlooking statement” major market risk exposure foreign currency fluctuations internationally changing interest rates primarily united states canada europe policy manage interest rates use combination fixed floating rate debt floating rates increase 10 september 30 2009 combined interest expense third parties would increase total 3 thousand month increase continued september 30 2009 2008 fixedrate debt outstanding 4989 million 4987 million net discount respectively instruments fixedrate therefore expose us risk loss earnings due changes market interest rates however fair value instruments would increase approximately 113 million interest rates decline 10 rates september 30 2009 periodically borrow funds denominated foreign currencies exposes us market risk associated exchange rate movements 72 million 76 million borrowings denominated foreign currencies september 30 2009 2008 respectively management believes prudent enter forward foreign exchange contracts hedge impact foreign currency fluctuations forward foreign exchange contracts september 30 2009 2008 expected maturity dates fair value market risk sensitive instruments stated millions us dollars item 8item 7a quantitative qualitative disclosures market risk table provides information companys market sensitive financial instruments constitutes forwardlooking statement companys major market risk exposure changing interest rates primarily united states canada companys policy manage interest rates use combination fixed floating rate debt portion companys borrowings denominated foreign currencies exposes company market risk associated exchange rate movements necessary company enters forward foreign exchange contracts hedge impact foreign currency fluctuations foreign exchange contracts outstanding september 30 1998 items described nontrading stated us dollars item 8 item 8 financial statements supplementary data report independent accountants stockholders bj services company audited accompanying consolidated statements financial position bj services company subsidiaries september 30 1995 1994 related consolidated statements operations stockholders equity cash flows three years period ended september 30 1995 audits also included financial statement schedule listed item 14 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position bj services company subsidiaries september 30 1995 1994 results operations cash flows three years period ended september 30 1995 conformity generally accepted accounting principles also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein described note 9 consolidated financial statements company changed method accounting postretirement benefits pensions effective october 1 1993 conform statement financial accounting standards 106 deloitte touche llp houston texas november 21 1995 bj services company consolidated statement operations see notes consolidated financial statements bj services company consolidated statement financial position assets see notes consolidated financial statements bj services company consolidated statement stockholders equity see notes consolidated financial statements bj services company consolidated statement cash flows see notes consolidated financial statements bj services company notes consolidated financial statements 1 basis presentation bj services company leading provider pressure pumping oilfield services petroleum industry consolidated financial statements include accounts bj services company majorityowned subsidiaries company significant intercompany balances transactions eliminated consolidation certain amounts 1994 1993 reclassified accompanying consolidated financial statements conform current year presentation amounts changed foreign exchange gains losses previously classified incomenet classified cost sales services goodwill amortization previously classified incomenet classified separate component operating expenses net income affected changes 2 summary significant accounting policies net income per share net income per share computed dividing net income weighted average number outstanding common shares common stock equivalents material dilutive effect computation net income per share year presented use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting periods actual results could differ estimates cash equivalents company considers highly liquid debt instruments purchased original maturities three months less cash equivalents inventories consist principally products consumed companys services provided customers b spare parts equipment used providing services c manufactured components attachments equipment used providing services stated primarily lower average cost market property stated cost less amounts provided permanent impairments includes capitalized interest 216000 541000 167000 years ended september 30 1995 1994 1993 respectively funds borrowed finance construction capital additions depreciation generally provided using straightline method estimated useful lives individual items leasehold improvements amortized straightline basis shorter estimated useful life lease term goodwill represents excess cost fair value net assets companies acquired purchase transactions goodwill amortized straightline method periods ranging 5 40 years accumulated amortization september 30 1995 1994 5174000 1880000 respectively company utilizes undiscounted cash flows acquired operations evaluate possible impairment related goodwill investments companies companys ownership interest ranges 20 50 percent company exercises significant influence operating financial policies accounted using equity method investments accounted using cost method foreign currency translation gains losses resulting financial statement translation foreign operations us dollar functional currency included consolidated statement operations gains losses resulting financial statement translation foreign operations bj services company notes consolidated financial statements continued foreign currency functional currency included separate component stockholders equity companys foreign operations primarily use us dollar functional currency foreign exchange contracts time company enters forward foreign exchange contracts hedge impact foreign currency fluctuations certain assets liabilities denominated foreign currencies changes market value offset foreign exchange gains losses related assets liabilities included cost sales services foreign exchange contracts outstanding september 30 1995 environmental remediation compliance environmental remediation compliance costs accrued based estimates known environmental exposures liabilities recorded environmental assessments andor remedial efforts probable cost reasonably estimated 3 unusual charge 1995 company recorded unusual charge 172 million 52 per share aftertax costs incurred connection acquisition western company north america western components unusual charge follows 1 includes 3646 noncash impairment facilities company western operated facilities many locations management made decision close duplicate facilities previously operated bj services retain operated western provision recorded adjust carrying value duplicate facilities estimated net realizable value accruals recorded estimated costs associated closings including maintenance facilities ultimate sale relocation assets substantially duplicate facilities closed september 30 1995 consummation western acquisition triggered change control provision companys 1990 stock incentive plan result 168547 performance units previously granted companys executive officers became fully vested 168547 shares common stock subsequently issued unusual charge includes amount excess value performance units date issuance estimated amount otherwise earned acquisition occurred unusual charge also includes legal severance bj employees mergerrelated costs would incurred acquisition western occurred bj services company notes consolidated financial statements continued 4 acquisitions businesses april 1995 company acquired western total consideration including transaction costs 5114 million cash company common stock warrants purchase common stock transaction may summarized follows 1 includes cash acquired 445 million acquisition accounted using purchase method accounting accordingly results western included financial statements beginning april 1 1995 assets liabilities western recorded companys books estimated fair market value april 1 1995 remaining purchase price reflected goodwill amortized straightline basis 40 years following unaudited pro forma summary presents consolidated results operations excluding estimated consolidation savings company two years ended september 30 1995 1994 acquisition occurred beginning fiscal year february 9 1994 company acquired remaining 50 ownership joint venture egypt hughes services ci ltd 20 million prior acquisition joint venture accounted using equity method accounting april 1 1993 company completed transaction acquire assets including existing service contracts norsk bronnservice subsidiary odfjell drilling consulting 54 million operations provide cementing gravel packing completion fluids services norwegian oil gas industry july 30 1993 company acquired coiled tubing operations italog spa 20 million italog based milan italy provides coiled tubing nitrogen pumping services italy nigeria name siat acquisition included assets existing contracts siat 1993 1994 acquisitions accounted purchases accordingly acquired assets liabilities recorded estimated fair values date acquisition excess consideration paid estimated fair value net assets acquired recorded goodwill amortized periods ranging 5 40 years bj services company notes consolidated financial statements continued 5 longterm debt bank credit facilities longterm debt september 30 1995 1994 consisted following april 15 1995 company canceled existing credit facility outstanding borrowings repaid funds committed unsecured credit facility bank credit facility executed accommodate acquisition western bank credit facility consists fiveyear 1750 million revolver sixyear 2250 million term loan providing aggregate 4000 million available principal borrowings company charged various fees connection bank credit facility including commitment fee based average daily unused portion commitment borrowings outstanding bank credit facility september 30 1995 amounted 2750 million comprised 2250 million term loan 500 million revolver interest charged outstanding borrowings based current market rates weighted average interest rate outstanding borrowings 64 september 30 1995 bank credit facility incorporates swingline facility allowing company borrow 200 million seven days minimum advances 10 million addition standby letters credit available amount exceed 200 million borrowings outstanding september 30 1995 september 30 1995 longterm debt due aggregate annual installments 35600000 37200000 49200000 48400000 98400000 years ending september 30 1996 1997 1998 1999 2000 respectively aggregate 26366000 thereafter commitment fees companys credit facilities 207206 16223 63679 1995 1994 1993 respectively addition committed facility company 500 million various unsecured discretionary lines credit september 30 1995 expire various dates 1996 requirements commitment fees compensating balances connection lines credit interest borrowings based prevailing market rates september 30 1995 20 million outstanding borrowings lines credit none september 30 1994 august 1991 company placed 300 million unsecured notes private investors notes bear interest fixed rate 92 principal payments due five equal annual installments first paid august 1994 october 1991 may 1995 company entered interest rate swap agreements effectively converted notes fixed rate debt interest rate 92 floating rate debt swap agreement liquidated may 1995 loss 679000 agreements resulted average annual effective interest rate 115 excluding loss 93 notes 1995 1994 respectively bj services company notes consolidated financial statements continued september 30 1995 company outstanding letters credit performance related bonds totaling 166 million 148 million respectively letters credit issued guarantee various trade insurance activities companys debt agreements contain various customary covenants including maintenance certain profitability solvency ratios restrictions dividend payments defined bank credit facility september 30 1995 companys debt capitalization ratio exceeded 35 result company prohibited bank credit facility making dividend payments time ratio drops 35 company also required make mandatory prepayments free cash flow defined bank credit facility subject certain ratios calculated end fiscal year september 30 1995 estimate 4 million prepayments classified current maturities longterm debt 6 financial instruments following methods assumptions used estimate fair value class financial instruments practicable estimate value cash equivalents trade receivables trade payables carrying amount approximates fair value short maturity instruments longterm debt based rates currently available company debt similar terms average maturities fair value companys notes 191 million longterm debt consists borrowings companys bank credit facility carrying amount borrowings approximates fair value individual borrowings bear interest current market rates 7 income taxes geographical sources income loss income taxes minority interest cumulative effect accounting change three years ended september 30 1995 follows provision benefit income taxes three years ended september 30 1995 summarized follows bj services company notes consolidated financial statements continued consolidated effective income tax rates percent income taxes minority interest cumulative effect accounting change three years ended september 30 1995 varied united states statutory income tax rate reasons set forth income tax provisions 1994 1993 included 1867000 620000 deferred foreign tax benefits related recognition foreign net loss carryforwards reserved valuation account september 30 1993 september 30 1992 respectively deferred tax assets liabilities recognized estimated future tax effects temporary differences tax basis asset liability reported amount financial statements measurement deferred tax assets liabilities based enacted tax laws rates currently effect jurisdictions company operations generally deferred tax assets liabilities classified current noncurrent according classification related asset liability financial reporting estimated deferred tax effect temporary differences carryforwards september 30 1995 1994 follows net change deferred tax asset valuation allowance reflects purchase accounting adjustments made properly state anticipated future benefit combined net operating loss carryforwards bj western entire deferred tax asset valuation allowance realized recorded reduction goodwill september 30 1995 company approximately 512 million us tax net operating loss carryforwards expiring varying amounts 2000 2010 result western experienced changes control defined internal revenue code section 382 prior years current year due bj services company notes consolidated financial statements continued merger bj usage approximately 375 million tax net operating loss carryforwards subject annual limitation potential impact annual limitation may usage tax net operating loss carryforwards reflected deferred tax asset valuation allowance company also foreign tax net operating loss carryovers 67 million september 30 1995 foreign tax net operating loss carryforwards subject annual limitation carryforward indefinitely company provide federal income taxes undistributed earnings foreign subsidiaries company considers permanently reinvested foreign operations cumulative amount undistributed earnings approximately 147 million september 30 1995 earnings remitted company us income taxes payable would substantially reduced foreign tax credits generated repatriation earnings 8 geographic information company operates exclusively one business segment oilfield services industry summarized information concerning geographic areas company operated september 30 1995 1994 1993 years ended shown follows export sales totaled 2807000 1392000 1861000 years ended september 30 1995 1994 1993 respectively corporate general administrative expense research engineering expense certain expenses related worldwide manufacturing support functions benefit domestic international operations allocation expenses made foreign areas based total revenues expenses allocated totaled 8357000 6847000 8390000 years ended september 30 1995 1994 1993 respectively 9 employee benefit plans company thrift plan whereby eligible employees elect contribute 2 12 base salaries employee benefit trust employee contributions matched company rate 50 per 100 6 employees base salary addition company contributes 2 5 employees base salary depending age january 1 year base contribution company matching contributions vest immediately base contributions become fully vested five bj services company notes consolidated financial statements continued years employment companys us employees formerly employed western covered thrift plan merged companys thrift plan effective december 31 1995 period since acquisition company intends match employee contributions rate companys existing thrift plan companys contributions thrift plans amounted 2862000 2551000 2324000 1995 1994 1993 respectively companys us employees formerly employed western least one year service also covered defined benefit pension plan carryover western acquisition pension benefits based years service average compensation employees five consecutive highest paid years last ten years worked pension benefits fully vested five years service management intends freeze benefits plan effective december 31 1995 merge employees thrift plan management yet made decision terminate plan therefore fund amounts necessary meet minimum funding requirements employees retirement income security act amended management intends freeze plan effective december 31 1995 accrued pension liability acquisition date net pension expense since acquisition date reflected assumption funded status plan september 30 1995 follows thousands assumptions used accounting companys us defined benefit plan follows costs period april 1 1995 september 30 1995 companys us defined benefit plan follows thousands bj services company notes consolidated financial statements continued addition company sponsors defined benefit plans foreign operations cover substantially employees united kingdom venezuela due differences foreign pension laws economics defined benefit plans least partially unfunded funded status plans september 30 1995 1994 follows thousands assumptions used accounting companys international defined benefit pension plans follows combined costs companys international defined benefit plans two years ended september 30 1995 follows thousands company also sponsors plan whereby certain health care life insurance benefits provided retired employees primarily us eligible dependents employee meets specified age service requirements plans unfunded company retains right subject existing agreements modify eliminate plans effective october 1 1993 company adopted statement financial accounting standards 106 employers accounting postretirement benefits pensions sfas 106 accordance requirements sfas 106 company changed accounting postretirement benefits cash basis accrual basis employees period service october 1 1993 company elected immediately recognize cumulative effect change accounting principle 160 million 104 million tax 67 per share effective january 1 1994 company amended postretirement medical benefit plan provide credits based years service could used purchase coverage active employee plans bj services company notes consolidated financial statements continued change effectively caps companys health care inflation rate 4 increase per year reduction approximately 57 million accumulated postretirement benefit obligation due amendment amortized average period future service date full eligibility postretirement benefits active employees postretirement medical benefit costs 946000 639000 590000 1995 1994 1993 respectively net periodic postretirement benefit costs two years ended september 30 1995 included following components thousands actuarial recorded liabilities postretirement benefits follows september 30 1995 1994 thousands accumulated postretirement benefit obligation determined using discount rate 7 health care cost trend rate 13 decreasing ratably 52 year 2020 thereafter increasing assumed health care cost trend rates one percentage point year would material impact accumulated postretirement benefit obligation net periodic postretirement benefit cost benefits effectively capped companys 1994 plan amendment 10 commitments contingencies company performance service operations sometimes named defendant litigation usually relating claims bodily injuries property damage including claims well reservoir damage company maintains insurance coverage claims extent deemed prudent management company believes existing claims potentially material adverse nature already provided appropriate accruals federal state local laws regulations govern companys operation underground fuel storage tanks rather incur additional costs restore upgrade tanks required regulations management opted remove existing tanks company process removing tanks identified certain tanks leaks require remedial cleanups addition company conducting number environmental investigations remedial actions current former company locations along companies named potentially responsible party 10 waste disposal sites company established accrual 13986000 environmental matters management believes best estimate companys portion future costs incurred bj services company notes consolidated financial statements continued company also maintains insurance environmental liabilities company believes reasonable based knowledge industry lease commitments september 30 1995 company longterm operating leases covering certain facilities equipment varying expiration dates minimum annual rental commitments years ended september 30 1996 1997 1998 1999 2000 16198000 12132000 10023000 6866000 5674000 respectively 35732000 aggregate thereafter 11 supplemental financial information supplemental financial information three years ended september 30 1995 follows connection acquisition company issued 263551 common stock warrants western stockholders income net three years ended september 30 1995 summarized follows 12 employee stock plans stock option plans companys 1990 stock incentive plan 1995 incentive plan plans provide granting options purchase companys common stock common stock performance based awards officers key employees nonemployee directors company options vest three year period exercisable periods ranging one ten years aggregate 3000000 shares common stock reserved grants 1324386 available september 30 1995 bj services company notes consolidated financial statements continued stock option activity companys plans summarized pursuant terms 1990 stock incentive plan 1993 1994 company also issued total 220316 performance units officers company unit represented right receive company end stipulated period unrestricted share common stock contingent upon achievement certain financial performance goals stipulated period company failed achieve specific financial goals set executive compensation committee board directors units would canceled related shares reverted company reissuance plan aggregate fair market value underlying shares granted plan considered unearned compensation time grant adjusted annually based current market price companys common stock compensation expense determined based managements current estimate likelihood meeting specific financial goals charged ratably stipulated period connection acquisition western triggered certain change control provisions companys 1990 stock incentive plan total 168547 units converted common stock issued officers remaining 51769 units canceled difference amount accrued acquisition date value shares issued reflected unusual charge accompanying financial statements see note 3 september 30 1995 units outstanding stock purchase plan companys 1990 employee stock purchase plan purchase plan employees may purchase shares companys common stock 85 market value first last business day twelvemonth plan period beginning october whichever lower purchases limited 10 employees regular pay maximum aggregate 750000 shares reserved purchase plan 576826 available future purchase september 30 1995 october 1995 55440 shares purchased 1668 per share 13 stockholders equity stockholder rights plan company stockholder rights plan designed deter coercive takeover tactics prevent acquirer gaining control company without offering fair price companys stockholders plan outstanding share companys common stock includes one bj services company notes consolidated financial statements continued preferred share purchase right becomes exercisable certain circumstances including beneficial ownership companys common stock person group equals exceeds 20 companys outstanding common stock right entitles registered holder purchase company one onehundredth share series two junior participating preferred stock price 75 subject adjustment certain circumstances upon occurrence certain events specified stockholder rights plan holder right acquiring person right upon exercise right receive number shares common stock company surviving corporation time transaction would market price two times purchase price right shares series two junior participating preferred stock issued company september 30 1995 january 1994 former stockholder rights plan triggered company redeemed preferred share purchase rights issued stockholder rights agreement acquire series one junior participating preferred stock rights redeemed price 01 per right total cost company 155000 stock purchase warrants connection acquisition western see note 4 company issued 4800037 stock purchase warrants issued april 14 1995 initial value 500 per warrant represents right purchase one share companys common stock exercise price 30 expiration date april 13 2000 september 30 1995 warrants exercised bj services company notes consolidated financial statements continued 14 quarterly financial data unaudited represents revenue less cost sales services research engineering expenses b includes 16 million 104 million tax 40 per share unusual charge resulting acquisition western see note 3 c includes 12 million 8 million tax 03 per share unusual charge resulting acquisition western see note 3 includes 15 million 05 per share nonrecurring tax benefits e includes 13 million 08 per share nonrecurring tax benefits item 9item 8 financial statements supplementary data independent auditors report stockholders bj services company audited accompanying consolidated statements financial position bj services company subsidiaries september 30 1996 1995 related consolidated statements operations stockholders equity cash flows three years period ended september 30 1996 audits also included financial statement schedule listed item 14 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position bj services company subsidiaries september 30 1996 1995 results operations cash flows three years period ended september 30 1996 conformity generally accepted accounting principles also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein described note 10 consolidated financial statements company changed method accounting postretirement benefits pensions effective october 1 1993 conform statement financial accounting standards 106 deloitte touche llp houston texas november 26 1996 bj services company consolidated statement operations see notes consolidated financial statements bj services company consolidated statement financial position assets see notes consolidated financial statements bj services company consolidated statement stockholders equity see notes consolidated financial statements bj services company consolidated statement cash flows see notes consolidated financial statements bj services company notes consolidated financial statements 1 basis presentation bj services company leading provider pressure pumping oilfield services petroleum industry consolidated financial statements include accounts bj services company majorityowned subsidiaries company significant intercompany balances transactions eliminated consolidation certain amounts 1995 1994 reclassified accompanying consolidated financial statements conform current year presentation 2 summary significant accounting policies earnings per share primary earnings per share based weighted average number shares outstanding period assumed exercise dilutive stock options warrants less number treasury shares assumed purchased proceeds using average market price companys common stock periods presented fully diluted earnings per share based weighted average number shares outstanding period assumed exercise dilutive stock options warrants less number treasury shares assumed purchased proceeds using closing market price companys common stock periods presented use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting periods actual results could differ estimates cash equivalents company considers highly liquid debt instruments purchased original maturities three months less cash equivalents inventories consist principally products consumed companys services provided customers b spare parts equipment used providing services c manufactured components attachments equipment used providing services stated primarily lower average cost market property stated cost less amounts provided permanent impairments includes capitalized interest 200000 216000 541000 years ended september 30 1996 1995 1994 respectively funds borrowed finance construction capital additions depreciation generally provided using straightline method estimated useful lives individual items leasehold improvements amortized straightline basis shorter estimated useful life lease term goodwill represents excess cost fair value net assets companies acquired purchase transactions goodwill amortized straightline method periods ranging 5 40 years accumulated amortization september 30 1996 1995 13084000 5174000 respectively company utilizes undiscounted estimated cash flows evaluate possible impairment goodwill investments companies companys ownership interest ranges 20 50 percent company exercises significant influence operating financial policies accounted using equity method investments accounted using cost method foreign currency translation gains losses resulting financial statement translation foreign operations us dollar functional currency included consolidated statement bj services company notes consolidated financial statements operations gains losses resulting financial statement translation foreign operations foreign currency functional currency included separate component stockholders equity except canada companys foreign operations primarily use us dollar functional currency foreign exchange contracts time company enters forward foreign exchange contracts hedge impact foreign currency fluctuations certain assets liabilities denominated foreign currencies changes market value offset foreign exchange gains losses related assets liabilities included cost sales services foreign exchange contracts outstanding september 30 1996 environmental remediation compliance environmental remediation compliance costs accrued based estimates known environmental exposures liabilities recorded environmental assessments andor remedial efforts probable cost reasonably estimated impairment longlived assets fiscal 1996 company adopted financial accounting standards board statement 121 accounting impairment longlived assets longlived assets disposed sfas 121 statement requires impairment losses recognized longlived assets used operations indicators impairment present undiscounted cash flows estimated generated assets less assets carrying amount sfas 121 also addresses accounting longlived assets expected disposed sfas 121s methodology accounting materially different companys previous policy therefore adoption sfas 121 material impact companys financial statements january 1996 company decided decommission stimulation vessel acquired western renaissance vessels hull sold january 1997 proceeds used reduce outstanding debt vessels stimulation equipment removed redeployed companys operating locations carrying value vessel 204 million recorded asset held sale included current assets company expect record loss sale hull redeployment equipment vessel employee stockbased compensation october 1995 financial accounting standards board statement 123 accounting stock based compensation sfas 123 issued sfas 123 company permitted either record expenses stock options stockbased employee compensation plans based fair value date grant continue apply current accounting policy accounting principles board opinion 25 apb 25 recognize compensation expense based intrinsic value equity instrument measurement date company currently follows apb 25 therefore compensation expense recognized exercise price employee stock options equals market price underlying stock date grant fiscal 1997 sfas 123 adopted company elect continue follow current apb 25 accounting policies 3 acquisitions businesses nowsco june 1996 company completed acquisition nowsco well service ltd nowsco total purchase price 5826 million including transaction costs cash transaction may summarized follows thousands bj services company notes consolidated financial statements acquisition accounted using purchase method accounting accordingly results nowscos operations included statement operations beginning july 1 1996 assets liabilities nowsco recorded companys statement financial position estimated fair market value june 30 1996 remaining purchase price reflected goodwill amortized straight line basis 40 years western april 1995 company acquired western company north america western total consideration including 72 million transaction costs 5114 million cash company common stock warrants purchase company common stock transaction may summarized follows thousands except warrant share amounts 1 includes cash acquired 445 million acquisition accounted using purchase method accounting accordingly results western included statement operations beginning april 1 1995 assets liabilities western recorded statement financial position estimated fair market value april 1 1995 remaining purchase price reflected goodwill amortized straightline basis 40 years following unaudited pro forma summary presents consolidated results operations excluding estimated consolidation savings company years ended september 30 1996 1995 nowsco western acquisitions related issuance common stock discussed note 14 occurred beginning 1995 thousands except per share amounts effective december 1 1995 company acquired remaining 60 ownership previously unconsolidated joint venture brazil total consideration 54 million consisting 37 million cash 17 million debt assumed company consolidated statement operations includes operating results subsidiary acquired since date acquisition february 9 1994 company acquired remaining 50 ownership joint venture egypt hughes services ci ltd 20 million prior acquisition joint venture accounted using equity method accounting acquisitions accounted using purchase method accounting accordingly excess total consideration estimated fair value net assets acquired recorded goodwill amortized periods ranging 10 40 years bj services company notes consolidated financial statements acquisitions material companys financial statements therefore pro forma information presented 4 unusual charges 1996 company recorded unusual charge 74 million 15 per share aftertax costs incurred connection acquisition nowsco components unusual charge follows thousands interest charge represents incremental interest accrued date financing nowsco acquisition june 13 1996 date nowscos results consolidated financial reporting purposes july 1 1996 bank fees represent writeoff unamortized portion companys prior credit facility replaced current credit facility finance nowsco acquisition asset writeoffs include computer systems inventory assets purchased previous years used subsequent acquisition remaining portion unusual charge reflects severance costs terminated bj services employees relocation personnel equipment legal fees costs would incurred acquisition nowsco occurred 1995 company recorded unusual charge 172 million 52 per share aftertax costs incurred connection acquisition western components unusual charge follows thousands 1 includes 3646 noncash impairment facilities company western operated facilities many locations management made decision close duplicate facilities previously operated bj services retain operated western provision recorded adjust carrying value duplicate facilities estimated net realizable value accruals recorded estimated costs associated closings including maintenance facilities ultimate sale relocation assets substantially duplicate facilities closed september 30 1995 consummation western acquisition triggered change control provision companys 1990 stock incentive plan result 168547 performance units previously granted bj services company notes consolidated financial statements companys executive officers became fully vested 168547 shares common stock subsequently issued 1995 unusual charge includes amount excess value performance units date issuance estimated amount otherwise earned acquisition occurred 1995 unusual charge also includes legal severance bj employees mergerrelated costs would incurred acquisition western occurred expenditures costs made september 30 1996 5 earnings per share following table presents information necessary calculate earnings per share three years ended september 30 1996 thousands except per share amounts 6 longterm debt bank credit facilities longterm debt september 30 1996 1995 consisted following thousands bj services company notes consolidated financial statements june 1996 company canceled existing credit facility outstanding borrowings repaid funds committed unsecured credit facility new bank credit facility executed accommodate acquisition nowsco borrowers guarantors new bank credit facility amended restated august company three subsidiaries bj services company usa bj service international inc bj services company middle east nowsco well service ltd companys canadian subsidiary borrower canadian dollars new bank credit facility consists canadian 320 million approximately us 234 million six year term loan repayable 22 quarterly installments beginning march 1997 five year us 325 million revolving facility interest outstanding borrowings charged based prevailing market rates company charged various fees connection new bank credit facility including commitment fee based average daily unused portion commitment fees companys credit facilities 366000 207000 16000 1996 1995 1994 respectively september 30 1996 approximately 143 million available borrow revolver principal reductions term loan due aggregate installments 25870000 34493000 44102000 47305000 229165000 years ended september 30 1997 1998 1999 2000 2001 respectively addition committed facility company 1000 million various unsecured discretionary lines credit september 30 1996 expire various dates 1997 requirements commitment fees compensating balances connection lines credit interest borrowings based prevailing market rates september 30 1996 1995 25 million 20 million respectively outstanding borrowings lines credit weighted average interest rates shortterm borrowings outstanding september 30 1996 1995 58 64 respectively february 1996 transaction exempt registration requirements securities act 1933 company issued 1250 million unsecured 7 notes due 2006 three companys subsidiaries obligors respect new bank credit facility companys 92 notes due august 1 1998 bj services company usa bj service international inc bj services company middle east collectively guarantor subsidiaries guarantors 7 notes august 1996 7 notes exchanged 7 series b notes due 2006 7 series b notes form terms 7 series b notes identical material respects form terms 7 notes except 7 series b notes issued transaction registered securities act 1933 net proceeds issuance 7 notes 1233 million used company repay indebtedness outstanding term loan portion companys existing bank credit facility august 1991 company placed 300 million unsecured notes private investors notes bear interest fixed rate 92 principal payments due five annual installments 60 million first paid august 1994 october 1991 may 1995 company entered interest rate swap agreements effectively converted notes fixed rate debt interest rate 92 floating rate debt swap agreement liquidated may 1995 loss 679000 agreements resulted average annual effective interest rate 115 excluding loss 93 notes 1995 1994 respectively september 30 1996 company outstanding letters credit performance related bonds totaling 162 million 215 million respectively letters credit issued guarantee various trade insurance activities companys debt agreements contain various customary covenants including maintenance certain profitability solvency ratios restrictions dividend payments defined new bank credit facility september 30 1996 companys debt capitalization ratio exceeded 35 result company prohibited new bank credit facility making dividend payments time ratio drops 35 bj services company notes consolidated financial statements continued 7 financial instruments following methods assumptions used estimate fair value class financial instruments practicable estimate value cash equivalents trade receivables trade payables carrying amount approximates fair value short maturity instruments longterm debt fair value based rates currently available company debt similar terms average maturities longterm debt consists borrowings companys bank credit facility carrying amount borrowings approximates fair value individual borrowings bear interest current market rates fair value financial instruments differed carrying value september 30 1996 1995 follows thousands 8 income taxes geographical sources income loss income taxes three years ended september 30 1996 follows thousands provision benefit income taxes three years ended september 30 1996 summarized thousands 1994 income tax provision included 1867000 deferred foreign tax benefits related recognition foreign net operating loss carryforwards reserved valuation account september 30 1993 bj services company notes consolidated financial statementscontinued consolidated effective income tax rates percent income loss income taxes cumulative effect accounting change three years ended september 30 1996 varied united states statutory income tax rate reasons set forth deferred tax assets liabilities recognized estimated future tax effects temporary differences tax basis asset liability reported amount financial statements measurement deferred tax assets liabilities based enacted tax laws rates currently effect jurisdictions company operations generally deferred tax assets liabilities classified current noncurrent according classification related asset liability financial reporting estimated deferred tax effect temporary differences carryforwards september 30 1996 1995 follows thousands net change deferred tax asset valuation allowance reflects purchase accounting adjustments made reflect anticipated future benefit combined net operating loss carryforwards bj services nowsco 1996 deferred tax valuation allowance decreased 200 million based increase projected taxable income following combination western bj services us operations decrease deferred tax valuation subsequent decrease recorded reduction goodwill bj services company notes consolidated financial statementscontinued september 30 1996 company approximately 585 million us tax net operating loss carryforwards expiring varying amounts 2000 2011 result western nowsco experienced changes control defined internal revenue code section 382 prior years result merger us operations bj services usage approximately 429 million tax net operating loss carryforwards subject annual limitation company believe based information currently available experienced change control result mergers however company determine later date change control occur effect annual limitation usage bj services tax net operating loss carryforwards would immaterial potential impact annual limitation may usage western nowsco tax net operating loss carryforwards reflected deferred tax asset valuation allowance balance september 30 1996 company also approximately 815 million foreign tax net operating loss carryforwards approximately 70 million foreign investment tax credit carryforwards september 30 1996 286 million foreign tax net operating loss carryforwards subject annual limitation carryforward indefinitely foreign investment tax credit carryforward remaining loss carryforward used expire beginning 1997 potential impact expiration foreign net operating loss investment tax credit carryforwards reflected deferred tax asset valuation allowance balance september 30 1996 company provide federal income taxes undistributed earnings foreign subsidiaries company considers permanently reinvested foreign operations cumulative amount undistributed earnings approximately 208 million september 30 1996 earnings remitted company us income taxes payable would substantially reduced foreign tax credits generated repatriation earnings 9 geographic information company operates primarily one business segment oilfield services industry summarized information concerning geographic areas company operated september 30 1996 1995 1994 years ended shown follows thousands corporate general administrative expense research engineering expense certain expenses related worldwide manufacturing support functions benefit domestic international operations allocation expenses made foreign areas based total bj services company notes consolidated financial statementscontinued revenues expenses allocated totaled 10853000 8357000 6847000 years ended september 30 1996 1995 1994 respectively 10 employee benefit plans company thrift plan whereby eligible employees elect contribute 2 12 base salaries employee benefit trust employee contributions matched company rate 50 per 100 6 employees base salary addition company contributes 2 5 employees base salary depending age january 1 year base contribution company matching contributions vest immediately base contributions become fully vested five years employment companys us employees formerly employed western covered thrift plan merged companys thrift plan effective december 31 1995 companys us employees formerly employed nowsco covered thrift plan merged companys thrift plan effective october 1 1996 companys contributions thrift plans amounted 5095000 2862000 2551000 1996 1995 1994 respectively companys us employees formerly employed western least one year service also covered defined benefit pension plan carryover western acquisition pension benefits based years service average compensation employees five consecutive highest paid years last ten years worked benefits western plan frozen effective december 31 1995 time earned benefits vested management yet made decision terminate plan therefore fund amounts necessary meet minimum funding requirements employees retirement income security act amended funded status plan september 30 1996 1995 follows thousands assumptions used accounting companys us defined benefit plan follows costs two years ended september 30 1996 companys us defined benefit plan follows thousands bj services company notes consolidated financial statements continued addition company sponsors defined benefit plans foreign operations cover substantially employees canada united kingdom venezuela due differences foreign pension laws economics defined benefit plans least partially unfunded funded status plans september 30 1996 1995 follows thousands assumptions used accounting companys international defined benefit pension plans follows combined costs companys international defined benefit plans three years ended september 30 1996 follows thousands company also sponsors plan whereby certain health care life insurance benefits provided retired employees primarily us eligible dependents employee meets specified age service requirements plans unfunded company retains right subject existing agreements modify eliminate plans effective october 1 1993 company adopted statement financial accounting standards 106 employers accounting postretirement benefits pensions sfas 106 accordance requirements sfas 106 company changed accounting postretirement benefits cash basis accrual basis employees period service october 1 1993 company elected immediately recognize cumulative effect change accounting principle 160 million 104 million tax 66 per share bj services company notes consolidated financial statements continued effective january 1 1994 company amended postretirement medical benefit plan provide credits based years service could used purchase coverage active employee plans change effectively caps companys health care inflation rate 4 increase per year reduction approximately 57 million accumulated postretirement benefit obligation due amendment amortized average period future service date full eligibility postretirement benefits active employees postretirement medical benefit costs 1681000 946000 639000 1996 1995 1994 respectively net periodic postretirement benefit costs three years ended september 30 1996 included following components thousands actuarial recorded liabilities postretirement benefits follows september 30 1996 1995 thousands accumulated postretirement benefit obligation determined using discount rate 75 health care cost trend rate 4 reflecting cap discussed increasing assumed health care cost trend rates one percentage point would material impact accumulated postretirement benefit obligation net periodic postretirement benefit cost benefits effectively capped companys 1994 plan amendment 11 commitments contingencies company performance service operations sometimes named defendant litigation usually relating claims bodily injuries property damage including claims well reservoir damage company maintains insurance coverage claims extent deemed prudent management company believes existing claims potentially material adverse nature already provided appropriate accruals federal state local laws regulations govern companys operation underground fuel storage tanks rather incur additional costs restore upgrade tanks required regulations management opted remove existing tanks company process removing tanks identified certain tanks leaks require remedial cleanups addition company conducting number environmental investigations remedial actions current former company locations along companies named potentially responsible party 8 waste disposal bj services company notes consolidated financial statements continued sites company established accrual 11500000 environmental matters management believes best estimate companys portion future costs incurred company also maintains insurance environmental liabilities company believes reasonable based knowledge industry lease commitments september 30 1996 company longterm operating leases covering certain facilities equipment varying expiration dates minimum annual rental commitments years ended september 30 1997 1998 1999 2000 2001 20308000 16353000 12578000 9270000 7187000 respectively 39968000 aggregate thereafter 12 supplemental financial information supplemental financial information three years ended september 30 1996 follows thousands connection western acquisition 1995 company issued 263551000 common stock warrants western stockholders income net three years ended september 30 1996 summarized follows thousands 13 employee stock plans stock option plans companys 1990 stock incentive plan 1995 incentive plan plans provide granting options purchase companys common stock common stock performance based awards officers key employees non employee directors company options vest threeyear period exercisable periods ranging one ten years aggregate 3000000 shares common stock reserved grants 957058 available september 30 1996 bj services company notes consolidated financial statements continued stock option activity companys plans three years ended september 30 1996 summarized thousands except per share prices pursuant terms 1990 stock incentive plan 1993 1996 company also issued total 332922 performance units officers company unit represents right receive company end stipulated period one unrestricted share common stock contingent upon achievement certain financial performance goals stipulated period company fail achieve specific financial goals set executive compensation committee board directors units canceled related shares revert company reissuance plan aggregate fair market value underlying shares granted plan considered unearned compensation time grant adjusted annually based current market price companys common stock compensation expense determined based managements current estimate likelihood meeting specific financial goals charged ratably stipulated period connection acquisition western triggered certain change control provisions companys 1990 stock incentive plan total 168547 units converted common stock issued officers 51769 units canceled difference amount accrued acquisition date value shares issued reflected unusual charge accompanying financial statements see note 4 september 30 1996 112606 units outstanding stock purchase plan companys 1990 employee stock purchase plan purchase plan employees may purchase shares companys common stock 85 market value first last business day twelvemonth plan period beginning october whichever lower purchases limited 10 employees regular pay maximum aggregate 750000 shares reserved purchase plan 521386 available future purchase september 30 1996 october 1996 78503 shares purchased 2146 per share 14 stockholders equity july 1 1996 company issued 9775000 shares common stock public offering net proceeds 3231 million used repay indebtedness incurred fund nowsco acquisition stockholder rights plan company stockholder rights plan rights plan designed deter coercive takeover tactics prevent acquirer gaining control company without offering fair price companys stockholders plan outstanding share bj services company notes consolidated financial statements continued companys common stock includes one preferred share purchase right becomes exercisable certain circumstances including beneficial ownership companys common stock person group equals exceeds 15 companys outstanding common stock right entitles registered holder purchase company one onehundredth share series junior participating preferred stock price 150 subject adjustment certain circumstances upon occurrence certain events specified rights plan holder right acquiring person right upon exercise right receive number shares common stock company surviving corporation time transaction would market price two times purchase price right shares series junior participating preferred stock issued company september 30 1996 january 1994 former rights plan triggered company redeemed preferred share purchase rights issued stockholder rights agreement acquire series one junior participating preferred stock rights redeemed price 01 per right total cost company 155000 stock purchase warrants connection acquisition western see note 3 company issued 4800037 stock purchase warrants issued april 14 1995 initial value 500 per warrant represents right purchase one share companys common stock exercise price 30 expiration date april 13 2000 september 30 1996 warrants exercised 15 quarterly financial data unaudited represents revenue less cost sales services research engineering expenses b includes 35 million 23 million tax 08 per share unusual charge resulting acquisition nowsco see note 4 c includes 39 million 25 million tax 06 per share unusual charge resulting acquisition nowsco see note 4 includes 16 million 104 million tax 40 per share unusual charge resulting acquisition western see note 4 e includes 12 million 8 million tax 03 per share unusual charge resulting acquisition western see note 4 f includes 15 million 05 per share nonrecurring tax benefits bj services company notes consolidated financial statements continued 16 supplemental guarantor information discussed note 6 guarantor subsidiaries fully unconditionally guaranteed joint several basis obligation pay principal interest respect 7 series b notes substantially companys operating income cash flow generated subsidiaries result funds necessary meet companys debt service obligations provided part distributions advances subsidiaries certain circumstances contractual legal restrictions well financial condition operating requirements companys subsidiaries could limit companys ability obtain cash subsidiaries purpose meeting debt service obligations including payment principal interest 7 series b notes although holders 7 series b notes direct creditors companys principal direct subsidiaries virtue guarantees company subsidiaries nonguarantor subsidiaries included among guarantor subsidiaries obligated respect 7 series b notes result claims creditors nonguarantor subsidiaries effectively priority respect assets earnings companies claims creditors company including holders 7 series b notes following supplemental consolidating condensed financial statements present 1 consolidating condensed statements financial position september 30 1996 september 30 1995 consolidating condensed statements operations years ended september 30 1996 1995 1994 consolidating condensed statements cash flows years ended september 30 1996 1995 1994 2 bj services company parent combined guarantor subsidiaries combined nonguarantor subsidiaries investments subsidiaries accounted using equity method 3 elimination entries necessary consolidate parent subsidiaries management believe separate financial statements guarantor subsidiaries 7 series b notes material investors 7 series b notes supplemental consolidating condensed statement operations year ended september 30 1996 thousands supplemental consolidating condensed statement operations year ended september 30 1995 thousands supplemental consolidating condensed statement operations year ended september 30 1994 thousands supplemental consolidating condensed statement financial position september 30 1996 thousands assets supplemental consolidating condensed statement financial position september 30 1995 thousands assets supplemental consolidating condensed statement cash flows year ended september 30 1996 thousands supplemental consolidating condensed statement cash flows year ended september 30 1995 thousands supplemental consolidating condensed statement cash flows year ended september 30 1994 thousands item 9item 8 financial statements supplementary data independent auditors report stockholders bj services company audited accompanying consolidated statements financial position bj services company subsidiaries september 30 1997 1996 related consolidated statements operations stockholders equity cash flows three years period ended september 30 1997 audits also included financial statement schedule listed item 14 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position bj services company subsidiaries september 30 1997 1996 results operations cash flows three years period ended september 30 1997 conformity generally accepted accounting principles also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein deloitte touche llp houston texas november 24 1997 december 15 1997 notes 6 14 bj services company consolidated statement operations see notes consolidated financial statements bj services company consolidated statement financial position assets see notes consolidated financial statements bj services company consolidated statement stockholders equity see notes consolidated financial statements bj services company consolidated statement cash flows see notes consolidated financial statements bj services company notes consolidated financial statements 1 basis presentation bj services company leading provider pressure pumping oilfield services petroleum industry consolidated financial statements include accounts bj services company majorityowned subsidiaries company significant intercompany balances transactions eliminated consolidation certain amounts 1996 1995 reclassified accompanying consolidated financial statements conform current year presentation 2 summary significant accounting policies earnings per share primary earnings per share based weighted average number shares outstanding period assumed exercise dilutive stock options warrants less number treasury shares assumed purchased proceeds using average market price companys common stock periods presented fully diluted earnings per share based weighted average number shares outstanding period assumed exercise dilutive stock options warrants less number treasury shares assumed purchased proceeds using closing market price companys common stock periods presented february 1997 financial accounting standards board issued statement financial accounting standards 128 sfas 128 earnings per share sfas 128 establishes standards computing presenting earnings per share eps applies entities publicly held common stock potential common stock statement simplifies standards computing eps previously found accounting principles board opinion 15 apb 15 earnings per share makes comparable international eps standards statement replaces presentation primary eps fully diluted eps requires presentation basic eps diluted eps basic eps excludes dilution computed dividing income available common stockholders weightedaverage number common shares outstanding period diluted eps computed similarly fully diluted eps pursuant apb 15 statement effective financial statements issued periods ending december 15 1997 including interim periods earlier application permitted pro forma basic eps three years ended september 30 1997 1996 1995 281 132 46 respectively based companys current capital structure pro forma diluted eps primary eps periods presented use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting periods actual results could differ estimates cash equivalents company considers highly liquid debt instruments purchased original maturities three months less cash equivalents inventories consist principally products consumed companys services provided customers ii spare parts equipment used providing services iii manufactured components attachments equipment used providing services stated primarily lower average cost market property stated cost less amounts provided permanent impairments includes capitalized interest 684000 200000 216000 years ended september 30 1997 1996 1995 respectively funds borrowed finance construction capital additions depreciation generally provided using straightline method estimated useful lives individual items leasehold bj services company notes consolidated financial statements continued improvements amortized straightline basis shorter estimated useful life lease term intangible assets goodwill represents excess cost fair value net assets companies acquired purchase transactions goodwill amortized straightline method periods ranging 5 40 years patents amortized straight line basis estimated useful lives exceed 17 years accumulated amortization intangible assets september 30 1997 1996 29612000 13412000 respectively company utilizes undiscounted estimated cash flows evaluate possible impairment intangible assets investments companies companys ownership interest ranges 20 50 percent company exercises significant influence operating financial policies accounted using equity method investments accounted using cost method foreign currency translation gains losses resulting financial statement translation foreign operations us dollar functional currency included consolidated statement operations gains losses resulting financial statement translation foreign operations foreign currency functional currency included separate component stockholders equity except canada companys foreign operations use us dollar functional currency foreign exchange contracts time company enters forward foreign exchange contracts hedge impact foreign currency fluctuations certain assets liabilities denominated foreign currencies changes market value offset foreign exchange gains losses related assets liabilities included cost sales services foreign exchange contracts outstanding september 30 1997 1996 environmental remediation compliance environmental remediation compliance costs accrued based estimates known environmental exposures liabilities recorded environmental assessments andor remedial efforts probable cost reasonably estimated impairment longlived assets accordance financial accounting standards board statement 121 accounting impairment longlived assets longlived assets disposed sfas 121 company recognizes impairment losses longlived assets used operations indicators impairment present undiscounted cash flows estimated generated assets less assets carrying amount january 1996 company decommissioned stimulation vessel renaissance acquired 1995 september 30 1996 carrying value vessel 204 million recorded asset held sale included current assets vessels hull sold january 1997 proceeds used reduce outstanding debt vessels stimulation equipment removed redeployed companys operating locations loss recorded sale hull redeployment equipment vessel employee stockbased compensation fiscal 1997 company adopted financial accounting standards board statement 123 accounting stockbased compensation sfas 123 sfas 123 company permitted either record expenses stock options stockbased employee compensation plans based fair value date grant continue apply current accounting policy accounting principles board opinion 25 apb 25 recognize compensation expense based intrinsic value equity instrument measurement date company elected continue following apb 25 therefore compensation expense recognized exercise price employee stock options equals market price underlying stock date grant new accounting pronouncements june 1997 financial accounting standards board issued statement 130 reporting comprehensive income sfas 130 statement 131 disclo bj services company notes consolidated financial statements continued sures segments enterprise related information sfas 131 sfas 130 sfas 131 effective periods beginning december 15 1997 sfas 130 establishes standards reporting displaying comprehensive income components sfas 131 establishes standards way public business enterprises report information operating segments interim annual financial statements two statements effect companys 1997 financial statements management currently evaluating additional disclosure may required two statements adopted first quarter fiscal 1999 3 acquisitions businesses nowsco june 1996 company completed acquisition nowsco well service ltd nowsco total purchase price 5826 million including transaction costs cash transaction may summarized follows thousands acquisition accounted using purchase method accounting accordingly results nowscos operations included statement operations beginning july 1 1996 assets liabilities nowsco recorded companys statement financial position estimated fair market value june 30 1996 remaining purchase price reflected goodwill amortized straight line basis 40 years western april 1995 company acquired western company north america western total consideration including 72 million transaction costs 5114 million cash company common stock warrants purchase company common stock transaction may summarized follows thousands 1 includes cash acquired 445 million acquisition accounted using purchase method accounting accordingly results western included statement operations beginning april 1 1995 assets liabilities western recorded statement financial position estimated fair market value april 1 1995 remaining purchase price reflected goodwill amortized straightline basis 40 years following unaudited pro forma summary presents consolidated results operations excluding estimated consolidation savings company years ended september 30 1996 1995 bj services company notes consolidated financial statements continued nowsco western acquisitions related issuance common stock discussed note 14 occurred beginning 1995 thousands except per share amounts effective july 1 1997 company acquired top tool company inc total cash outlay 73 million including transaction costs top tool provides oilfield servicing tools along louisiana gulf coast acquisition provides added capacity tool expertise companys downhole tool operations consolidated statement operations includes operating results subsidiary acquired since date acquisition effective december 1 1996 company acquired remaining 51 ownership previously unconsolidated joint venture argentina total consideration 135 million funded borrowings existing credit facilities consolidated statement operations includes operating results subsidiary acquired since date acquisition effective december 1 1995 company acquired remaining 60 ownership previously unconsolidated joint venture brazil total consideration 54 million consisting 37 million cash 17 million debt assumed company consolidated statement operations includes operating results subsidiary acquired since date acquisition acquisitions accounted using purchase method accounting accordingly excess total consideration estimated fair value net assets acquired recorded goodwill amortized 40 years acquisitions material companys financial statements therefore pro forma information presented 4 unusual charges 1996 company recorded unusual charge 74 million 15 per share aftertax costs incurred connection acquisition nowsco components unusual charge follows thousands interest charge represents incremental interest accrued date financing nowsco acquisition june 13 1996 date nowscos results consolidated financial reporting purposes july 1 1996 bank fees represent writeoff unamortized portion companys prior credit facility replaced current credit facility finance nowsco acquisition asset writeoffs include computer systems inventory assets purchased previous years used bj services company notes consolidated financial statements continued subsequent acquisition remaining portion unusual charge reflects severance costs terminated bj services employees relocation personnel equipment legal fees costs would incurred acquisition nowsco occurred expenditures costs made september 30 1997 1995 company recorded unusual charge 172 million 52 per share aftertax costs incurred connection acquisition western components unusual charge follows thousands 1 includes 3646 noncash impairment facilities company western operated facilities many locations management made decision close duplicate facilities previously operated bj services retain operated western provision recorded adjust carrying value duplicate facilities estimated net realizable value accruals recorded estimated costs associated closings including maintenance facilities ultimate sale relocation assets substantially duplicate facilities closed september 30 1995 consummation western acquisition triggered change control provision companys 1990 stock incentive plan result 168547 performance units previously granted companys executive officers became fully vested 168547 shares common stock subsequently issued 1995 unusual charge includes amount excess value performance units date issuance estimated amount otherwise earned acquisition occurred 1995 unusual charge also includes legal severance bj employees mergerrelated costs would incurred acquisition western occurred expenditures costs made september 30 1996 bj services company notes consolidated financial statements continued 5 earnings per share following table presents information necessary calculate earnings per share three years ended september 30 1997 thousands except per share amounts 6 longterm debt bank credit facilities longterm debt september 30 1997 1996 consisted following thousands june 1996 company replaced existing credit facility committed unsecured credit facility bank credit facility executed accommodate acquisition nowsco company three subsidiaries bj services company usa bj service international inc bj services company middle east borrowers guarantors bank credit facility november 1997 bank credit facility amended remove bj services company usa bj service international inc bj services company middle east borrowers accordingly guarantees released nowsco well service ltd companys canadian subsidiary borrower canadian dollars bank credit facility consists canadian 320 million approximately us 232 million six year term loan repayable bj services company notes consolidated financial statements continued 22 quarterly installments began march 1997 five year us 325 million revolving facility october 1997 company reduced commitment revolving facility 100 million 225 million interest outstanding borrowings charged based prevailing market rates company charged various fees connection bank credit facility including commitment fee based average daily unused portion commitment fees companys credit facilities 414000 366000 207000 1997 1996 1995 respectively september 30 1997 3250 million available borrow revolver subsequently reduced 2250 million october 1997 principal reductions term loan due aggregate installments 34054000 43540000 46702000 34950000 years ended september 30 1998 1999 2000 2001 2002 respectively addition committed facility company 979 million various unsecured discretionary lines credit september 30 1997 expire various dates 1998 requirements commitment fees compensating balances connection lines credit interest borrowings based prevailing market rates september 30 1997 1996 598 million 25 million respectively outstanding borrowings lines credit weighted average interest rates shortterm borrowings outstanding september 30 1997 1996 47 58 respectively 1996 company issued 1250 million unsecured 7 notes due 2006 registered securities act 1933 net proceeds issuance 7 notes 1233 million used company repay indebtedness outstanding term loan portion companys existing bank credit facility three companys subsidiaries obligors respect bank credit facility companys 92 notes due august 1 1998 bj services company usa bj service international inc bj services company middle east collectively guarantor subsidiaries guarantors 7 notes result amendment bank credit facility november 1997 prepayment 92 notes december 1997 discussed guarantees guarantor subsidiaries released accordance terms indenture august 1991 company placed 300 million unsecured notes private investors notes bear interest fixed rate 92 principal payments due five annual installments 60 million first paid august 1994 company repaid remaining 60 million balance december 1997 september 30 1997 company outstanding letters credit performance related bonds totaling 187 million 264 million respectively letters credit issued guarantee various trade activities companys debt agreements contain various customary covenants including maintenance certain profitability solvency ratios restrictions dividend payments defined bank credit facility september 30 1997 company prohibited making dividend payments 7 financial instruments following methods assumptions used estimate fair value class financial instruments practicable estimate value cash equivalents trade receivables trade payables carrying amount approximates fair value short maturity instruments longterm debt fair value based rates currently available company debt similar terms average maturities longterm debt consists borrowings companys bank credit bj services company notes consolidated financial statements continued facility carrying amount borrowings approximates fair value individual borrowings bear interest current market rates fair value financial instruments differed carrying value september 30 1997 1996 follows thousands 8 income taxes geographical sources income loss income taxes three years ended september 30 1997 follows thousands provision benefit income taxes three years ended september 30 1997 summarized thousands bj services company notes consolidated financial statements continued consolidated effective income tax rates percent income taxes three years ended september 30 1997 varied united states statutory income tax rate reasons set forth deferred tax assets liabilities recognized estimated future tax effects temporary differences tax basis asset liability reported amount financial statements measurement deferred tax assets liabilities based enacted tax laws rates currently effect jurisdictions company operations generally deferred tax assets liabilities classified current noncurrent according classification related asset liability financial reporting estimated deferred tax effect temporary differences carryforwards september 30 1997 1996 follows thousands 1997 deferred tax valuation allowance decreased due increase projected taxable income following combination western nowsco bj services operations 1996 deferred tax valuation allowance decreased 200 million based increase projected taxable income following combination western bj services us operations adjustments deferred tax valuation allowance recorded reduction goodwill subsequent decreases deferred tax valuation allowance also recorded reduction goodwill september 30 1997 company approximately 506 million us tax net operating loss carryforwards expiring varying amounts 2000 2011 company also approximately bj services company notes consolidated financial statements continued 82 million foreign tax net operating loss carryforwards approximately 7 million foreign investment tax credit carryforwards september 30 1997 foreign tax net operating loss carryforwards approximately 44 million subject annual limitation carryforward indefinitely foreign investment tax credit carryforward remaining loss carryforward used expire varying amounts beginning 1998 potential impact expiration net operating loss investment tax credit carryforwards reflected deferred tax asset valuation allowance balance september 30 1997 1996 company provide federal income taxes undistributed earnings foreign subsidiaries company considers permanently reinvested foreign operations cumulative amount undistributed earnings approximately 280 million september 30 1997 earning remitted company us income taxes payable would substantially reduced foreign tax credits generated repatriation earnings 9 geographic information company operates primarily one business segment oilfield services summarized information concerning geographic areas company operated september 30 1997 1996 1995 years ended shown follows thousands export sales totaled 11547000 2744000 5634000 years ended september 30 1997 1996 1995 respectively corporate general administrative expense research engineering expense certain expenses related worldwide manufacturing support functions benefit domestic international operations allocation expenses made foreign areas based total revenues expenses allocated totaled 12106000 10853000 8357000 years ended september 30 1997 1996 1995 respectively 10 employee benefit plans company administers thrift plan whereby eligible employees elect contribute 2 12 base salaries employee benefit trust employee contributions matched company rate 50 per 100 6 employees base salary addition company contributes 2 5 employees base salary depending age january 1 year base bj services company notes consolidated financial statements continued contribution company matching contributions vest immediately base contributions become fully vested five years employment companys us employees formerly employed western covered thrift plan merged companys thrift plan effective december 31 1995 companys us employees formerly employed nowsco covered thrift plan merged companys thrift plan effective october 1 1996 companys contributions thrift plans amounted 6887000 5095000 2862000 1997 1996 1995 respectively companys us employees formerly employed western least one year service also covered defined benefit pension plan carryover western acquisition pension benefits based years service average compensation employees five consecutive highest paid years last ten years worked benefits western plan frozen effective december 31 1995 time earned benefits vested management yet made decision whether terminate plan therefore fund amounts necessary meet minimum funding requirements employees retirement income security act amended funded status plan september 30 1997 1996 follows thousands pursuant provisions statement financial accounting standards 87 employers accounting pensions company recorded noncurrent liabilities additional minimum pension liability adjustment 32 million september 30 1997 representing amount accumulated benefit obligation exceeded fair value plan assets plus accrued amounts previously recorded previously unrecognized prior service costs september 30 1997 full amount adjustment net related deferred tax benefit recorded reduction stockholders equity 21 million assumptions used accounting companys us defined benefit plan follows costs two years ended september 30 1997 companys us defined benefit plan follows thousands bj services company notes consolidated financial statements continued addition company sponsors defined benefit plans foreign operations cover substantially employees canada united kingdom venezuela due differences foreign pension laws economics defined benefit plans least partially unfunded funded status plans september 30 1997 1996 follows thousands assumptions used accounting companys international defined benefit pension plans follows combined costs companys international defined benefit plans three years ended september 30 1997 follows thousands company also sponsors plan whereby certain health care life insurance benefits provided retired employees primarily us eligible dependents employee meets specified age service requirements plans unfunded company retains right subject existing agreements modify eliminate plans companys postretirement medical benefit plan provides credits based years service used purchase coverage active employee plans plan effectively caps companys health care inflation rate 4 increase per year reduction approximately 57 million accumulated postretirement benefit obligation due amendment amortized average period future service date full eligibility postretirement benefits active employees bj services company notes consolidated financial statements continued net periodic postretirement benefit costs three years ended september 30 1997 included following components thousands actuarial recorded liabilities postretirement benefits follows september 30 1997 1996 thousands accumulated postretirement benefit obligation september 30 1997 1996 determined using discount rate 70 75 respectively health care cost trend rate 4 reflecting cap discussed increasing assumed health care cost trend rates one percentage point would material impact accumulated postretirement benefit obligation net periodic postretirement benefit cost benefits effectively capped company 11 commitments contingencies company performance service operations sometimes named defendant litigation usually relating claims bodily injuries property damage including claims well reservoir damage company maintains insurance coverage claims extent deemed prudent management company believes existing claims potentially material adverse nature already provided appropriate accruals federal state local laws regulations govern companys operation underground fuel storage tanks rather incur additional costs restore upgrade tanks required regulations management opted remove existing tanks company process removing tanks identified certain tanks leaks require remedial cleanups addition company conducting number environmental investigations remedial actions current former company locations along companies named potentially responsible party five waste disposal sites company established accrual 8100000 environmental matters management believes best estimate companys portion future costs incurred company also maintains insurance environmental liabilities company believes reasonable based knowledge industry 1997 company completed transaction involving transfer certain pumping service equipment assets company received 1000 million used pay outstanding bank debt equipment used provide services companys customers company pay bj services company notes consolidated financial statements continued service fee period least eight fourteen years transaction generated deferred gain book purposes approximately 38 million amortized twelve years lease longterm commitments september 30 1997 company longterm operating leases service fee commitments covering certain facilities equipment varying expiration dates minimum annual commitments years ended september 30 1998 1999 2000 2001 2002 35807000 29993000 26889000 29140000 19484000 respectively 89026000 aggregate thereafter 12 supplemental financial information supplemental financial information three years ended september 30 1997 follows thousands connection western acquisition 1995 company issued 263551000 common stock warrants western stockholders income net three years ended september 30 1997 summarized follows thousands 13 employee stock plans stock option plans companys 1990 stock incentive plan 1995 incentive plan plans provide granting options purchase companys common stock common stock performance based awards officers key employees nonemployee directors company options vest threeyear period exercisable periods ranging one ten years options granted december 1996 also acceleration clause provided options would vest immediately closing price common stock reached 7500 october 1 1997 companys common stock closed 7506 options granted december 12 1996 became vested full bj services company notes consolidated financial statements continued aggregate 3000000 shares common stock reserved grants 665347 available future grants september 30 1997 summary status companys stock option activity related information years ended september 30 1997 1996 1995 presented thousands except per share prices following table summarizes information stock options outstanding september 30 1997 thousands except per share prices sfas 123 encourages require companies record compensation cost employee stockbased compensation plans fair value determined generally recognized option pricing models blackscholes model binomial model inexact subjective nature deriving stock option values using methods company adopted disclosureonly provisions sfas 123 continues account stockbased compensation past using intrinsic value method prescribed apb 25 accordingly compensation expense recognized companys employee stock option plans compensation cost companys employee stock option plans determined based fair value grant date awards issued 1996 1997 consistent provisions sfas 123 companys net earnings fully diluted earnings per share would reduced 51 million 13 per share 18 million 06 per share 1997 1996 respectively calculation consider effect 1997 1996 awards issued prior 1996 may bj services company notes consolidated financial statements continued representative effects pro forma net income future years pro forma fair value options date grant estimated using blackscholes model following assumptions stock purchase plan companys 1990 employee stock purchase plan purchase plan employee participants may purchase shares common stock 85 market value first last business day twelvemonth plan period beginning october whichever lower purchases limited 10 employees regular pay maximum aggregate 750000 shares reserved purchase plan 442763 available future purchase september 30 1997 october 1997 93110 shares purchased 3081 per share october 1996 78503 shares purchased 2146 per share compensation cost companys stock purchase plan determined consistent provisions sfas 123 companys net earnings fully diluted earnings per share would reduced 6 million 02 per share 4 million 01 per share 1997 1996 respectively pro forma value employees purchase rights estimated using blackscholes model following assumptions dividend yield expected life 1 year expected volatility 374 risk free interest rate 58 weightedaverage fair value purchase rights granted 1997 1996 1079 751 respectively pursuant terms 1990 stock incentive plan 1993 1997 company also issued total 353384 performance units officers company unit represents right receive company end stipulated period one unrestricted share common stock contingent upon achievement certain financial performance goals stipulated period company fail achieve specific financial goals set executive compensation committee board directors units canceled related shares revert company reissuance plan aggregate fair market value underlying shares granted plan considered unearned compensation time grant adjusted annually based current market price common stock compensation expense determined based managements current estimate likelihood meeting specific financial goals charged ratably stipulated period connection acquisition western triggered certain change control provisions companys 1990 stock incentive plan total 168547 units converted common stock issued officers 51769 units canceled difference amount accrued acquisition date value shares issued reflected unusual charge accompanying financial statements see note 4 september 30 1997 133068 units outstanding 14 stockholders equity july 1 1996 company issued 9775000 shares common stock public offering net proceeds 3231 million used repay indebtedness incurred fund nowsco acquisition stockholder rights plan company stockholder rights plan rights plan designed deter coercive takeover tactics prevent acquirer gaining control company without offering fair price companys stockholders plan outstanding share common stock includes one preferred share purchase right becomes exercisable certain circumstances including beneficial ownership common stock person group equals exceeds 15 companys outstanding common stock right entitles registered bj services company notes consolidated financial statements continued holder purchase company one onehundredth share series junior participating preferred stock price 150 subject adjustment certain circumstances upon occurrence certain events specified rights plan holder right acquiring person right upon exercise right receive number shares common stock company surviving corporation time transaction would market price two times purchase price right shares series junior participating preferred stock issued company september 30 1997 stock purchase warrants connection acquisition western see note 3 company issued 4800037 stock purchase warrants issued april 14 1995 initial value 500 per warrant represents right purchase one share common stock exercise price 30 expiration date april 13 2000 september 30 1997 546 warrants exercised stock split september 30 1997 38530762 shares common stock issued outstanding december 11 1997 companys board directors approved 2 1 stock split effected form stock dividend holders record january 30 1998 stock split subject stockholder approval annual meeting stockholders january 22 1998 amendment companys charter increasing number authorized shares common stock 80 million 160 million shares 15 quarterly financial data unaudited 1 represents revenue less cost sales services research engineering expenses 2 includes 35 million 23 million tax 08 per share unusual charge resulting acquisition nowsco see note 4 3 includes 39 million 25 million tax 06 per share unusual charge resulting acquisition nowsco see note 4 item 9item 8 financial statements supplementary data independent auditors report stockholders bj services company audited accompanying consolidated statements financial position bj services company subsidiaries september 30 1999 1998 related consolidated statements operations stockholders equity cash flows three years period ended september 30 1999 audits also included financial statement schedule listed item 14 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position bj services company subsidiaries september 30 1999 1998 results operations cash flows three years period ended september 30 1999 conformity generally accepted accounting principles also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein deloitte touche llp houston texas november 23 1999 bj services company consolidated statement operations see notes consolidated financial statements bj services company consolidated statement financial position assets see notes consolidated financial statements bj services company consolidated statement financial position liabilities stockholders equity see notes consolidated financial statements bj services company consolidated statement stockholders equity see notes consolidated financial statements bj services company consolidated statement cash flows see notes consolidated financial statements bj services company notes consolidated financial statements 1 basis presentation bj services company leading provider pressure pumping oilfield services petroleum industry consolidated financial statements include accounts bj services company majorityowned subsidiaries company significant intercompany balances transactions eliminated consolidation certain amounts 1998 1997 reclassified accompanying consolidated financial statements conform current year presentation fiscal 1997 number shares price per share amounts restated reflect 2 1 stock split fiscal year 1998 see notes 13 14 2 summary significant accounting policies use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting periods actual results could differ estimates cash equivalents company considers highly liquid debt instruments purchased original maturities three months less cash equivalents inventories consist principally products consumed companys services provided customers ii spare parts equipment used providing services iii manufactured components attachments equipment used providing services stated primarily lower weightedaverage cost market property stated cost less amounts provided permanent impairments includes capitalized interest 2317000 1665000 684000 years ended september 30 1999 1998 1997 respectively funds borrowed finance construction capital additions depreciation generally provided using straightline method estimated useful lives individual items leasehold improvements amortized straightline basis shorter estimated useful life lease term intangible assets goodwill represents excess cost fair value net assets companies acquired purchase transactions goodwill amortized straightline method periods ranging 5 40 years patents amortized straight line basis estimated useful lives exceed 17 years accumulated amortization intangible assets september 30 1999 1998 51934000 43525000 respectively company utilizes undiscounted estimated cash flows evaluate possible impairment intangible assets cash flows exceed net carrying value intangible assets company records impairment charge equal difference discounted estimated cash flows net carrying value discount rate utilized based market factors time charge determined investments companies companys ownership interest ranges 20 50 percent company exercises significant influence operating financial policies accounted using equity method investments accounted using cost method revenue recognition company recognizes revenue services rendered products delivered certain revenues companys process pipeline services reported bj services company notes consolidated financial statements continued 2 summary significant accounting policies continued percentage completion method accounting using measurements progress towards completion appropriate work performed foreign currency translation gains losses resulting financial statement translation foreign operations us dollar functional currency included consolidated statement operations cost sales gains losses resulting financial statement translation foreign operations foreign currency functional currency included separate component stockholders equity except canada companys foreign operations use us dollar functional currency foreign exchange contracts time company enters forward foreign exchange contracts hedge impact foreign currency fluctuations certain assets liabilities denominated foreign currencies changes market value offset foreign exchange gains losses related assets liabilities included cost sales services material foreign exchange contracts outstanding september 30 1999 1998 environmental remediation compliance environmental remediation compliance costs accrued based estimates known environmental exposures liabilities recorded environmental assessments andor remedial efforts probable cost reasonably estimated impairment longlived assets accordance financial accounting standards board statement 121 accounting impairment longlived assets longlived assets disposed sfas 121 company recognizes impairment losses longlived assets used operations indicators impairment present undiscounted cash flows estimated generated assets less assets carrying amount years ended september 30 1999 1998 company recorded impairment 231 million 123 million respectively certain longlived assets based decrease undiscounted cash flows expected generated assets result downturn oilfield drilling activity see note 4 employee stockbased compensation fiscal 1997 company adopted financial accounting standards board statement 123 accounting stockbased compensation sfas 123 sfas 123 company permitted either record expenses stock options stockbased employee compensation plans based fair value date grant continue apply accounting principles board opinion 25 apb 25 recognize compensation expense based intrinsic value equity instrument measurement date company elected continue following apb 25 therefore compensation expense recognized exercise price employee stock options equals market price underlying stock date grant new accounting pronouncements effective october 1 1998 company adopted financial accounting standards board statement 130 reporting comprehensive income sfas 130 statement 131 disclosures segments enterprise related information sfas 131 statement 132 employers disclosures pensions postretirement benefits sfas 132 sfas 130 establishes standards reporting displaying comprehensive income components sfas 131 establishes standards way public business enterprises report information operating segments interim annual financial statements sfas 132 standardizes employers disclosures pensions postretirement benefit plans extent bj services company notes consolidated financial statements continued 2 summary significant accounting policies continued possible requires additional information changes benefit obligations fair value plan assets june 1998 financial accounting standards board issued statement 133 accounting derivative instruments hedging activities sfas 133 sfas 133 establishes accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities statement requires entity recognize derivatives either assets liabilities statement financial position measure instruments fair value statement effective fiscal quarters fiscal years beginning june 15 2000 therefore used preparing companys 1999 financial statements management currently evaluating additional adjustment disclosure may required statements adopted fiscal 2001 3 acquisitions businesses effective june 28 1999 company acquired selected assets subsidiaries fracmaster ltd total consideration 784 million acquisition accounted using purchase method accounting accordingly results fracmaster ltds operations included companys statement operations beginning july 1 1999 assets liabilities fracmaster ltd recorded companys statement financial position estimated fair market value 784 million september 30 1999 allocation purchase price may summarized follows millions 1 includes cash acquired 49 million pro forma financial information presented acquisition material companys consolidated financial statements effective september 30 1998 company acquired remaining 51 ownership previously unconsolidated joint venture bolivia total consideration 26 million cash effective july 1 1997 company acquired top tool company inc total cash outlay 73 million including transaction costs top tool provides oilfield servicing tools customers operating along louisiana gulf coast acquisition provides added capacity tool expertise companys downhole tool operations consolidated statement operations includes operating results subsidiary acquired since date acquisition effective december 1 1996 company acquired remaining 51 ownership previously unconsolidated joint venture argentina total consideration 135 million funded bj services company notes consolidated financial statements continued 3 acquisitions businesses continued borrowings existing credit facilities consolidated statement operations includes operating results subsidiary acquired since date acquisition acquisitions accounted using purchase method accounting accordingly excess total consideration estimated fair value net assets acquired recorded goodwill amortized 40 years acquisitions material companys financial statements therefore pro forma information presented 4 unusual charges first two quarters fiscal 1999 company recorded pretax unusual charges totaling 397 million 260 million tax 36 per diluted share reflect changes operations result downturn oilfield drilling activity components unusual charge follows thousands asset impairment 231 million primarily relates certain equipment previously utilized companys us operations sold decommissioned salvaged spare parts severance related benefits relate cost involuntary termination approximately 1100 employees worldwide company paid substantially severance benefits end fiscal 1999 facility closures costs primarily represent remaining lease obligations related closure several locations oil producing regions us also one location latin america costs incurred first six months fiscal 1999 relocation equipment personnel resulting closing facilities fourth quarter fiscal 1998 company recorded pretax unusual charge 266 million 176 million tax 22 per diluted share reflect changes operations result bj services company notes consolidated financial statements continued 4 unusual charges continued downturn oilfield drilling activity components unusual charge follows thousands 1 includes 55 noncash impairment facilities asset impairment losses 122 million consist principally writedown certain nonproductive facilities equipment us result evaluation companys ability recover asset costs given downturn oilfield drilling activity severance related benefits costs relate involuntary termination approximately 850 permanent contracted personnel worldwide substantially notified september 30 1998 bad debt expense relates writeoff uncollectible receivables resulting certain customers inability pay obligations due reduced production revenue result lower prices oil natural gas facility closure costs relate closing certain marginal operating locations impacted drilling downturn also cancellation costs related proposed new office building costs relate primarily legal expenses resulting employee terminations cancellation costs related certain proposed equipment purchases expenditures 1998 provision made september 30 1999 5 earnings per share october 1997 company adopted statement financial accounting standards 128 earnings per share eps accordance standard company replaced presentation primary eps fully diluted eps presentation basic eps diluted eps periods presented basic eps excludes dilution computed dividing income available common stockholders weightedaverage number common shares outstanding period diluted eps based weightedaverage number shares outstanding period assumed exercise dilutive stock options warrants less number treasury shares assumed purchased proceeds using average market price companys common stock periods presented annual meeting stockholders january 22 1998 companys stockholders approved amendment companys charter increasing number authorized shares common stock 80 million 160 million shares 2 1 stock split approved board directors december 11 1997 effected form stock dividend distributed february 20 1998 stockholders record january 30 1998 accordingly references financial statements number shares outstanding earnings per share amounts retroactively restated periods presented reflect increased number common shares outstanding resulting stock split bj services company notes consolidated financial statements continued 5 earnings per share continued following table presents information necessary calculate earnings per share three years ended september 30 1999 thousands except per share amounts 1 antidilutive company incurred net loss period 6 longterm debt bank credit facilities longterm debt september 30 1999 1998 consisted following thousands company committed unsecured bank credit facility bank credit facility consisting sixyear term loan approximately 1211 million currently drawn partially canadian dollars provision renewable annually option banks repayable 22 quarterly installments began march 1997 five year us 2250 million revolving facility available june 2001 interest outstanding borrowings charged based prevailing market rates company charged various fees connection bank credit facility including commitment fee based average daily unused portion commitment fees companys credit facilities 155000 355000 414000 1999 1998 1997 respectively september 30 1999 borrowings outstanding bank credit facility totaled 3411 million consisting 1211 million term loan 2200 million revolving loan principal reductions term loans bank credit facility due aggregate annual installments bj services company notes consolidated financial statements continued 6 longterm debt bank credit facilities continued 441 million 441 million 329 million years ending september 30 2000 2001 2002 respectively addition committed facility company 2020 million various unsecured discretionary lines credit september 30 1999 expire various dates 2000 requirements commitment fees compensating balances connection lines credit interest borrowings based prevailing market rates september 30 1999 1060 million outstanding borrowings lines credit consisting 611 million canadian borrowings 438 million us borrowings 11 million currencies september 30 1998 1849 million outstanding borrowings lines credit weighted average interest rates shortterm borrowings outstanding september 30 1999 1998 56 61 respectively company issued outstanding 1250 million unsecured 7 notes due 2006 net proceeds issuance 7 notes 1233 million august 1996 used company repay indebtedness outstanding term loan portion companys existing bank credit facility september 30 1999 company outstanding letters credit performance related bonds totaling 186 million 333 million respectively letters credit issued guarantee various trade activities companys debt agreements contain various customary covenants including maintenance certain profitability solvency ratios restrictions dividend payments defined bank credit facility none materially restrict companys activities 7 financial instruments following methods assumptions used estimate fair value class financial instruments practicable estimate value cash equivalents trade receivables trade payables shortterm borrowings carrying amount approximates fair value short maturity instruments longterm debt fair value based rates currently available company debt similar terms average maturities longterm debt consists borrowings companys bank credit facility carrying amount borrowings approximates fair value individual borrowings bear interest current market rates fair value financial instruments differed carrying value september 30 1999 1998 follows thousands bj services company notes consolidated financial statements continued 8 income taxes geographical sources income loss income taxes three years ended september 30 1999 follows thousands provision benefit income taxes three years ended september 30 1999 summarized thousands consolidated effective income tax rates percent income taxes three years ended september 30 1999 varied united states statutory income tax rate reasons set forth deferred tax assets liabilities recognized estimated future tax effects temporary differences tax basis asset liability reported amount financial statements measurement deferred tax assets liabilities based enacted tax laws rates currently effect jurisdictions company operations generally deferred tax assets bj services company notes consolidated financial statements continued 8 income taxes continued liabilities classified current noncurrent according classification related asset liability financial reporting estimated deferred tax effect temporary differences carryforwards september 30 1999 1998 follows thousands september 30 1999 company approximately 537 million us tax net operating loss carryforwards expiring varying amounts 2000 2011 company also approximately 79 million foreign tax net operating loss carryforwards approximately 10 million foreign investment tax credit carryforwards september 30 1999 foreign tax net operating loss carryforwards approximately 40 million subject annual limitation carryforward indefinitely foreign investment tax credit carryforward remaining loss carryforward used expire varying amounts beginning 2000 potential impact expiration net operating loss investment tax credit carryforwards reflected deferred tax asset valuation allowance balance september 30 1999 1998 increase deferred tax valuation allowance 1998 1999 reflects calculable portion gross tax asset recorded respect fracmaster acquisition company believes may realized subsequent decrease deferred tax valuation allowance recorded reduction goodwill company provide federal income taxes undistributed earnings foreign subsidiaries company considers permanently reinvested foreign operations cumulative amount undistributed earnings approximately 395 million september 30 1999 9 segment information company three business segments usmexico pressure pumping international pressure pumping oilfield services usmexico pressure pumping services segment includes cementing services stimulation services consisting fracturing acidizing sand control nitrogen coiled tubing downhole tools services provided throughout united states mexico international pressure pumping services segment also includes cementing stimulation services provided 40 countries major international oil natural gas producing areas latin america europe africa southeast asia canada middle east oilfield services bj services company notes consolidated financial statements continued 9 segment information continued segment consists specialty chemicals tubular services process pipeline services throughout us internationally accounting policies segments described summary significant accounting policies company evaluates performance operating segments based operating income excluding goodwill amortization unusual charges intersegment sales transfers significant summarized financial information concerning companys segments shown following table corporate column includes corporate general administrative expenses goodwill amortization unusual charges interest expense income expense items allocated reportable segments business segments bj services company notes consolidated financial statements continued 9 segment information continued geographic information revenues product line 10 employee benefit plans company administers thrift plan whereby eligible employees elect contribute 2 12 base salaries employee benefit trust employee contributions matched company rate 50 per 100 6 employees base salary addition company contributes 2 5 employees base salary depending age january 1 year base contribution company matching contributions vest immediately base contributions become fully vested five years employment companys contributions thrift plans amounted 7365000 7916000 6887000 1999 1998 1997 respectively bj services company notes consolidated financial statements continued 10 employee benefit plans continued companys canadian employees formerly employed fracmaster ltd see note 3 currently covered registered retirement savings plan whereby eligible employees elect contribute 1 5 salary based years service addition company also contributes 4 6 employees base salary based years service beginning first year employees participating plan company contributions vest immediately fiscal year ended september 30 1999 company contributed approximately 227000 plan management process developing unified plan canadian employees companys us employees formerly employed western company north america western least one year service covered defined benefit pension plan carryover western acquisition pension benefits based years service average compensation employees five consecutive highest paid years last ten years worked benefits western plan frozen effective december 31 1995 time earned benefits vested management yet made decision whether terminate plan therefore fund amounts necessary meet minimum funding requirements employees retirement income security act amended funded status plan september 30 1999 1998 follows thousands following provides reconciliation benefit obligation plan assets bj services company notes consolidated financial statements continued 10 employee benefit plans continued pursuant provisions statement financial accounting standards 87 employers accounting pensions company recorded noncurrent liabilities minimum pension liability adjustment 44 million 92 million september 30 1999 1998 respectively representing amount accumulated benefit obligation exceeded fair value plan assets previously unrecognized prior service costs september 30 1999 1998 full amount adjustments net related deferred tax benefit recorded reduction stockholders equity see note 12 disclosure amounts included comprehensive income assumptions used accounting companys us defined benefit plan follows costs three years ended september 30 1999 companys us defined benefit plan follows thousands addition company sponsors defined benefit plans foreign operations cover substantially employees canada united kingdom company also sponsored defined benefit plan venezuela fiscal year 1998 new labor law enacted venezuela resulted termination plan new labor law essence prospectively requires employers fund stipulated amounts based employees salaries trust fund making contribution company obligation therefore obligation included venezuela september 30 1999 bj services company notes consolidated financial statements continued 10 employee benefit plans continued 1998 funded status companys international plans september 30 1999 1998 follows thousands following provides reconciliation benefit obligation plan assets companys international defined benefit plans thousands bj services company notes consolidated financial statements continued 10 employee benefit plans continued assumptions used accounting companys international defined benefit pension plans follows combined costs companys international defined benefit plans three years ended september 30 1999 follows thousands addition company expensed 780000 910000 1999 1998 respectively relating settlement pension liability resulting enactment new labor law venezuela company also sponsors plan whereby certain health care life insurance benefits provided retired employees primarily us eligible dependents employee meets specified age service requirements plans unfunded company retains right subject existing agreements modify eliminate plans companys postretirement medical benefit plan provides credits based years service used purchase coverage active employee plans plan effectively caps companys health care inflation rate 4 increase per year reduction approximately 57 million accumulated postretirement benefit obligation due amendment amortized average period future service date full eligibility postretirement benefits active employees bj services company notes consolidated financial statements continued 10 employee benefit plans continued net periodic postretirement benefit costs three years ended september 30 1999 included following components thousands actuarial recorded liabilities postretirement benefits follows september 30 1999 1998 thousands following provides reconciliation benefit obligation plan assets thousands accumulated postretirement benefit obligation september 30 1999 1998 determined using discount rate 725 625 respectively health care cost trend rate 4 reflecting cap discussed increasing assumed health care cost trend rates one percentage point would material impact accumulated postretirement benefit obligation net periodic postretirement benefit cost benefits effectively capped company bj services company notes consolidated financial statements continued 11 commitments contingencies company performance service operations sometimes named defendant litigation usually relating claims bodily injuries property damage including claims well reservoir damage company maintains insurance coverage claims extent deemed prudent management company believes existing claims potentially material adverse nature already provided appropriate accruals federal state local laws regulations govern companys operation underground fuel storage tanks rather incur additional costs restore upgrade tanks required regulations management opted remove existing tanks company completed removal tanks remedial cleanups progress related tank removals addition company conducting number environmental investigations remedial actions current former company locations along companies named potentially responsible party five waste disposal sites company established accrual approximately 6 million environmental matters management believes best estimate companys portion future costs incurred company also maintains insurance environmental liabilities company believes reasonable based knowledge industry 1997 company completed transaction involving transfer certain pumping service equipment assets company received 1000 million used pay outstanding bank debt equipment used provide services companys customers company pay service fee period least eight fourteen years transaction generated deferred gain book purposes approximately 38 million amortized twelve years balance deferred gain 283 million 334 million september 30 1999 1998 respectively lease longterm commitments september 30 1999 company longterm operating leases service fee commitments covering certain facilities equipment well longterm commitments varying expiration dates minimum annual commitments years ended september 30 2000 2001 2002 2003 2004 36162000 32968000 27152000 20930000 19927000 respectively 71100000 aggregate thereafter bj services company notes consolidated financial statements continued 12 supplemental financial information supplemental financial information three years ended september 30 1999 follows thousands income expensenet three years ended september 30 1999 summarized follows thousands bj services company notes consolidated financial statements continued 12 supplemental financial information continued accumulated comprehensive income consists following thousands tax effects allocated component comprehensive income may summarized follows thousands 13 employee stock plans stock option plans companys 1990 stock incentive plan 1995 incentive plan 1997 incentive plan plans provide granting options purchase companys common stock common stock performance based awards officers key employees nonemployee directors company options vest three fouryear period exercisable periods ranging one ten years options granted december 1996 also acceleration clause provided options would vest immediately closing price common stock reached 3750 october 1 1997 companys common stock closed 3753 options granted december 12 1996 became vested full aggregate 9000000 shares bj services company notes consolidated financial statements continued 13 employee stock plans continued common stock reserved grants 1858717 available future grants september 30 1999 summary status companys stock option activity related information years ended september 30 1999 1998 1997 presented thousands except per share prices following table summarizes information stock options outstanding september 30 1999 thousands except per share prices sfas 123 encourages require companies record compensation cost employee stockbased compensation plans fair value determined generally recognized option pricing models blackscholes model binomial model inexact subjective nature deriving stock option values using methods company adopted disclosureonly provisions sfas 123 continues account stockbased compensation past using intrinsic value method prescribed apb 25 accordingly compensation expense recognized companys employee stock option plans compensation cost companys employee stock option plans determined based fair value grant date awards issued 1999 1998 1997 consistent provisions sfas 123 companys net earnings diluted earnings per share would reduced 60 million 08 per share 44 million 05 per share 51 million 07 per share 1999 1998 1997 respectively calculation consider effect awards issued prior 1996 may representative effects pro forma net income future bj services company notes consolidated financial statements continued 13 employee stock plans continued years pro forma fair value options date grant estimated using blackscholes model following assumptions stock purchase plan companys 1990 employee stock purchase plan companys 1999 employee stock purchase plan together purchase plan plans employees may purchase shares common stock 85 market value first last business day twelvemonth plan period beginning october whichever lower purchases limited 10 employees regular pay maximum aggregate 4500000 shares reserved purchase plan 3567636 available future purchase september 30 1999 october 1999 347316 shares purchased 1381 per share october 1998 131435 shares purchased 1504 per share compensation cost companys stock purchase plan determined consistent provisions sfas 123 companys net earnings diluted earnings per share would reduced 14 million 02 per share 6 million 01 per share 6 million 01 per share 1999 1998 1997 respectively pro forma value employees purchase rights estimated using blackscholes model following assumptions dividend yield expected life 1 year expected volatility 654 1999 662 1998 374 1997 risk free interest rate 499 1999 468 1998 58 1997 weightedaverage fair value per share purchase rights granted 1999 1998 1997 623 681 1079 respectively stock incentive plan pursuant terms 1990 stock incentive plan 1993 1997 company also issued total 632932 performance units officers company unit represents right receive company end stipulated period one unrestricted share common stock contingent upon achievement certain financial performance goals stipulated period company fail achieve specific financial goals set executive compensation committee board directors units canceled related shares revert company reissuance plan aggregate fair market value underlying shares granted plan considered unearned compensation time grant adjusted annually based current market price common stock compensation expense determined based managements current estimate likelihood meeting specific financial goals charged ratably stipulated period october 12 1998 executive compensation committee board directors reviewed companys performance threeyear period ending september 30 1998 purposes determining performance criteria achievement level unit awards made november 1995 based various performance factors including comparison companys stock price peer group established time grant changed significantly due mergers acquisitions oilfield sector earnings growth return equity growth return assets growth compensation committee decided 1995 units vest level 66 maximum level therefore total 137353 units converted common stock issued officers 11287 units deferred later issuance 76572 units cancelled bj services company notes consolidated financial statements continued 13 employee stock plans continued september 30 1999 81913 units outstanding november 23 1999 executive compensation committee board directors reviewed companys performance threeyear period ending september 30 1999 determined highest level performance criteria achieved unit awards made december 1996 therefore total 40924 units converted common stock issued officers 14 stockholders equity stockholder rights plan company stockholder rights plan rights plan designed deter coercive takeover tactics prevent acquirer gaining control company without offering fair price companys stockholders plan outstanding share common stock includes one preferred share purchase right becomes exercisable certain circumstances including beneficial ownership common stock person group equals exceeds 15 companys outstanding common stock right entitles registered holder purchase company one onehundredth share series junior participating preferred stock price 150 subject adjustment certain circumstances upon occurrence certain events specified rights plan holder right acquiring person right upon exercise right receive number shares common stock company surviving corporation time transaction would market price two times purchase price right shares series junior participating preferred stock issued company september 30 1999 rights proportionately adjusted stock split record date reflect effect february 1998 stock split stock purchase warrants connection acquisition western 1995 company issued 4800037 stock purchase warrants issued april 14 1995 initial value 500 per warrant subsequent february 1998 stock split warrant represents right purchase two shares common stock exercise price 15 per share expiration date april 13 2000 september 30 1999 4923 warrants exercised stock split annual meeting stockholders january 22 1998 companys stockholders approved amendment companys charter increasing number authorized shares common stock 80 million 160 million shares allowed company effect 2 1 stock split form dividend previously authorized board directors december 11 1997 distribution february 20 1998 increased number shares outstanding 37694427 75388854 net treasury shares 986000 split share per share data including stock option stock purchase plan information restated reflect stock split treasury stock december 1997 board directors approved share repurchase program authorizing purchases 150 million common stock discretion companys management may 1998 board approved increase authorized amount 300 million program company repurchased 5996400 shares cost 1966 million fiscal 1998 shares fiscal 1999 october 1999 company reissued 4027972 shares treasury stock private placement certain financial institutions proceeds private placement 1440 million used pay outstanding debt company also entered privately negotiated option agreements pursuant currently intends repurchase equivalent number shares april 2000 total 1490 million bj services company notes consolidated financial statements continued 15 quarterly financial data unaudited 1 represents revenue less cost sales services research engineering expenses 2 includes 216 million 140 million tax 19 per diluted share unusual charge resulting restructuring worldwide operations due downturn oilfield drilling activity see note 4 3 includes 181 million 121 million tax 17 per diluted share unusual charge resulting restructuring worldwide operations due downturn oilfield drilling activity see note 4 includes 266 million 176 million tax 22 per diluted share unusual charge resulting restructuring worldwide operations due downturn oilfield drilling activity see note 4 item 9item 8 financial statements supplementary data independent auditors report stockholders bj services company audited accompanying consolidated statements financial position bj services company subsidiaries september 30 2000 1999 related consolidated statements operations stockholders equity cash flows three years period ended september 30 2000 audits also included financial statement schedule listed item 14 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position bj services company subsidiaries september 30 2000 1999 results operations cash flows three years period ended september 30 2000 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein deloitte touche llp houston texas november 16 2000 bj services company consolidated statement operations see notes consolidated financial statements bj services company consolidated statement financial position see notes consolidated financial statements bj services company consolidated statement stockholders equity see notes consolidated financial statements bj services company consolidated statement cash flows see notes consolidated financial statements bj services company notes consolidated financial statements 1 basis presentation bj services company leading provider pressure pumping oilfield services petroleum industry consolidated financial statements include accounts bj services company majorityowned subsidiaries company significant intercompany balances transactions eliminated consolidation certain amounts 1999 1998 reclassified accompanying consolidated financial statements conform current year presentation 2 summary significant accounting policies use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting periods actual results could differ estimates cash equivalents company considers highly liquid debt instruments purchased original maturities three months less cash equivalents inventories consist principally products consumed companys services provided customers ii spare parts equipment used providing services iii manufactured components attachments equipment used providing services stated primarily lower weightedaverage cost market property stated cost less amounts provided permanent impairments includes capitalized interest 1557000 2317000 1665000 years ended september 30 2000 1999 1998 respectively funds borrowed finance construction capital additions depreciation generally provided using straightline method estimated useful lives individual items leasehold improvements amortized straightline basis shorter estimated useful life lease term intangible assets goodwill represents excess cost fair value net assets companies acquired purchase transactions goodwill amortized straightline method periods ranging 5 40 years patents amortized straight line basis estimated useful lives exceed 17 years accumulated amortization intangible assets september 30 2000 1999 70557000 51934000 respectively company utilizes undiscounted estimated cash flows evaluate possible impairment intangible assets cash flows less net carrying value intangible assets company records impairment charge equal difference discounted estimated cash flows net carrying value discount rate utilized based market factors time charge determined investments companies companys ownership interest ranges 20 50 percent company exercises significant influence operating financial policies accounted using equity method investments accounted using cost method revenue recognition company recognizes revenue services rendered products delivered certain revenues companys process pipeline services reported percentage completion method accounting using measurements progress towards completion appropriate work performed bj services company notes consolidated financial statementscontinued foreign currency translation gains losses resulting financial statement translation foreign operations us dollar functional currency included consolidated statement operations cost sales gains losses resulting financial statement translation foreign operations foreign currency functional currency included separate component stockholders equity except canada companys foreign operations use us dollar functional currency foreign exchange contracts time company enters forward foreign exchange contracts hedge impact foreign currency fluctuations certain assets liabilities denominated foreign currencies changes market value offset foreign exchange gains losses related assets liabilities included cost sales services one foreign exchange contract outstanding september 30 2000 amount 506 million none 1999 contract settled october 1 2000 gain loss environmental remediation compliance environmental remediation compliance costs accrued based estimates known environmental exposures liabilities recorded environmental assessments andor remedial efforts probable cost reasonably estimated impairment longlived assets accordance financial accounting standards board statement 121 accounting impairment longlived assets longlived assets disposed sfas 121 company recognizes impairment losses longlived assets used operations indicators impairment present undiscounted cash flows estimated generated assets less assets carrying amount years ended september 30 1999 1998 company recorded impairment 231 million 123 million respectively certain longlived assets based decrease undiscounted cash flows expected generated assets result downturn oilfield drilling activity see note 4 employee stockbased compensation fiscal 1997 company adopted financial accounting standards board statement 123 accounting stock based compensation sfas 123 sfas 123 company permitted either record expenses stock options stockbased employee compensation plans based fair value date grant continue apply accounting principles board opinion 25 apb 25 recognize compensation expense based intrinsic value equity instrument measurement date company elected continue following apb 25 therefore compensation expense recognized exercise price employee stock options equals market price underlying stock date grant new accounting pronouncements june 1998 financial accounting standards board issued statement 133 accounting derivative instruments hedging activities sfas 133 sfas 133 establishes accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities statement requires entity recognize derivatives either assets liabilities statement financial position measure instruments fair value statement effective fiscal quarters fiscal years beginning june 15 2000 therefore used preparing companys 2000 financial statements adoption standard beginning fiscal year 2001 material impact companys financial position results operations bj services company notes consolidated financial statementscontinued 3 acquisitions businesses effective june 28 1999 company acquired selected assets subsidiaries fracmaster ltd total consideration 784 million acquisition accounted using purchase method accounting accordingly results fracmaster ltds operations included companys statement operations beginning july 1 1999 assets liabilities fracmaster ltd recorded companys statement financial position estimated fair market value 784 million september 30 1999 allocation purchase price may summarized follows millions 1 includes cash acquired 49 million pro forma financial information presented acquisition material companys consolidated financial statements effective june 1 2000 company acquired remaining 60 ownership previously unconsolidated joint venture malaysia total consideration 32 million cash effective september 30 1998 company acquired remaining 51 ownership previously unconsolidated joint venture bolivia total consideration 26 million cash acquisitions accounted using purchase method accounting accordingly excess total consideration estimated fair value net assets acquired recorded goodwill amortized 40 years acquisitions material companys financial statements therefore pro forma information presented 4 unusual charges fiscal 1999 company recorded pretax unusual charges totaling 397 million 260 million tax 36 per diluted share reflect changes operations result downturn oilfield drilling activity components unusual charge follows thousands 1999 asset impairment losses 231 million primarily relate certain equipment previously utilized companys us operations sold decommissioned salvaged spare parts bj services company notes consolidated financial statementscontinued severance related benefits relate cost involuntary termination approximately 1100 employees worldwide facility closures costs primarily represent remaining lease obligations related closure several locations oil producing regions us also one location latin america costs incurred first six months fiscal 1999 relocation equipment personnel resulting closing facilities except remaining lease obligations 5 million related closure locations expenditures provision made september 30 1999 unexpended provision remaining lease obligations related closure locations 1 million september 30 2000 fourth quarter fiscal 1998 company recorded pretax unusual charge 266 million 176 million tax 22 per diluted share reflect changes operations result downturn oilfield drilling activity components unusual charge follows thousands 1 includes 55 noncash impairment facilities 1998 asset impairment losses 122 million consist principally writedown certain nonproductive facilities equipment us result evaluation companys ability recover asset costs given downturn oilfield drilling activity severance related benefits costs relate involuntary termination approximately 850 permanent contracted personnel worldwide substantially notified september 30 1998 bad debt expense relates writeoff uncollectible receivables resulting certain customers inability pay obligations due reduced production revenue result lower prices oil natural gas facility closure costs relate closing certain marginal operating locations impacted drilling downturn also cancellation costs related proposed new office building costs relate primarily legal expenses resulting employee terminations cancellation costs related certain proposed equipment purchases expenditures 1998 provision made september 30 1999 5 earnings per share october 1997 company adopted statement financial accounting standards 128 earnings per share eps accordance standard company replaced presentation primary eps fully diluted eps presentation basic eps diluted eps periods presented basic eps excludes dilution computed dividing income available common stockholders weightedaverage number common shares outstanding period diluted eps based weightedaverage number shares outstanding period assumed exercise dilutive stock options warrants less number treasury shares assumed purchased proceeds using average market price companys common stock periods presented annual meeting stockholders january 22 1998 companys stockholders approved amendment companys charter increasing number authorized shares common stock 80 bj services company notes consolidated financial statementscontinued million 160 million shares 2 1 stock split approved board directors december 11 1997 effected form stock dividend distributed february 20 1998 stockholders record january 30 1998 accordingly references financial statements number shares outstanding earnings per share amounts retroactively restated periods presented reflect increased number common shares outstanding resulting stock split following table presents information necessary calculate earnings per share three years ended september 30 2000 thousands except per share amounts 1 antidilutive company incurred net loss period 2 includes dilutive impact warrants periods outstanding april 2000 6 longterm debt bank credit facilities longterm debt september 30 2000 1999 consisted following thousands company committed unsecured bank credit facility bank credit facility consisting sixyear term loan approximately 468 million currently drawn canadian dollars provision renewable annually option banks repayable 22 quarterly installments began march 1997 five year us 2250 million revolving facility available june 2001 interest outstanding borrowings charged based prevailing market rates interest rates 625 565 september 30 2000 1999 respectively company charged various fees connection bank credit facility including commitment fee based average daily unused portion commitment fees companys credit facilities 290000 155000 355000 2000 1999 1998 respectively september 30 2000 borrowings outstanding bank credit bj services company notes consolidated financial statementscontinued facility totaled 468 million consisting solely borrowings term loan principal reductions term loans bank credit facility due aggregate annual installments 304 million 164 million years ending september 30 2001 2002 respectively addition committed facility company 1494 million various unsecured discretionary lines credit september 30 2000 expire various dates 2001 requirements commitment fees compensating balances connection lines credit interest borrowings based prevailing market rates september 30 2000 34 million outstanding borrowings lines credit september 30 1999 1060 million outstanding borrowings lines credit weighted average interest rates shortterm borrowings outstanding september 30 2000 1999 91 56 respectively company issued outstanding 1250 million unsecured 7 notes due 2006 net proceeds issuance 7 notes 1233 million august 1996 used company repay indebtedness outstanding term loan portion companys existing bank credit facility september 30 2000 company outstanding letters credit performance related bonds totaling 189 million 462 million respectively letters credit issued guarantee various trade activities companys debt agreements contain various customary covenants including maintenance certain profitability solvency ratios restrictions dividend payments defined bank credit facility none materially restrict companys activities 7 financial instruments following methods assumptions used estimate fair value class financial instruments practicable estimate value cash equivalents trade receivables trade payables shortterm borrowings carrying amount approximates fair value short maturity instruments longterm debt fair value based rates currently available company debt similar terms average maturities longterm debt consists borrowings companys bank credit facility carrying amount borrowings approximates fair value individual borrowings bear interest current market rates fair value financial instruments differed carrying value september 30 2000 1999 follows thousands bj services company notes consolidated financial statementscontinued 8 income taxes geographical sources income loss income taxes three years ended september 30 2000 follows thousands provision benefit income taxes three years ended september 30 2000 summarized thousands consolidated effective income tax rates percent income taxes three years ended september 30 2000 varied united states statutory income tax rate reasons set forth bj services company notes consolidated financial statementscontinued deferred tax assets liabilities recognized estimated future tax effects temporary differences tax basis asset liability reported amount financial statements measurement deferred tax assets liabilities based enacted tax laws rates currently effect jurisdictions company operations generally deferred tax assets liabilities classified current noncurrent according classification related asset liability financial reporting estimated deferred tax effect temporary differences carryforwards september 30 2000 1999 follows thousands september 30 2000 company approximately 421 million us tax net operating loss carryforwards expiring varying amounts 2002 2014 company also approximately 80 million foreign tax net operating loss carryforwards approximately 11 million foreign research development tax credit carryforwards september 30 2000 foreign tax net operating loss carryforwards approximately 54 million subject annual limitation carryforward indefinitely foreign research development tax credit carryforward remaining loss carryforward used expire varying amounts beginning 2001 potential impact expiration net operating loss research development tax credit carryforwards reflected deferred tax asset valuation allowance balance september 30 2000 1999 2000 deferred tax valuation allowance increased 11 million result final adjustments fracmaster purchase price allocation allowance increased 39 million related net operating losses recognized venezuela expected expire prior utilization allowance reduced 8 million result foreign exchange movements company provide federal income taxes undistributed earnings foreign subsidiaries company considers permanently reinvested foreign operations cumulative amount undistributed earnings approximately 446 million september 30 2000 earnings remitted company us income taxes payable would substantially reduced foreign tax credits generated repatriation earnings bj services company notes consolidated financial statementscontinued 9 segment information company three business segments usmexico pressure pumping international pressure pumping oilfield services usmexico pressure pumping services segment includes cementing services stimulation services consisting fracturing acidizing sand control nitrogen coiled tubing downhole tools services provided throughout united states mexico international pressure pumping services segment also includes cementing stimulation services provided 40 countries major international oil natural gas producing areas latin america europe africa southeast asia canada middle east oilfield services segment consists specialty chemicals tubular services process pipeline services throughout us internationally accounting policies segments described summary significant accounting policies company evaluates performance operating segments based operating income excluding goodwill amortization unusual charges intersegment sales transfers significant summarized financial information concerning companys segments shown following table corporate column includes corporate general administrative expenses goodwill amortization unusual charges business segments bj services company notes consolidated financial statementscontinued geographic information revenues product line reconciliation segment information consolidated income loss income taxes set forth thousands bj services company notes consolidated financial statementscontinued 10 employee benefit plans us benefit plans company administers thrift plan us based employees whereby eligible employees elect contribute 2 12 base salaries employee benefit trust employee contributions matched company rate 50 per 100 6 employees base salary addition company contributes 2 5 employees base salary depending age january 1 year base contribution company matching contributions vest immediately base contributions become fully vested five years employment companys contributions thrift plans amounted 7614000 7365000 7916000 2000 1999 1998 respectively effective october 1 2000 company established supplemental executive retirement plan unfunded defined benefit plan provide company executives supplemental retirement benefits supplemental retirement benefits based highest consecutive three years compensation final ten years become vested age 55 companys us employees formerly employed western company north america western least one year service covered defined benefit pension plan carryover western acquisition pension benefits based years service average compensation employees five consecutive highest paid years last ten years worked benefits western plan frozen effective december 31 1995 time earned benefits vested management yet made decision whether terminate plan therefore fund amounts necessary meet minimum funding requirements employees retirement income security act amended funded status plan september 30 2000 1999 follows thousands following provides reconciliation benefit obligation plan assets bj services company notes consolidated financial statementscontinued pursuant provisions statement financial accounting standards 87 employers accounting pensions company recorded noncurrent liabilities minimum pension liability adjustment 37 million 44 million september 30 2000 1999 respectively previously unrecognized prior service costs september 30 2000 1999 full amount adjustments net related deferred tax benefit reflected reduction stockholders equity see note 12 disclosure amounts included comprehensive income assumptions used accounting companys us defined benefit plan follows costs three years ended september 30 2000 companys us defined benefit plan follows thousands foreign benefit plans addition company sponsors defined benefit plans foreign operations cover substantially employees canada united kingdom effective july 1 2000 defined contribution component added canadian pension plan active members permitted elect whether participate defined benefit defined contribution component plan conversion resulted settlement projected benefit obligation respect members elected transfer benefits entitlement defined contribution component plan settlement gain 15 million recognized income year ended september 30 2000 company also sponsored defined benefit plan venezuela 1998 fiscal year 1998 new labor law enacted venezuela resulted termination plan new labor law essence prospectively requires employers fund stipulated amounts based employees salaries trust fund making contribution company obligation therefore obligation included venezuela figures funded status companys international plans september 30 2000 1999 follows thousands bj services company notes consolidated financial statementscontinued following provides reconciliation benefit obligation plan assets companys international defined benefit plans thousands assumptions used accounting companys international defined benefit pension plans follows combined costs companys international defined benefit plans three years ended september 30 2000 follows thousands addition company expensed 130000 780000 910000 2000 1999 1998 respectively relating settlement pension liability resulting enactment new labor law venezuela bj services company notes consolidated financial statementscontinued postretirement benefit plans company also sponsors plans whereby certain health care life insurance benefits provided retired employees primarily us eligible dependents employee meets specified age service requirements plans unfunded company retains right subject existing agreements modify eliminate plans companys postretirement medical benefit plan provides credits based years service used purchase coverage active employee plans plan effectively caps companys health care inflation rate 4 increase per year 1995 reduction accumulated postretirement benefit obligation approximately 57 million due cap amortized average period future service date full eligibility postretirement benefits active employees net periodic postretirement benefit costs three years ended september 30 2000 included following components thousands actuarial recorded liabilities postretirement benefits follows september 30 2000 1999 thousands following provides reconciliation benefit obligation plan assets thousands accumulated postretirement benefit obligation september 30 2000 1999 determined using discount rate 770 725 respectively health care cost trend rate 4 reflecting cap bj services company notes consolidated financial statementscontinued discussed increasing assumed health care cost trend rates one percentage point would material impact accumulated postretirement benefit obligation net periodic postretirement benefit cost benefits effectively capped company 11 commitments contingencies company performance service operations sometimes named defendant litigation usually relating claims bodily injuries property damage including claims well reservoir damage company maintains insurance coverage claims extent deemed prudent management company believes existing claims potentially material adverse nature already provided appropriate accruals federal state local laws regulations govern companys operation underground fuel storage tanks rather incur additional costs restore upgrade tanks required regulations management opted remove existing tanks company completed removal tanks remedial cleanups progress related tank removals addition company conducting environmental investigations remedial actions current former company locations along companies currently named potentially responsible party five thirdparty owned waste disposal sites company established accrual approximately 7 million environmental matters managements best estimate companys portion future costs incurred company also maintains insurance environmental liabilities amounts company believes reasonable based knowledge potential exposures december 1999 company completed transaction involving transfer certain pumping service equipment assets company received 1200 million used pay outstanding bank debt equipment used provide services companys customers company pay service fee period least six 13 years transaction generated deferred gain book purposes included longterm liabilities approximately 63 million amortized 13 years balance deferred gain 574 million september 30 2000 1997 company completed transaction involving transfer certain pumping service equipment assets company received 1000 million used pay outstanding bank debt equipment used provide services companys customers company pay service fee period least eight 14 years transaction generated deferred gain book purposes approximately 38 million amortized 12 years balance deferred gain 254 million 283 million september 30 2000 1999 respectively lease longterm commitments september 30 2000 company longterm operating leases service fee commitments covering certain facilities equipment well longterm commitments varying expiration dates minimum annual commitments years ended september 30 2001 2002 2003 2004 2005 47141000 40889000 35155000 33198000 33788000 respectively 134205000 aggregate thereafter bj services company notes consolidated financial statementscontinued 12 supplemental financial information supplemental financial information three years ended september 30 2000 follows thousands income expensenet three years ended september 30 2000 summarized follows thousands accumulated comprehensive income consists following thousands bj services company notes consolidated financial statementscontinued tax effects allocated component comprehensive income may summarized follows thousands 13 employee stock plans stock option plans companys 1990 stock incentive plan 1995 incentive plan 1997 incentive plan plans provide granting options purchase companys common stock common stock performance based awards officers key employees nonemployee directors company options vest three fouryear period exercisable periods ranging one ten years aggregate 9000000 shares common stock reserved grants 1826937 available future grants september 30 2000 summary status companys stock option activity related information years ended september 30 2000 1999 1998 presented thousands except per share prices bj services company notes consolidated financial statementscontinued following table summarizes information stock options outstanding september 30 2000 thousands except per share prices sfas 123 encourages require companies record compensation cost employee stockbased compensation plans fair value determined generally recognized option pricing models blackscholes model binomial model inexact subjective nature deriving stock option values using methods company adopted disclosureonly provisions sfas 123 continues account stockbased compensation past using intrinsic value method prescribed apb 25 accordingly compensation expense recognized companys employee stock option plans compensation cost companys employee stock option plans determined based fair value grant date awards issued 2000 1999 1998 consistent provisions sfas 123 companys net earnings diluted earnings per share would reduced 64 million 08 per share 60 million 08 per share 44 million 05 per share 2000 1999 1998 respectively calculation consider effect awards issued prior 1996 may representative effects pro forma net income future years pro forma fair value options date grant estimated using blackscholes model following assumptions stock purchase plan companys 1990 employee stock purchase plan companys 1999 employee stock purchase plan together purchase plan plans employees may purchase shares common stock 85 market value first last business day twelvemonth plan period beginning october whichever lower purchases limited 10 employees regular pay maximum aggregate 4500000 shares reserved purchase plan 3220938 available future purchase september 30 2000 october 2000 196922 shares purchased 2704 per share october 1999 347316 shares purchased 1381 per share compensation cost companys stock purchase plan determined consistent provisions sfas 123 companys net earnings diluted earnings per share would reduced 16 million 02 per share 14 million 02 per share 6 million 01 per share 2000 1999 1998 respectively pro forma value employees purchase rights estimated using blackscholes model following assumptions dividend yield expected life 1 year expected volatility 642 2000 654 1999 662 1998 risk free interest rate 616 2000 499 1999 468 1998 weightedaverage fair value per share purchase rights granted 2000 1999 1998 1221 623 681 respectively bj services company notes consolidated financial statementscontinued stock incentive plan pursuant terms 1990 stock incentive plan 1993 1999 company also issued total 643686 performance units officers company unit represents right receive company end stipulated period one unrestricted share common stock contingent upon achievement certain financial performance goals stipulated period company fail achieve specific financial goals set executive compensation committee board directors units canceled related shares revert company reissuance plan aggregate fair market value underlying shares granted plan considered unearned compensation time grant adjusted annually based current market price common stock compensation expense determined based managements current estimate likelihood meeting specific financial goals charged ratably stipulated period october 12 1998 executive compensation committee board directors reviewed companys performance threeyear period ending september 30 1998 purposes determining performance criteria achievement level unit awards made november 1995 based various performance factors including comparison companys stock price peer group established time grant changed significantly due mergers acquisitions oilfield sector earnings growth return equity growth return assets growth compensation committee decided 1995 units vest level 66 maximum level therefore total 123145 units converted common stock issued officers 25495 units deferred later issuance 76572 units cancelled 25495 deferred units 5705 converted common stock september 30 2000 november 23 1999 executive compensation committee board directors reviewed companys performance threeyear period ending september 30 1999 determined highest level performance criteria achieved unit awards made december 1996 therefore total 40924 units converted common stock issued officers september 30 2000 122733 units outstanding november 16 2000 executive compensation committee board directors reviewed companys performance threeyear period ending september 30 2000 determined highest level performance criteria achieved unit awards made december 1997 therefore total 29702 units converted stock issued officers 14 stockholders equity stockholder rights plan company stockholder rights plan rights plan designed deter coercive takeover tactics prevent acquirer gaining control company without offering fair price companys stockholders plan outstanding share common stock includes one preferred share purchase right becomes exercisable certain circumstances including beneficial ownership common stock person group equals exceeds 15 companys outstanding common stock right entitles registered holder purchase company one onehundredth share series junior participating preferred stock price 150 subject adjustment certain circumstances upon occurrence certain events specified rights plan holder right acquiring person right upon exercise right receive number shares common stock company surviving corporation time transaction would market price two times purchase price right shares series junior participating preferred stock issued company september 30 2000 rights proportionately adjusted stock split record date reflect effect february 1998 stock split stock purchase warrants connection acquisition western 1995 company issued 4800037 stock purchase warrants issued april 14 1995 initial value 500 per warrant subsequent february 1998 stock split warrant represented right purchase two shares common stock exercise price 15 per share expiration date bj services company notes consolidated financial statementscontinued april 13 2000 total 4787852 warrants exercised expiration date leaving 8224 issued outstanding warrants expired unexercised exercise warrants resulted issuance 9575704 shares common stock split annual meeting stockholders january 22 1998 companys stockholders approved amendment companys charter increasing number authorized shares common stock 80 million 160 million shares allowed company effect 2 1 stock split form dividend previously authorized board directors december 11 1997 distribution february 20 1998 increased number shares outstanding 37694427 75388854 net treasury shares 986000 split share per share data including stock option stock purchase plan information restated reflect stock split treasury stock december 1997 board directors approved share repurchase program authorizing purchases 150 million common stock discretion companys management may 1998 board approved increase authorized amount 300 million september 2000 board approved additional increase 150 million program company repurchased 5996400 shares cost 1966 million fiscal 1998 none fiscal 1999 400000 shares cost 228 million fiscal 2000 october 1999 company reissued 4027972 shares treasury stock private placement certain financial institutions proceeds private placement 1440 million used pay outstanding debt company also entered privately negotiated option agreements pursuant repurchased equivalent number shares april 2000 total 1490 million company utilized proceeds 1435 million exercise warrants fund purchase 15 quarterly financial data unaudited 1 represents revenue less cost sales services research engineering expenses 2 includes 216 million 140 million tax 19 per diluted share unusual charge resulting restructuring worldwide operations due downturn oilfield drilling activity see note 4 3 includes 181 million 121 million tax 17 per diluted share unusual charge resulting restructuring worldwide operations due downturn oilfield drilling activity see note 4 item 9item 8 financial statements supplementary data independent auditors report stockholders bj services company audited accompanying consolidated statements financial position bj services company subsidiaries september 30 2001 2000 related consolidated statements operations stockholders equity cash flows three years period ended september 30 2001 audits also included financial statement schedule listed item 14 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position bj services company subsidiaries september 30 2001 2000 results operations cash flows three years period ended september 30 2001 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein deloitte touche llp houston texas november 14 2001 bj services company consolidated statement operations see notes consolidated financial statements bj services company consolidated statement financial position assets see notes consolidated financial statements bj services company liabilities stockholders equity see notes consolidated financial statements bj services company consolidated statement stockholders equity see notes consolidated financial statements bj services company consolidated statement cash flows see notes consolidated financial statements bj services company notes consolidated financial statements 1 basis presentation bj services company leading provider pressure pumping oilfield services petroleum industry consolidated financial statements include accounts bj services company majorityowned subsidiaries company significant intercompany balances transactions eliminated consolidation references financial statements footnotes numbers shares outstanding earnings per share amounts per share data including stock option stock purchase plan information restated reflect 2 1 stock split occurred may 31 2001 certain amounts 2000 1999 reclassified accompanying consolidated financial statements conform current year presentation 2 summary significant accounting policies use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting periods actual results could differ estimates cash equivalents company considers highly liquid investments purchased original maturities three months less cash equivalents inventories consist principally products consumed companys services provided customers ii spare parts equipment used providing services iii manufactured components attachments equipment used providing services stated primarily lower weightedaverage cost market property stated cost less amounts provided permanent impairments includes capitalized interest 19 million 16 million 23 million years ended september 30 2001 2000 1999 respectively funds borrowed finance construction capital additions depreciation generally provided using straightline method estimated useful lives individual items leasehold improvements amortized straightline basis shorter estimated useful lives lease terms intangible assets goodwill represents excess cost fair value net assets companies acquired purchase transactions goodwill amortized straightline method periods ranging 5 40 years patents amortized straightline basis estimated useful lives exceed 17 years accumulated amortization intangible assets september 30 2001 2000 845 million 706 million respectively company utilizes undiscounted estimated cash flows evaluate possible impairment intangible assets cash flows less net carrying value intangible assets company records impairment loss equal difference discounted estimated cash flows net carrying value discount rate utilized based market factors time loss determined see new accounting pronouncements note information regarding effects new accounting pronouncement companys prospective accounting goodwill amortization bj services company notes consolidated financial statementscontinued investments companies companys ownership interest ranges 20 50 percent company exercises significant influence operating financial policies accounted using equity method investments accounted using cost method revenue recognition company recognizes revenue services rendered products delivered foreign currency translation gains losses resulting financial statement translation foreign operations us dollar functional currency included consolidated statement operations cost sales gains losses resulting financial statement translation foreign operations foreign currency functional currency included separate component stockholders equity except canada companys foreign operations use us dollar functional currency foreign exchange contracts company sometimes enters forward foreign exchange contracts hedge impact currency fluctuations certain assets liabilities denominated foreign currencies changes market value offset foreign exchange gains losses related assets liabilities included cost sales services one foreign exchange contract outstanding september 30 2001 amount 139 million another outstanding september 30 2000 amount 506 million contracts settled october 1 2001 2000 respectively gain loss environmental remediation compliance environmental remediation compliance costs accrued based estimates known environmental exposures liabilities recorded environmental assessments andor remedial efforts probable cost reasonably estimated impairment longlived assets financial accounting standards board fasb statement 121 accounting impairment longlived assets longlived assets disposed sfas 121 company recognizes impairment losses longlived assets used operations indicators impairment present undiscounted cash flows estimated generated assets less carrying amounts year ended september 30 1999 company recorded impairment 231 million certain longlived assets based decrease undiscounted cash flows expected generated assets result reduced oilfield drilling activity see note 4 employee stockbased compensation fasb statement 123 accounting stockbased compensation company permitted either record expenses stock options stockbased employee compensation plans based fair value date grant continue apply accounting principles board opinion 25 apb 25 recognize compensation expense based intrinsic value equity instruments measurement dates company elected continue following apb 25 therefore compensation expense recognized exercise prices employee stock options equal market prices underlying stock dates grant new accounting pronouncements june 1998 fasb issued statement 133 accounting derivative instruments hedging activities amended sfas 133 sfas 133 established accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities statement requires recognition derivatives either assets liabilities measurement instruments fair value companys adoption sfas 133 beginning fiscal 2001 material impact financial position results operations july 20 2001 fasb issued statement 141 business combinations sfas 141 statement 142 goodwill intangible assets sfas 142 sfas 141 requires business combinations initiated june 30 2001 accounted using purchase method use poolingofinterest method longer permitted bj services company notes consolidated financial statementscontinued sfas 142 requires goodwill longer amortized earnings instead reviewed possible impairment goodwill amortization ceases upon adoption sfas 142 effective fiscal years beginning december 15 2001 early adoption permitted companies fiscal years beginning march 15 2001 company currently intends adopt sfas 142 effective october 1 2001 beginning next fiscal year companys cessation goodwill amortization guidelines sfas 142 result reduction approximately 14 million annual operating expenses assuming impairment goodwill company process determining effects implementation sfas 142 august 2001 fasb issued statement 143 accounting asset retirement obligations sfas 143 requires fair value liability asset retirement legal obligation recognized period incurred liability initially recorded associated costs capitalized increasing carrying amount related longlived asset time liability periodically accreted present value capitalized cost depreciated useful life related asset sfas 143 effective fiscal years beginning june 15 2002 earlier application encouraged sfas 143 requires entities record cumulative effect change accounting principle income statement period adoption company plans adopt sfas 143 october 1 2002 process determining effect adoption consolidated financial statements august 2001 fasb issued statement 144 accounting impairment disposal longlived assets sfas 144 sfas 144 provides new guidance recognition impairment losses longlived assets held used disposed also broadens definition constitutes discontinued operation results discontinued operations measured presented sfas 144 supercedes sfas 121 apb opinion 30 retaining many requirements statements sfas 144 assets held sale component entity included discontinued operations cash flows eliminated ongoing operations entity significant continuing involvement operations sfas 144 effective fiscal years beginning december 15 2001 early adoption encouraged sfas 144 expected materially change methods used company measure impairment losses longlived assets may result future dispositions reported discontinued operations greater extent currently permitted company plans adopt sfas 144 october 1 2002 3 acquisitions businesses effective june 28 1999 company acquired selected assets subsidiaries fracmaster ltd total consideration 784 million acquisition accounted using purchase method accounting accordingly results fracmaster ltds operations included companys statement operations beginning july 1 1999 assets liabilities fracmaster ltd recorded companys september 30 1999 statement financial position estimated fair market value 784 million allocation purchase price may summarized follows millions 1 includes cash acquired 49 million 2 reduced value assigned noncurrent assets bj services company notes consolidated financial statementscontinued pro forma financial information presented acquisition material companys consolidated financial statements company made acquisitions fiscal 2001 2000 aggregate consideration 290 million 32 million respectively acquisitions accounted using purchase method accounting accordingly excess total consideration estimated fair value net assets acquired recorded goodwill amortized 40 years acquisitions material companys financial statements therefore pro forma information presented 4 unusual charges fiscal 1999 company recorded pretax unusual charges totaling 397 million 260 million tax 18 per diluted share reflect changes operations result downturn oilfield drilling activity components unusual charge follows thousands 1999 asset impairment losses 231 million primarily relate certain equipment previously utilized companys us operations sold decommissioned salvaged spare parts severance related benefits relate cost involuntary termination approximately 1100 employees worldwide facility closures costs primarily represent remaining lease obligations related closure several locations us one latin america costs incurred relocation equipment personnel resulting closing facilities expenditures provision made september 30 2001 5 earnings per share basic earnings per share eps excludes dilution computed dividing income available common stockholders weightedaverage number common shares outstanding period diluted eps based weightedaverage number shares outstanding period assumed exercise dilutive stock options warrants less number treasury shares assumed purchased proceeds using average market price companys common stock periods presented special meeting may 10 2001 companys stockholders approved amendment companys charter increasing number authorized shares common stock 160 million shares 380 million shares result 2 1 stock split effected form stock dividend distributed may 31 2001 stockholders record may 17 2001 accordingly references financial statements number shares outstanding earnings per share amounts retroactively restated periods presented reflect increased number common shares outstanding resulting stock split bj services company notes consolidated financial statementscontinued following table presents information necessary calculate earnings per share three years ended september 30 2001 thousands except per share amounts 1 antidilutive company incurred net loss period 2 includes dilutive impact warrants periods outstanding april 2000 6 debt bank credit facilities longterm debt september 30 2001 2000 consisted following thousands june 2001 company replaced existing credit facility bank credit facility 400 million committed line credit committed credit facility connection replacement bank credit facility company prepaid 303 million borrowings outstanding term loan portion accelerated recognition 12 million unamortized debt issuance costs committed credit facility consists 200 million 364day commitment renews annually option lenders 200 million threeyear commitment interest outstanding borrowings charged based prevailing market rates 326 625 september 30 2001 2000 respectively company charged various fees connection committed credit facility including commitment fee based average daily unused portion commitment fees 383000 290000 155000 2001 2000 1999 respectively outstanding borrowings committed credit facility september 30 2001 addition committed credit facility company 1198 million unsecured discretionary lines credit september 30 2001 expire various dates 2002 requirements commitment fees compensating balances connection lines credit interest prevailing bj services company notes consolidated financial statementscontinued market rates 140 million 34 million outstanding borrowings lines credit september 30 2001 2000 respectively weighted average interest rates shortterm borrowings outstanding september 30 2001 2000 64 91 respectively june 2001 company repurchased retired 46 million 7 notes maturing 2006 recorded associated debt extinguishment costs 17 million classified expense consisting mainly 13 million early payment premium remaining 788 million notes outstanding september 30 2001 mature 2006 september 30 2001 company outstanding letters credit performance related bonds totaling 172 million 517 million respectively letters credit issued guarantee various trade activities companys debt agreements contain various customary covenants including maintenance certain profitability solvency ratios defined committed credit facility none materially restrict companys activities 7 financial instruments following methods assumptions used estimate fair value class financial instruments practicable cash equivalents trade receivables trade payables shortterm borrowings carrying amount approximates fair value short maturity instruments longterm debt fair value based rates currently available company debt similar terms average maturities longterm debt consists borrowings committed credit facility carrying amount borrowings approximates fair value interest individual borrowings current market rates fair value financial instruments differed carrying value september 30 2001 2000 follows thousands 8 income taxes geographical sources income loss income taxes three years ended september 30 2001 follows thousands bj services company notes consolidated financial statementscontinued provision benefit income taxes three years ended september 30 2001 summarized thousands consolidated effective income tax rates percent income taxes three years ended september 30 2001 varied united states statutory income tax rate reasons set forth deferred tax assets liabilities recognized estimated future tax effects temporary differences tax basis assets liabilities reported amounts financial statements measurement deferred tax assets liabilities based enacted tax laws rates currently effect jurisdictions company operations generally deferred tax assets liabilities classified current noncurrent according classification related assets liabilities financial reporting estimated deferred tax effect temporary differences carryforwards september 30 2001 2000 follows thousands bj services company notes consolidated financial statementscontinued september 30 2001 company approximately 105 million us tax net operating loss carryforwards expiring varying amounts 2002 2014 company also approximately 41 million foreign tax net operating loss carryforwards approximately 11 million foreign research development tax credit carryforwards september 30 2001 foreign tax net operating loss carryforwards approximately 12 million subject annual limitations carryforward indefinitely foreign research development tax credit carryforward remaining loss carryforward used expire varying amounts beginning 2002 potential impact expiration foreign net operating loss research development tax credit carryforwards reflected deferred tax asset valuation allowance balance september 30 2001 2000 42 million increase deferred tax valuation allowance resulted 11 million adjustments fracmaster purchase price allocation 39 million increase related net operating losses recognized venezuela expected expire prior utilization 8 million reduction result foreign exchange movements company provide federal income taxes undistributed earnings foreign subsidiaries considered permanently reinvested foreign operations cumulative amount undistributed earnings approximately 540 million september 30 2001 earnings remitted company us income taxes payable would substantially reduced foreign tax credits generated repatriation earnings 9 segment information company three business segments usmexico pressure pumping international pressure pumping oilfield services usmexico pressure pumping segment includes cementing services stimulation services consisting fracturing acidizing sand control nitrogen coiled tubing downhole tools services provided throughout united states mexico international pressure pumping segment includes cementing stimulation services provided customers 40 countries major international oil natural gas producing areas canada latin america europe africa southeast asia middle east russia china oilfield services segment consists specialty chemicals tubular services process pipeline services provided us internationally accounting policies segments described summary significant accounting policies company evaluates performance operating segments based operating income excluding goodwill amortization unusual charges intersegment sales transfers significant bj services company notes consolidated financial statementscontinued summarized financial information concerning companys segments three years ended september 30 2001 shown following tables thousands corporate column includes corporate expenses allocated operating segments business segments 1 operating income segment excludes goodwill amortization unusual charges bj services company notes consolidated financial statementscontinued geographic information revenues product line reconciliation segment information consolidated income loss income taxes three years ended september 30 2001 set forth thousands bj services company notes consolidated financial statementscontinued 10 employee benefit plans us benefit plans company administers thrift plan us based employees whereby eligible employees elect contribute 2 12 base salaries employee benefit trust employee contributions matched company rate 50 per 100 6 employees base salary addition company contributes 2 5 employees base salary depending age january 1 year base contribution company matching contributions vest immediately base contributions become fully vested five years employment companys contributions thrift plans amounted 84 million 76 million 74 million 2001 2000 1999 respectively effective october 1 2000 company established nonqualified supplemental executive retirement plan unfunded defined benefit plan provide company executives supplemental retirement benefits based highest consecutive three years compensation final ten years become vested age 55 expense associated plan 37 million 2001 related accrued benefit obligation 37 million september 30 2001 effective december 7 2000 company established nonqualified directors benefit plan unfunded defined benefit plan provide companys nonemployee directors benefits upon termination service based number years service last annual retainer fee expense associated plan 13 million 2001 related accrued benefit obligation 13 million september 30 2001 companys us employees formerly employed least one year western company north america western covered defined benefit pension plan carryover companys acquisition western pension benefits based years service average compensation employees five consecutive highest paid years last ten years worked benefits western plan frozen effective december 31 1995 time earned benefits vested funded status plan september 30 2001 2000 follows thousands bj services company notes consolidated financial statementscontinued following reconciliation benefit obligation plan assets pursuant provisions statement financial accounting standards 87 employers accounting pensions company recorded noncurrent liabilities minimum pension liability adjustments 129 million 37 million september 30 2001 2000 respectively previously unrecognized prior service costs september 30 2001 2000 full amount adjustments net related deferred tax benefit reflected reduction stockholders equity see note 12 disclosure amounts included comprehensive income assumptions used accounting companys us defined benefit plan follows costs three years ended september 30 2001 companys us defined benefit plan follows thousands foreign benefit plans company sponsors defined benefit plans cover substantially employees canada united kingdom effective july 1 2000 defined contribution component added canadian pension plan active members permitted elect participate either defined benefit defined contribution component plan conversion resulted settlement projected benefit obligation members elected transfer benefits entitlement defined contribution component bj services company notes consolidated financial statementscontinued plan settlement gain 15 million recognized income year ended september 30 2000 companys contributions canadian defined contribution plan 17 million 3 million 2001 2000 respectively funded status companys international plans september 30 2001 2000 follows thousands following reconciliation benefit obligation plan assets companys international defined benefit plans thousands bj services company notes consolidated financial statementscontinued assumptions used accounting companys international defined benefit pension plans follows combined costs companys international defined benefit plans three years ended september 30 2001 follows thousands postretirement benefit plans company sponsors plans provide certain health care life insurance benefits retired employees primarily us meet specified age service requirements eligible dependents plans unfunded company retains right subject existing agreements modify eliminate companys postretirement medical benefit plan provides credits based years service used purchase coverage active employee plans plan effectively caps companys health care inflation rate 4 increase per year 1995 reduction accumulated postretirement benefit obligation approximately 57 million due cap amortized average period future service date full eligibility postretirement benefits active employees amount fully amortized september 30 2000 net periodic postretirement benefit costs three years ended september 30 2001 included following components thousands bj services company notes consolidated financial statementscontinued actuarial recorded liabilities postretirement benefits follows september 30 2001 2000 thousands following provides reconciliation benefit obligation plan assets thousands accumulated postretirement benefit obligation september 30 2001 2000 determined using discount rate 687 770 respectively health care cost trend rate 4 reflecting cap described increasing assumed health care cost trend rates one percentage point would material impact accumulated postretirement benefit obligation net periodic postretirement benefit cost benefits effectively capped company 11 commitments contingencies company performance service operations sometimes named defendant litigation usually relating claims bodily injuries property damage including claims well reservoir damage company maintains insurance coverage claims extent deemed prudent management company believes existing claims potentially material adverse nature already provided appropriate accruals federal state local laws regulations govern companys operation underground fuel storage tanks rather incur additional costs restore upgrade tanks required regulations management opted remove existing tanks company completed removal tanks remedial cleanups progress related tank removals addition company conducting environmental investigations remedial actions current former company locations along companies currently named potentially responsible party five thirdparty owned waste disposal sites accrual approximately 5 million established environmental matters managements best estimate companys portion future costs incurred insurance also maintained environmental liabilities amounts companys management believes reasonable based knowledge potential exposures bj services company notes consolidated financial statementscontinued december 1999 company completed transaction involving transfer certain pumping service equipment assets received 1200 million used pay outstanding bank debt equipment used provide services customers company pays service fee period least six 13 years transaction generated deferred gain included longterm liabilities approximately 63 million amortized 13 years balance deferred gain 526 million 574 million september 30 2001 2000 respectively 1997 company completed transaction involving transfer certain pumping service equipment assets company received 1000 million used pay outstanding bank debt equipment used provide services companys customers company pays service fee period least eight 14 years transaction generated deferred gain approximately 38 million amortized 12 years balance deferred gain 215 million 254 million september 30 2001 2000 respectively lease longterm commitments september 30 2001 company longterm operating leases service fee commitments covering certain facilities equipment well longterm commitments varying expiration dates minimum annual commitments years ended september 30 2002 2003 2004 2005 2006 437 million 379 million 359 million 353 million 329 million respectively 1041 million aggregate thereafter 12 supplemental financial information supplemental financial information three years ended september 30 2001 follows thousands income expense net three years ended september 30 2001 summarized follows thousands bj services company notes consolidated financial statementscontinued accumulated comprehensive income loss consists following thousands tax effects allocated component comprehensive income may summarized follows thousands 13 employee stock plans stock option plans companys 1990 stock incentive plan 1995 incentive plan 1997 incentive plan 2000 incentive plan plans provide granting options purchase companys common stock common stock performance based awards officers key employees nonemployee directors options vest three fouryear periods exercisable periods ranging one ten years aggregate 23962454 shares common stock reserved grants 8298882 available future grants september 30 2001 bj services company notes consolidated financial statementscontinued summary status companys stock option activity related information three years ended september 30 2001 presented thousands except per share prices following table summarizes information stock options outstanding september 30 2001 thousands except per share prices remaining life sfas 123 encourages require companies record compensation cost employee stockbased compensation plans fair value determined generally recognized option pricing models blackscholes model binomial model inexact subjective nature deriving stock option values using methods company adopted disclosureonly provisions sfas 123 continues account stockbased compensation past using intrinsic value method prescribed apb 25 accordingly compensation expense recognized companys employee stock option plans compensation cost employee stock option plans determined based fair value grant date awards issued 2001 2000 1999 consistent provisions sfas 123 companys net earnings diluted earnings per share would reduced 91 million 05 per share 64 million 04 per share 60 million 04 per share 2001 2000 1999 respectively calculation consider effect awards issued prior 1996 may representative effects pro forma net income future years pro forma fair value options date grant estimated using blackscholes model following assumptions bj services company notes consolidated financial statementscontinued stock purchase plan companys 1990 employee stock purchase plan 1999 employee stock purchase plan together purchase plan allow employees purchase shares companys common stock 85 market value first last business day twelvemonth plan period beginning october whichever lower purchases limited 10 employees regular pay maximum aggregate 8558124 shares reserved purchase plan 5606156 available future purchase september 30 2001 october 2001 242960 shares purchased 1512 per share october 2000 393844 shares purchased 1352 per share compensation cost stock purchase plan determined consistent provisions sfas 123 companys net earnings diluted earnings per share would reduced 10 million 01 per share 16 million 01 per share 14 million 01 per share 2001 2000 1999 respectively pro forma value employees purchase rights estimated using blackscholes model following assumptions dividend yield expected life one year expected volatility 630 2001 642 2000 654 1999 riskfree interest rate 196 2001 616 2000 499 1999 weightedaverage fair value per share purchase rights granted 2001 2000 1999 652 611 312 respectively stock incentive plan pursuant terms 1990 stock incentive plan 1997 stock incentive plan 1993 2000 company granted total 1767814 performance units officers unit represents right receive company end stipulated period one unrestricted share common stock contingent upon achievement certain financial performance goals stipulated period company fail achieve specific financial goals set executive compensation committee board directors units canceled related shares revert company reissuance plan aggregate fair market value underlying shares granted plan considered unearned compensation time grant adjusted annually based current market price common stock compensation expense determined based managements current estimate likelihood meeting specific financial goals expensed ratably stipulated period april 1995 november 2000 total 1061730 units converted common stock issued officers 50990 units deferred later issuance 371192 units canceled 50990 deferred units 5074 converted common stock september 30 2001 september 30 2001 288976 units outstanding 14 stockholders equity stockholder rights plan company stockholder rights plan rights plan designed deter coercive takeover tactics prevent acquirer gaining control company without offering fair price stockholders plan outstanding share common stock includes onequarter preferred share purchase right becomes exercisable certain circumstances including beneficial ownership common stock person group equals exceeds 15 companys outstanding common stock right entitles registered holder purchase company one onethousandth share series junior participating preferred stock price 150 subject adjustment certain circumstances upon occurrence certain events specified rights plan holder right acquiring person right upon exercise right receive number shares common stock company surviving corporation time transaction would market price two times purchase price right shares series junior participating preferred stock issued company september 30 2001 rights proportionately adjusted reflect effects february 1998 may 2001 stock splits stock purchase warrants connection acquisition western 1995 company issued 4800037 stock purchase warrants issued april 14 1995 initial value bj services company notes consolidated financial statementscontinued 500 per warrant subsequent february 1998 stock split warrant represented right purchase two shares common stock exercise price 15 per share expiration date april 13 2000 total 4787852 warrants exercised expiration date leaving 8224 issued outstanding warrants expired unexercised exercise warrants resulted issuance 19151408 shares common stock split special meeting may 10 2001 companys stockholders approved amendment companys charter increasing number authorized shares common stock 160 million 380 million shares allowed company effect 2 1 stock split form dividend previously authorized board directors march 22 2001 distribution may 31 2001 increased number shares outstanding 82283861 164567722 share per share data including stock option stock purchase plan information restated reflect stock split treasury stock december 1997 board directors approved share repurchase program authorizing purchases 150 million common stock discretion companys management board subsequently increased authorized amount 300 million may 1998 450 million september 2000 600 million july 2001 subsequent september 30 2001 board directors approved increase authorized amount 750 million program company repurchased 12792800 shares cost 2194 million fiscal 2000 7014200 shares cost 1775 million fiscal 2001 october 1999 company reissued 8055944 shares treasury stock private placement certain financial institutions proceeds private placement 1440 million used pay outstanding debt company also entered privately negotiated option agreements pursuant repurchased equivalent number shares april 2000 total 1490 million company utilized proceeds 1435 million exercise warrants fund purchase 15 quarterly financial data unaudited 1 represents revenue less cost sales services research engineering expenses item 9item 8 financial statements supplementary data independent auditors report stockholders bj services company audited accompanying consolidated statements financial position bj services company subsidiaries september 30 2002 2001 related consolidated statements operations stockholders equity cash flows three years period ended september 30 2002 audits also included financial statement schedule listed item 15 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position bj services company subsidiaries september 30 2002 2001 results operations cash flows three years period ended september 30 2002 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 2 consolidated financial statements company changed method accounting goodwill 2002 deloitte touche llp houston texas november 21 2002 bj services company consolidated statement operations see notes consolidated financial statements bj services company consolidated statement financial position assets see notes consolidated financial statements bj services company liabilities stockholders equity see notes consolidated financial statements bj services company consolidated statement stockholders equity see notes consolidated financial statements bj services company consolidated statement cash flows see notes consolidated financial statements bj services company notes consolidated financial statements 1 basis presentation bj services company leading provider pressure pumping oilfield services petroleum industry consolidated financial statements include accounts bj services company majorityowned subsidiaries company significant intercompany balances transactions eliminated consolidation references financial statements footnotes numbers shares outstanding earnings per share amounts per share data including stock option stock purchase plan information restated reflect 2 1 stock split occurred may 31 2001 certain amounts 2001 2000 reclassified accompanying consolidated financial statements conform current year presentation 2 summary significant accounting policies use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting periods actual results could differ estimates cash equivalents company considers highly liquid investments purchased original maturities three months less cash equivalents inventories consist principally products consumed companys services provided customers ii spare parts equipment used providing services iii manufactured components attachments equipment used providing services stated primarily lower weightedaverage cost market property stated cost less amounts provided permanent impairments includes capitalized interest 27 million 19 million 16 million years ended september 30 2002 2001 2000 respectively funds borrowed finance construction capital additions depreciation generally provided using straightline method estimated useful lives individual items leasehold improvements amortized straightline basis shorter estimated useful lives lease terms estimated useful lives 10 30 years buildings leasehold improvements range three 12 years machinery equipment intangible assets goodwill represents excess cost fair value net assets companies acquired purchase transactions prior fiscal year 2002 goodwill amortized straightline basis periods ranging 5 40 years effective october 1 2001 company adopted financial accounting standards board statement 142 goodwill intangible assets sfas 142 sfas 142 requires goodwill longer amortized earnings instead must reviewed possible impairment least annually company ceased amortization goodwill beginning october 1 2001 company performed transitional fair value based impairment test utilizing discounted estimated cash flows evaluate possible impairment goodwill determined fair value exceeded recorded amount october 1 2001 therefore impairment loss recorded goodwill 392 million recorded connection may 2002 osca acquisition see note 3 companys net goodwill balance 873 million bj services company notes consolidated financial statementscontinued september 30 2002 assessed management fully recoverable changes carrying amount goodwill reporting unit year ended september 30 2002 follows thousands patents amortized straightline basis estimated useful lives exceed 17 years intangible assets goodwill net accumulated amortization 24 million 20 million september 30 2002 2001 respectively company utilizes undiscounted estimated cash flows evaluate possible impairment intangible assets cash flows less net carrying value intangible assets company records impairment loss equal difference discounted estimated cash flows net carrying value discount rate utilized based market factors time loss determined following table provides pro forma results years ended september 30 2001 2000 nonamortization provisions sfas 142 applied thousands except per share amounts investments companies companys ownership interest ranges 20 50 percent company exercises significant influence operating financial policies accounted using equity method investments accounted using cost method revenue recognition companys revenues composed product sales rental service revenues products rentals services generally sold based fixed determinable priced purchase orders contracts customer company recognizes revenues product sales title passes customer rental service revenues recognized services provided collectibility reasonably assured foreign currency translation companys functional currency primarily us dollar gains losses resulting financial statement translation foreign operations us dollar functional bj services company notes consolidated financial statementscontinued currency included consolidated statement operations cost sales gains losses resulting financial statement translation foreign operations foreign currency functional currency included separate component stockholders equity companys operations canada hungary use respective local currencies functional currency foreign exchange contracts company sometimes enters forward foreign exchange contracts hedge impact currency fluctuations certain assets liabilities denominated foreign currencies changes market value offset foreign exchange gains losses related assets liabilities included cost sales services foreign exchange contracts outstanding september 30 2002 one foreign exchange contract outstanding september 30 2001 amount 139 million contract settled october 1 2001 gain loss environmental remediation compliance environmental remediation costs accrued based estimates known environmental exposures liabilities recorded environmental assessments andor remedial efforts probable cost reasonably estimated research development expenditures research development expenditures charged income incurred employee stockbased compensation fasb statement 123 accounting stockbased compensation company permitted either record expenses stock options stockbased employee compensation plans based fair value date grant continue apply accounting principles board opinion 25 apb 25 recognize compensation expense based intrinsic value equity instruments measurement dates company elected continue following apb 25 therefore compensation expense recognized exercise prices employee stock options equal market prices underlying stock dates grant new accounting pronouncements august 2001 fasb issued statement 143 accounting asset retirement obligations sfas 143 requires fair value liability asset retirement legal obligation recognized period incurred liability initially recorded associated costs capitalized increasing carrying amount related longlived asset time liability accreted present value period capitalized cost depreciated useful life related asset sfas 143 effective fiscal years beginning june 15 2002 sfas 143 requires entities record cumulative effect change accounting principle income statement period adoption company adopt sfas 143 october 1 2002 expect adoption standard material impact companys financial position results operations august 2001 fasb issued statement 144 accounting impairment disposal longlived assets sfas 144 sfas 144 provides new guidance recognition impairment losses longlived assets held used disposed also broadens definition constitutes discontinued operation results discontinued operations measured presented sfas 144 supercedes sfas 121 apb opinion 30 retaining many requirements statements sfas 144 assets held sale component entity included discontinued operations cash flows eliminated ongoing operations entity company significant continuing involvement operations prospectively sfas 144 effective fiscal years beginning december 15 2001 early adoption encouraged sfas 144 expected materially change methods used company measure impairment losses longlived assets may result future dispositions reported bj services company notes consolidated financial statementscontinued discontinued operations greater extent currently permitted company adopt sfas 144 october 1 2002 april 2002 fasb issued sfas 145 rescission sfas statements 4 44 64 amendment sfas 13 technical corrections purpose statement update clarify simplify existing accounting standards adopted statement effective april 30 2002 determined significant impact financial statements july 2002 fasb issued sfas 146 accounting costs associated exit disposal activities sfas 146 standard requires companies recognize costs associated exit disposal activities incurred rather date commitment exit disposal plan examples costs covered standard include lease termination costs certain employee severance costs associated restructuring discontinued operation plant closing exit disposal activity sfas 146 replaces accounting guidance provided eitf issue 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring sfas 146 applied prospectively exit disposal activities initiated december 31 2002 3 acquisitions businesses osca may 31 2002 company completed acquisition osca inc osca total purchase price 4706 million including transaction costs acquisition accounted using purchase method accounting accordingly results oscas operations included consolidated statement operations beginning june 1 2002 assets liabilities osca recorded companys consolidated statement financial position estimated fair market value may 31 2002 remaining purchase price reflected goodwill following table reflects thousands except per share amounts companys results operations pro forma basis acquisition completed october 1 2000 utilizing oscas historical results periods presented unaudited pro forma information excludes effects cost elimination reduction initiatives directly related acquisition pro forma financial information necessarily indicative operating results would occurred acquisition consummated october 1 2000 necessarily indicative future operating results bj services company notes consolidated financial statementscontinued allocation purchase price estimated goodwill summarized follows thousands company process completing review determination fair values assets acquired accordingly allocation purchase price subject revision based final determination asset values upon finalization certain real estate appraisals completion valuation intangible assets acquired certain finite lived andor intangible assets may identified revalued 25 million additional fair value allocated assets effect related annual depreciation andor amortization assuming average useful life 10 years would result reduction net income approximately 16 million 01 per diluted share company expects complete remaining asset valuations within first half fiscal 2003 june 24 2002 company completed 91 million acquisition coiled tubing assets business maritima petroleo e engenharia ltda maritima leading provider coiled tubing services brazil acquisition accounted using purchase method accounting company made acquisitions fiscal 2001 2000 aggregate consideration 290 million 32 million respectively acquisitions accounted using purchase method accounting accordingly excess total consideration estimated fair value net assets acquired recorded goodwill acquisitions material companys financial statements therefore pro forma information presented 4 earnings per share basic earnings per share eps excludes dilution computed dividing income available common stockholders weightedaverage number common shares outstanding period diluted eps based weightedaverage number shares outstanding period assumed exercise dilutive stock options warrants less number treasury shares assumed purchased proceeds using average market price companys common stock periods presented bj services company notes consolidated financial statementscontinued dilutive effect included convertible senior notes issued april 24 2002 see note 5 company currently ability intends settle conversion price cash special meeting may 10 2001 companys stockholders approved amendment companys charter increasing number authorized shares common stock 160 million shares 380 million shares result 2 1 stock split effected form stock dividend distributed may 31 2001 stockholders record may 17 2001 accordingly references financial statements number shares outstanding earnings per share amounts retroactively restated periods presented reflect increased number common shares outstanding resulting stock split following table presents information necessary calculate earnings per share three years ended september 30 2002 thousands except per share amounts 1 2002 69000 stock options excluded computation diluted earnings per share due antidilutive effect 2 includes dilutive impact warrants periods outstanding april 2000 5 debt bank credit facilities longterm debt september 30 2002 2001 consisted following thousands april 24 2002 company sold convertible senior notes face value maturity 4490 million gross proceeds 3551 million company also granted overallotment option 15 exercised full additional face value maturity 674 million gross proceeds 533 million notes unsecured senior obligations rank equally right payment companys bj services company notes consolidated financial statementscontinued existing future senior unsecured indebtedness company used aggregate net proceeds 4001 million fund substantial portion acquisition osca general corporate purposes notes mature 20 years cannot called company three years issuance redemption price must paid cash notes called holders notes require company repurchase notes third fifth tenth fifteenth anniversaries issuance company option pay repurchase price cash stock issue price notes 79076 1000 face value represents yield maturity 1625 yield maturity 050 per year issue price paid cash life security notes convertible bj services common stock initial rate 149616 shares 1000 face amount note rate results initial conversion price 5285 per share based purchasers original issue discount represents premium 45 april 18 2002 closing sale price companys common stock new york stock exchange 3645 per share company option settle notes surrendered conversion using cash generally except upon occurrence specified events including credit rating downgrade investment grade holders notes entitled exercise conversion rights companys stock price greater specified percentage beginning 120 declining 110 maturity notes accreted conversion price per share september 30 2002 accreted conversion price per share would 5311 june 2001 company replaced existing credit facility bank credit facility 400 million committed line credit committed credit facility connection replacement bank credit facility company prepaid 303 million borrowings outstanding term loan portion accelerated recognition 12 million unamortized debt issuance costs classified interest expense committed credit facility consists 200 million 364day commitment renews annually option lenders 200 million threeyear commitment 364day commitment expired june 2002 renewed additional 364 days interest outstanding borrowings charged based prevailing market rates 242 326 september 30 2002 2001 respectively company charged various fees connection committed credit facility including commitment fee based average daily unused portion commitment fees 493000 383000 290000 2002 2001 2000 respectively outstanding borrowings committed credit facility september 30 2002 2001 addition committed credit facility company 1290 million unsecured discretionary lines credit september 30 2002 expire various dates 2003 requirements commitment fees compensating balances connection lines credit interest prevailing market rates 35 million 140 million outstanding borrowings lines credit september 30 2002 2001 respectively weighted average interest rates shortterm borrowings outstanding september 30 2002 2001 575 640 respectively june 2001 company repurchased retired 46 million 7 notes maturing 2006 recorded associated debt extinguishment costs 17 million classified expense consisting mainly 13 million early payment premium remaining 788 million notes outstanding september 30 2002 mature 2006 september 30 2002 company outstanding letters credit performance related bonds totaling 192 million 538 million respectively letters credit issued guarantee various trade activities bj services company notes consolidated financial statementscontinued companys debt agreements contain various customary covenants including maintenance certain profitability solvency ratios defined committed credit facility none materially restrict companys activities 6 financial instruments following methods assumptions used estimate fair value class financial instruments practicable cash equivalents trade receivables trade payables shortterm borrowings carrying amount approximates fair value short maturity instruments longterm debt fair value based rates currently available company debt similar terms average maturities fair value financial instruments differed carrying value september 30 2002 2001 follows thousands 7 income taxes geographical sources income taxes three years ended september 30 2002 follows thousands provision income taxes three years ended september 30 2002 summarized thousands bj services company notes consolidated financial statementscontinued consolidated effective income tax rates percent income taxes three years ended september 30 2002 varied united states statutory income tax rate reasons set forth deferred tax assets liabilities recognized estimated future tax effects temporary differences tax basis assets liabilities reported amounts financial statements measurement deferred tax assets liabilities based enacted tax laws rates currently effect jurisdictions company operations generally deferred tax assets liabilities classified current noncurrent according classification related assets liabilities financial reporting estimated deferred tax effect temporary differences carryforwards september 30 2002 2001 follows thousands september 30 2002 company approximately 39 million foreign tax net operating loss carryforwards approximately 16 million foreign research development tax credit carryforwards foreign tax net operating loss carryforwards approximately 98 million subject annual limitations carryforward indefinitely potential impact expiration foreign net operating loss research development credit carryforwards reflected deferred tax asset valuation allowance balance september 30 2002 fiscal 2002 company declared dividends foreign subsidiaries amount approximately 183 million us income tax liability associated dividends substantially offset foreign tax credits generated repatriation earnings remaining amount undistributed earnings approximately 410 million september 30 2002 considered permanently bj services company notes consolidated financial statementscontinued reinvested foreign operations earnings remitted company us income taxes payable would substantially reduced foreign tax credits generated repatriation earnings 8 segment information company three business segments usmexico pressure pumping international pressure pumping oilfield services usmexico pressure pumping segment includes cementing services stimulation services consisting fracturing acidizing sand control nitrogen coiled tubing service tool services provided throughout united states mexico international pressure pumping segment includes cementing stimulation services provided customers 40 countries major international oil natural gas producing areas canada latin america europe africa southeast asia middle east russia china oilfield services segment consists specialty chemicals tubular services process pipeline services provided us internationally companys completion tools completion fluids business operations added oilfield services segment beginning june 2002 result acquisition osca inc accounting policies segments described summary significant accounting policies company evaluates performance operating segments based operating income excluding goodwill amortization intersegment sales transfers material summarized financial information concerning companys segments three years ended september 30 2002 shown following tables thousands corporate column includes corporate expenses allocated operating segments business segments 1 operating income segment excludes goodwill amortization bj services company notes consolidated financial statementscontinued 2 result acquisition osca beginning june 2002 certain products services company considers completion tools completion fluids included oilfield services segment revenue operating income depreciation amounts relating products service lines us prior acquisition ocsa reclassified conform current year presentation amounts relating products service lines sold internationally reclassified impracticable amounts considered material segment information provided geographic information revenues product line reconciliation segment information consolidated income taxes three years ended september 30 2002 set forth thousands bj services company notes consolidated financial statementscontinued 9 employee benefit plans us benefit plans company administers thrift plan us based employees whereby eligible employees elect contribute 2 12 base salaries employee benefit trust employee contributions matched company rate 50 per 100 6 employees base salary addition company contributes 2 5 employees base salary depending age january 1 year base contribution company matching contributions vest immediately base contributions become fully vested five years employment companys employees formerly employed osca see note 3 covered savings plan merged companys thrift plan effective august 1 2002 companys contributions thrift plans amounted 106 million 84 million 76 million 2002 2001 2000 respectively effective october 1 2000 company established nonqualified supplemental executive retirement plan unfunded defined benefit plan provide company executives supplemental retirement benefits based highest consecutive three years compensation final ten years become vested age 55 expense associated plan 40 million 37 million 2002 2001 repectively related accrued benefit obligation 73 million 37 million september 30 2002 2001 respectively effective december 7 2000 company established nonqualified directors benefit plan unfunded defined benefit plan provide companys nonemployee directors benefits upon termination service based number years service last annual retainer fee expense associated plan 1 million 13 million 2002 2001 respectively related accrued benefit obligation 14 million 13 million september 30 2002 2001 respectively companys us employees formerly employed least one year western company north america western covered defined benefit pension plan carryover companys acquisition western pension benefits based years service average compensation employees five consecutive highest paid years last ten years worked benefits western plan frozen effective december 31 1995 time earned benefits vested funded status plan september 30 2002 2001 follows thousands bj services company notes consolidated financial statementscontinued following reconciliation benefit obligation plan assets accordance statement financial accounting standards 87 employers accounting pensions company recorded noncurrent liabilities minimum pension liability adjustments 232 million 129 million september 30 2002 2001 respectively previously unrecognized prior service costs september 30 2002 2001 full amount adjustments net related deferred tax benefit reflected within accumulated comprehensive income reduction stockholders equity see note 11 disclosure amounts included comprehensive income assumptions used accounting companys us defined benefit plan follows costs three years ended september 30 2002 companys us defined benefit plan follows thousands foreign benefit plans company sponsors defined benefit plans cover substantially employees canada germany united kingdom effective july 1 2000 defined contribution component added canadian pension plan active members permitted elect participate either defined benefit defined contribution component plan conversion resulted settlement projected benefit obligation members elected transfer benefits entitlement defined contribution component plan settlement gain 15 million recognized income year ended bj services company notes consolidated financial statementscontinued september 30 2000 companys contributions canadian defined contribution plan 13 million 17 million 2002 2001 respectively funded status companys international plans september 30 2002 2001 follows thousands following reconciliation benefit obligation plan assets companys international defined benefit plans thousands bj services company notes consolidated financial statementscontinued assumptions used accounting companys international defined benefit pension plans follows combined costs companys international defined benefit plans three years ended september 30 2002 follows thousands postretirement benefit plans company sponsors plans provide certain health care life insurance benefits retired employees primarily us meet specified age service requirements eligible dependents plans unfunded company retains right subject existing agreements modify eliminate companys postretirement medical benefit plan provides credits based years service used purchase coverage active employee plans plan effectively caps companys health care inflation rate 4 increase per year 1995 reduction accumulated postretirement benefit obligation approximately 57 million due cap amortized average period future service date full eligibility postretirement benefits active employees amount fully amortized september 30 2000 2002 company provided additional employer contributions 4 cap covered retirees order reduce level required retiree contributions additional contributions deviation substantive plan 2002 resulted additional 2 million net periodic post retirement benefits cost fiscal year ended september 30 2002 net periodic postretirement benefit costs three years ended september 30 2002 included following components thousands bj services company notes consolidated financial statementscontinued actuarial recorded liabilities postretirement benefits follows september 30 2002 2001 thousands following provides reconciliation benefit obligation thousands accumulated postretirement benefit obligation september 30 2002 2001 determined using discount rate 650 687 respectively health care cost trend rate 4 reflecting cap described increasing assumed health care cost trend rates one percentage point would material impact accumulated postretirement benefit obligation net periodic postretirement benefit cost benefits effectively capped company 10 commitments contingencies litigation company performance service operations sometimes named defendant litigation usually relating claims bodily injuries property damage including claims well reservoir damage company maintains insurance coverage claims extent deemed prudent management company believes existing claims potentially material adverse nature already provided appropriate accruals april 2002 jury determined osca negligent 1999 blowout offshore well owned newfield exploration entry final judgment delayed case pending completion related insurance coverage litigation filed osca certain insurers former insurance broker oscas share judgment could 133 million great lakes chemical corporation formerly owned majority outstanding shares osca agreed indemnify company 75 uninsured liability excess 3 million arising newfield litigation company believes adequately reserved contingency environmental federal state local laws regulations govern companys operation underground fuel storage tanks rather incur additional costs restore upgrade tanks required bj services company notes consolidated financial statementscontinued regulations management opted remove existing tanks company completed removal tanks remedial cleanups progress related tank removals addition company conducting environmental investigations remedial actions current former company locations along companies currently named potentially responsible party three thirdparty owned waste disposal sites accrual approximately 5 million established environmental matters managements best estimate companys portion future costs incurred insurance also maintained environmental liabilities amounts companys management believes reasonable based knowledge potential exposures lease longterm commitments december 1999 company completed transaction involving transfer certain pumping service equipment assets received 1200 million used pay outstanding bank debt equipment used provide services customers company pays service fee period least six 13 years transaction generated deferred gain included longterm liabilities approximately 63 million amortized 13 years balance deferred gain 478 million 526 million september 30 2002 2001 respectively 1997 company completed transaction involving transfer certain pumping service equipment assets company received 1000 million used pay outstanding bank debt equipment used provide services companys customers company pays service fee period least eight 14 years transaction generated deferred gain approximately 38 million amortized 12 years balance deferred gain 188 million 215 million september 30 2002 2001 respectively september 30 2002 company longterm operating leases service fee commitments covering certain facilities equipment well longterm commitments varying expiration dates minimum annual commitments years ended september 30 2003 2004 2005 2006 2007 520 million 440 million 421 million 406 million 320 million respectively 1058 million aggregate thereafter 11 supplemental financial information supplemental financial information three years ended september 30 2002 follows thousands bj services company notes consolidated financial statementscontinued expense income net three years ended september 30 2002 summarized follows thousands accumulated comprehensive income loss consists following thousands tax effects allocated component comprehensive income may summarized follows thousands bj services company notes consolidated financial statementscontinued 12 employee stock plans stock option plans companys 1990 stock incentive plan 1995 incentive plan 1997 incentive plan 2000 incentive plan plans provide granting options purchase companys common stock common stock performance based awards officers key employees nonemployee directors options vest three fouryear periods exercisable periods ranging one ten years aggregate 23962454 shares common stock reserved grants 4927644 available future grants september 30 2002 summary status companys stock option activity related information three years ended september 30 2002 presented thousands except per share prices following table summarizes information stock options outstanding september 30 2002 thousands except per share prices remaining life sfas 123 encourages require companies record compensation cost employee stockbased compensation plans fair value determined generally recognized option pricing models blackscholes model binomial model inexact subjective nature deriving stock option values using methods company adopted disclosureonly provisions sfas 123 continues account stockbased compensation past using intrinsic value method prescribed apb 25 accordingly compensation expense recognized companys employee stock option plans compensation cost employee stock option plans determined based fair value grant date awards issued 2002 2001 2000 consistent provisions sfas 123 companys net earnings diluted earnings per share would reduced 168 million 10 per bj services company notes consolidated financial statementscontinued share 91 million 05 per share 64 million 04 per share 2002 2001 2000 respectively pro forma fair value options date grant estimated using blackscholes model following assumptions fiscal 2002 company changed method estimating future volatility purposes valuing stock options shares underlying employee stock purchase plan company calculated volatility using historical daily weekly monthly price intervals generate reasonable range expected future volatility used factor low end range accordance sfas 123 stock purchase plan companys 1990 employee stock purchase plan 1999 employee stock purchase plan together purchase plan allow employees purchase shares companys common stock 85 market value first last business day twelvemonth plan period beginning october whichever lower purchases limited 10 employees regular pay maximum aggregate 8558124 shares reserved purchase plan 5363196 available future purchase september 30 2002 october 2002 661215 shares purchased 1512 per share october 2001 242960 shares purchased 1512 per share compensation cost stock purchase plan determined consistent provisions sfas 123 companys net earnings diluted earnings per share would reduced 19 million 01 per share 10 million 01 per share 16 million 01 per share 2002 2001 2000 respectively pro forma value employees purchase rights estimated using blackscholes model following assumptions dividend yield expected life one year expected volatility 400 2002 630 2001 642 2000 riskfree interest rate 158 2002 196 2001 616 2000 weightedaverage fair value per share purchase rights granted 2002 2001 2000 441 652 611 respectively stock incentive plan pursuant terms 1990 stock incentive plan 1997 stock incentive plan 1993 2000 company granted total 1767814 performance units officers unit represents right receive company end stipulated period one unrestricted share common stock contingent upon achievement certain financial performance goals stipulated period company fail achieve specific financial goals set executive compensation committee board directors units canceled related shares revert company reissuance plan aggregate fair market value underlying shares granted plan considered unearned compensation time grant adjusted annually based current market price common stock compensation expense determined based managements current estimate likelihood meeting specific financial goals expensed ratably stipulated period april 1995 november 2000 total 1061730 units converted common stock issued officers 50990 units deferred later issuance 371192 units canceled 50990 deferred units converted common stock september 30 2002 june 2002 41771 shares forfeited upon retirement resignation former officers september 30 2002 242133 units outstanding november 21 2002 executive compensation committee board directors reviewed companys performance threeyear period ending september 30 2002 determined highest level performance criteria achieved unit awards made december 1999 therefore total 146595 units converted stock issued officers bj services company notes consolidated financial statementscontinued 13 stockholders equity stockholder rights plan company stockholder rights plan rights plan designed deter coercive takeover tactics prevent acquirer gaining control company without offering fair price stockholders plan amended outstanding share common stock includes onequarter preferred share purchase right becomes exercisable certain circumstances including beneficial ownership common stock person group equals exceeds 15 companys outstanding common stock right entitles registered holder purchase company one onethousandth share series junior participating preferred stock price 520 subject adjustment certain circumstances result stock splits effected form stock dividends 1998 2001 one right associated four outstanding shares common stock purchase price onefourth right associated one share common stock effectively 130 upon occurrence certain events specified rights plan holder right acquiring person right upon exercise right receive number shares common stock company surviving corporation time transaction would market price two times purchase price right rights plan amended september 26 2002 extend expiration date rights september 26 2012 increase purchase price rights shares series junior participating preferred stock issued company september 30 2002 stock split special meeting may 10 2001 companys stockholders approved amendment companys charter increasing number authorized shares common stock 160 million 380 million shares allowed company effect 2 1 stock split form dividend previously authorized board directors march 22 2001 distribution may 312001 increased number shares outstanding 82283861 164567722 share per share data including stock option stock purchase plan information restated reflect stock split treasury stock december 1997 board directors approved share repurchase program authorizing purchases 150 million common stock discretion companys management board subsequently increased authorized amount 300 million may 1998 450 million september 2000 600 million july 2001 750 million october 2001 program company repurchased 19807000 shares cost 3969 million fiscal 2001 4376000 shares cost 1021 million fiscal 2002 convertible senior notes april 24 2002 company sold convertible senior notes face value maturity 5164 million gross proceeds 4084 million see note 5 bj services company notes consolidated financial statementscontinued 14 quarterly financial data unaudited 1 represents revenue less cost sales services research engineering expenses 2 company ceased amortizing goodwill october 1 2001 accordance adoption sfas 142 see note 2 item 9item 8 financial statements supplementary data independent auditors’ report stockholders bj services company audited accompanying consolidated statements financial position bj services company subsidiaries september 30 2003 2002 related consolidated statements operations stockholders’ equity cash flows three years period ended september 30 2003 audits also included financial statement schedule listed item 15 financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position bj services company subsidiaries september 30 2003 2002 results operations cash flows three years period ended september 30 2003 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 2 consolidated financial statements company changed method accounting goodwill 2002 deloitte touche llp houston texas december 12 2003 bj services company consolidated statement operations accompanying notes integral part consolidated financial statements bj services company consolidated statement financial position assets accompanying notes integral part consolidated financial statements liabilities stockholders’ equity accompanying notes integral part consolidated financial statements bj services company consolidated statement stockholders’ equity thousands except share data accompanying notes integral part consolidated financial statements bj services company consolidated statement cash flows accompanying notes integral part consolidated financial statements bj services company notes consolidated financial statements 1 basis presentation company consolidates investments greater 50 percent control material intercompany balances transactions eliminated consolidation investments companies company’s ownership interest ranges 20 50 percent company exercises significant influence operating financial policies accounted using equity method investments accounted using cost method preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting periods actual results could differ estimates references financial statements footnotes numbers shares outstanding earnings per share amounts per share data including stock option stock purchase plan information restated reflect 2 1 stock split occurred may 31 2001 certain amounts 2002 2001 reclassified accompanying consolidated financial statements conform current year presentation 2 summary significant accounting policies cash equivalents company considers highly liquid investments purchased original maturities three months less cash equivalents allowance doubtful accounts company performs ongoing credit evaluations customers adjusts credit limits based upon payment history customer’s current credit worthiness determined review current credit information continuously monitor collections payments customers maintain provision estimated uncollectible accounts based upon historical experience specific customer collection issues identified credit losses historically within expectations provisions established cannot give assurances continue experience credit loss rates past cyclical nature industry may affect customers’ operating performance cash flows could impact ability collect obligations addition many customers located certain international areas inherently subject risks economic political civil instabilities may impact ability collect accounts receivables inventories consist principally products consumed company’s services provided customers ii spare parts equipment used providing services iii manufactured components attachments equipment used providing services stated primarily lower weightedaverage cost market cost primarily represents invoice costs company regularly reviews inventory quantities hand records provisions excess obsolete inventory based primarily estimated forecast product demand market conditions production requirements technological developments significant unanticipated changes company’s forecasts could require additional provisions excess obsolete inventory property stated cost less amounts provided permanent impairments includes capitalized interest 06 million 27 million 19 million years ended september 30 2003 2002 2001 respectively funds borrowed finance construction capital additions depreciation bj services company notes consolidated financial statementscontinued generally provided using straightline method estimated useful lives individual items leasehold improvements amortized straightline basis shorter estimated useful lives lease terms estimated useful lives 10 30 years buildings leasehold improvements range 3 12 years machinery equipment company makes judgments estimates conjunction carrying value assets including amounts capitalized depreciation amortization methods useful lives additionally carrying values assets reviewed impairment whenever events changes circumstances indicate carrying amounts may recoverable impairment loss recorded period determined carrying amount recoverable requires company make longterm forecasts future revenue costs related assets subject review forecasts require assumptions demand company’s products services future market conditions technological developments significant unanticipated changes assumptions could require provision impairment future period intangible assets goodwill represents excess cost fair value net assets companies acquired purchase transactions prior fiscal year 2002 goodwill amortized straightline basis periods ranging 5 40 years effective october 1 2001 company adopted financial accounting standards board statement 142 “goodwill intangible assets” “sfas 142” sfas 142 requires goodwill longer amortized earnings company ceased amortization goodwill beginning october 1 2001 company performed transitional fair value based impairment test utilizing discounted estimated cash flows evaluate possible impairment goodwill determined fair value exceeded recorded amount october 1 2001 therefore impairment loss recorded sfas 142 requires goodwill reviewed possible impairment annual basis circumstances indicate impairment may exist impairment adjustment neccesary company’s 8797 million net goodwill balance september 30 2002 2003 changes carrying amount goodwill reporting unit year ended september 30 2003 follows thousands patents amortized straightline basis estimated useful lives exceed 17 years intangible assets goodwill net accumulated amortization 35 million 24 million september 30 2003 2002 respectively company utilizes undiscounted estimated cash flows evaluate possible impairment intangible assets cash flows less net carrying value intangible assets company records impairment loss equal difference discounted estimated cash flows net carrying value discount rate utilized based market factors time loss determined bj services company notes consolidated financial statementscontinued following table provides pro forma results year ended september 30 2001 nonamortization provisions sfas 142 applied thousands except per share amounts income taxes company provides income taxes accordance statement financial accounting standards “sfas” 109 accounting income taxes standard takes account differences financial statement treatment tax treatment certain transactions deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect change tax rates recognized income expense period includes enactment date calculation requires company make certain estimates future operations changes state federal foreign tax laws well changes financial condition could affect estimates valuation allowance deferred tax assets company records valuation allowance reduce deferred tax assets likely portion deferred tax assets expire realization benefit future deductibility probable ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character future self insurance accruals company selfinsured certain losses relating workers’ compensation general liability property damage employee medical benefits claims filed claims incurred reported company’s liability estimated actuarial undiscounted basis using individual casebased valuations statistical analysis based upon judgment historical experience however final cost many claims may known five years longer management reviews reserve quarterly basis september 30 2003 september 30 2002 selfinsurance accruals totaled 148 million 123 million respectively contingencies accounted accordance sfas 5 “accounting contingencies” “sfas 5” sfas 5 requires record estimated loss contingency information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements amount bj services company notes consolidated financial statementscontinued loss reasonably estimated accounting contingencies environmental legal income tax matters requires company use judgment company believes accruals matters adequate actual loss contingency significantly different estimated loss results operations may understated significant litigation company accrues legal costs environmental remediation compliance environmental remediation costs accrued based estimates known environmental exposures using currently available facts existing environmental permits technology presently enacted laws regulations sites company primarily responsible remediation company’s estimates costs developed based internal evaluations discounted accruals recorded environmental assessments andor remedial efforts probable cost reasonably estimated accrual recorded even significant uncertainties exist ultimate cost remediation ongoing environmental compliance costs obtaining environmental permits installation pollution control equipment waste disposal expensed incurred company identified potentially responsible party us federal state superfund site company accrues share estimated remediation costs site based ratio estimated volume waste contributed site company total volume waste site revenue recognition company’s revenue composed product sales rental service revenue products rentals services generally sold based fixed determinable priced purchase orders contracts customer company recognizes revenue product sales title passes customer assumes risks rewards ownership collectibility reasonably assured rental service revenue recognized services provided collectibility reasonably assured research development expenditures research development expenditures charged income incurred maintenance repairs expenditures maintenance repairs expensed incurred expenditures renewals improvements capitalized extend life increase capacity improve efficiency asset foreign currency translation company’s functional currency primarily us dollar gains losses resulting financial statement translation foreign operations us dollar functional currency included consolidated statement operations cost sales gains losses resulting financial statement translation foreign operations foreign currency functional currency included separate component stockholders’ equity company’s operations canada hungary use respective local currencies functional currency derivative instruments company sometimes enters forward foreign exchange contracts hedge impact currency fluctuations certain transactions assets liabilities denominated foreign currencies enter derivative instruments speculative trading purposes sfas 133 “accounting derivative instruments hedging activities” amended requires company recognize derivatives balance sheet fair value ineffective portion derivative’s change fair value recognized earnings company designates documents derivative instrument cash flow hedge inception derivative assessed determine hedge highly effective offsetting changes cash flows hedged item inception ongoing basis employee stockbased compensation sfas 123 “accounting stockbased compensation” company permitted either record expenses stock options stockbased employee compensation plans based fair value date grant continue apply accounting principles bj services company notes consolidated financial statementscontinued board opinion 25 “apb 25” recognize compensation expense based intrinsic value equity instruments measurement dates company elected continue following apb 25 therefore compensation expense recognized exercise prices employee stock options equal market prices underlying stock dates grant following pro forma table illustrates effect net income earnings per share company applied fair value recognition provisions sfas 123 stock option plan stock purchase plan thousands except per share amounts pro forma compensation expense determined sfas 123 calculated using blackscholes option pricing model following assumptions fiscal 2002 company changed method estimating future volatility purposes valuing stock options shares underlying employee stock purchase plan company calculated volatility using historical daily weekly monthly price intervals generate reasonable range expected future volatility used factor low end range accordance sfas 123 new accounting pronouncements august 2001 fasb issued sfas 143 “accounting asset retirement obligations” “sfas 143” sfas 143 requires fair value liability asset retirement legal obligation recognized period incurred liability initially recorded bj services company notes consolidated financial statementscontinued associated costs capitalized increasing carrying amount related longlived asset time liability accreted present value period capitalized cost depreciated useful life related asset sfas 143 effective fiscal years beginning june 15 2002 sfas 143 requires entities record cumulative effect change accounting principle income statement period adoption company adopted sfas 143 october 1 2002 company asset retirement obligation “aro” respect machinery equipment permanently affixed decks certain leased vessels company obligated remove machinery equipment restore vessel original condition upon returning vessel owner company determined fair value aro using “expected cash flow” approach probability weighting multiple scenarios related outcomes cumulative effect adoption sfas 143 effect earnings per share aro 31 million october 1 2002 due immaterial effects new standard cumulative basis october 1 2002 presenting pro forma aro disclosures based aro’s october 1 2003 annual basis expect depreciation expense increase approximately 01 million incur accretion expense approximately 02 million result adopting sfas 143 august 2001 fasb issued sfas 144 “accounting impairment disposal longlived assets” “sfas 144” sfas 144 provides new guidance recognition impairment losses longlived assets held used disposed also broadens definition constitutes discontinued operation results discontinued operation measured presented sfas 144 supercedes sfas 121 “accounting impairment longlived assets longlived assets disposed of” apb opinion 30 retaining many requirements two statements sfas 144 assets held sale component entity included discontinued operations cash flows eliminated ongoing operations reporting entity significant continuing involvement discontinued operations prospectively sfas 144 effective fiscal years beginning december 15 2001 sfas 144 materially change methods used company measure impairment losses longlived assets may result future dispositions reported discontinued operations greater extent currently permitted company adopted sfas 144 october 1 2002 july 2002 fasb issued sfas 146 “accounting costs associated exit disposal activities “sfas 146” standard requires companies recognize costs associated exit disposal activities incurred rather date commitment exit disposal plan examples costs covered standard include lease termination costs certain employee severance costs associated restructuring discontinued operation plant closing exit disposal activity sfas 146 replaces accounting guidance provided eitf issue 943 “liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring” sfas 146 applied prospectively exit disposal activities initiated december 31 2002 company adopted sfas 146 january 1 2003 adoption material impact company’s financial position results operations november 2002 fasb interpretation 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others interpretation fasb statements 5 57 107 rescission fasb interpretation 34” “fin 45” issued interpretation requires upon issuance guarantee entity must recognize liability fair value obligation assumes obligation interpretation intended improve comparability financial reporting requiring identical accounting guarantees issued separately identified consideration guarantees issued without separately identified consideration fin 45’s provisions initial recognition measurement applied prospective basis guarantees issued modified december 31 2002 irrespective bj services company notes consolidated financial statementscontinued guarantor’s fiscal yearend guarantor’s previous accounting guarantees issued date fin 45’s initial application may revised restated reflect effect recognition measurement provisions fin 45 company adopted fin 45 january 1 2003 liabilities required recognized upon adoption company’s current guarantees disclosed note 10 notes consolidated financial statements december 2002 fasb issued sfas 148 “accounting stockbased compensationtransition disclosure amendment fasb statement 123 accounting stockbased compensation” “sfas 148” statement amends sfas 123 provide alternative methods transition voluntary change fair valuebased method accounting stockbased employee compensation addition statement amends disclosure requirements sfas 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results statement also requires effects disclosed prominently specifying form content location disclosures sfas 148 intended improve prominence clarity pro forma disclosures required sfas 123 prescribing specific tabular format requiring disclosure “summary significant accounting policies” equivalent addition statement intended improve timeliness disclosures requiring inclusion financial reports interim periods sfas 148 also amends certain disclosure requirements apb 25 statement effective financial statements fiscal years ending december 15 2002 effective financial reports containing condensed financial statements interim periods beginning december 15 2002 company adopt fair value based method accounting stockbased employee compensation therefore adoption sfas 148 january 1 2003 impacted disclosures financial results company january 2003 fasb issued fasb interpretation 46 “fin 46” “consolidation variable interest entities” fin 46 clarifies application accounting research bulletin 51 “consolidated financial statements” certain entities equity investors characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support parties fin 46 applies immediately variable interest entities created january 31 2003 variable interest entities enterprise obtains interest date applies first fiscal year interim period beginning june 15 2003 variable interest entities enterprise holds variable interest acquired february 1 2003 fin 46 applies public enterprises beginning applicable interim annual period company adopted fin 46 july 1 2003 adoption provisions fin 46 material impact company’s financial position results operations 3 acquisitions businesses osca may 31 2002 company completed acquisition osca inc “osca” total purchase price 4706 million including transaction costs acquisition accounted using purchase method accounting accordingly results osca’s operations included consolidated statement operations beginning june 1 2002 assets liabilities osca recorded company’s consolidated statement financial position estimated fair market value may 31 2002 remaining purchase price reflected goodwill bj services company notes consolidated financial statementscontinued following table reflects thousands except per share amounts company’s results operations pro forma basis acquisition completed beginning periods presented utilizing osca’s historical results unaudited pro forma information excludes effects cost elimination reduction initiatives directly related acquisition 1 includes 135 million tax charge recorded osca’s march 31 2002 preacquisition financial statements newfield litigation see note 10 pro forma financial information necessarily indicative operating results would occurred acquisition consummated beginning periods presented necessarily indicative future operating results company completed review determination fair values assets acquired allocation purchase price estimated goodwill summarized follows thousands 1 adjustment recognize booktotax differences assets reserve preacquisition audits ongoing bj services company notes consolidated financial statementscontinued june 24 2002 company completed 91 million acquisition coiled tubing assets business maritima petroleo e engenharia ltda “maritima” leading provider coiled tubing services brazil acquisition accounted using purchase method accounting company made acquisitions fiscal 2001 aggregate consideration 290 million acquisitions accounted using purchase method accounting accordingly excess total consideration estimated fair value net assets acquired recorded goodwill acquisitions material company’s financial statements therefore pro forma information presented 4 earnings per share basic earnings per share “eps” excludes dilution computed dividing net income weightedaverage number common shares outstanding period diluted eps based weightedaverage number shares outstanding period assumed exercise dilutive instruments stock options stock purchase plan stock incentive plan less number treasury shares assumed purchased proceeds using average market price company’s common stock periods presented dilutive effect included convertible senior notes issued april 24 2002 see note 5 company currently ability intent settle conversion price cash following table presents information necessary calculate earnings per share three years ended september 30 2003 thousands except per share amounts 1 years ended september 30 2003 2002 67 69 stock options respectively excluded computation diluted earnings per share due antidilutive effect 5 debt bank credit facilities longterm debt september 30 2003 2002 consisted following thousands bj services company notes consolidated financial statementscontinued april 24 2002 company sold convertible senior notes face value maturity 5164 million gross proceeds 4084 million notes unsecured senior obligations rank equally right payment company’s existing future senior unsecured indebtedness company used aggregate net proceeds 4001 million fund substantial portion purchase price acquisition osca closed may 31 2002 general corporate purposes 4149 million 4102 million outstanding convertible senior notes september 30 2003 september 30 2002 respectively notes mature 2022 cannot called company three years issuance company exercises right call notes redemption price must paid cash holders notes require company repurchase notes third fifth tenth fifteenth anniversaries issuance company option pay repurchase price cash stock issue price notes 79076 1000 face value represents annual yield maturity 1625 yield maturity 050 per year issue price paid semiannually cash life security notes convertible bj services common stock initial rate 149616 shares 1000 face amount note rate results initial conversion price 5285 per share based purchaser’s original issue discount represents premium 45 april 18 2002 closing sale price company’s common stock new york stock exchange 3645 per share company option currently ability intent settle notes surrendered conversion using cash generally except upon occurrence specified events including credit rating downgrade investment grade holders notes entitled exercise conversion rights company’s stock price greater specified percentage beginning 120 declining 110 maturity notes accreted conversion price per share september 30 2003 accreted conversion price per share would 5356 june 2001 company replaced existing credit facility “bank credit facility” 400 million committed line credit “committed credit facility” connection replacement bank credit facility company prepaid 303 million borrowings outstanding term loan portion accelerated recognition 12 million unamortized debt issuance costs classified interest expense committed credit facility consists 200 million 364day commitment renews annually option lenders 200 million threeyear commitment 364day commitment expired june 2003 renewed additional 364 days interest outstanding borrowings charged based prevailing market rates 179 242 september 30 2003 2002 respectively company charged various fees connection committed credit facility including commitment fee based average daily unused portion commitment fees 496000 493000 383000 2003 2002 2001 respectively outstanding borrowings committed credit facility september 30 2003 2002 addition committed credit facility company 1197 million unsecured discretionary lines credit september 30 2003 expire bank’s discretion requirements commitment fees compensating balances connection lines credit interest prevailing market rates 59 million 35 million outstanding borrowings lines credit september 30 2003 2002 respectively weighted average interest rates shortterm borrowings outstanding september 30 2003 2002 500 575 respectively june 2001 company repurchased retired 46 million 7 notes maturing 2006 recorded associated debt extinguishment costs 17 million classified expense consisting mainly 13 million early payment premium september 30 2003 september 30 2002 company issued outstanding 789 million bj services company notes consolidated financial statementscontinued company’s debt agreements contain various customary covenants including maintenance certain profitability solvency ratios defined committed credit facility none materially restrict company’s activities company currently compliance covenants imposed terms indebtedness 6 financial instruments following methods assumptions used estimate fair value class financial instruments practicable cash equivalents trade receivables trade payables shortterm borrowings foreign exchange contracts carrying amount approximates fair value short maturity instruments longterm debt fair value based rates currently available company debt similar terms average maturities foreign exchange contracts periodically company borrows funds denominated foreign currencies exposes company market risk associated exchange rate movements borrowings denominated foreign currencies september 30 2003 necessary company enters forward foreign exchange contracts hedge impact foreign currency fluctuations four forward foreign exchange contracts september 30 2003 amount 23 million contracts accounted cash flow hedges future foreign currency denominated obligations beginning november 2003 ending august 2004 one contract settle following four quarters effect cash flow hedges september 30 2003 accumulated comprehensive income material items described nontrading stated us dollars thousands fair value financial instruments differed carrying value september 30 2003 2002 follows thousands 7 income taxes geographical sources income taxes three years ended september 30 2003 follows thousands bj services company notes consolidated financial statementscontinued provision income taxes three years ended september 30 2003 summarized thousands consolidated effective income tax rates percent income loss income taxes three years ended september 30 2003 varied united states statutory income tax rate reasons set forth bj services company notes consolidated financial statementscontinued deferred tax assets liabilities recognized estimated future tax effects temporary differences tax basis assets liabilities reported amount financial statements measurement deferred tax assets liabilities based enacted tax laws rules currently effect taxing jurisdictions company operations generally deferred tax assets liabilities classified current noncurrent according classification related asset liability financial reporting estimated deferred tax effect temporary differences carryforwards september 30 2003 2002 follows thousands september 30 2003 company approximately 302 million foreign tax net operating loss carryforwards potential impact foreign net operating loss carryforwards subject expiration reflected asset valuation allowance balance september 30 2003 company’s valuation allowance recorded part respective allocations purchase price various business acquisitions reversal valuation allowance effect company’s effective tax rate instead would recorded reduction goodwill attributable respective acquisition deferred us income tax liability recognized undistributed earnings foreign subsidiaries deemed permanently invested outside us earnings remitted company us income taxes payable would substantially reduced foreign tax credits generated repatriation earnings alternative minimum tax credit carryforward available offset future federal income tax liabilities alternative minimum tax credit expiration date 8 segment information company currently thirteen operating segments separate financial information available separate management teams engaged oilfield services results operating segments evaluated regularly chief operating decision maker deciding allocate resources assessing performance operating segments aggregated three reportable segments usmexico pressure pumping international pressure pumping oilfield services usmexico pressure pumping two operating segments includes cementing services stimulation services consisting fracturing acidizing sand control nitrogen coiled tubing service tool services provided throughout united states mexico two operating segments aggregated one reportable segment offer type services similar economic characteristics similar production processes use methods provide services bj services company notes consolidated financial statementscontinued international pressure pumping segment six operating segments similar usmexico pressure pumping includes cementing stimulation services consisting fracturing acidizing sand control nitrogen coiled tubing service tool services provided customers 50 countries major international oil natural gas producing areas canada latin america europe africa southeast asia middle east russia china operating segments aggregated one reportable segment similar economic characteristics offer type services similar production processes use methods provide services also serve similar customers include major multinational independent national stateowned oil companies oilfield services segment five operating segments operating segments provide oilfield services production chemicals casing tubular services process pipeline services acquisition osca may 31 2002 completion tools completion fluids services us select markets internationally operating segments aggregated one reportable segment provide oilfield services serve similar customers operating segments share equipment accounting policies segments described summary significant accounting policies company evaluates performance segments based operating income intersegment sales transfers material summarized financial information concerning company’s segments three years ended september 30 2003 shown following tables thousands “corporate” column includes corporate expenses allocated operating segments years ended september 30 2003 2002 2001 revenue attributable one customer accounted 10 total revenue business segments 1 operating income segment excludes goodwill amortization 2 result acquisition osca beginning june 2002 certain products services company considers completion tools completion fluids included oilfield services segment revenue operating income depreciation amounts relating products service lines us prior acquisition ocsa reclassified conform current year presentation amounts relating products service lines sold internationally reclassified impracticable amounts considered material segment information provided bj services company notes consolidated financial statementscontinued geographic information revenue product line reconciliation segment information consolidated income taxes three years ended september 30 2003 set forth thousands bj services company notes consolidated financial statementscontinued 9 employee benefit plans us benefit plans company administers thrift plan us based employees whereby eligible employees elect contribute 2 20 base salaries employee benefit trust employee contributions matched company rate 50 per 100 6 employee’s base salary addition company contributes 2 5 employee’s base salary depending age january 1 year base contribution company matching contributions vest immediately company base contributions become fully vested five years employment company’s employees formerly employed osca see note 3 covered savings plan merged company’s thrift plan effective august 1 2002 company’s contributions thrift plans amounted 114 million 106 million 84 million 2003 2002 2001 respectively effective october 1 2000 company established nonqualified supplemental executive retirement plan unfunded defined benefit plan provide company executives supplemental retirement benefits based highest consecutive three years compensation final ten years become vested age 55 expense associated plan 34 million 40 million 37 million 2003 2002 2001 respectively related accrued benefit obligation 100 million 73 million september 30 2003 2002 respectively effective december 7 2000 company established nonqualified directors’ benefit plan unfunded defined benefit plan provide company’s nonemployee directors benefits upon termination service based number years service last annual retainer fee expense associated plan 3 million 1 million 13 million 2003 2002 2001 respectively related accrued benefit obligation 17 million 14 million september 30 2003 2002 respectively company’s us employees formerly employed least one year western company north america “western” covered defined benefit pension plan carryover company’s acquisition western pension benefits based years service average compensation employee’s five consecutive highest paid years last ten years worked benefits western plan frozen effective december 31 1995 time earned benefits vested us pension plan assets primarily invested us equities fixed income securities company funds pension plans amounts necessary meet minimum funding requirements employee’s retirement income security act amended funded status plan september 30 2003 2002 follows thousands bj services company notes consolidated financial statementscontinued following reconciliation benefit obligation plan assets accordance sfas 87 “employers’ accounting pensions” company’s balance noncurrent liabilities minimum pension liability adjustments 233 million 232 million september 30 2003 2002 respectively previously unrecognized prior service costs september 30 2003 2002 full amount adjustments net related deferred tax benefit reflected within accumulated comprehensive income reduction stockholders’ equity see note 12 disclosure amounts included comprehensive income calendar year 2004 company minimum pension funding requirement 59 million expected funded cash flows operating activities assumptions used accounting company’s us defined benefit pension plan measurement date september 30 follows costs three years ended september 30 2003 company’s us defined benefit plan follows thousands foreign benefit plans company sponsors defined benefit pension plans cover substantially employees canada united kingdom “uk” canadian pension plan assets primarily invested fixed income securities bj services company notes consolidated financial statementscontinued canadian equities remaining balance invested us equities international equities shortterm securities uk pension plan assets primarily invested uk equities fixed income securities funded status company’s international plans september 30 2003 2002 combined basis follows thousands calendar year 2004 company minimum pension funding requirement 52 million expected funded cash flows operating activities following reconciliation benefit obligation plan assets company’s international defined benefit plans combined basis thousands bj services company notes consolidated financial statementscontinued assumptions used accounting company’s international defined benefit pension plans measurement date september 30 follows combined costs company’s international defined benefit plans three years ended september 30 2003 follows thousands postretirement benefit plans company sponsors plans provide certain health care life insurance benefits retired employees primarily us meet specified age service requirements eligible dependents plans unfunded company retains right subject existing agreements modify eliminate company’s postretirement medical benefit plan provides credits based years service used purchase coverage active employee plans plan effectively caps company’s health care inflation rate 4 increase per year 1995 reduction accumulated postretirement benefit obligation approximately 57 million due cap amortized average period future service date full eligibility postretirement benefits active employees amount fully amortized september 30 2000 2002 company provided additional employer contributions 4 cap covered retirees order reduce level required retiree contributions additional contributions deviation substantive plan 2002 resulted additional 2 million net periodic post retirement benefits cost fiscal year ended september 30 2002 bj services company notes consolidated financial statementscontinued net periodic postretirement benefit costs three years ended september 30 2003 included following components thousands actuarial recorded liabilities postretirement benefits follows september 30 2003 2002 thousands following provides reconciliation benefit obligation thousands accumulated postretirement benefit obligation september 30 2003 2002 determined using discount rate 585 650 respectively health care cost trend rate 4 reflecting cap described increasing assumed health care cost trend rates one percentage point would material impact accumulated postretirement benefit obligation net periodic postretirement benefit cost benefits effectively capped company 10 commitments contingencies litigation company performance service operations sometimes named defendant litigation usually relating claims bodily injuries property damage including claims well reservoir damage company maintains insurance coverage claims extent deemed prudent management company believes existing claims likely material adverse effect company’s financial position results operations already provided bj services company notes consolidated financial statementscontinued acquisition company assumed responsibility certain claims proceedings made western company north america nowsco well service ltd osca connection businesses claims proceedings continue covered insurance policies company’s predecessors place time acquisitions although outcome claims proceedings company including western nowsco osca cannot predicted certainty management believes existing claims proceedings likely material adverse effect company’s financial position results operations already provided chevron phillips litigation july 10 2002 chevron phillips chemical company “chevron phillips” filed lawsuit bj services company “bj” patent infringement united states district court southern district texas corpus christi lawsuit relates patent issued 1992 phillips petroleum company “phillips” patent ‘477 patent relates method using enzymes decompose used drilling mud although bj patents remediating damage resulting drillin fluids opposed drilling muds oil gas formations products services offered “mudzyme” trademark company approached phillips license ‘477 patent bj advised phillips licensed patent exclusive basis geomicrobial technologies inc “gmt” company coowned former phillips employee one inventors ‘477 patent bj deal gmt obtaining sublicense bj entered five year sublicense agreement gmt 1997 early 2000 phillips advised bj phillips reportedly terminated license agreement phillips gmt’s nonpayment royalties bj’s sublicense also terminated even though bj believes sublicense gmt properly terminated bj’s mudzyme treatments may covered ‘477 patent 2000 bj stopped offering enzyme product use drilling mud drillin fluids us nevertheless chevron phillips claiming use enzymes fracturing fluids applications oil gas industry falls ‘477 patent even though patent valid united states chevron phillips requesting court award damages bj’s use enzymes foreign countries theory oil produced wells treated enzymes imported united states company disputes chevron phillips’ interpretation ‘477 patent theory damages vigorously defended allegations november 25th 26th 2002 court conducted hearing regarding scope interpretation claims ‘477 patent following hearing court issued ruling march 16 2003 believe interprets ‘477 patent manner consistent bj’s position based ruling bj filed motion summary judgment seeking determination fracturing fluids enzymes come within scope ‘477 patent court granted motion july 2 2003 subsequently bj filed motion summary judgment relating use mudzymes outside united states september 22 2003 court granted company’ motion dismissed portion chevron phillips’ case advised chevron phillips appeal rulings court appeals federal circuit although rulings district court favorable company’s position could overturned appeal given scope claims possibility costly litigation even substantial adverse verdict still exists however company presently believe likely results litigation material adverse impact company’s financial position results operations halliburton python litigation june 27 2002 halliburton energy services inc filed suit bj weatherford international inc patent infringement connection drillable bridge plug tools used isolate portions bj services company notes consolidated financial statementscontinued well stimulation work plugs milled using coiled tubing workover rig halliburton claims tools offered bj trade name “python” weatherford infringe two patents tool constructed composite material lawsuit filed united states district court northern district texas dallas halliburton requested district court issue temporary restraining order preliminary injunction weatherford bj prevent either company selling competing tools march 4 2003 district court issued opinion denying halliburton’s requests court denied halliburton’s motion reconsider halliburton filed appeal court appeals federal circuit company believes current design python plug offered bj infringe valid claims two halliburton patents company also believes certain claims halliburton patents invalid based upon prior art demonstrated products offered well halliburton filed patents bj’s revenue sale python tools since inception product summer 2001 approximately 4 million company believes liability infringement halliburton patents moreover even patents found enforceable company found infringed company believe likely results litigation material adverse impact company’s financial position results operations halliburton vistar litigation march 17 2000 bj services company filed lawsuit halliburton energy services united states district court southern district texas houston lawsuit bj alleged well fracturing fluid system used halliburton infringes patent issued bj january 2000 method well fracturing referred bj “vistar™” case tried march april 2002 jury reached verdict favor bj april 12 2002 jury determined bj’s patent valid halliburton’s competing fluid system phoenix infringed bj patent district court entered judgment 1011 million permanent injunction preventing halliburton using phoenix system august 6 2003 threejudge panel court appeals federal circuit washington dc unanimously affirmed judgment bj’s favor october 17 2003 federal circuit denied halliburton’s request rehearing halliburton 90 days date seek review case us supreme court september 30 2003 company recorded income related case judgment final newfield litigation april 4 2002 jury rendered verdict adverse osca connection litigation pending united states district court southern district texas houston lawsuit arose blowout occurred 1999 offshore well owned newfield exploration jury determined osca’s negligence caused contributed blowout responsible 86 damages suffered newfield total damage amount awarded newfield 155 million excluding pre postjudgement interest court delayed entry final judgment case pending completion related insurance coverage litigation filed osca certain insurers former insurance broker court elected conduct trial insurance coverage issues based upon briefs parties interim related litigation filed osca former insurance brokers errors omissions connection policies issue case stayed february 28 2003 court issued final judgement connection newfield claims based upon jury’s verdict total amount verdict osca 156 million inclusive interest time court issued ruling related insurance dispute finding osca’s coverage loss limited 38 million motions new trial denied judge case appeal us court appeals fifth circuit bj services company notes consolidated financial statementscontinued regard liability case insurance coverage issues great lakes chemical corporation formerly owned majority outstanding shares osca agreed indemnify bj 75 uninsured liability excess 3 million arising newfield litigation taking indemnity account company’s share uninsured portion verdict approximately 57 million company fully reserved share liability environmental federal state local laws regulations govern company’s operation underground fuel storage tanks rather incur additional costs restore upgrade tanks required regulations management opted remove existing tanks company completed removal tanks remedial cleanups progress related tank removals addition company conducting environmental investigations remedial actions current former company locations along companies currently named potentially responsible party four thirdparty owned waste disposal sites accrual approximately 33 million established environmental matters management’s best estimate company’s portion future costs incurred insurance also maintained environmental liabilities amounts company’s management believes reasonable based knowledge potential exposures company notified may 19 2003 misdemeanor criminal charges filed connection illegal disposal allegedly hazardous waste facility ardmore oklahoma company’s investigation incident concluded former employee facility product handler removed improperly disposed drums facility september 2001 without instructions knowledge management location product handler provided written statement investigating authorities admitted disposed drums without instructions anyone company knew actions prohibited law charges filed company carry potential fines 50000 company believe criminally responsible actions former employee intends defend charges company begun discussions prosecuting authorities effort resolve matter lease longterm commitments december 1999 company contributed certain pumping service equipment limited partnership equipment used provide services company’s customers company pays service fee period least six years 13 years approximately 12 million annually accounted operating lease included “obligations equipment financing arrangements” contractual obligations section company owns 1 interest limited partnership transaction resulted gain deferred amortized 13 years balance deferred gain 339 million 478 million september 30 2003 september 30 2002 respectively agreement permits substitution equipment within partnership long implied fair value new property transferred date substitution equals exceeds implied fair value defined current property partnership replaced company received partnership approval september 2003 substitute certain pumping service equipment accounted exchange likekind assets earnings impact since earnings process yet culminated result substitutions deferred gain reduced 92 million september 30 2003 september 2010 company option obligation purchase pumping service equipment approximately 32 million 1997 company contributed certain pumping service equipment limited partnership equipment used provide services company’s customers company pays service fee period least eight years 14 years approximately 10 million annually bj services company notes consolidated financial statementscontinued accounted operating lease included “obligations equipment financing arrangements” contractual obligations section company owns 1 interest limited partnership transaction resulted gain deferred amortized 12 years balance deferred gain 160 188 million september 30 2003 september 30 2002 respectively agreement permits substitution equipment within partnership long implied fair value new property transferred date substitution equals exceeds implied fair value defined current property partnership replaced company received partnership approval october 2003 substitute certain pumping service equipment accounted exchange likekind assets earnings impact since earnings process yet culminated result substitutions deferred gain reduced 141 million subsequent september 30 2003 june 2009 company option obligation purchase pumping service equipment approximately 27 million september 30 2003 company longterm operating leases service fee commitments covering certain facilities equipment well longterm commitments varying expiration dates minimum annual commitments years ended september 30 2004 2005 2006 2007 2008 624 million 600 million 560 million 444 million 352 million respectively 769 million aggregate thereafter contractual obligations company routinely issues parent company guarantees “pcg’s connection service contracts entered company’s subsidiaries issuance pcg’s frequently condition bidding process imposed company’s customers work countries outside north america pcg’s typically provide company guarantees performance services company’s local subsidiary term pcg’s varies length services contract company arranges issuance variety bank guarantees performance bonds standby letters credit vast majority issued connection contracts company subsidiary entered customers customer right call bank guarantee performance bond standby letter credit event company subsidiary defaults performance services instruments required condition company subsidiary awarded contract typically released upon completion contract balance instruments predominantly standby letters credit issued connection variety company’s financial obligations support fronted insurance programs claims administration funding certain employee benefit plans temporary importation bonds following table summarizes company’s commercial commitments september 30 2003 thousands bj services company notes consolidated financial statementscontinued following table summarizes company’s contractual cash obligations commercial commitments september 30 2003 thousands 11 investment affiliates company conducts operations investments affiliates accounted using cost equity method pd mexicana sociedad de responsabilidad limitada de capital variable “pdm” pdm incorporated january 2001 main activity provide drilling integrated services wells development stage means contract established pemex exploracions produccion “pemex” sole purpose pdm carry complete pemex contract expires august 2005 bj service international inc wholly owned subsidiary company pd holdings wholly owned subsidiary precision drilling corporation 50 pdm funding pdm expenses made basis consistent ownership percentages societe algerienne de stimulation de puits producteurs d’hydroncarbures “bjsp” purpose bjsp perform services casing cementing stimulation well testing algeria bj service international inc wholly owned subsidiary company owns 49 bjsp l’enterprise de services aux puits owns remaining 51 current agreemement expires july 2005 extended mutual agreement stockholders profits losses shared stockholders proportion ownership percentages societe de services industriels “ssi” bj services international sarl wholly owned subsidiary company owns 50 ssi l’air liquide sa owns remaining 50 stockholders share profits losses ssi proportion ownership percentages september 30 2003 2002 combined net accounts receivable reflected consolidated statement financial position unconsolidated affiliates totaled 143 million 138 million respectively september 30 2003 2002 combined accounts payable reflected consolidated statement financial position unconsolidated affiliates totaled 02 million 01 million respectively company’s combined investment september 30 2003 2002 135 million 124 million respectively company recognized revenue 359 million 348 million 180 million years ending september 30 2003 2002 2001 respectively primarily services performed behalf equity affiliates bj services company notes consolidated financial statementscontinued 12 supplemental financial information supplemental financial information three years ended september 30 2003 follows thousands expense income net three years ended september 30 2003 summarized follows thousands accumulated comprehensive income loss consists following thousands bj services company notes consolidated financial statementscontinued tax effects allocated component comprehensive income summarized follows thousands 13 employee stock plans stock option plans company’s 1990 stock incentive plan 1995 incentive plan 1997 incentive plan 2000 incentive plan “plans” provide granting options purchase company’s common stock “common stock” performance based awards officers key employees nonemployee directors options vest three fouryear periods exercisable periods ranging one ten years aggregate 23962454 shares common stock reserved grants 4792051 available future grants september 30 2003 summary status company’s stock option activity related information three years ended september 30 2003 presented thousands except per share prices bj services company notes consolidated financial statementscontinued following table summarizes information stock options outstanding september 30 2003 thousands except per share prices remaining life stock purchase plan company’s 1990 employee stock purchase plan 1999 employee stock purchase plan together “purchase plan” allow employees purchase shares company’s common stock 85 market value first last business day twelvemonth plan period beginning october whichever lower purchases limited 10 employee’s regular pay maximum aggregate 8558124 shares reserved purchase plan 4704075 available future purchase september 30 2003 october 2003 494982 shares purchased 2210 october 2002 661215 shares purchased 1512 per share sfas 123 “sfas 123” “accounting stockbased compensation” encourages require companies record compensation cost employee stockbased compensation plans fair value determined generally recognized option pricing models blackscholes model binomial model inexact subjective nature deriving stock option values using methods company adopted disclosureonly provisions sfas 123 continues account stock option plan stock purchase plan past using intrinsic value method prescribed accounting principles board “apb” 25 “accounting stock issued employees” accordingly compensation expense recognized consolidated statement operations company’s employee stock option plans december 2002 sfas no148 “accounting stockbased compensationtransition disclosure” issued amended sfas 123 statement revises disclosure provisions annual interim basis show effect reported results company applied fair value recognition provisions sfas 123 company adopted provisions reflected note 2 stock incentive plan pursuant terms 1990 stock incentive plan 1997 stock incentive plan 1993 2000 company granted total 1767814 performance units “units” officers unit represents right receive company end stipulated period one unrestricted share common stock contingent upon achievement certain financial performance goals stipulated period company fail achieve specific financial goals set executive compensation committee board directors units canceled related shares revert company reissuance plan aggregate fair market value underlying shares granted plan considered unearned compensation time grant adjusted quarterly based current market price common stock compensation expense determined based management’s current estimate likelihood meeting specific financial goals expensed ratably stipulated period april 1995 november 2000 total 1061730 units converted common stock issued officers 50990 units deferred later issuance 371192 units canceled 50990 deferred units converted common stock september 30 2002 june 2002 41771 shares bj services company notes consolidated financial statementscontinued forfeited upon retirement resignation former officers november 21 2002 executive compensation committee board directors reviewed company’s performance threeyear period ending september 30 2002 determined highest level performance criteria achieved unit awards made december 1999 therefore total 146595 units converted stock issued officers 2003 additional 412 shares forfeited upon retirement former officer november 20 2003 executive compensation committee board directors reviewed company’s performance threeyear period ending september 30 2003 determined highest level performance criteria achieved unit awards made november 2000 therefore total 95126 units converted stock issued officers 14 stockholders’ equity stockholder rights plan company stockholder rights plan “rights plan” designed deter coercive takeover tactics prevent acquirer gaining control company without offering fair price stockholders plan amended outstanding share common stock includes onequarter preferred share purchase right “right” becomes exercisable certain circumstances including beneficial ownership common stock person group equals exceeds 15 company’s outstanding common stock right entitles registered holder purchase company one onethousandth share series junior participating preferred stock price 520 subject adjustment certain circumstances result stock splits effected form stock dividends 1998 2001 one right associated four outstanding shares common stock purchase price onefourth right associated one share common stock effectively 130 upon occurrence certain events specified rights plan holder right acquiring person right upon exercise right receive number shares common stock company surviving corporation time transaction would market price two times purchase price right rights plan amended september 26 2002 extend expiration date rights september 26 2012 increase purchase price rights shares series junior participating preferred stock issued company september 30 2003 stock split special meeting may 10 2001 company’s stockholders approved amendment company’s charter increasing number authorized shares common stock 160 million 380 million shares allowed company effect 2 1 stock split form dividend previously authorized board directors march 22 2001 distribution may 312001 increased number shares outstanding 82283861 164567722 share per share data including stock option stock purchase plan information restated reflect stock split treasury stock december 1997 board directors approved share repurchase program authorizing purchases 150 million common stock discretion company’s management board subsequently increased authorized amount 300 million may 1998 450 million september 2000 600 million july 2001 750 million october 2001 program company repurchased 19807000 shares cost 3969 million fiscal 2001 4376000 shares cost 1021 million fiscal 2002 convertible senior notes april 24 2002 company sold convertible senior notes face value maturity 5164 million gross proceeds 4084 million see note 5 bj services company notes consolidated financial statementscontinued 15 quarterly financial data unaudited 1 represents revenue less cost sales services research engineering expenses 2 beginning june 1 2002 amounts include results osca acquisition see note 3 16 subsequent events november 26 2003 company completed acquisition cajun tubular services inc “cajun” total purchase price 81 million net cash cajun located lafayette louisiana provides tubular running testing torque monitoring services gulf mexico market acquisition accounted using purchase method accounting december 2 2003 company acquired assets business petrodrive division grant prideco inc total purchase price 7 million petrodrive located lafayette louisiana leading provider hydraulic diesel hammer services gulf mexico market select markets internationally acquisition accounted using purchase method accounting board directors approved 2003 incentive plan permits granting stock options stock based awards cash awards employees officers nonemployee directors aggregate 4000000 shares common stock may issued 2003 incentive plan item 9item 8 financial statements supplementary data report independent registered public accounting firm stockholders bj services company audited accompanying consolidated statements financial position bj services company subsidiaries “company” september 30 2004 2003 related consolidated statements operations stockholders’ equity comprehensive income cash flows three years period ended september 30 2004 audits also included financial statement schedule listed item 15 financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position bj services company subsidiaries september 30 2004 2003 results operations cash flows three years period ended september 30 2004 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein deloitte touche llp houston texas january 26 2005 bj services company consolidated statement operations accompanying notes integral part consolidated financial statements bj services company consolidated statement financial position assets accompanying notes integral part consolidated financial statements liabilities stockholders’ equity accompanying notes integral part consolidated financial statements bj services company consolidated statement stockholders’ equity comprehensive income thousands accompanying notes integral part consolidated financial statements bj services company consolidated statement cash flows accompanying notes integral part consolidated financial statements bj services company notes consolidated financial statements 1 business basis presentation bj services company “company” whose operations trace back byron jackson company founded 1872 organized 1990 corporate laws state delaware company leading provider pressure pumping oilfield services serving petroleum industry worldwide company’s pressure pumping services consist cementing stimulation services used completion new oil natural gas wells remedial work existing wells onshore offshore oilfield services include completion tools completion fluids casing tubular services provided oil natural gas exploration production industry commissioning inspection services provided refineries pipelines offshore platforms production chemical services company consolidates investments greater 50 control material intercompany balances transactions eliminated consolidation investments companies company’s ownership interest ranges 20 50 company exercises significant influence operating financial policies accounted using equity method investments accounted using cost method preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting periods actual results could differ estimates certain amounts 2003 2002 reclassified accompanying consolidated financial statements conform current year presentation 2 summary significant accounting policies cash equivalents company considers highly liquid investments purchased original maturities three months less time purchase cash equivalents shortterm investments highly liquid investments maturities one year less time purchase classified shortterm investments company accounts shortterm investments accordance sfas 115 accounting certain investments debt equity securities shortterm investments held maturity recorded amortized cost purposes consolidated statement cash flow company consider shortterm investments cash equivalents generally original maturities excess three months allowance doubtful accounts company performs ongoing credit evaluations customers adjusts credit limits based upon payment history customer’s current credit worthiness determined review available credit information continuously monitor collections payments customers maintain provision estimated uncollectible accounts based upon historical experience specific customer collection issues identified credit losses historically within expectations provisions established cannot give assurances continue experience credit loss rates past cyclical nature industry may affect customers’ operating performance cash flows could impact ability collect obligations addition many customers located certain international areas inherently subject risks economic political civil instabilities may impact ability collect receivables inventories consist principally products consumed company’s services provided customers ii spare parts equipment used providing services iii bj services company notes consolidated financial statementscontinued manufactured components attachments equipment used providing services stated primarily lower weightedaverage cost market cost primarily represents invoiced costs company regularly reviews inventory quantities hand records provisions excess obsolete inventory based primarily estimated forecast product demand market conditions production requirements technological developments significant unanticipated changes company’s forecasts could require additional provisions excess obsolete inventory property stated cost less amounts provided permanent impairments includes capitalized interest 08 million 06 million 27 million years ended september 30 2004 2003 2002 respectively funds borrowed finance construction capital additions depreciation generally provided using straightline method estimated useful lives individual items leasehold improvements amortized straightline basis shorter estimated useful lives lease terms estimated useful lives 10 30 years buildings leasehold improvements range 3 12 years machinery equipment company makes judgments estimates conjunction carrying value assets including amounts capitalized depreciation amortization methods useful lives additionally carrying values assets reviewed impairment whenever events changes circumstances indicate carrying amounts may recoverable determination recoverability made based upon estimated undiscounted future cash flows fair value impairment loss recorded period determined carrying amount recoverable amount impairment amount net book value assets exceed fair value fair value determination requires company make longterm forecasts future revenue costs related assets subject review forecasts require assumptions demand company’s products services future market conditions technological developments significant unanticipated changes assumptions could require provision impairment future period intangible assets goodwill represents excess cost fair value net assets companies acquired purchase transactions company accounts goodwill accordance statement financial accounting standards “sfas” 142 goodwill intangible assets requires goodwill reviewed possible impairment annual basis circumstances indicate impairment may exist impairment adjustment necessary company’s 8859 million 8797 million net goodwill balance september 30 2004 2003 respectively changes carrying amount goodwill reporting unit year ended september 30 2004 follows thousands patents amortized straightline basis estimated useful lives exceed 17 years intangible assets goodwill net accumulated amortization 43 million 35 million september 30 2004 2003 respectively company utilizes undiscounted estimated cash flows evaluate possible impairment intangible assets cash flows less net carrying value bj services company notes consolidated financial statementscontinued intangible assets company records impairment loss equal difference discounted estimated cash flows net carrying value discount rate utilized based market factors time loss determined income taxes company provides income taxes accordance sfas 109 accounting income taxes standard takes account differences financial statement treatment tax treatment certain transactions deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect change tax rates recognized income expense period includes enactment date calculation requires company make certain estimates future operations changes state federal foreign tax laws well changes financial condition could affect estimates valuation allowance deferred tax assets company records valuation allowance reduce deferred tax assets likely portion deferred tax assets expire realization benefit future deductibility probable ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character future self insurance accruals company selfinsured certain losses relating workers’ compensation general liability property damage employee medical benefits claims filed claims incurred reported company’s liability estimated actuarial undiscounted basis using individual casebased valuations statistical analysis based upon judgment historical experience however final cost many claims may known five years longer management reviews reserve quarterly basis changes claims experience health care costs etc could affect estimates contingencies accounted accordance sfas 5 accounting contingencies standard requires record estimated loss contingency information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements amount loss reasonably estimated accounting contingencies environmental legal income tax matters requires company use judgment company believes accruals matters adequate actual loss contingency significantly different estimated loss results operations may overor understated significant litigation company accrues legal costs environmental remediation compliance environmental remediation costs accrued based estimates known environmental exposures using currently available facts existing environmental permits technology presently enacted laws regulations sites company primarily responsible remediation company’s estimates costs developed based internal evaluations discounted accruals recorded environmental assessments andor remedial efforts probable cost reasonably estimated accrual recorded even significant uncertainties exist ultimate cost remediation updated additional information becomes available ongoing environmental compliance costs obtaining environmental permits installation pollution control equipment waste disposal expensed incurred company identified potentially responsible party us federal state superfund site company accrues share estimated remediation costs site based ratio estimated volume waste contributed site company total volume waste site revenue recognition company’s revenue composed product sales rental service revenue products rentals services generally sold based fixed determinable priced purchase orders bj services company notes consolidated financial statementscontinued contracts customer include right return company recognizes revenue product sales title passes customer assumes risks rewards ownership collectibility reasonably assured rental service revenue recognized services provided collectibility reasonably assured research development expenditures research development expenditures charged income incurred maintenance repairs expenditures maintenance repairs expensed incurred expenditures renewals improvements capitalized extend life increase capacity improve efficiency asset foreign currency translation company’s functional currency primarily us dollar gains losses resulting financial statement translation foreign operations foreign currency functional currency included separate component stockholders’ equity company’s operations canada hungary use respective local currencies functional currency derivative instruments company sometimes enters forward foreign exchange contracts hedge impact currency fluctuations certain transactions assets liabilities denominated foreign currencies enter derivative instruments speculative trading purposes sfas 133 accounting derivative instruments hedging activities amended requires company recognize derivatives balance sheet fair value company designates documents derivative instrument hedge inception derivative assessed determine hedge highly effective inception ongoing basis ineffective portion derivative’s change fair value recognized earnings employee stockbased compensation sfas 123 accounting stockbased compensation company permitted either record expenses stock options stockbased employee compensation plans based fair value date grant continue apply accounting principles board opinion 25 “apb 25” recognize compensation expense based intrinsic value equity instruments measurement dates company elected continue following apb 25 therefore compensation expense recognized exercise prices employee stock options equal market prices underlying stock dates grant following pro forma table illustrates effect net income earnings per share company applied fair value recognition provisions sfas 123 stock option plan stock purchase plan thousands except per share amounts bj services company notes consolidated financial statementscontinued pro forma compensation expense determined sfas 123 calculated using blackscholes option pricing model following assumptions company calculated volatility using historical daily weekly monthly price intervals generate reasonable range expected future volatility used factor low end range accordance sfas 123 new accounting pronouncements december 2004 fasb issued sfas 123revised 2004 “sfas 123r” sharebased payment revision sfas 123 accounting stockbased compensation supersedes apb 25 accounting stock issued employees noted employee stockbased compensation accounting policy described company record compensation expense stockbased compensation sfas 123r company required measure cost employee services received exchange stock based grantdate fair value limited exceptions cost recognized period employee required provide service exchange award usually vesting period fair value estimated using optionpricing model excess tax benefits defined sfas 123r recognized addition paidin capital effective beginning first interim annual reporting period begins june 15 2005 company currently process evaluating impact sfas 123r financial statements including different optionpricing models pro forma table illustrates effect net income earnings per share company applied fair value recognition provisions sfas 123 december 2003 fasb issued sfas 132revised 2003 employers’ disclosures pensions postretirement benefits standard increases existing disclosure requirements requiring details pension plan assets benefit obligations cash flows benefit costs related information companies required segregate plan assets category debt equity real estate provide certain expected rates return informational disclosures see note 9 since sfas 132r revises disclosure requirements impact company’s financial position results operations january 2003 fasb issued fasb interpretation 46 “fin 46” consolidation variable interest entities fin 46 clarifies application accounting research bulletin 51 consolidated bj services company notes consolidated financial statementscontinued financial statements certain entities equity investors characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support parties december 2003 fasb issued fin 46r revised certain provisions original interpretation permitted multiple effective dates based upon nature formation date variable interest entity adoption provisions fin 46 material impact company’s financial position results operations see note 10 3 acquisitions businesses osca may 31 2002 company completed acquisition osca inc “osca” total purchase price 4706 million including transaction costs acquisition accounted using purchase method accounting accordingly results osca’s operations included consolidated statement operations beginning june 1 2002 assets liabilities osca recorded company’s consolidated statement financial position estimated fair market value may 31 2002 remaining purchase price reflected goodwill bj’s acquisition strategy focus product service lines complementary pressure pumping add product service offering strength company one company’s objectives increase presence global completion services business osca’s technically advanced offering completion tools combined bj’s extensive geographic market presence provided attractive opportunity expansion product line osca also brings company premium completion fluids business broaden company’s completion services offering around world combination company’s pressure pumping capabilities osca’s completion tool fluids technologies significantly strengthens ability meet increasing customer preference purchase greater range completion products services single company bj services company notes consolidated financial statementscontinued following table reflects thousands except per share amounts company’s results operations pro forma basis acquisition completed beginning periods presented utilizing osca’s historical results unaudited pro forma information excludes effects cost elimination reduction initiatives directly related acquisition 1 includes 135 million tax charge recorded osca’s march 31 2002 preacquisition financial statements newfield litigation see note 10 pro forma financial information necessarily indicative operating results would occurred acquisition consummated beginning periods presented necessarily indicative future operating results company completed review determination fair values assets acquired allocation purchase price estimated goodwill summarized follows thousands bj services company notes consolidated financial statementscontinued november 26 2003 company completed acquisition cajun tubular services inc “cajun” total purchase price 83 million net cash cajun located lafayette louisiana provides tubular running testing torque monitoring services gulf mexico market business complements company’s casing tubular services business oilfield services segment december 2 2003 company acquired assets business petrodrive division grant prideco inc total purchase price 7 million petrodrive located lafayette louisiana leading provider hydraulic diesel hammer services gulf mexico market select markets internationally business complements company’s casing tubular services business oilfield services segment cajun petrodrive acquisitions resulted total goodwill 62 million date company process completing review determination fair values assets acquired cajun petrodrive accordingly allocation purchase price subject revision based final determination asset values pro forma financial information acquisitions included material company 4 earnings per share basic earnings per share “eps” excludes dilution computed dividing net income weightedaverage number common shares outstanding period diluted eps based weightedaverage number shares outstanding period assumed exercise dilutive instruments stock option plans stock purchase plan stock incentive plan less number treasury shares assumed purchased exercise proceeds using average market price company’s common stock periods presented dilutive effect included convertible senior notes issued april 24 2002 see note 5 company currently ability intent settle potential conversion cash following table presents information necessary calculate earnings per share three years ended september 30 2004 thousands except per share amounts 1 years ended september 30 2004 2003 2002 zero 67 69 stock options respectively excluded computation diluted earnings per share due antidilutive effect bj services company notes consolidated financial statementscontinued 5 debt bank credit facilities longterm debt september 30 2004 2003 consisted following thousands june 2004 company replaced existing credit facility revolving credit facility “revolving credit facility” permits borrowings 400 million principal amount revolving credit facility includes 50 million sublimit issuance standby letters credit 20 million sublimit swingline loans swingline loans shortterm maturities remaining amounts outstanding revolving credit facility become due payable june 2009 interest outstanding borrowings charged based prevailing market rates company charged various fees connection revolving credit facility including commitment fee based average daily unused portion commitment totalling 05 million fiscal 2004 addition revolving credit facility charges utilization fee outstanding loans letters credit usage revolving credit facility exceeds 33 though charges fiscal 2004 outstanding borrowings revolving credit facility september 30 2004 april 24 2002 company sold convertible senior notes face value maturity 5164 million gross proceeds 4084 million notes unsecured senior obligations rank equally right payment company’s existing future senior unsecured indebtedness company used aggregate net proceeds 4001 million fund substantial portion purchase price acquisition osca closed may 31 2002 general corporate purposes 4196 million 4149 million outstanding convertible senior notes september 30 2004 september 30 2003 respectively notes mature 2022 cannot called company three years issuance company exercises right call notes redemption price must paid cash holders notes require company repurchase notes april 2005 fifth tenth fifteenth anniversaries issuance company option pay repurchase price cash stock issue price notes 79076 1000 face value represents annual yield maturity 1625 yield maturity 050 per year issue price paid semiannually cash life security notes convertible bj services common stock initial rate 149616 shares 1000 face amount note rate results initial conversion price 5285 per share based purchaser’s original issue discount represents premium 45 april 18 2002 closing sale price company’s common stock new york stock exchange 3645 per share company option currently ability intent settle notes surrendered conversion using cash generally except upon occurrence specified events including credit rating downgrade investment grade holders notes entitled exercise conversion rights company’s bj services company notes consolidated financial statementscontinued stock price greater specified percentage beginning 120 declining 110 maturity notes accreted conversion price per share september 30 2004 accreted conversion price per share would 5417 september 30 2004 september 30 2003 company issued outstanding 789 million unsecured 7 series b notes due february 1 2006 net discount addition revolving credit facility company 942 million unsecured discretionary lines credit september 30 2004 expire bank’s discretion requirements commitment fees compensating balances connection lines credit interest prevailing market rates 38 million 59 million outstanding borrowings lines credit september 30 2004 2003 respectively weighted average interest rates shortterm borrowings outstanding september 30 2004 2003 575 500 respectively revolving credit facility includes various customary covenants provisions including maintenance certain profitability solvency ratios none materially restrict company’s activities december 29 2004 company gave notice default lenders revolving credit facility failure comply covenants timely provide lenders annual audited financial statements certain reports similar default notices given entities obligations owed equipment financing partnerships referenced note 10 january 13 2005 however debt instruments earliest date event default permitting acceleration indebtedness termination credit facilities lenders could occur result delay furnishing financial statements reports january 29 2005 since company expects furnish financial statements reports date defaults cured event default occur debt instruments result delay january 26 2005 company compliance financial covenants borrowings revolving credit facility cash equivalents shortterm investments excess indebtedness 6 financial instruments following methods assumptions used estimate fair value class financial instruments practicable cash equivalents shortterm investments trade receivables trade payables shortterm borrowings foreign exchange contracts carrying amount approximates fair value short maturity instruments longterm debt fair value based rates currently available company debt similar terms average maturities foreign exchange contracts periodically company borrows funds denominated foreign currencies exposes company market risk associated exchange rate movements borrowings denominated foreign currencies september 30 2004 necessary company enters forward foreign exchange contracts hedge impact foreign currency fluctuations four forward foreign exchange contracts september 30 2003 amount 23 million settled august 31 2004 contracts accounted cash flow hedges future foreign currency denominated obligations effect cash flow hedges september 30 2003 accumulated comprehensive income material items described nontrading bj services company notes consolidated financial statementscontinued fair value financial instruments differed carrying value september 30 2004 2003 follows thousands 7 income taxes geographical sources income taxes three years ended september 30 2004 follows thousands provision income taxes three years ended september 30 2004 summarized thousands consolidated effective income tax rates percent income loss income taxes three years ended september 30 2004 varied united states statutory income tax rate reasons set forth bj services company notes consolidated financial statementscontinued deferred tax assets liabilities recognized estimated future tax effects temporary differences tax basis assets liabilities reported amount financial statements measurement deferred tax assets liabilities based enacted tax laws rules currently effect taxing jurisdictions company operations generally deferred tax assets liabilities classified current noncurrent according classification related asset liability financial reporting estimated deferred tax effect temporary differences carryforwards september 30 2004 2003 follows thousands 1 deferred gain contribution pumping service equipment partnerships referred note 10 september 30 2004 company approximately 371 million foreign tax net operating loss carryforwards 162 million foreign capital loss carryforwards company also 13 million foreign tax credit carryforwards potential impact foreign net operating loss carryforwards subject expiration reflected asset valuation allowance balance september 30 2004 foreign net operating loss carryforwards expire follows 48 million fiscal 2005 22 million fiscal 2006 22 million fiscal 2008 12 million fiscal 2009 remaining 267 million expire foreign capital losses foreign tax credits expire company’s valuation allowance relates foreign net operating losses recorded part respective allocations purchase price various business acquisitions reversal valuation allowance effect company’s effective tax rate instead would recorded reduction goodwill attributable respective acquisition company also 182 million 44 million us foreign tax credit tax credit carryforwards company records valuation allowance assets usage becomes probable us foreign tax credit carryforward expires fiscal 2012 us tax credits expire follows 09 million fiscal 2020 24 million fiscal 2021 11 million fiscal 2022 deferred us income tax liability recognized undistributed earnings foreign subsidiaries deemed permanently invested outside us earnings remitted company us income taxes payable would substantially reduced foreign tax credits generated repatriation earnings bj services company notes consolidated financial statementscontinued october 2004 american jobs creation act 2004 “act” signed law act contains new provisions may impact company’s us income tax liability future years company currently analyzing provisions reflect tax effect period effect becomes probable 8 segment information company currently thirteen operating segments separate financial information available separate management teams engaged oilfield services results operating segments evaluated regularly chief operating decision maker deciding allocate resources assessing performance operating segments aggregated three reportable segments usmexico pressure pumping international pressure pumping oilfield services usmexico pressure pumping two operating segments includes cementing services stimulation services consisting fracturing acidizing sand control nitrogen coiled tubing service tool services provided throughout united states mexico two operating segments aggregated one reportable segment offer type services similar economic characteristics similar production processes use methods provide services international pressure pumping segment six operating segments similar usmexico pressure pumping includes cementing stimulation services consisting fracturing acidizing sand control nitrogen coiled tubing service tool services provided customers 49 countries major international oil natural gas producing areas canada latin america europe africa southeast asia middle east russia china operating segments aggregated one reportable segment similar economic characteristics offer type services similar production processes use methods provide services also serve similar customers include major multinational independent national stateowned oil companies oilfield services segment five operating segments operating segments provide oilfield services production chemicals casing tubular services process pipeline services acquisition osca may 31 2002 completion tools completion fluids services us select markets internationally operating segments aggregated one reportable segment provide oilfield services serve similar customers operating segments share resources accounting policies segments described summary significant accounting policies company evaluates performance segments based operating income intersegment sales transfers material bj services company notes consolidated financial statementscontinued summarized financial information concerning company’s segments three years ended september 30 2004 shown following tables thousands “corporate” column includes corporate expenses allocated operating segments years ended september 30 2004 2003 2002 company provided services several thousand customers none accounted 5 consolidated revenue business segments 1 result acquisition osca beginning june 2002 certain products services company considers completion tools completion fluids included oilfield services segment geographic information bj services company notes consolidated financial statementscontinued revenue product line reconciliation segment information consolidated income taxes three years ended september 30 2004 set forth thousands 9 employee benefit plans company administers defined contribution plans employees us uk canada whereby eligible employees elect contribute 2 20 base salaries employee benefit trust employee contributions matched company rate 50 per 100 6 employee’s base salary us equal matching 55 employees base salary uk addition company contributes 2 6 employee’s base salary depending age years service us uk canada company matching contributions vest immediately company base contributions become fully vested five years employment company’s employees formerly employed osca see note 3 covered savings plan merged company’s us plan effective august 1 2002 company’s contributions defined contribution plans amounted 143 million 132 million 121 million 2004 2003 2002 respectively effective october 1 2000 company established nonqualified supplemental executive retirement plan unfunded defined benefit plan provide company executives supplemental retirement benefits based highest consecutive three years compensation final ten years become vested age 55 expense associated plan 34 million 34 million 40 million years ended september 30 2004 2003 2002 respectively related accrued benefit obligation 130 million 100 million september 30 2004 2003 respectively effective december 7 2000 company established nonqualified directors’ benefit plan unfunded defined benefit plan provide company’s nonemployee directors benefits upon termination service based number years service last annual retainer fee expense associated plan 01 million 03 million 01 million years ended september 30 2004 2003 2002 respectively related accrued benefit obligation 18 million 17 million september 30 2004 2003 respectively defined benefit pension plans company defined benefit pension plans covering employees us uk norway canada defined benefit pension plan us frozen effective december 31 1995 time bj services company notes consolidated financial statementscontinued earned benefits vested fiscal 2004 plans frozen new entrants uk canada addition many employees canada converted defined benefit plan defined contribution plan see “settlement benefits conversion” defined benefit plan tables company uses september 30 measurement date plans obligations funded status amounts recognized consolidated statement financial position consist bj services company notes consolidated financial statementscontinued accumulated benefit obligations abo excess plan assets abo actuarial present value pension benefits employees’ current compensation levels differs projected benefit obligation abo include assumptions future compensation levels abo plans 1818 million 1566 million september 30 2004 2003 respectively components net periodic benefit cost additional information assumptions used determine benefit obligations september 30 follows assumptions used determine net periodic benefit cost years ended september 30 follows bj services company notes consolidated financial statementscontinued expected longterm rate return assumptions represent rate return plan assets reflecting average rate earnings expected funds invested provide benefits included projected benefit obligation assumption determined reflecting expectations regarding future rates return portfolio considering asset distribution target related historical rates return redemption yield government fixed interest bonds well corporate bonds used proxies return debt securities weighted relative proportion within actual portfolio return equities based historical longterm performance equity classes rate reassessed least annual basis plan assets company objective diversify portfolio among several asset classes reduce volatility maintaining asset mix provides highest rate return acceptable risk primarily mix equity securities 60 75 fixed income funds 25 40 generate asset returns comparable general market company investment committee meets least annually review portfolio returns determine assetmix targets based assetliability studies nationally recognized thirdparty investment consultant assisted company developing asset allocation strategy determine company’s expected rate return expected risk various investment portfolios investment committee considered studies formal establishment current assetmix targets based projected risk return levels asset class contributions estimated benefit payments pension plans generally funded amounts necessary meet legal contractual minimum funding requirements totaled 104 million fiscal 2004 company infrequently makes discretionary contributions 90 million discretionary contribution made us plan fiscal 2004 company expects contribute 79 million defined benefit plans fiscal 2005 represents legal contractual minimum funding requirements following benefit payments reflect expected future service appropriate expected paid bj services company notes consolidated financial statementscontinued postretirement benefit plans company sponsors plans provide certain health care life insurance benefits retired employees primarily us meet specified age service requirements eligible dependents plans unfunded company retains right subject existing agreements modify eliminate company’s postretirement medical benefit plan provides credits based years service used purchase coverage retiree plan effectively caps company’s health care inflation rate 4 increase per year 2002 company provided additional employer contributions 4 cap covered retirees order reduce level required retiree contributions additional contributions deviation substantive plan 2002 resulted additional 2 million net periodic post retirement benefits cost fiscal year ended september 30 2002 obligations funded status abo actuarial present value pension benefits employees’ current compensation levels differs projected benefit obligation abo include assumptions future compensation levels abo 458 million 408 million september 30 2004 2003 respectively bj services company notes consolidated financial statementscontinued amounts recognized consolidated statement financial position consist postretirement benefit obligation september 30 2004 2003 determined using discount rate 575 585 respectively health care cost trend rate 4 reflecting cap described increasing assumed health care cost trend rates one percentage point would material impact accumulated postretirement benefit obligation net periodic postretirement benefit cost benefits effectively capped company components net periodic benefit cost postretirement benefit cost september 30 2004 2003 2002 determined using discount rate 585 650 687 respectively health care cost trend rate 4 reflecting cap described contributions estimated benefit payments pension plans generally funded amounts necessary meet legal contractual minimum funding requirements company expects contribute 11 million defined benefit plans fiscal 2005 represents legal contractual minimum funding requirements following benefit payments reflect expected future service appropriate expected paid bj services company notes consolidated financial statementscontinued 10 commitments contingencies litigation company performance service operations sometimes named defendant litigation usually relating claims bodily injuries property damage including claims well reservoir damage company maintains insurance coverage claims extent deemed prudent management series acquisitions company assumed responsibility certain claims proceedings made western company north america nowsco well service ltd osca companies whose stock acquired connection businesses claims proceedings continue covered insurance policies company’s predecessors place time acquisitions although outcome claims proceedings company including western nowsco osca cannot predicted certainty management believes existing claims proceedings likely material adverse effect company’s financial position results operations already provided chevron phillips litigation july 10 2002 chevron phillips chemical company “chevron phillips” filed lawsuit company patent infringement united states district court southern district texas corpus christi lawsuit relates patent issued 1992 phillips petroleum company “phillips” patent ‘477 patent relates method using enzymes decompose used drilling mud although company patents remediating damage resulting drillin fluids opposed drilling muds oil natural gas formations products services offered registered “mudzymes” trademark company approached phillips license ‘477 patent company advised phillips licensed patent exclusive basis geomicrobial technologies inc “gmt” company coowned former phillips employee one inventors ‘477 patent company deal gmt obtaining sublicense company entered five year sublicense agreement gmt 1997 early 2000 phillips advised company phillips reportedly terminated license agreement phillips gmt’s nonpayment royalties company’s sublicense also terminated even though company believes sublicense gmt properly terminated company’s mudzymes treatments may covered ‘477 patent 2000 company stopped offering enzyme product use drilling mud drillin fluids us nevertheless chevron phillips claimed use enzymes fracturing fluids applications oil natural gas industry falls ‘477 patent even though patent valid united states chevron phillips requested court award damages company’s use enzymes foreign countries theory oil produced wells treated enzymes imported united states company chevron phillips reached settlement agreement august 1 2004 company purchased ‘477 patent chevron phillips exchange cash certain royalty payments company’s use mudzymes future halliburtonpython litigation june 27 2002 halliburton energy services inc filed suit company weatherford international inc patent infringement connection drillable bridge plug tools used isolate portions well stimulation work plugs milled using coiled tubing bj services company notes consolidated financial statementscontinued workover rig halliburton claims tools offered company trade name “python” weatherford infringe two patents tool constructed composite material lawsuit filed united states district court northern district texas dallas halliburton requested district court issue temporary restraining order preliminary injunction weatherford company prevent either company selling competing tools march 4 2003 district court issued opinion denying halliburton’s requests court denied halliburton’s motion reconsider halliburton filed appeal court appeals federal circuit oral argument took place june 10 2004 june 14 2004 court appeals issued ruling affirming district court’s opinion july 6 2004 halliburton submitted patents reexamination us patent office seeking reaffirm validity patents company filed request reexamination patents lawsuit pending northern district texas dismissed november 16 2004 request halliburton dismissal “without prejudice” meaning halliburton right refile lawsuit may depending outcome reexamination process referenced company filed motion court requesting court reinstate case solely purpose conducting markman hearing construe construction claims halliburton patent irrespective outcome pending motion patent reexamination company expect outcome matter material adverse effect financial position results operations cash flows however assurance ultimate outcome matter future lawsuits may filed halliburtonvistar litigation march 17 2000 company filed lawsuit halliburton energy services united states district court southern district texas houston lawsuit company alleged well fracturing fluid system used halliburton infringes patent issued company january 2000 method well fracturing referred company “vistar®” case tried march april 2002 jury reached verdict favor company april 12 2002 jury determined company’s patent valid halliburton’s competing fluid system phoenix infringed company’s patent district court entered judgment 1011 million permanent injunction preventing halliburton using phoenix system august 6 2003 threejudge panel court appeals federal circuit washington dc unanimously affirmed judgment company’s favor october 17 2003 federal circuit denied halliburton’s request rehearing halliburton filed petition writ certiorari us supreme court january 15 2004 april 5 2004 supreme court notified parties would hear halliburton’s appeal april 14 2004 halliburton transferred sum 1064 million company representing full payment original judgment certain court costs interest accrued date quarter ended june 30 2004 company recorded gain 864 million net legal fees 56 million taxes “other incomeexpensenet” consolidated statement operations reflecting receipt sum newfield litigation april 4 2002 jury rendered verdict adverse osca connection litigation pending united states district court southern district texas houston lawsuit filed newfield exploration september 8 2004 arose blowout occurred 1999 offshore well owned newfield jury determined osca’s negligence caused contributed blowout responsible 86 damages suffered newfield total damage amount awarded newfield 155 million excluding pre postjudgment interest court delayed entry final judgment case pending completion related insurance coverage litigation filed osca certain insurers former insurance broker court elected conduct trial insurance coverage issues bj services company notes consolidated financial statementscontinued based upon briefs parties interim related litigation filed osca former insurance brokers errors omissions connection policies issue case stayed february 28 2003 court issued final judgement connection newfield claims based upon jury’s verdict total amount verdict osca 156 million inclusive interest time court issued ruling related insurance dispute finding osca’s coverage loss limited 38 million motions new trial denied judge case appeal us court appeals fifth circuit regard liability case insurance coverage issues oral argument scheduled april 2005 great lakes chemical corporation formerly owned majority outstanding shares osca agreed indemnify company 75 uninsured liability excess 3 million arising newfield litigation taking indemnity account company’s share uninsured portion verdict approximately 57 million company fully reserved share liability asbestos litigation august 2004 certain predecessors company named defendants four lawsuits filed circuit courts jones smith counties mississippi four lawsuits include 118 individual plaintiffs alleging suffer various illnesses exposure asbestos lawsuits assert claims unseaworthiness negligence strict liability based upon status company’s predecessors jones act employers cases include numerous defendants general defendants alleged manufactured distributed utilized products containing asbestos discovery conducted date company provided sufficient information determine number plaintiffs claim exposed asbestos employed company capacity employed medical condition accordingly company unable estimate potential exposure lawsuits company predecessors past maintained insurance believes available address liability arising claims company intends defend vigorously based information available company time company expect outcome lawsuits material adverse effect financial position results operations cash flows however assurance ultimate outcome lawsuits additional similar lawsuits may filed environmental federal state local laws regulations govern company’s operation underground fuel storage tanks rather incur additional costs restore upgrade tanks required regulations management opted remove existing tanks company completed removal tanks remedial cleanups progress related tank removals addition company conducting environmental investigations remedial actions current former company locations along companies currently named potentially responsible party four thirdparty owned waste disposal sites accrual approximately 27 million established environmental matters management’s best estimate company’s portion future costs incurred insurance also maintained environmental liabilities company notified may 19 2003 misdemeanor criminal charges filed connection illegal disposal allegedly hazardous waste facility ardmore oklahoma company’s investigation incident concluded former employee facility product handler removed improperly disposed drums facility september 2001 without instructions knowledge management location product handler provided written statement investigating authorities admitted disposed drums without instructions anyone bj services company notes consolidated financial statementscontinued company knew actions prohibited law criminal proceedings dismissed company entered consent order civil proceeding regarding matter march 24 2004 state oklahoma department environmental quality fine 50000 assessed 25000 paid cash company expects receive credit balance fine performing cementing services oklahoma department environmental quality company also required pay drum disposal costs 5770 lease longterm commitments december 1999 company contributed certain pumping service equipment limited partnership company owns 1 interest limited partnership equipment used provide services company’s customers company pays service fee period least six years 13 years approximately 12 million annually accounted operating lease included “obligations equipment financing arrangements” contractual obligations section company assessed terms agreement determined variable interest entity defined fin 46 consolidation variable interest entities however company deemed primary beneficiary therefore consolidation required transaction resulted gain deferred amortized 13 years balance deferred gain 266 million 339 million september 30 2004 september 30 2003 respectively agreement permits substitution equipment within partnership long implied fair value new property transferred date substitution equals exceeds implied fair value defined current property partnership replaced company received partnership approval july 2004 substitute certain pumping service equipment accounted exchange likekind assets earnings impact since earnings process yet culminated result substitutions deferred gain reduced 33 million september 2010 company option obligation purchase pumping service equipment approximately 32 million 1997 company contributed certain pumping service equipment limited partnership company owns 1 interest limited partnership equipment used provide services company’s customers company pays service fee period least eight years 13 years approximately 10 million annually accounted operating lease included “obligations equipment financing arrangements” contractual obligations section company assessed terms agreement determined variable interest entity defined fin 46 consolidation variable interest entities however company deemed primary beneficiary therefore consolidation required transaction resulted gain deferred amortized 12 years balance deferred gain 04 million 160 million september 30 2004 september 30 2003 respectively agreement permits substitution equipment within partnership long implied fair value new property transferred date substitution equals exceeds implied fair value defined current property partnership replaced company received partnership approval october 2003 july 2004 substitute certain pumping service equipment accounted exchange likekind assets earnings impact since earnings process yet culminated result substitutions deferred gain reduced 141 million october 2003 13 million july 2004 june 2009 company option obligation purchase pumping service equipment approximately 27 million september 30 2003 company longterm operating leases service fee commitments covering certain facilities equipment well longterm commitments varying expiration dates minimum annual commitments years ending september 30 2005 2006 2007 2008 2009 639 million 596 million 453 million 362 million 260 million respectively 492 million aggregate thereafter bj services company notes consolidated financial statementscontinued contractual obligations company routinely issues parent company guarantees “pcg’s” connection service contracts entered company’s subsidiaries issuance pcg’s frequently condition bidding process imposed company’s customers work countries outside north america pcg’s typically provide company guarantees performance services company’s local subsidiary term pcg’s varies length service contract company arranges issuance variety bank guarantees performance bonds standby letters credit vast majority issued connection contracts company subsidiary entered customers customer right call bank guarantee performance bond standby letter credit event company subsidiary defaults performance services instruments required condition company subsidiary awarded contract typically released upon completion contract balance instruments predominantly standby letters credit issued connection variety company’s financial obligations support fronted insurance programs claims administration funding certain employee benefit plans temporary importation bonds following table summarizes company’s commercial commitments september 30 2004 thousands following table summarizes company’s contractual cash obligations commercial commitments september 30 2004 thousands 1 net original issue discounts 2 includes agreements purchase goods services approved specify significant terms pricing quantity timing company policy require purchase order completed items 200 miscellaneous items office supplies 3 includes expected cash payments longterm liabilities reflected consolidated balance sheet amounts timing payment known amounts include asset retirement obligations known pension funding requirements postretirement benefit obligation management compensation agreements environmental accruals miscellaneous longterm obligations amounts exclude deferred gains see “lease longterm commitments” pension obligations funding requirements uncertain longterm contingent liabilities bj services company notes consolidated financial statementscontinued 11 investment affiliates company conducts operations investments affiliates accounted using cost equity method pd mexicana sociedad de responsabilidad limitada de capital variable “pdm” pdm incorporated january 2001 main activity provide drilling integrated services wells development stage means contract established pemex exploracions produccion “pemex” sole purpose pdm carry complete pemex contract expires august 2005 bj service international inc wholly owned subsidiary company pd holdings wholly owned subsidiary precision drilling corporation 50 pdm funding pdm expenses made basis consistent ownership percentages societe algerienne de stimulation de puits producteurs d’hydroncarbures “bjsp” purpose bjsp perform services casing cementing stimulation well testing algeria bj service international inc wholly owned subsidiary company owns 49 bjsp l’enterprise de services aux puits owns remaining 51 current agreement expires july 2005 extended mutual agreement stockholders profits losses shared stockholders proportion ownership percentages societe de services industriels “ssi”bj services international sarl wholly owned subsidiary company owns 50 ssi l’air liquide sa owns remaining 50 stockholders share profits losses ssi proportion ownership percentages september 30 2004 2003 combined net accounts receivable reflected consolidated statement financial position unconsolidated affiliates totaled 206 million 143 million respectively september 30 2004 2003 combined accounts payable reflected consolidated statement financial position unconsolidated affiliates totaled 01 million 02 million respectively company’s combined investment september 30 2004 2003 102 million 135 million respectively company recognized revenue 513 million 359 million 348 million years ended september 30 2004 2003 2002 respectively primarily services performed behalf equity affiliates 12 supplemental financial information supplemental financial information three years ended september 30 2004 follows thousands bj services company notes consolidated financial statementscontinued expense income net three years ended september 30 2004 summarized follows thousands accumulated comprehensive income loss consists following thousands tax effects allocated component changes comprehensive income summarized follows thousands bj services company notes consolidated financial statementscontinued 13 employee stock plans stock option plans company’s 1995 incentive plan 1997 incentive plan 2000 incentive plan 2003 incentive plan “plans” provide granting stock options officers key employees nonemployee directors exercise price equal fair market value stock date grant options vest three fouryear periods exercisable periods ranging one ten years aggregate 22000000 shares common stock authorized grants 7482935 available future grants september 30 2004 summary status company’s stock option activity related information three years ended september 30 2004 presented thousands except per share prices following table summarizes information stock options outstanding september 30 2004 thousands except per share prices remaining life stock purchase plan company’s 1999 employee stock purchase plan “purchase plan” allows employees purchase shares company’s common stock 85 market value first last business day twelvemonth plan period beginning october whichever lower purchases limited 10 employee’s regular salary maximum aggregate 6000000 shares reserved purchase plan 3790458 available future purchase september 30 2004 total 418603 shares purchased 2904 per share fiscal 2004 495014 shares purchased 2210 per share fiscal 2003 company reserved total 327905 shares fiscal 2005 stock incentive plan pursuant terms 1997 stock incentive plan 2000 stock incentive plan company reserved 494952 performance units “units” representing maximum number units officers could receive unit represents right receive company end stipulated bj services company notes consolidated financial statementscontinued period one unrestricted share common stock contingent upon achievement certain financial performance goals stipulated period company fail achieve specific financial goals set executive compensation committee board directors units canceled related shares revert company reissuance plan aggregate fair market value underlying shares granted plan considered unearned compensation time grant adjusted quarterly based current market price common stock compensation expense determined based management’s current estimate likelihood meeting specific financial goals expensed ratably stipulated period executive compensation committee board directors reviewed company’s three year performance determined highest level performance criteria achieved unit awards november 2002 2003 total 146595 units 95126 units respectively converted stock issued officers remaining balance reserve assessed threeyear performance period company ending september 30 2006 director stock award addition stock option awards nonemployee directors may granted award common stock company exercise price options vest three fouryear periods still director company end period exercisable periods ranging one ten years september 30 2004 company 15948 grants outstanding awarded november 2003 none exercisable compensation expense valued using blackscholes model expensed using graded vesting year ended september 30 2004 company recorded expense 02 million award november 2004 company awarded additional 24000 grants nonemployee directors 14 stockholders’ equity stockholder rights plan company stockholder rights plan “rights plan” designed deter coercive takeover tactics prevent acquirer gaining control company without offering fair price stockholders plan amended outstanding share common stock includes onequarter preferred share purchase right “right” becomes exercisable certain circumstances including beneficial ownership common stock person group equals exceeds 15 company’s outstanding common stock right entitles registered holder purchase company one onethousandth share series junior participating preferred stock price 520 subject adjustment certain circumstances result stock splits effected form stock dividends 1998 2001 one right associated four outstanding shares common stock purchase price onefourth right associated one share common stock effectively 130 upon occurrence certain events specified rights plan holder right acquiring person right upon exercise right receive number shares common stock company surviving corporation time transaction would market price two times purchase price right rights plan amended september 26 2002 extend expiration date rights september 26 2012 increase purchase price rights shares series junior participating preferred stock issued company september 30 2004 treasury stock december 1997 board directors approved share repurchase program authorizing purchases 150 million common stock discretion company’s management board subsequently increased authorized amount 300 million may 1998 450 million september 2000 600 million july 2001 750 million october 2001 program company repurchased total 24183000 shares cost 4990 million fiscal 2002 shares repurchased fiscal 2004 2003 convertible senior notes april 24 2002 company sold convertible senior notes face value maturity 5164 million gross proceeds 4084 million see note 5 bj services company notes consolidated financial statementscontinued dividends since initial public offering 1990 bj services paid cash dividends stockholders july 22 2004 company announced initiation regular quarterly cash dividend declared dividend 08 per common share paid october 15 2004 stockholders record close business september 15 2004 amount 129 million company anticipates paying cash dividends amount 08 per common share quarterly basis fiscal 2005 however board directors must approve dividend quarter ability change dividend policy time 15 quarterly financial data unaudited 1 represents revenue less cost sales services research engineering expenses 2 includes 864 million halliburton award third quarter fiscal 2004 see note 10 122 million reversal excess liabilities asiapacific region fourth quarter fiscal 2004 see note 16 subsequent event october 2004 company received report whistleblower alleging asia pacific region controller misappropriated company funds fiscal 2001 company began internal investigation misappropriation whether inappropriate actions occurred region controller admitted multiple misappropriations 30month period ended april 2002 employment terminated misappropriations identified date total approximately 90 million repaid company misappropriated funds recorded expense consolidated statement operations prior periods therefore restatement misappropriation required result company expects record 90 million income consolidated condensed statement operations quarter ending december 31 2004 company conducted comprehensive review asia pacific region’s balance sheet determined excess liabilities accumulated period years still existed september 30 2004 amount 122 million following adjustments recorded accordance gaap company policy net effect adjustments reported income consolidated statement operations year ended september 30 2004 based review facts circumstances surrounding accounting adjustments believe amounts identified quantitatively qualitatively material financial statements presented annual report form 10k recorded correction amounts fiscal 2004 since individually aggregate material prior periods current year company continuing investigate whether additional funds misappropriated beyond 9 million identified date investigate possible inappropriate actions company continues investigation adjustments may recorded consolidated statements operations material adjustments known time october 2004 company also received whistleblower allegations illegal payments foreign officials made asia pacific region audit committee board directors engaged independent counsel conduct separate investigation determine whether illegal payments made investigation continuing found information indicating illegal payments government officials asia pacific region aggregating excess 15 million may made several years item 9item 8 financial statements supplementary data management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting term defined securities exchange act 1934 rule 13a15f company’s internal controls designed provide reasonable assurance reliability financial statements external purposes accordance accounting principles generally accepted us internal control financial reporting inherent limitations may prevent detect misstatements therefore even systems determined effective provide reasonable assurance absolute assurance respect financial statement preparation presentation changes conditions effectiveness internal control financial reporting may vary time supervision participation company’s chief executive officer chief financial officer management evaluated effectiveness company’s internal control financial reporting september 30 2005 required securities exchange act 1934 rule 13a15c making assessment management utilized criteria set forth committee sponsoring organizations treadway commission internal controlintegrated framework management concluded based evaluation company’s internal control financial reporting effective september 30 2005 management’s assessment effectiveness company’s internal control financial reporting september 30 2005 audited deloitte touche llp independent registered public accounting firm stated report included herein jw stewart tm whichard jw stewart tm whichard president chief executive officer vice president chief financial officer report independent registered public accounting firm stockholders bj services company audited management’s assessment included accompanying management’s report internal control financial reporting bj services company subsidiaries “company” maintained effective internal control financial reporting september 30 2005 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion management’s assessment effectiveness internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal controls financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers persons performing similar functions effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion management’s assessment company maintained effective internal control financial reporting september 30 2005 fairly stated material respects based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission also opinion company maintained material respects effective internal control financial reporting september 30 2005 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission also audited accordance standards public company accounting oversight board united states consolidated financial statements financial statement schedule year ended september 30 2005 company report dated december 14 2005 expressed unqualified opinion consolidated financial statements financial statement schedule deloitte touche llp houston texas december 14 2005 report independent registered public accounting firm stockholders bj services company audited accompanying consolidated statements financial position bj services company subsidiaries “company” september 30 2005 2004 related consolidated statements operations stockholders’ equity comprehensive income cash flows three years period ended september 30 2005 audits also included financial statement schedule listed index item 15 financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position bj services company subsidiaries september 30 2005 2004 results operations cash flows three years period ended september 30 2005 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states effectiveness company’s internal control financial reporting september 30 2005 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated december 14 2005 expressed unqualified opinion management’s assessment effectiveness company’s internal control financial reporting unqualified opinion effectiveness company’s internal control financial reporting deloitte touche llp houston texas december 14 2005 bj services company consolidated statement operations accompanying notes integral part consolidated financial statements bj services company consolidated statement financial position assets accompanying notes integral part consolidated financial statements liabilities stockholders’ equity accompanying notes integral part consolidated financial statements bj services company consolidated statement stockholders’ equity comprehensive income thousands accompanying notes integral part consolidated financial statements bj services company consolidated statement cash flows accompanying notes integral part consolidated financial statements bj services company notes consolidated financial statements 1 business basis presentation bj services company “company” whose operations trace back byron jackson company founded 1872 organized 1990 corporate laws state delaware company leading worldwide provider pressure pumping oilfield services petroleum industry company’s pressure pumping services consist cementing stimulation services used completion new oil natural gas wells remedial work existing wells onshore offshore oilfield services include completion tools completion fluids casing tubular services provided oil natural gas exploration production industry commissioning inspection services provided refineries pipelines offshore platforms production chemical services company consolidates investments greater 50 control material intercompany balances transactions eliminated consolidation investments companies company’s ownership interest ranges 20 50 company exercises significant influence operating financial policies accounted using equity method investments accounted using cost method preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting periods actual results could differ estimates share earnings per share amounts restated periods presented reflect increased number common shares outstanding resulting 2for1 stock split payable september 1 2005 stockholders record august 18 2005 certain amounts 2004 2003 reclassified accompanying consolidated financial statements conform current year presentation 2 summary significant accounting policies cash equivalents company considers highly liquid investments purchased original maturities three months less time purchase cash equivalents shortterm investments highly liquid investments maturities one year less time purchase classified shortterm investments company accounts shortterm investments accordance sfas 115 accounting certain investments debt equity securities shortterm investments held maturity recorded amortized cost purposes consolidated statement cash flows company consider shortterm investments cash equivalents generally original maturities excess three months allowance doubtful accounts company performs ongoing credit evaluations customers adjusts credit limits based upon payment history customer’s current credit worthiness determined review available credit information continuously monitor collections payments customers maintain provision estimated uncollectible accounts based upon historical experience specific customer collection issues identified credit losses historically within expectations provisions established cannot give assurances continue experience credit loss rates past cyclical nature industry may affect customers’ operating performance cash flows could impact ability collect obligations addition many customers located certain international areas inherently subject risks economic political civil instabilities may impact ability collect receivables bj services company notes consolidated financial statementscontinued inventories consist principally products consumed company’s services provided customers ii spare parts equipment used providing services iii manufactured components attachments equipment used providing services stated primarily lower weightedaverage cost market cost primarily represents invoiced costs company regularly reviews inventory quantities hand records provisions excess obsolete inventory based primarily estimated forecast product demand market conditions production requirements technological developments significant unanticipated changes company’s forecasts could require additional provisions excess obsolete inventory property stated cost less amounts provided permanent impairments includes capitalized interest 12 million 08 million 06 million years ended september 30 2005 2004 2003 respectively funds borrowed finance construction capital additions depreciation generally provided using straightline method estimated useful lives individual items leasehold improvements amortized straightline basis shorter estimated useful lives lease terms estimated useful lives 10 30 years buildings leasehold improvements range 3 12 years machinery equipment company makes judgments estimates conjunction carrying value assets including amounts capitalized depreciation amortization methods useful lives additionally carrying values assets reviewed impairment whenever events changes circumstances indicate carrying amounts may recoverable determination recoverability made based upon estimated undiscounted future cash flows impairment loss recorded period determined carrying amount recoverable amount impairment amount net book value assets exceed fair value fair value determination requires company make longterm forecasts future revenue costs related assets subject review forecasts require assumptions demand company’s products services future market conditions technological developments significant unanticipated changes assumptions could require provision impairment future period rig count experienced double digit growth last three years company’s equipment perform currently working result yearend procedures determined remaining equipment able operate would written fair value usable major components fair value assets based market prices similar assets result 117 million impairment recorded company’s fourth fiscal quarter 2005 reflected corporate results intangible assets goodwill represents excess cost fair value net assets companies acquired purchase transactions company accounts goodwill accordance statement financial accounting standards “sfas” 142 goodwill intangible assets requires goodwill reviewed possible impairment annual basis circumstances indicate impairment may exist company performed annual evaluation september 30 concluded impairment adjustment necessary company’s 8852 million 8859 million net goodwill balance september 30 2005 2004 respectively changes carrying amount goodwill reporting unit year ended september 30 2005 follows thousands bj services company notes consolidated financial statementscontinued fiscal 2005 goodwill reduced 07 million connection resolution certain tax uncertainties relating prior acquisitions eitf 937 uncertainties related income taxes purchase business combination resolution tax uncertainties treated adjustment goodwill originally recorded acquisition technology based intangible assets amortized straightline basis ranging 520 years weighted average amortization period 136 years technology based intangible assets net accumulated amortization 82 million 43 million september 30 2005 2004 respectively amortization three years ended september 30 2005 2004 2003 05 million 03 million 02 million respectively company utilizes undiscounted estimated cash flows evaluate possible impairment intangible assets cash flows less net carrying value intangible assets company records impairment loss equal difference discounted estimated cash flows net carrying value discount rate utilized based market factors time loss determined income taxes company provides income taxes accordance sfas 109 accounting income taxes standard takes account differences financial statement treatment tax treatment certain transactions deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect change tax rates recognized income expense period includes enactment date calculation requires company make certain estimates future operations changes state federal foreign tax laws well changes financial condition could affect estimates company records valuation allowance reduce deferred tax assets likely portion deferred tax assets expire realization benefit consider available evidence positive negative determine whether valuation allowance needed ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character within carryback carryforward period set forth applicable tax law tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities potentially courts resolution situations inevitably includes degree uncertainty accordingly provide taxes amounts believe ultimately result proceedings addition aforementioned assessments received various taxing authorities provide taxes certain situations assessments received situations accrue income taxes consider probable taxes ultimately payable exceed amounts reflected filed tax returns accordingly taxes provided situations guidance statement financial accounting standards “sfas” 5 accounting contingencies self insurance accruals company selfinsured certain losses relating workers’ compensation general liability property damage employee medical benefits claims filed claims incurred reported company’s liability based primarily actuarial undiscounted basis using individual casebased valuations statistical analysis based upon judgment historical experience however final cost many claims may known five years longer management reviews reserve quarterly basis changes claims experience health care costs etc could affect estimates contingencies accounted accordance sfas 5 accounting contingencies standard requires record estimated loss contingency information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements amount loss bj services company notes consolidated financial statementscontinued reasonably estimated accounting contingencies environmental legal income tax matters requires company use judgment company believes accruals matters adequate actual loss contingency significantly different estimated loss results operations may adversely impacted significant litigation company accrues legal costs environmental remediation compliance environmental remediation costs accrued based estimates known environmental exposures using currently available facts existing environmental permits technology presently enacted laws regulations sites company primarily responsible remediation company’s estimates costs developed based internal evaluations discounted accruals recorded environmental assessments andor remedial efforts probable cost reasonably estimated accrual recorded even significant uncertainties exist ultimate cost remediation updated additional information becomes available ongoing environmental compliance costs obtaining environmental permits installation pollution control equipment waste disposal expensed incurred company identified potentially responsible party us federal state superfund site company accrues share estimated remediation costs site based ratio estimated volume waste contributed site company total estimated volume waste site revenue recognition company’s revenue composed product sales rental service revenue products rentals services generally sold based fixed determinable priced purchase orders contracts customer include right return company recognizes revenue product sales title passes customer assumes risks rewards ownership collectibility reasonably assured rental service revenue recognized services provided collectibility reasonably assured research development expenditures research development expenditures expensed incurred maintenance repairs expenditures maintenance repairs expensed incurred expenditures renewals improvements capitalized extend life increase capacity improve efficiency asset foreign currency translation company’s functional currency primarily us dollar gains losses resulting financial statement translation foreign operations foreign currency functional currency included separate component stockholders’ equity company’s operations canada hungary use respective local currencies functional currency derivative instruments company sometimes enters forward foreign exchange contracts hedge impact currency fluctuations certain transactions assets liabilities denominated foreign currencies enter derivative instruments speculative trading purposes sfas 133 accounting derivative instruments hedging activities amended requires company recognize derivatives balance sheet fair value company designates documents derivative instrument hedge inception derivative assessed determine hedge highly effective inception ongoing basis ineffective portion derivative’s change fair value recognized earnings employee stockbased compensation sfas 123 accounting stockbased compensation company permitted either record expenses stock options stockbased employee compensation plans based fair value date grant continue apply accounting principles board opinion 25 accounting stock issued employees “apb 25” recognize compensation expense based intrinsic value equity instruments measurement dates company elected continue bj services company notes consolidated financial statementscontinued following apb 25 therefore compensation expense recognized stock purchase plan stock option plan exercise prices employee stock options equal market prices underlying stock dates grant company expenses fair value awards granted stock incentive plan restricted stock awards discussed sfas 123r effective company october 1 2005 following pro forma table illustrates effect net income earnings per share company applied fair value recognition provisions sfas 123 stock option plan stock purchase plan thousands except per share amounts 1 october november 2001 company granted approximately 100 stock options typically granted therefore minimal amount issued subsequent year given threeyear vesting schedule awards stockbased compensation expense higher fiscal 2002 2003 2004 pro forma compensation expense determined sfas 123 calculated using blackscholes option pricing model following assumptions company calculated volatility using historical daily weekly monthly price intervals generate reasonable range expected future volatility used factor low end range accordance sfas 123 bj services company notes consolidated financial statementscontinued new accounting pronouncements may 2005 fasb issued sfas 154 “sfas 154” accounting changes error corrections replacement apb opinion 20 accounting changes sfas 3 reporting accounting changes interim financial statements sfas 154 voluntary changes accounting principle well changes pursuant accounting pronouncements include specific transition requirements must applied retrospectively prior periods’ financial statements retrospective application requires cumulative effect change reflected carrying value assets liabilities first period presented offsetting adjustments recorded beginning retained earnings period presented must adjusted reflect period specific effects applying change also new statement change accounting estimate continues accounted period change future periods necessary corrections errors continue reported restating prior period financial statements beginning first period presented material statement effective accounting changes corrections errors made fiscal years beginning december 15 2005 company adopt sfas 154 october 1 2006 adoption material impact company’s financial position results operations since sfas 154 applied prospectively december 2004 fasb issued sfas 123revised 2004 “sfas 123r” sharebased payment revision sfas 123 accounting stockbased compensation “sfas 123” supersedes apb 25 accounting stock issued employees september 30 2005 company recorded compensation expense stock purchase plan stock option plan sfas 123r company required measure cost employee services received exchange stock based grantdate fair value limited exceptions cost recognized period employee required provide service exchange award usually vesting period fair value estimated using optionpricing model excess tax benefits defined sfas 123r recognized addition paidin capital effective october 1 2005 company adopt sfas 123r using modified prospective method modified prospective method company recognize expense beginning october 1 2005 unvested awards granted prior adoption date october 1 2005 remaining vesting period awards new awards granted adoption date expensed vesting period award company currently uses blackscholes option pricing model disclosures stockbased compensation information plans continuing use model sfas 123r determining expense awards stock option plan stock purchase plan company historically expensed fair value awards granted stock incentive plan adoption sfas 123r require company utilize binomial model value stock incentive plan awards anticipate valuation methodology required sfas 123r materially change compensation expense associated awards company historically recognized consolidated statement operations following table summarizes impact adoption sfas 123r plans bj services company notes consolidated financial statementscontinued estimates future grants table based level grants awarded fiscal 2005 actual number awards types awards granted may change respect consolidated statement financial position increase unearned compensation approximately 40 million equally offsetting decrease capital excess par stockholders’ equity information regarding plans see note 13 notes consolidated financial statements october 2004 american jobs creation act 2004 “act” signed law act contains new provisions may impact company’s us income tax liability future years act provides deduction income qualified domestic production activities phased 2005 2010 guidance fasb staff position 1091 application fasb statement 109 “accounting income taxes” tax deduction qualified production activities provided american jobs creation act 2004 deduction treated “special deduction” described fasb statement 109 special deduction effect deferred tax assets liabilities existing enactment date rather impact deduction reported period deduction claimed tax return expect deduction material impact effective tax rate future years act applicable company beginning october 1 2005 december 2004 fasb issued fasb staff position 1092 “fsp 1092” accounting disclosure guidance foreign repatriation provision within american jobs creation act 2004 provides guidance sfas 109 respect recording potential impact repatriation provisions act company’s income tax expense deferred tax liability fsp 1092 states company allowed time beyond financial reporting period enactment evaluate effect act plan reinvestment repatriation foreign earnings purposes applying sfas 109 company considering possibility remitting dividends excess 20 million perhaps materially excess 20 million next fiscal year claim benefits new provision furthermore company believes residual us tax liability possible repatriation would fully offset excess foreign tax credits company 3 acquisitions businesses november 26 2003 company completed acquisition cajun tubular services inc “cajun” total purchase price 81 million net cash cajun located lafayette louisiana provides tubular running testing torque monitoring services gulf mexico market business complements company’s casing tubular services business oilfield services segment bj services company notes consolidated financial statementscontinued december 2 2003 company acquired assets business petrodrive division grant prideco inc total purchase price 7 million petrodrive located lafayette louisiana leading provider hydraulic diesel hammer services gulf mexico market select markets internationally business complements company’s casing tubular services business oilfield services segment acquisitions resulted total goodwill 62 million pro forma financial information presented acquisitions material company 4 earnings per share basic earnings per share “eps” excludes dilution computed dividing net income weightedaverage number common shares outstanding period diluted eps based weightedaverage number shares outstanding period assumed exercise dilutive instruments stock option plans stock purchase plan stock incentive plan less number treasury shares assumed purchased exercise proceeds using average market price company’s common stock periods presented dilutive effect included convertible senior notes issued april 24 2002 see note 5 company settled conversion cash following table presents information necessary calculate earnings per share three years ended september 30 2005 thousands except per share amounts 1 years ended september 30 2005 2004 stock options excluded computation diluted earnings per share due antidilutive effect year ended september 30 2003 134 thousand stock options excluded computation diluted earnings per share due antidilutive effect 5 debt bank credit facilities longterm debt september 30 2005 2004 consisted following thousands bj services company notes consolidated financial statementscontinued june 2004 company replaced existing credit facility revolving credit facility “revolving credit facility” permits borrowings 400 million principal amount revolving credit facility includes 50 million sublimit issuance standby letters credit 20 million sublimit swingline loans swingline loans shortterm maturities remaining amounts outstanding revolving credit facility become due payable june 2009 interest outstanding borrowings charged based prevailing market rates company charged various fees connection revolving credit facility including commitment fee based average daily unused portion commitment totaling 05 million fiscal 2005 addition revolving credit facility charges utilization fee outstanding loans letters credit usage revolving credit facility exceeds 33 though charges fiscal 2005 outstanding borrowings revolving credit facility september 30 2005 2004 april 24 2002 company sold convertible senior notes face value maturity 5164 million gross proceeds 4084 million notes unsecured senior obligations ranked equally right payment company’s existing future senior unsecured indebtedness company used aggregate net proceeds 4001 million fund substantial portion purchase price acquisition osca closed may 31 2002 general corporate purposes april 25 2005 company redeemed outstanding convertible senior notes redemption price 4224 million 4196 million outstanding convertible senior notes september 30 2004 september 30 2005 september 30 2004 company issued outstanding 790 million 789 million respectively unsecured 7 series b notes due february 1 2006 net discount addition revolving credit facility company 443 million unsecured discretionary lines credit september 30 2005 expire bank’s discretion requirements commitment fees compensating balances connection lines credit interest prevailing market rates 34 million 38 million outstanding borrowings lines credit september 30 2005 2004 respectively weighted average interest rates shortterm borrowings outstanding september 30 2005 2004 775 575 respectively revolving credit facility includes various customary covenants provisions including maintenance certain profitability solvency ratios none materially restrict company’s activities company currently compliance covenants imposed terms indebtedness 6 financial instruments following methods assumptions used estimate fair value class financial instruments practicable cash equivalents shortterm investments trade receivables trade payables shortterm borrowings foreign exchange contracts carrying amount approximates fair value short maturity instruments longterm debt fair value based rates currently available company debt similar terms average maturities foreign exchange contracts periodically company borrows funds denominated foreign currencies exposes company market risk associated exchange rate movements borrowings denominated foreign currencies september 30 2005 2004 bj services company notes consolidated financial statementscontinued fair value financial instruments differed carrying value september 30 2005 2004 follows thousands 7 income taxes geographical sources income taxes three years ended september 30 2005 follows thousands provision income taxes three years ended september 30 2005 summarized thousands consolidated effective income tax rates percent income loss income taxes three years ended september 30 2005 varied united states statutory income tax rate reasons set forth bj services company notes consolidated financial statementscontinued deferred tax assets liabilities recognized estimated future tax effects temporary differences tax basis assets liabilities reported amount financial statements measurement deferred tax assets liabilities based enacted tax laws rules currently effect taxing jurisdictions company operations generally deferred tax assets liabilities classified current noncurrent according classification related asset liability financial reporting estimated deferred tax effect temporary differences carryforwards september 30 2005 2004 follows thousands 1 deferred gain contribution pumping service equipment partnerships referred note 10 september 30 2005 company approximately 538 million foreign net operating loss carryforwards foreign net operating loss carryforwards expire follows 112 million fiscal year 2010 remaining 426 million expire company also 263 million us foreign tax credit carryforwards substantially us foreign tax credits expire 2012 potential impact foreign net operating loss carryforwards foreign tax credits subject expiration reflected asset valuation allowance balance september 30 2005 furthermore respect valuation allowance approximately 28 million valuation allowance subsequently realized allocated reduce goodwill company records valuation allowance reduce deferred tax assets likely portion deferred tax assets expire realization benefit company reached irs audit settlement respect fiscal year 2002 tax return received additional tax credits result audit resolution likely additional credits realized valuation allowance recorded additional credits company’s stock basis difference foreign subsidiaries us deferred tax liability established approximately 204 million september 30 2005 stock basis difference arises existence unremitted foreign earnings cumulative translation adjustments company provided additional taxes anticipated repatriation foreign earnings foreign subsidiaries bj services company notes consolidated financial statementscontinued determined foreign subsidiaries earnings indefinitely reinvested foreign subsidiaries whose earnings indefinitely reinvested provision us federal state income taxes provided company record tax liability full tax versus book basis difference foreign subsidiaries additional net deferred tax liability approximately 15 million would recorded 8 segment information company currently thirteen operating segments separate financial information available separate management teams engaged oilfield services results operating segments evaluated regularly chief operating decision maker deciding allocate resources assessing performance operating segments aggregated three reportable segments usmexico pressure pumping international pressure pumping oilfield services usmexico pressure pumping two operating segments includes cementing services stimulation services consisting fracturing acidizing sand control nitrogen coiled tubing service tool services provided throughout united states mexico two operating segments aggregated one reportable segment offer type services similar economic characteristics similar production processes use methods provide services international pressure pumping segment six operating segments similar usmexico pressure pumping includes cementing stimulation services consisting fracturing acidizing sand control nitrogen coiled tubing service tool services provided customers 48 countries major international oil natural gas producing areas canada latin america europe africa asia pacific russia middle east operating segments aggregated one reportable segment similar economic characteristics offer type services similar production processes use methods provide services also serve similar customers include major multinational independent national stateowned oil companies oilfield services segment five operating segments operating segments provide oilfield services production chemicals casing tubular services process pipeline services completion tools completion fluids services us select markets internationally operating segments aggregated one reportable segment provide oilfield services serve similar customers operating segments share resources accounting policies segments described summary significant accounting policies company evaluates performance segments based operating income intersegment sales transfers material bj services company notes consolidated financial statementscontinued summarized financial information concerning company’s segments three years ended september 30 2005 shown following tables thousands “corporate” column includes corporate expenses allocated operating segments revenue geographic location determined based location services rendered products sold years ended september 30 2005 2004 2003 company provided services several thousand customers none accounted 5 consolidated revenue business segments geographic information bj services company notes consolidated financial statementscontinued revenue product line reconciliation segment information consolidated income taxes three years ended september 30 2005 set forth thousands 9 employee benefit plans company administers defined contribution plans employees us uk canada whereby eligible employees may elect contribute 2 20 base salaries employee benefit trust employee contributions matched company rate 50 per 100 6 employee’s base salary us equal matching 55 employees base salary uk addition company contributes 2 6 employee’s base salary depending age years service us uk canada company matching contributions vest immediately company base contributions become fully vested five years employment company’s contributions defined contribution plans amounted 166 million 143 million 132 million 2005 2004 2003 respectively effective october 1 2000 company established nonqualified supplemental executive retirement plan unfunded defined benefit plan provide company executives supplemental retirement benefits based highest consecutive three years compensation final ten years become vested age 55 expense associated plan 21 million 34 million 34 million years ended september 30 2005 2004 2003 respectively related accrued benefit obligation 141 million 130 million september 30 2005 2004 respectively effective december 7 2000 company established nonqualified directors’ benefit plan unfunded defined benefit plan provide company’s nonemployee directors benefits upon termination service based number years service last annual retainer fee expense associated plan 05 million 01 million 03 million years ended september 30 2005 2004 2003 respectively related accrued benefit obligation 23 million 18 million september 30 2005 2004 respectively defined benefit pension plans company defined benefit pension plans covering employees us uk norway canada defined benefit pension plan us frozen effective december 31 1995 time bj services company notes consolidated financial statementscontinued earned benefits vested fiscal 2004 plans frozen new entrants uk canada addition many employees canada converted defined benefit plan defined contribution plan see “settlement benefits conversion” defined benefit plan tables company uses september 30 measurement date plans amounts presented thousands unless otherwise stated obligations funded status amounts recognized consolidated statement financial position consist bj services company notes consolidated financial statementscontinued accumulated benefit obligations abo excess plan assets abo actuarial present value pension benefits employees’ current compensation levels differs projected benefit obligation abo include assumptions future compensation levels abo plans 1972 million 1820 million september 30 2005 2004 respectively components net periodic benefit cost additional information assumptions used determine benefit obligations september 30 follows assumptions used determine net periodic benefit cost years ended september 30 follows bj services company notes consolidated financial statementscontinued expected longterm rate return assumptions represent rate return plan assets reflecting average rate earnings expected funds invested provide benefits included projected benefit obligation assumption determined reflecting expectations regarding future rates return portfolio considering asset distribution target related historical rates return redemption yield government fixed interest bonds well corporate bonds used proxies return debt securities weighted relative proportion within actual portfolio return equities based historical longterm performance equity classes rate reassessed least annual basis plan assets company objective diversify portfolio among several asset classes reduce volatility maintaining asset mix provides highest rate return acceptable risk primarily mix equity securities 60 75 fixed income funds 25 40 generate asset returns comparable general market company investment committees meet least annually review portfolio returns determine assetmix targets based assetliability studies nationally recognized thirdparty investment consultants assist company developing asset allocation strategy determine company’s expected rate return expected risk various investment portfolios investment committees considered studies formal establishment current assetmix targets based projected risk return levels asset class contributions estimated benefit payments pension plans generally funded amounts necessary meet legal contractual minimum funding requirements totaled 88 million fiscal 2005 company infrequently makes discretionary contributions 90 million discretionary contribution made us plan fiscal 2004 company expects contribute 66 million defined benefit plans fiscal 2006 represents legal contractual minimum funding requirements following benefit payments reflect expected future service appropriate expected paid bj services company notes consolidated financial statementscontinued postretirement benefit plans company sponsors plans provide certain health care life insurance benefits retired employees primarily us meet specified age service requirements eligible dependents plans unfunded company retains right subject existing agreements modify eliminate company’s postretirement medical benefit plan provides credits based years service used purchase coverage retiree plan effectively caps company’s health care inflation rate 4 increase per year company uses september 30 measurement date plans amounts presented thousands unless otherwise stated obligations funded status abo 499 million 458 million september 30 2005 2004 respectively amounts recognized consolidated statement financial position consist bj services company notes consolidated financial statementscontinued postretirement benefit obligation september 30 2005 2004 determined using discount rate 575 respectively health care cost trend rate 4 reflecting cap described increasing assumed health care cost trend rates one percentage point would material impact accumulated postretirement benefit obligation net periodic postretirement benefit cost benefits effectively capped company components net periodic benefit cost postretirement benefit cost september 30 2005 2004 2003 determined using discount rate 575 585 650 respectively health care cost trend rate 4 reflecting cap described contributions estimated benefit payments pension plans generally funded amounts necessary meet legal contractual minimum funding requirements company expects contribute 12 million postretirement plan fiscal 2006 represents anticipated claims following benefit payments reflect expected future service appropriate expected paid 10 commitments contingencies litigation company performance service operations sometimes named defendant litigation usually relating claims bodily injuries property damage including claims well reservoir damage company maintains insurance coverage claims extent deemed prudent management series acquisitions company assumed responsibility certain claims proceedings made western company north america “western” nowsco well service ltd bj services company notes consolidated financial statementscontinued “nowsco” osca companies whose stock acquired connection businesses claims proceedings continue covered insurance policies company’s predecessors place time acquisitions although outcome claims proceedings company including western nowsco osca cannot predicted certainty management believes existing claims proceedings likely material adverse effect company’s financial position results operations already provided halliburtonpython litigation june 27 2002 halliburton energy services inc filed suit company weatherford international inc patent infringement connection drillable bridge plug tools used isolate portions well stimulation work plugs milled using coiled tubing workover rig halliburton claims tools offered company trade name “python” weatherford infringe two patents tool constructed composite material lawsuit filed united states district court northern district texas dallas halliburton requested district court issue temporary restraining order preliminary injunction weatherford company prevent either company selling competing tools march 4 2003 district court issued opinion denying halliburton’s requests court denied halliburton’s motion reconsider halliburton filed appeal court appeals federal circuit oral arguments took place june 10 2004 june 14 2004 court appeals issued ruling affirming district court’s opinion july 6 2004 halliburton submitted patents reexamination us patent office seeking reaffirm validity patents company filed request reexamination patents lawsuit pending northern district texas dismissed november 16 2004 request halliburton dismissal “without prejudice” meaning halliburton right refile lawsuit may depending outcome reexamination process referenced court denied company’s motion requesting case reinstated solely purpose conducting markman hearing construe claims halliburton patent irrespective outcome pending patent reexamination company expect outcome matter material adverse effect financial position results operations cash flows however assurance ultimate outcome matter future lawsuits may filed newfield litigation april 4 2002 jury rendered verdict adverse osca connection litigation pending united states district court southern district texas houston lawsuit filed newfield exploration september 29 2000 arose blowout occurred 1999 offshore well owned newfield jury determined osca’s negligence caused contributed blowout responsible 86 damages suffered newfield total damage amount awarded newfield 155 million excluding pre postjudgment interest court delayed entry final judgment case pending completion related insurance coverage litigation filed osca certain insurers former insurance broker court elected conduct trial insurance coverage issues based upon briefs parties interim related litigation filed osca former insurance brokers errors omissions connection policies issue case stayed february 28 2003 court issued final judgement connection newfield claims based upon jury’s verdict total amount verdict osca 156 million inclusive interest time court issued ruling related insurance dispute finding osca’s coverage loss limited 38 million motions new trial denied judge case appeal bj services company notes consolidated financial statementscontinued us court appeals fifth circuit regard liability case insurance coverage issues oral argument held april 4 2005 parties awaiting ruling great lakes chemical corporation formerly owned majority outstanding shares osca agreed indemnify company 75 uninsured liability excess 3 million arising newfield litigation taking indemnity account company’s share uninsured portion verdict approximately 56 million company fully reserved share liability asbestos litigation august 2004 certain predecessors company named defendants four lawsuits filed circuit courts jones smith counties mississippi four lawsuits include 118 individual plaintiffs alleging suffer various illnesses exposure asbestos seeking damages lawsuits assert claims unseaworthiness negligence strict liability based upon status company’s predecessors jones act employers cases include numerous defendants general defendants alleged jones act employers plaintiffs andor manufactured distributed utilized products containing asbestos plaintiffs process completing data sheets specifying companies employed asbestoscontaining products allegedly exposed process approximately 20 plaintiffs identified company predecessors employer products company predecessors identified date plaintiffs contained asbestos data sheet process complete expect company dismissed case identified employer minimal medical information regarding alleged asbestosrelated disease suffered plaintiffs provided accordingly company unable estimate potential exposure lawsuits company predecessors past maintained insurance believes available respond claims addition jones act cases company named small number additional asbestos cases allegations cases vary generally include claims company provided unspecified product service contained utilized asbestos allegations involve claims company successor byron jackson company date company successful obtaining dismissals cases without payment settlements judgments although remain pending present time company intends defend vigorously cases based information available company time company expect outcome lawsuits material adverse effect financial position results operations cash flows however assurance ultimate outcome lawsuits additional similar lawsuits may filed us commerce department settlement agreement company entered settlement agreement dated july 7 2005 us commerce department’s bureau industry security “bis” regarding violations certain export laws occurred 1999 2002 violations relate total 13 unlicensed shipments chemical products made time frame products used company’s oilfield operations china russia colombia contained chemical compounds ingredients regulated export administration regulations precursors weapons drugs none products left control company subsidiaries concentration restricted chemical compounds products triggered requirement export license shipped united states company detected unlicensed shipments review export records voluntarily reported violations bis settlement agreement required payment fine company amount 142450 company submit selfaudit export compliance program bis later twenty four months following entry settlement agreement bj services company notes consolidated financial statementscontinued environmental federal state local laws regulations govern company’s operation underground fuel storage tanks rather incur additional costs restore upgrade tanks required regulations management opted remove existing tanks company completed removal tanks remedial cleanups progress related tank removals addition company conducting environmental investigations remedial actions current former company locations along companies currently named potentially responsible party four thirdparty owned waste disposal sites accrual approximately 25 million established environmental matters management’s best estimate company’s portion future costs incurred insurance also maintained environmental liabilities lease longterm commitments december 1999 company contributed certain pumping service equipment limited partnership company owns 1 interest limited partnership equipment used provide services company’s customers company pays service fee period least six years 13 years approximately 12 million annually accounted operating lease included “equipment financing arrangements” contractual cash obligations table company assessed terms agreement determined variable interest entity defined fin 46 consolidation variable interest entities “fin 46” however company deemed primary beneficiary therefore consolidation required transaction resulted gain deferred amortized 13 years balance deferred gain 221 million 266 million september 30 2005 september 30 2004 respectively agreement permits substitution equipment within partnership long implied fair value new property transferred date substitution equals exceeds implied fair value defined current property partnership replaced company received partnership approval april 2005 july 2004 substitute certain pumping service equipment accounted exchange likekind assets earnings impact since earnings process yet culminated result substitutions deferred gain reduced 11 million 33 million respectively october 2005 company received another partnership approval substitute certain pumping services equipment reducing deferred gain 14 million september 2010 company option obligation purchase pumping service equipment approximately 32 million currently company expects purchase pumping service equipment 2010 1997 company contributed certain pumping service equipment limited partnership company owns 1 interest limited partnership equipment used provide services company’s customers company pays service fee period least eight years 13 years approximately 10 million annually accounted operating lease included “equipment financing arrangements” contractual cash obligations table company assessed terms agreement determined variable interest entity defined fin 46 however company deemed primary beneficiary therefore consolidation required transaction resulted gain deferred amortized 12 years balance deferred gain 03 million 04 million september 30 2005 september 30 2004 respectively agreement permits substitution equipment within partnership long implied fair value new property transferred date substitution equals exceeds implied fair value defined current property partnership replaced company received partnership approval october 2003 july 2004 substitute certain pumping service equipment accounted exchange likekind assets earnings impact since earnings process yet culminated result substitutions deferred gain reduced 141 million october 2003 13 million bj services company notes consolidated financial statementscontinued july 2004 june 2009 company option obligation purchase pumping service equipment approximately 27 million currently company expects purchase pumping service equipment 2009 september 30 2003 company longterm operating leases service fee commitments covering certain facilities equipment well longterm commitments varying expiration dates minimum annual commitments years ending september 30 2006 2007 2008 2009 2010 638 million 469 million 373 million 267 million 102 million respectively 122 million aggregate thereafter contractual obligations company routinely issues parent company guarantees “pcg’s” connection service contracts entered company’s subsidiaries issuance pcg’s frequently condition bidding process imposed company’s customers work countries outside north america pcg’s typically provide company guarantees performance services company’s local subsidiary represent financial obligation company term pcg’s varies length service contract company arranges issuance variety bank guarantees performance bonds standby letters credit vast majority issued connection contracts company subsidiary entered customers customer right call bank guarantee performance bond standby letter credit event company subsidiary defaults performance services instruments required condition company subsidiary awarded contract typically released upon completion contract balance instruments predominantly standby letters credit issued connection variety company’s financial obligations support fronted insurance programs claims administration funding certain employee benefit plans temporary importation bonds following table summarizes company’s commercial commitments september 30 2005 thousands bj services company notes consolidated financial statementscontinued following table summarizes company’s contractual cash obligations commercial commitments september 30 2005 thousands 1 net original issue discounts 2 discussed previously company option obligation purchase pumping service equipment two partnerships approximately 27 million 32 million 2009 2010 respectively currently company expects purchase pumping service equipment therefore included table 3 includes agreements purchase goods services approved specify significant terms pricing quantity timing company policy require purchase order completed items 200 miscellaneous items office supplies 4 includes expected cash payments longterm liabilities reflected consolidated balance sheet amounts timing payment known amounts include asset retirement obligations known pension funding requirements postretirement benefit obligation environmental accruals miscellaneous longterm obligations amounts exclude deferred gains see “lease longterm commitments” pension obligations funding requirements uncertain longterm contingent liabilities 11 investment affiliates company conducts operations investments affiliates accounted using cost equity method pd mexicana sociedad de responsabilidad limitada de capital variable “pdm” pdm incorporated january 2001 main activity provide drilling integrated services wells development stage means contract established pemex exploracions produccion “pemex” sole purpose pdm carry complete pemex contract bj service international inc wholly owned subsidiary company pd holdings wholly owned subsidiary precision drilling corporation 50 pdm funding pdm expenses made basis consistent ownership percentages contract expired joint venture currently liquidated societe algerienne de stimulation de puits producteurs d’hydroncarbures “bjsp” purpose bjsp perform services casing cementing stimulation well testing algeria bj service international inc wholly owned subsidiary company owns 49 bjsp l’enterprise de services aux puits owns remaining 51 current agreement expires march 2006 contract extended mutual agreement stockholders company currently negotiating extend agreement profits losses shared stockholders proportion ownership percentages bj services company notes consolidated financial statementscontinued societe de services industriels “ssi” bj services international sarl wholly owned subsidiary company owns 50 ssi l’air liquide sa owns remaining 50 stockholders share profits losses ssi proportion ownership percentages september 30 2005 2004 combined net accounts receivable reflected consolidated statement financial position unconsolidated affiliates totaled 65 million 206 million respectively september 30 2005 2004 combined accounts payable reflected consolidated statement financial position unconsolidated affiliates totaled 02 million 01 million respectively company’s combined investment september 30 2005 2004 116 million 102 million respectively company recognized revenue 302 million 513 million 359 million years ended september 30 2005 2004 2003 respectively primarily services performed behalf equity affiliates 12 supplemental financial information supplemental financial information three years ended september 30 2005 follows thousands expense income net three years ended september 30 2005 summarized follows thousands bj services company notes consolidated financial statementscontinued october 2004 company received report whistleblower alleging asia pacific region controller misappropriated company funds fiscal 2001 company began internal investigation misappropriation whether inappropriate actions occurred region controller admitted multiple misappropriations totaling approximately 90 million 30month period ended april 2002 misappropriations approximately 90 million repaid company region controller’s employment terminated although unauthorized misappropriations expense company form theft recorded consolidated statement operations periods prior april 2002 90 million repayment represents gain contingency reflected income consolidated condensed statement operations quarter ended december 31 2004 accordance sfas 5 accounting contingencies prior filing report form 10k fiscal 2004 company conducted review asia pacific region’s balance sheet determined net excess accrued liabilities accumulated period years still existed september 30 2004 amount 122 million based comprehensive analysis company identified 95 million excess accrued liabilities asia pacific region reversed fourth quarter fiscal 2005 following adjustments recorded accordance gaap company policy net effect adjustments reported income consolidated statement operations years ended september 30 2005 2004 company continuing investigate whether additional funds misappropriated beyond 90 million originally identified investigate possible inappropriate actions date company identified additional 17 million believes stolen former region controller although unauthorized additional 17 million likely theft expense company recorded consolidated statement operations periods prior april 2002 company continues investigation adjustments may recorded consolidated statements operations material adjustments known time october 2004 company also received whistleblower allegations illegal payments foreign officials made asia pacific region audit committee board directors engaged independent counsel conduct separate investigation determine whether illegal payments made investigation continuing found information indicating significant likelihood payments may illegal made government officials asia pacific region aggregating approximately 26 million several years company voluntarily disclosed information found investigation us department justice “doj” us securities exchange commission “sec” engaged ongoing discussions authorities review matter company special investigation audit committee continuing investigate payments approximately 10 million asia pacific region beyond referenced bj services company notes consolidated financial statementscontinued cases company yet able establish legitimacy transactions reflected underlying documents cases questions adequacy underlying documents support accounting entries payments may prove proper due circumstances surrounding payments company continues investigate determine whether theft improprieties may involved payments previously expensed therefore company believes additional expense required recorded payments connection discussions regarding possible illegal payments asia pacific region us government officials raised question whether company made illegal payments contractor intermediary obtain business country central asia audit committee investigating question company voluntarily disclosed information found investigation doj sec engaged ongoing discussions authorities review matter doj sec authorities broad range civil criminal sanctions us foreign corrupt practices act laws may seek impose corporations individuals appropriate circumstances including limited injunctive relief disgorgement fines penalties modifications business practices compliance programs agencies authorities entered agreements obtained range sanctions several public corporations individuals arising allegations improper payments deficiencies books records internal controls whereby civil criminal penalties imposed including cases multimillion dollar fines sanctions discussions doj sec regarding certain matters described possible accurately predict time matters resolved based current information cannot predict outcome investigations whether reach resolution discussions actions may taken doj sec authorities effect may consolidated financial statements discussed annual report form 10k period ended september 30 2004 misappropriations related accounting adjustments asia pacific region possible certain internal control operating deficiencies fiscal 2002 company implemented policy changes worldwide disbursements march 2005 company assigned new controller assistant controller several new accountants asia pacific region addition put place control process improvement managers six regional bases worldwide document enhance test control processes company also made several enhancements accounting policies procedures 2005 company adopted new policies procedures retention international commercial agents company still process reviewing control policies procedures may make enhancements accumulated comprehensive income loss consists following thousands bj services company notes consolidated financial statementscontinued tax effects allocated component changes comprehensive income summarized follows thousands 13 employee stock plans stock option plans company’s 1995 incentive plan 1997 incentive plan 2000 incentive plan 2003 incentive plan “plans” provide granting stock options officers key employees nonemployee directors exercise price equal fair market value stock date grant options vest three fouryear periods exercisable periods ranging one ten years aggregate 32000000 shares common stock authorized grants 12827616 available future grants september 30 2005 summary status company’s stock option activity related information three years ended september 30 2005 presented thousands except per share prices bj services company notes consolidated financial statementscontinued following table summarizes information stock options outstanding september 30 2005 thousands except per share prices remaining life stock purchase plan company’s 1999 employee stock purchase plan “purchase plan” allows employees purchase shares company’s common stock 85 market value first last business day twelvemonth plan period beginning october whichever lower purchases limited 10 employee’s regular salary maximum aggregate 12000000 shares reserved purchase plan 7008626 available future purchase september 30 2005 total 572322 shares purchased 2227 per share fiscal 2005 837174 shares purchased 1452 per share fiscal 2004 990028 shares purchased 1105 per share fiscal 2003 company reserved total 565433 shares fiscal 2006 stock incentive plan pursuant terms 1997 stock incentive plan 2000 stock incentive plan company reserved 860106 performance units “units” representing maximum number units officers could receive unit represents right receive company end stipulated period one unrestricted share common stock contingent upon achievement certain financial performance goals stipulated period company fail achieve specific financial goals set executive compensation committee board directors units canceled related shares revert company reissuance plan aggregate fair market value underlying shares granted plan considered unearned compensation time grant adjusted quarterly based current market price common stock compensation expense determined based management’s current estimate likelihood meeting specific financial goals expensed ratably stipulated period executive compensation committee board directors reviewed company’s three year performance determined highest level performance criteria achieved unit awards november 2003 total 190252 units converted stock issued officers november 2006 405166 units assessed threeyear performance period company ending september 30 2006 remaining balance reserve assessed threeyear performance period company ending september 30 2007 november 2005 company awarded additional 194673 units director stock awards addition stock option awards nonemployee directors may granted award common stock company exercise price “restricted stock” stock option restricted stock awards vest three fouryear periods still director company end period exercisable periods ranging one ten years upon retirement vesting may accelerate restricted stock awards total 79896 september 30 2005 10632 exercisable bj services company notes consolidated financial statementscontinued compensation expense valued using blackscholes model expensed using graded vesting november 2005 company granted additional restricted stock award 48000 nonemployee directors 14 stockholders’ equity common stock board directors unanimously approved charter amendment increasing authorized number shares common stock 380000000 shares 980000000 shares requires stockholder approval dividends company’s board directors approved 2 1 stock split effected form stock dividend payable september 1 2005 stockholders record august 18 2005 share earnings per share amounts restated periods presented reflect increased number common shares outstanding initial public offering 1990 2004 bj services pay cash dividends stockholders however july 22 2004 company announced initiation regular quarterly cash dividend company paid cash dividends amount 04 per common share quarterly basis 519 million aggregate annual amount fiscal 2005 july 28 2005 company’s board directors approved 25 increase quarterly cash dividend declared cash dividend 05 per common share payable october 15 2005 shareholders record september 15 2005 aggregate amount 161 million company anticipates paying cash dividends amount 05 per common share quarterly basis fiscal 2006 however dividends subject approval company’s board directors quarter board ability change dividend policy time stockholder rights plan company stockholder rights plan “rights plan” designed deter coercive takeover tactics prevent acquirer gaining control company without offering fair price company’s stockholders rights plan amended september 26 2002 extend expiration date rights september 26 2012 increase purchase price rights plan amended outstanding share common stock includes oneeighth preferred share purchase right “right” becomes exercisable certain circumstances including beneficial ownership common stock person group equals exceeds 15 company’s outstanding common stock right entitles registered holder purchase company one onethousandth share series junior participating preferred stock price 520 subject adjustment certain circumstances result stock splits effected form stock dividends 1998 2001 2005 one right associated eight outstanding shares common stock purchase price oneeighth right associated one share common stock effectively 65 upon occurrence certain events specified rights plan holder right “acquiring person” defined rights plan right upon exercise right receive number shares common stock company surviving corporation time transaction would market price two times purchase price right shares series junior participating preferred stock issued company treasury stock december 1997 board directors approved share repurchase program authorizing purchases 150 million common stock discretion company’s management board subsequently increased authorized amount 300 million may 1998 450 million september 2000 600 million july 2001 750 million october 2001 program company repurchased total 48366000 shares cost 4990 million fiscal 2002 fiscal 2005 3982000 shares purchased cost 984 million shares repurchased fiscal 2004 2003 treasury shares utilized company’s various stock plans described note 13 total 3655 treasury shares used cost 452 million fiscal 2005 7126 treasury shares used cost 601 million fiscal 2004 3022 treasury shares used cost 201 million fiscal 2003 bj services company notes consolidated financial statementscontinued 15 quarterly financial data unaudited 1 represents revenue less cost sales services research engineering expenses 2 includes halliburton patent infringement award 864 million net legal expenses fiscal 2004 see note 10 notes consolidated financial statements item 9item 8 financial statements supplementary data management’s report internal control financial reporting responsible establishing maintaining adequate internal control financial reporting term defined securities exchange act 1934 rule 13a15f internal controls designed provide reasonable assurance reliability financial statements external purposes accordance accounting principles generally accepted us internal control financial reporting inherent limitations may prevent detect misstatements therefore even systems determined effective provide reasonable assurance absolute assurance respect financial statement preparation presentation changes conditions effectiveness internal control financial reporting may vary time supervision participation chief executive officer chief financial officer evaluated effectiveness internal control financial reporting september 30 2006 required securities exchange act 1934 rule 13a15c making assessment utilized criteria set forth committee sponsoring organizations treadway commission internal controlintegrated framework concluded based evaluation internal control financial reporting effective september 30 2006 assessment effectiveness internal control financial reporting september 30 2006 audited deloitte touche llp independent registered public accounting firm stated report included herein report independent registered public accounting firm board directors stockholders bj services company audited management’s assessment included accompanying management’s report internal control financial reporting bj services company subsidiaries “company” maintained effective internal control financial reporting september 30 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion management’s assessment effectiveness internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal controls financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers persons performing similar functions effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion management’s assessment company maintained effective internal control financial reporting september 30 2006 fairly stated material respects based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission also opinion company maintained material respects effective internal control financial reporting september 30 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission also audited accordance standards public company accounting oversight board united states consolidated financial statements financial statement schedule year ended september 30 2006 company report dated december 7 2006 expressed unqualified opinion consolidated financial statements financial statement schedule deloitte touche llp houston texas december 7 2006 report independent registered public accounting firm board directors stockholders bj services company audited accompanying consolidated statements financial position bj services company subsidiaries “company” september 30 2006 2005 related consolidated statements operations stockholders’ equity comprehensive income cash flows three years period ended september 30 2006 audits also included financial statement schedule listed index item 15 financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position bj services company subsidiaries september 30 2006 2005 results operations cash flows three years period ended september 30 2006 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states effectiveness company’s internal control financial reporting september 30 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated december 7 2006 expressed unqualified opinion management’s assessment effectiveness company’s internal control financial reporting unqualified opinion effectiveness company’s internal control financial reporting deloitte touche llp houston texas december 7 2006 bj services company consolidated statement operations accompanying notes integral part consolidated financial statements bj services company consolidated statement financial position assets accompanying notes integral part consolidated financial statements liabilities stockholders’ equity accompanying notes integral part consolidated financial statements bj services company consolidated statement stockholders’ equity comprehensive income thousands accompanying notes integral part consolidated financial statements bj services company consolidated statement cash flows accompanying notes integral part consolidated financial statements bj services company notes consolidated financial statements 1 business basis presentation bj services company “company” whose operations trace back byron jackson company founded 1872 organized 1990 corporate laws state delaware leading worldwide provider pressure pumping oilfield services petroleum industry pressure pumping services consist cementing stimulation services used completion new oil natural gas wells remedial work existing wells onshore offshore oilfield services group includes completion tools completion fluids casing tubular services provided oil natural gas exploration production industry commissioning inspection services provided refineries pipelines offshore platforms production chemical services consolidate investments greater 50 control material intercompany balances transactions eliminated consolidation investments companies ownership interest ranges 20 50 exercise significant influence operating financial policies accounted using equity method investments accounted using cost method preparation financial statements conformity accounting principles generally accepted united states america requires us make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting periods actual results could differ estimates share earnings per share amounts restated periods presented reflect increased number common shares outstanding resulting 2for1 stock split payable september 1 2005 stockholders record august 18 2005 certain amounts 2005 2004 reclassified accompanying consolidated financial statements conform current year presentation 2 summary significant accounting policies cash equivalents consider highly liquid investments purchased original maturities three months less time purchase cash equivalents allowance doubtful accounts perform ongoing credit evaluations customers adjust credit limits based upon payment history customer’s current credit worthiness determined review available credit information continuously monitor collections payments customers maintain provision estimated uncollectible accounts based upon historical experience specific customer collection issues identified credit losses historically within expectations provisions established cannot give assurances continue experience credit loss rates past cyclical nature industry may affect customers’ operating performance cash flows could impact ability collect obligations addition many customers located certain international areas inherently subject risks economic political civil instabilities may impact ability collect receivables inventories consist principally products consumed services provided customers ii spare parts equipment used providing services iii manufactured components attachments equipment used providing services stated primarily lower weightedaverage cost market cost primarily represents invoiced costs regularly review inventory quantities hand record provisions excess obsolete inventory based primarily estimated forecast product demand market conditions production requirements technological developments significant unanticipated changes market condition forecast could require additional provisions excess obsolete inventory bj services company notes consolidated financial statementscontinued property stated cost less amounts provided permanent impairments includes capitalized interest 20 million 12 million 08 million years ended september 30 2006 2005 2004 respectively depreciation generally provided using straightline method estimated useful lives individual items leasehold improvements amortized straightline basis shorter estimated useful lives lease terms estimated useful lives 10 30 years buildings leasehold improvements range 3 12 years machinery equipment make judgments estimates conjunction carrying value assets including amounts capitalized depreciation amortization methods useful lives additionally carrying values assets reviewed impairment whenever events changes circumstances indicate carrying amounts may recoverable determination recoverability made based upon estimated undiscounted future cash flows impairment loss recorded period determined carrying amount recoverable amount impairment amount net book value asset exceeds fair value fair value determination requires us make longterm forecasts future revenue costs related assets subject review forecasts require assumptions demand products services future market conditions technological developments significant unanticipated changes assumptions could require provision impairment future period rig count experienced double digit growth last three years substantially equipment perform currently working fiscal 2005 determined certain equipment able operate would written fair value usable major components fair value assets based market prices similar assets fiscal 2005 recorded 117 million impairment fourth fiscal quarter 2005 related idle assets impairment reflected corporate results intangible assets goodwill represents excess cost fair value net assets companies acquired purchase transactions account goodwill accordance statement financial accounting standards “sfas” 142 goodwill intangible assets requires goodwill reviewed possible impairment annual basis circumstances indicate impairment may exist performed annual evaluation september 30 concluded impairment adjustment necessary goodwill balance september 30 2006 2005 respectively intangible assets primarily consist technology based intangible assets amortized straightline basis ranging 5 20 years weighted average amortization period 177 years utilize undiscounted estimated cash flows evaluate possible impairment intangible assets cash flows less net carrying value intangible assets would record impairment loss equal difference discounted estimated cash flows net carrying value discount rate utilized based market factors time loss determined income taxes provide income taxes accordance sfas 109 accounting income taxes standard takes account differences financial statement treatment tax treatment certain transactions deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect change tax rates recognized income expense period includes enactment date calculation requires us make certain estimates future operations changes state federal foreign tax laws well changes financial condition could affect estimates record valuation allowance reduce deferred tax assets likely portion deferred tax assets utilized consider available evidence positive negative determine whether valuation allowance needed ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character within carryback carryforward period set bj services company notes consolidated financial statementscontinued forth applicable tax law tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities potentially courts resolution situations inevitably includes degree uncertainty accordingly provide taxes amounts believe ultimately result proceedings addition aforementioned assessments received various taxing authorities provide taxes certain situations assessments received situations accrue income taxes consider probable taxes ultimately payable exceed amounts reflected filed tax returns accordingly taxes provided situations guidance sfas 5 accounting contingencies self insurance accruals selfinsured certain losses relating workers’ compensation general liability property damage employee medical benefits claims filed claims incurred reported liability based primarily actuarial undiscounted basis using individual casebased valuations statistical analysis based upon judgment historical experience however final cost many claims may known five years longer management reviews reserve quarterly basis changes claims experience health care costs etc could affect estimates contingencies accounted accordance sfas 5 standard requires record estimated loss contingency information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements amount loss reasonably estimated accounting contingencies environmental legal income tax matters requires us use judgment believe accruals matters adequate actual loss contingency significantly different estimated loss results operations may adversely impacted significant litigation accrue legal costs environmental remediation compliance environmental remediation costs accrued based estimates known environmental exposures using currently available facts existing environmental permits technology presently enacted laws regulations sites primarily responsible remediation estimate costs developed based internal evaluations discounted accruals recorded environmental assessments andor remedial efforts probable cost reasonably estimated accrual recorded even significant uncertainties exist ultimate cost remediation updated additional information becomes available ongoing environmental compliance costs obtaining environmental permits installation pollution control equipment waste disposal expensed incurred identified potentially responsible party us federal state superfund site accrue share estimated remediation costs site based ratio estimated volume waste contributed site us total estimated volume waste site revenue recognition revenue composed product sales rental service revenue products rentals services generally sold based fixed determinable priced purchase orders contracts customer include right return recognize revenue product sales title passes customer assumes risks rewards ownership collectibility reasonably assured rental service revenue recognized services provided collectibility reasonably assured research development expenditures research development expenditures expensed incurred maintenance repairs expenditures maintenance repairs expensed incurred expenditures renewals improvements capitalized extend life increase capacity improve efficiency asset bj services company notes consolidated financial statementscontinued foreign currency translation functional currency primarily us dollar gains losses resulting financial statement translation foreign operations foreign currency functional currency included separate component stockholders’ equity operation canada hungary algeria use respective local currencies functional currency derivative instruments occasionally enter forward foreign exchange contracts hedge impact currency fluctuations certain transactions assets liabilities denominated foreign currencies enter derivative instruments speculative trading purposes sfas 133 accounting derivative instruments hedging activities amended requires recognize derivatives balance sheet fair value record derivative transactions accordance sfas 133 employee stockbased compensation beginning october 1 2005 employee services received exchange stock expensed accordance sfas 123r sharebased payment fair value employee services received exchange stock measured based grantdate fair value fair value determined using blackscholes optionpricing model stock option awards montecarlo simulation model stock incentive awards granted expensed proratably vesting period award stock based compensation expense recognized based awards ultimately expected vest therefore reduced expense estimated forfeitures based historical forfeiture rates sfas 123r requires forfeitures estimated time grant revised necessary subsequent periods reflect actual forfeitures prior october 1 2005 adopted disclosureonly provisions sfas 123 accounted substantially stockbased compensation using intrinsic value method prescribed apb 25 apb 25 compensation expense recognized stock options stock purchase plan compensation expense recognized stock incentive awards director stock awards see note 13 additional information new accounting pronouncements september 2006 fasb issued sfas 158 employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r “sfas 158” require companies recognize overfunded underfunded status defined benefit postretirement plan multiemployer plan asset liability statement financial position recognize changes funded status year changes occur comprehensive income business entity also requires companies measure funded status plan date yearend statement financial position additionally companies need recognize funded status benefit plan measured difference plan assets fair value limited exceptions benefit obligation statement financial position pension plan benefit obligation projected benefit obligation postretirement benefit plan retiree health care plan benefit obligation accumulated postretirement benefit obligation b recognize component comprehensive income net tax gains losses prior service costs credits arise period recognized components net periodic benefit cost c measure defined benefit plan assets obligations date employer’s fiscal yearend statement financial position disclose notes financial statements additional information certain effects net periodic benefit cost next fiscal year arise delayed recognition gains losses prior service costs credits transition asset obligation bj services company notes consolidated financial statementscontinued recognition asset liability related funded status pension plan disclosures effective fiscal years ending december 15 2006 required changes measurement date effective fiscal years ending december 15 2008 currently measure defined benefit plan assets obligations fiscal yearend portion sfas 158 impact financial statements currently process evaluating impact financial statements requirements sfas 158 september 2006 fasb issued sfas 157 “sfas 157” fair value measurements effective financial statements issued fiscal years beginning november 15 2007 sfas 157 introduces new definition fair value fair value hierarchy requiring market based assumptions used available new disclosures assets liabilities measured fair value based level hierarchy currently process evaluating impact sfas 157 financial statements july 2006 fasb issued interpretation 48 “fin 48” accounting uncertainty income taxes effective fiscal years beginning december 15 2006 fin 48 prescribes recognition threshold measurement attribute well criteria subsequently recognizing derecognizing measuring tax positions financial statement purposes requires companies make disclosures uncertain income tax positions including detailed rollforward tax benefits taken qualify financial statement recognition currently process evaluating impact fin 48 financial statements may 2005 fasb issued sfas 154 accounting changes error corrections replacement apb opinion 20 accounting changes sfas 3 reporting accounting changes interim financial statements sfas 154 voluntary changes accounting principle well changes pursuant accounting pronouncements include specific transition requirements must applied retrospectively prior periods’ financial statements retrospective application requires cumulative effect change reflected carrying value assets liabilities first period presented offsetting adjustments recorded beginning retained earnings period presented must adjusted reflect period specific effects applying change also sfas 154 change accounting estimate continues accounted period change future periods necessary corrections errors continue reported restating prior period financial statements beginning first period presented material sfas 154 effective accounting changes corrections errors made fiscal years beginning december 15 2005 adopted sfas 154 october 1 2006 adoption material impact financial position results operations since sfas 154 applied prospectively october 2004 american jobs creation act 2004 “act” signed law act contains new provisions may impact us income tax liability beginning current fiscal year act provides deduction income qualified domestic production activities phased 2005 2010 guidance fasb staff position 1091 application fasb statement 109 “accounting income taxes” tax deduction qualified production activities provided american jobs creation act 2004 deduction treated “special deduction” described fasb statement 109 special deduction effect deferred tax assets liabilities existing enactment date rather impact deduction reported period deduction incurred december 2004 fasb issued fasb staff position 1092 “fsp 1092” accounting disclosure guidance foreign repatriation provision within american jobs creation act 2004 provides guidance respect recording potential impact repatriation provisions act sfas 109 company’s income tax expense deferred tax liability fsp 1092 states company bj services company notes consolidated financial statementscontinued allowed time beyond financial reporting period enactment evaluate effect act plan reinvestment repatriation foreign earnings purposes applying sfas 109 remitted qualifying dividends foreign subsidiaries amount 67 million fiscal year claim benefits provision act furthermore believe residual us tax liability planned repatriation would fully offset usable excess foreign tax credits 3 acquisitions businesses june 25 2006 acquired additional 2 interest algerian joint venture societe algerienne de stimulation de puits productures d’hydrocarbures “bjsp” 46 million increasing total ownership bjsp 51 l’enterprise de services aux puits “ensp” indirect subsidiary sonatrach owns remaining 49 bjsp provides coiled tubing cementing services algerian market prior obtaining controlling interest bjsp accounted investment using cost method could exercise significant influence entity following transaction accounted stepacquisition control bjsp consolidate entity accordance apb 18 equity method accounting investments common stock arb 51 consolidated financial statements retroactively adjusted beginning retained earnings adopt equity method accounting ownership interest previous periods adjustment resulted 83 million increase beginning retained earnings reflected consolidated statement stockholders’ equity comprehensive income statement operations restated impact adopting equity method material given period following transaction assets liabilities results operations bjsp included consolidated results international pressure pumping segment consolidation resulted increase 424 million total current assets including approximately 141 million cash 121 million total current liabilities 193 million minority interest 02 million goodwill process completing purchase price allocation step acquisition pro forma financial information acquisition included material consolidated financial statements august 15 2006 purchased substantially operating assets dyna coil south texas ltd dyna coil injection systems inc dynochem ltd collectively “dynacoil” 617 million cash dynacoil focused production optimization services particularly installation service capillary injection systems associated products production chemicals mostly us canada included production chemicals business oilfield services segment acquisition resulted increase 82 million total current assets 34 million property equipment 71 million technology based intangibles 429 million goodwill process completing purchase price allocation pro forma financial information acquisition included material consolidated financial statements 4 earnings per share basic eps excludes dilution computed dividing net income weightedaverage number common shares outstanding period diluted eps based weightedaverage number shares outstanding period assumed exercise dilutive instruments stock options employee stock purchase plan stock incentive awards director stock awards less number treasury shares assumed purchased exercise proceeds using average market price common stock periods presented bj services company notes consolidated financial statementscontinued following table presents information necessary calculate earnings per share three years ended september 30 2006 thousands except per share amounts 1 years ended september 30 2006 2005 2004 respectively stock options excluded computation diluted earnings per share due antidilutive effect november 2006 granted 1702045 shares stock options 144000 director stock awards reserved 774911 shares employee stock purchase plan 113180 units stock incentive awards see note 13 information terms conditions plans 5 debt long term debt september 30 consisted following thousands june 8 2006 completed public offering 5000 million aggregate principal amount senior notes consisting 2500 million floating rate senior notes due 2008 annual interest rate threemonth libor plus 17 basis points 2500 million 575 senior notes due 2011 net proceeds offering approximately 4971 million deducting underwriting discounts commissions expenses used primarily repurchase outstanding shares common stock also repay indebtedness fund capital expenditures corporate purposes september 30 2006 2500 million senior notes due 2008 issued outstanding 2497 million net discount 575 senior notes due 2011 issued outstanding june 2004 replaced existing credit facility revolving credit facility “revolving credit facility” permits borrowings 400 million principal amount revolving credit facility includes 50 million sublimit issuance standby letters credit 20 million sublimit swingline loans swingline loans shortterm maturities remaining amounts outstanding revolving credit facility become due payable june 2009 interest outstanding borrowings charged bj services company notes consolidated financial statementscontinued based prevailing market rates charged various fees connection revolving credit facility including commitment fee based average daily unused portion commitment totaling 05 million fiscal 2006 2005 addition revolving credit facility charges utilization fee outstanding loans letters credit usage revolving credit facility exceeds 33 though charges fiscal 2005 material fees fiscal 2006 september 30 2006 1600 million outstanding borrowings revolving credit facility september 30 2005 addition revolving credit facility 644 million unsecured discretionary lines credit september 30 2006 expire bank’s discretion requirements commitment fees compensating balances connection lines credit interest prevailing market rates 03 million 34 million outstanding borrowings lines credit september 30 2006 2005 respectively weighted average interest rates shortterm borrowings outstanding september 30 2006 2005 595 775 respectively september 30 2005 issued outstanding 790 million unsecured 7 series b notes due february 1 2006 net discount repaid debt obligation available cash maturity date february 1 2006 senior notes revolving credit facility include various customary covenants provisions including maintenance certain profitability solvency ratios none materially restrict activities currently compliance covenants imposed 6 financial instruments following methods assumptions used estimate fair value class financial instruments practicable cash equivalents shortterm investments trade receivables trade payables shortterm borrowings carrying amount approximates fair value short maturity instruments longterm debt fair value based rates currently available us debt similar terms average maturities foreign exchange contracts periodically borrow funds denominated foreign currencies exposes us market risk associated exchange rate movements 03 million borrowings denominated foreign currencies september 30 2006 borrowings september 30 2005 fair value financial instruments differed carrying value september 30 2006 2005 follows thousands bj services company notes consolidated financial statementscontinued 7 income taxes geographical sources income taxes three years ended september 30 follows thousands provision income taxes three years ended september 30 summarized thousands consolidated effective income tax rates percent income loss income taxes three years ended september 30 2005 varied united states statutory income tax rate reasons set forth deferred tax assets liabilities recognized estimated future tax effects temporary differences tax basis assets liabilities reported amount financial statements measurement deferred tax assets liabilities based enacted tax laws rules currently effect bj services company notes consolidated financial statementscontinued taxing jurisdictions operations generally deferred tax assets liabilities classified current noncurrent according classification related asset liability financial reporting estimated deferred tax effect temporary differences carryforwards september 30 follows thousands 1 deferred gain contribution pumping service equipment partnerships referred note 10 september 30 2006 approximately 576 million foreign net operating loss carryforwards 204 million state net operating loss carryforwards foreign net operating loss carryforwards expire follows 139 million fiscal year 2016 remaining 437 million expire state net operating losses expire fiscal year 2007 fiscal year 2018 also 372 million us foreign tax credit carryforwards substantially us foreign tax credits expire 2012 tax impact net operating loss foreign tax credit carryforwards likely expire realization benefit reflected valuation allowance balance september 30 2006 record valuation allowance reduce deferred tax assets likely portion deferred tax assets expire realization benefit management believes likely portion foreign net operating loss carry forwards us foreign tax credits realized valuation allowance recorded amounts furthermore respect valuation allowance approximately 28 million valuation allowance subsequently realized allocated reduce goodwill stock basis difference foreign subsidiaries us deferred tax liability established approximately 281 million september 30 2006 stock basis difference arises existence unremitted foreign earnings cumulative translation adjustments provided additional taxes anticipated repatriation foreign earnings foreign subsidiaries determined bj services company notes consolidated financial statementscontinued foreign subsidiaries earnings indefinitely reinvested foreign subsidiaries whose earnings indefinitely reinvested provision us federal state income taxes provided record tax liability full tax versus book basis difference foreign subsidiaries additional net deferred tax liability approximately 186 million would necessary 8 segment information currently thirteen operating segments separate financial information available separate management teams engaged oilfield services results operating segments evaluated regularly chief operating decision maker deciding allocate resources assessing performance operating segments aggregated four reportable segments usmexico pressure pumping international pressure pumping canada pressure pumping oilfield services group canada pressure pumping added segment fiscal 2006 result international pressure pumping recast reflect change usmexico pressure pumping two operating segments includes cementing services stimulation services consisting fracturing acidizing sand control nitrogen coiled tubing service tool services provided throughout united states mexico two operating segments aggregated one reportable segment offer type services similar economic characteristics similar production processes use methods provide services international pressure pumping segment five operating segments similar usmexico pressure pumping includes cementing stimulation services consisting fracturing acidizing sand control nitrogen coiled tubing service tool services provided customers 50 countries major international oil natural gas producing areas latin america europe africa asia pacific russia middle east operating segments aggregated one reportable segment similar economic characteristics offer type services similar production processes use methods provide services also serve similar customers include major multinational independent national stateowned oil companies canada pressure pumping segment one operating segment like international usmexico pressure pumping includes cementing stimulation services consisting fracturing acidizing sand control nitrogen coiled tubing service tool services provided customers major oil natural gas producing areas canada oilfield services segment five operating segments operating segments provide oilfield services production chemicals casing tubular services process pipeline services completion tools completion fluids services us select markets internationally operating segments aggregated one reportable segment provide oilfield services serve similar customers operating segments share resources accounting policies segments described summary significant accounting policies evaluate performance segments based operating income intersegment sales transfers material summarized financial information concerning segments three years ended september 30 2006 shown following tables thousands “corporate” column includes corporate expenses allocated operating segments revenue geographic location determined based location services rendered products sold years ended september 30 2006 2005 2004 provided services several thousand customers none accounted 5 consolidated revenue bj services company notes consolidated financial statementscontinued business segments geographic information bj services company notes consolidated financial statementscontinued revenue product line reconciliation segment information consolidated income taxes three years ended september 30 2006 set forth thousands 9 employee benefit plans administer defined contribution plans employees us uk canada whereby eligible employees may elect contribute 2 20 base salaries employee benefit trust match employee contributions rate 100 per 100 6 employee’s base salary us equal matching 55 employee’s base salary uk addition contribute 2 6 employee’s base salary depending age years service us uk canada matching contributions vest immediately base contributions become fully vested five years employment contributions defined contribution plans 239 million 166 million 143 million fiscal 2006 2005 2004 respectively effective october 1 2000 established nonqualified supplemental executive retirement plan unfunded defined benefit plan provide executives supplemental retirement benefits based highest consecutive three years compensation final ten years become vested age 55 expense associated plan 29 million 21 million 34 million years ended september 30 2006 2005 2004 respectively related accrued benefit obligation 165 million 141 million september 30 2006 2005 respectively effective december 7 2000 established nonqualified directors’ benefit plan unfunded defined benefit plan provide nonemployee directors benefits upon termination service based number years service last annual retainer fee expense associated plan 07 million 05 million 01 million years ended september 30 2006 2005 2004 respectively related accrued benefit obligation 29 million 23 million september 30 2006 2005 respectively bj services company notes consolidated financial statementscontinued defined benefit pension plans defined benefit pension plans covering certain employees us uk norway canada fiscal 2004 plans frozen new entrants uk canada defined benefit pension plan us frozen effective december 31 1995 time earned benefits vested september 2006 entered agreement settle obligation respect us defined benefit plan assets approximately 72 million plus contribution 15 million used purchase insurance contract used fund benefits settle plan proposed settlement requires approval pension benefit guaranty corporation internal revenue service relieve us primary responsibility pension benefit obligation regulatory approval obtained expected fiscal 2007 expense approximately 233 million prepaid pension cost 233 million asset represents difference amounts funded time amount required expensed sfas 87 relieving us obligation expense would otherwise recognized remaining plan life accelerated period approval received result actions reclassified pension asset recorded payment annuity current assets use september 30 measurement date plans amounts presented thousands unless otherwise stated obligations funded status bj services company notes consolidated financial statementscontinued amounts recognized consolidated statement financial position consist accumulated benefit obligations abo excess plan assets abo actuarial present value pension benefits employees’ current compensation levels differs projected benefit obligation abo include assumptions future compensation levels abo plans 2398 million 1972 million september 30 2006 2005 respectively components net periodic benefit cost additional information bj services company notes consolidated financial statementscontinued assumptions used determine benefit obligations september 30 follows assumptions used determine net periodic benefit cost years ended september 30 follows expected longterm rate return assumptions represent rate return plan assets reflecting average rate earnings expected funds invested provide benefits included projected benefit obligation assumption determined reflecting expectations regarding future rates return portfolio considering asset distribution target related historical rates return redemption yield government fixed interest bonds well corporate bonds used proxies return debt securities weighted relative proportion within actual portfolio return equities based historical longterm performance equity classes rate reassessed least annual basis plan assets objective diversify portfolio among several asset classes reduce volatility maintaining asset mix provides highest rate return acceptable risk primarily mix equity securities 60 75 fixed income funds 25 40 generate asset returns comparable general market investment committees meet least annually review portfolio returns determine assetmix targets based assetliability studies nationally recognized thirdparty investment consultants assist us developing asset allocation strategy determine expected rate return expected risk various investment portfolios investment committees consider studies formal establishment current assetmix targets based projected risk return levels asset class investment portfolio september 30 2006 2005 1 plan assets approximately 71 million plus contribution 15 million used purchase insurance contract used fund benefits settle us plan bj services company notes consolidated financial statementscontinued contributions estimated benefit payments pension plans generally funded amounts necessary meet legal contractual minimum funding requirements totaled 73 million fiscal 2006 infrequently make discretionary contributions expect contribute 81 million defined benefit plans fiscal 2007 represents legal contractual minimum funding requirements following benefit payments reflect expected future service appropriate expected paid 1 disclosed annuity contract purchased us plan therefore approximately 72 million distributed plan participants form individual annuity contracts 2007 benefit payments related plan included schedule postretirement benefit plans sponsor plans provide certain health care life insurance benefits retired employees primarily us meet specified age service requirements eligible dependents plans unfunded retain right subject existing agreements modify eliminate postretirement medical benefit plan provides credits based years service used purchase coverage retiree plan effectively caps health care inflation rate 4 increase per year use september 30 measurement date plans amounts presented thousands unless otherwise stated obligations funded status bj services company notes consolidated financial statementscontinued abo 550 million 499 million september 30 2006 2005 respectively amounts recognized consolidated statement financial position consist postretirement benefit obligation september 30 2006 2005 determined using discount rate 60 575 respectively health care cost trend rate 4 reflecting cap described increasing assumed health care cost trend rates one percentage point would material impact accumulated postretirement benefit obligation net periodic postretirement benefit cost benefits capped components net periodic benefit cost postretirement benefit cost september 30 2006 2005 2004 determined using discount rate 575 585 respectively health care cost trend rate 4 reflecting cap described contributions estimated benefit payments postretirement plan generally funded amounts necessary meet benefit costs incurred expect contribute 13 million post retirement plan fiscal 2007 represents anticipated claims following benefit payments reflect expected future service appropriate expected paid bj services company notes consolidated financial statementscontinued 10 commitments contingencies litigation performance service operations sometimes named defendant litigation usually relating claims bodily injuries property damage including claims well reservoir damage maintain insurance coverage claims extent deemed prudent management series acquisitions assumed responsibility certain claims proceedings made western company north america nowsco well service ltd osca companies whose stock acquired connection businesses claims proceedings continue covered insurance policies predecessors place time acquisitions although outcome claims proceedings us including western nowsco osca cannot predicted certainty management believes existing claims proceedings likely material adverse effect financial position results operations already provided newfield litigation april 4 2002 jury rendered verdict adverse osca connection litigation pending united states district court southern district texas houston lawsuit filed newfield exploration september 29 2000 arose blowout occurred 1999 offshore well owned newfield jury determined osca’s negligence caused contributed blowout responsible 86 damages suffered newfield total damage amount awarded newfield 156 million excluding pre postjudgment interest court delayed entry final judgment case pending completion related insurance coverage litigation filed osca certain insurers former insurance broker court elected conduct trial insurance coverage issues based upon briefs parties interim related litigation filed osca former insurance brokers errors omissions connection policies issue case stayed february 28 2003 court issued final judgment connection newfield claims based upon jury’s verdict time court issued rulings adverse osca connection claim insurance coverage motions new trial denied judge case appealed us court appeals fifth circuit regard liability case insurance coverage issues fifth circuit issued ruling april 12 2006 finding osca liability issues ruling osca’s favor insurance coverage based fifth circuit’s opinion believe half judgment osca covered insurance policy issued aislic aig affiliate aislic filed motion rehearing fifth circuit denied case remanded district court june 5 2006 consideration one exclusion contained aislic policy even interpretation exclusion resolved manner adverse osca majority judgment osca remain covered aislic policy upon remand newfield filed motion enforce judgment osca court denied great lakes chemical corporation owned majority outstanding shares osca time acquisition agreed indemnify osca 75 uninsured liability excess 3 million arising newfield litigation taking indemnity account without regard outcome insurance coverage dispute share verdict approximately 55 million fully reserved share liability asbestos litigation august 2004 certain predecessors company along numerous defendants named four lawsuits filed circuit courts jones smith counties mississippi four lawsuits included 118 individual plaintiffs alleging suffer various illnesses exposure asbestos seeking bj services company notes consolidated financial statementscontinued damages lawsuits assert claims unseaworthiness negligence strict liability based upon status company’s predecessors jones act employers plaintiffs required complete data sheets specifying companies employed asbestoscontaining products allegedly exposed process approximately 25 plaintiffs identified company predecessors employer amended lawsuits filed four individuals company remainder original claims 114 dismissed four lawsuits three failed name company employer manufacturer asbestos containing products thereby dismissed subsequently individual one lawsuits brought action company result currently named employer two mississippi lawsuits possible many 21 claimants identified company predecessors employer could file suit company done time minimal medical information regarding alleged asbestosrelated disease suffered plaintiffs two lawsuits provided accordingly company unable estimate potential exposure lawsuits company predecessors past maintained insurance may available respond claims addition jones act cases company named small number additional asbestos cases allegations cases vary generally include claims company provided unspecified product service contained utilized asbestos allegations involve claims company successor byron jackson company date company successful obtaining dismissals cases without payment settlements judgments although remain pending present time company intends defend vigorously cases based information available company time company expect outcome lawsuits individually collectively material adverse effect financial position results operations cash flows however assurance ultimate outcome lawsuits additional similar lawsuits may filed gene ellison et al v fpc disposal et al december 12 2000 gene marcia ellison filed lawsuit state district court canadian county oklahoma company 120 defendants including western fpc disposal inc owns operates commercial facility disposal oilgas well drilling fluids cuttings salt water located onehalf mile property owned ellisons conduct farming ranching activities canadian county oklahoma original complaint ellisons alleged company western sent flowback water well disposal activities polluted water therefore property original complaint ellisons sought actual punitive damages excess 10 thousand property damage personal annoyance endangerment comfort health tranquility safety april 2002 company filed motion summary judgment granted state district court plaintiffs appealed motion summary judgment oklahoma appeals court reversed trial court’s decision company ultimately filed petition writ certiorari denied oklahoma supreme court lawsuit sent back trial court case proceeded late september 2006 plaintiffs quantified actual damages excess 5000 million claiming theories remediation unjust enrichment lost profits addition plaintiffs seeking punitive damages company 518 million company western allegedly supplied approximately 175 loads alleged polluted disposal pit 1988 1995 loads diluted operator fpc accordance procedures known approved oklahoma corporation commission time company expect outcome lawsuit material adverse effect financial position results operations cash flows however assurance ultimate outcome bj services company notes consolidated financial statementscontinued environmental federal state local laws regulations govern operation underground fuel storage tanks rather incur additional costs restore upgrade tanks required regulations management opted remove existing tanks completed removal tanks remedial cleanups progress related tank removals addition conducting environmental investigations remedial actions current former company locations along companies currently named potentially responsible party four waste disposal sites owned third parties accrual approximately 42 million established environmental matters management’s best estimate portion future costs incurred insurance also maintained environmental liabilities lease longterm commitments 1999 contributed certain pumping service equipment limited partnership 1 interest limited partnership equipment used provide services customers pay service fee period least six years 13 years approximately 12 million annually accounted operating lease assessed terms agreement determined variable interest entity defined fin 46 consolidation variable interest entities however deemed primary beneficiary therefore consolidation required transaction resulted gain deferred amortized 13 years balance deferred gain 161 million 221 million september 30 2006 september 30 2005 respectively agreement permits substitution equipment within partnership long implied fair value new property transferred date substitution equals exceeds implied fair value defined current property partnership replaced result substitutions deferred gain reduced 28 million fiscal 2006 11 million fiscal 2005 september 2010 option obligation purchase pumping service equipment approximately 32 million currently intent exercise option 1997 contributed certain pumping service equipment limited partnership 1 interest limited partnership equipment used provide services customers pay service fee period least eight years 13 years approximately 10 million annually accounted operating lease assessed terms agreement determined variable interest entity defined fin 46 consolidation variable interest entities however deemed primary beneficiary therefore consolidation required transaction resulted gain deferred amortized 12 years deferred gain september 30 2006 deferred gain balance september 30 2005 03 million agreement permits substitution equipment within partnership long implied fair value new property transferred date substitution equals exceeds implied fair value defined current property partnership replaced result substitutions deferred gain reduced 03 million fiscal 2006 june 2009 option obligation purchase pumping service equipment approximately 27 million currently intent exercise option prices purchase equipment partnerships depend part fair market value equipment held partnerships time options exercised well factors specified agreements september 30 2006 longterm operating leases service fee commitments covering certain facilities equipment well longterm commitments varying expiration dates minimum annual commitments years ending september 30 2007 2008 2009 2010 2011 624 million 555 million 429 million 121 million 101 million respectively 140 million aggregate thereafter bj services company notes consolidated financial statementscontinued contractual obligations routinely issue parent company guarantees “pcgs” connection service contracts entered subsidiaries issuance pcgs frequently condition bidding process imposed customers work countries outside north america pcgs typically provide guarantee performance services local subsidiary term pcgs varies length service contract date parent company called upon perform pcgs arrange issuance variety bank guarantees performance bonds standby letters credit vast majority issued connection contracts subsidiary entered customers customer right call bank guarantee performance bond standby letter credit event subsidiary default performance services instruments required condition awarded contract typically released upon completion contract balance instruments predominantly standby letters credit issued connection variety financial obligations support fronted insurance programs claims administration funding certain employee benefit plans temporary importation bonds following table summarizes commercial commitments september 30 2006 thousands following table summarizes contractual cash obligations commercial commitments september 30 2006 thousands 1 discussed previously option obligation purchase pumping service equipment two partnerships approximately 27 million 32 million 2009 2010 respectively currently expect purchase pumping service equipment therefore included option payment table 2 includes agreements purchase goods services approved specify significant terms pricing quantity timing policies require purchase order completed items 200 miscellaneous items office supplies 3 entered agreements certain suppliers ensure certain level materials maintained us canada bj services company notes consolidated financial statementscontinued 4 includes expected cash payments longterm liabilities reflected consolidated balance sheet amounts timing payment known amounts include asset retirement obligations known pension funding requirements postretirement benefit obligation environmental accruals miscellaneous longterm obligations amounts exclude deferred gains see “lease longterm commitments” pension obligations funding requirements uncertain longterm contingent liabilities 11 intangible assets changes carrying amount goodwill reporting unit year ended september 30 2006 follows thousands fiscal 2005 goodwill reduced 07 million connection resolution certain tax uncertainties relating prior acquisitions eitf 937 uncertainties related income taxes purchase business combination resolution tax uncertainties treated adjustment goodwill originally recorded acquisition discussed note 3 acquisitions bjsp dynacoil increased goodwill 431 million fiscal 2006 technology based intangible assets net accumulated amortization 197 million 82 million september 30 2006 2005 respectively result dynacoil acquisition intangibles increased 71 million remaining increase primarily result development specialty tools amortization three years ended september 30 2006 2005 2004 07 million 05 million 03 million respectively bj services company notes consolidated financial statementscontinued 12 supplemental financial information supplemental financial information years ended september 30 follows thousands 1 includes step acquisition entries bjsp see note 3 expense income net years ended september 30 summarized follows thousands october 2004 company received report whistleblower alleging asia pacific region controller misappropriated company funds fiscal 2001 company began internal investigation misappropriation whether inappropriate actions occurred region controller admitted multiple misappropriations totaling approximately 90 million 30month period ended april 2002 misappropriations approximately 90 million repaid company region controller’s employment terminated misappropriations expense company form theft recorded consolidated statement operations periods prior april 2002 90 million repayment represents gain contingency reflected income consolidated condensed statement operations quarter ended december 31 2004 accordance sfas 5 accounting contingencies prior filing report form 10k fiscal 2004 conducted review asia pacific region’s balance sheet determined net excess accrued liabilities accumulated period years still existed september 30 2004 amount 122 million based comprehensive analysis bj services company notes consolidated financial statementscontinued identified 95 million excess accrued liabilities asia pacific region reversed fourth quarter fiscal 2005 following adjustments recorded accordance gaap policies net effect adjustments reported income consolidated statement operations years ended september 30 2005 2004 adjustments identified fiscal 2006 company continuing investigate whether additional funds misappropriated beyond 90 million originally identified company identified additional 17 million believes misappropriated former region controller additional 17 million likely misappropriations expenses company recorded consolidated statement operations periods prior april 2002 possible additional information could emerge resulting adjustments consolidated statements operations material adjustments known time october 2004 company also received whistleblower allegations illegal payments foreign officials made asia pacific region audit committee board directors engaged independent counsel conduct separate investigation determine whether illegal payments made investigation found information indicating significant likelihood payments made company entity asia pacific region company certain contractual relationships used make payments government officials asia pacific region information included information indicating certain employees company asia pacific region believed funds paid entity would used make payments government officials payments may illegal aggregated approximately 26 million made fiscal 1999 2004 thereafter december 2005 company received payment approximately 28 million entity referenced entity said funds represented 26 million funds described plus interest amount 26 million misappropriated benefit certain entity’s employees used make payments government officials audit committee’s investigation able verify claim 28 million payment represents gain contingency reflected income consolidated condensed statement operations quarter ended december 31 2005 accordance sfas 5 accounting contingencies company audit committee also investigated large volume payments made company period fiscal 1998 2004 asia pacific region respect approximately 10 million payments investigations date either able establish legitimacy transactions reflected underlying documents able resolve questions adequacy underlying documents support accounting entries payments may proper due circumstances surrounding payments investigations able determine whether theft illegal payments improprieties may involved payments bj services company notes consolidated financial statementscontinued previously expensed therefore company believes additional expense required recorded payments company voluntarily disclosed information found special audit committee investigation well related information company’s theft investigation us department justice “doj” us securities exchange commission “sec” engaged ongoing discussions authorities review matter company cannot predict whether investigative efforts may required initiated authorities connection discussions regarding possible illegal payments asia pacific region us government officials raised question whether company made illegal payments contractor intermediary obtain business country central asia audit committee investigated question company voluntarily disclosed information found investigation doj sec engaged ongoing discussions authorities review matter doj sec authorities broad range civil criminal sanctions us foreign corrupt practices act laws may seek impose corporations individuals appropriate circumstances including limited injunctive relief disgorgement fines penalties modifications business practices compliance programs agencies authorities entered agreements obtained range sanctions several public corporations individuals arising allegations improper payments deficiencies books records internal controls whereby civil criminal penalties imposed including cases multimillion dollar fines sanctions discussions doj sec regarding certain matters described possible accurately predict time matters resolved based current information cannot predict outcome investigations whether reach resolution discussions actions may taken doj sec authorities effect foregoing may consolidated financial statements misappropriations related accounting adjustments asia pacific region possible certain internal control operating deficiencies fiscal 2002 company implemented policy changes worldwide disbursements significant personnel changes also made asia pacific region company assigned new region manager new region controller assistant controller replaced several accountants asia pacific region company also took disciplinary action personnel region addition put place internal control process improvement function led internal control manager corporate office supported managers five regional bases worldwide document enhance test control processes accumulated comprehensive income loss consists following thousands bj services company notes consolidated financial statementscontinued tax effects allocated component changes comprehensive income summarized follows thousands 13 employee stock plans october 1 2005 adopted sfas 123r using modified prospective method sfas 123r revision sfas 123 accounting stockbased compensation supersedes apb 25 accounting stock issued employees sfas 123r cost employee services received exchange stock measured based grantdate fair value limited exceptions cost recognized period employee required provide service exchange award usually vesting period fair value estimated using optionpricing model excess tax benefits defined sfas 123r recognized addition paidin capital modified prospective method began recognizing expense october 1 2005 unvested awards granted prior adoption date october 1 2005 expected vest remaining vesting period awards new awards granted adoption date expensed ratably vesting period award stock based compensation expense recognized based awards ultimately expected vest reduced expense estimated forfeitures based historical forfeiture rates sfas 123r requires forfeitures estimated time grant revised necessary subsequent periods reflect actual forfeitures november 10 2005 fasb issued fasb staff position fas 123r3 “transition election related accounting tax effects sharebased payment awards” “fsp 123r3” fsp 123r3 provides alternative method calculating excess tax benefits “apic pool” method defined sfas123r onetime election adopt transition method fsp 123r3 available entities adopting sfas 123r calculated apic pool using method outlined sfas 123r impact adoption materially affect financial position results operations currently three incentive plans employee stock purchase plan affected sfas 123r 1997 incentive plan 2000 incentive plan 2003 incentive plan “plans” provide granting stock options officers key employees nonemployee directors exercise price equal bj services company notes consolidated financial statementscontinued fair market value stock date grant 2003 plan provides director stock awards exercise price plans also provide granting performance awards officers aggregate 320 million shares common stock authorized grants 117 million shares available future grants september 30 2006 1999 employee stock purchase plan “purchase plan” allows employees purchase shares common stock 85 market value first last business day whichever lower twelvemonth plan period beginning october 1 purchases limited 10 employee’s regular salary 21250 whichever less aggregate 120 million shares common stock authorized grants 65 million shares available future grants september 30 2006 prior october 1 2005 adopted disclosureonly provisions sfas 123 accounted certain stockbased compensation using intrinsic value method prescribed apb 25 apb 25 compensation expense recognized stock options stock purchase plan compensation expense recognized stock incentive awards director stock awards sfas 123r unearned compensation balance september 30 2005 reclassified capital excess par october 1 2005 following table summarizes stock based compensation expense recognized sfas 123r fiscal 2006 fiscal 2005 2004 apb 25 allocated follows thousands following table illustrates effect net income earnings per share fiscal 2006 compared pro forma effect net income earnings per share fiscal 2005 2004 applied fair value recognition provisions sfas 123 stock options shares reserved stock purchase plan thousands except per share amounts bj services company notes consolidated financial statementscontinued stock options plans provide granting stock options officers key employees nonemployee directors exercise price equal fair market value stock date grant options outstanding generally vest three fouryear periods exercisable periods ranging seven ten years expected life determined based exercise history last ten years october 1 2005 began segregating grants options officers nonofficers fair value determination sfas 123r due differences exercise patterns prior adoption sfas 123r segregate grants groups beginning october 1 2005 calculated estimated volatility using historical daily price intervals generate expected future volatility based appropriate expected lives options prior october 1 2005 calculated volatility using historical daily weekly monthly price intervals generate reasonable range expected future volatility used factor low end range accordance sfas 123 riskfree interest rate based observed us treasury rates appropriate expected lives options dividend yield based history dividend payouts compensation expense grants determined sfas 123r fiscal years ended september 30 calculated using blackscholes option pricing model following assumptions summary stock option activity related information presented thousands except per share prices september 30 2006 bj services company notes consolidated financial statementscontinued weightedaverage grant date fair value options granted fiscal 2006 2005 2004 1170 699 607 respectively total intrinsic value options exercised years ended september 30 2006 2005 2004 211 million 482 million 783 million respectively summary status unvested shares september 30 2006 changes fiscal 2006 presented thousands except per share prices september 30 2006 179 million total unrecognized compensation cost related unvested stock options cost expected recognized weightedaverage period 30 years total fair value shares vested years ended september 30 2006 2005 2004 96 million 170 million 180 million respectively director stock awards addition stock options nonemployee directors may granted award common stock company exercise price “restricted stock” restricted stock awards generally vest three year period compensation expense determined sfas 123r calculated using blackscholes option pricing model assumptions used calculate stock based compensation expense non officer stock option grants prior adopting sfas 123r compensation expense restricted stock awards calculated manner expense director stock awards 13 million 06 million 02 million fiscal 2006 2005 2004 respectively stock incentive awards made 1997 stock incentive plan 2000 stock incentive plan reserved 681603 shares common stock issuance performance units “units” awarded representing maximum number shares officers could receive outstanding awards unit represents right receive company end stipulated period one unrestricted share common stock contingent upon achievement certain financial performance goals stipulated period sfas 123r compensation expense recorded entire grant amount adjusted regardless achievement level attained result personnel leaving prior end performance period 36 million expensed fiscal 2006 exclusive cash award component discussed prior adoption sfas 123r aggregate fair market value underlying shares granted plan considered unearned compensation time grant adjusted quarterly based current market price common stock compensation expense determined based management’s current estimate likelihood meeting specific financial goals expensed ratably stipulated period addition award units officer also awarded cash equal tax liability units receive end performance period recognize compensation expense cash award ratably performance period cash liability marked market quarterly according sfas 123r adjustment recorded compensation expense september 30 2006 accrued 36 million cash award liability outstanding grants however actual performance results bj services company notes consolidated financial statementscontinued end performance period could result decrease increase actual cash payments resulting increase decrease compensation expense end performance period performance criteria met fiscal 2004 grant accordance sfas 123r compensation expense reversed fair value award however 42 million reversed cash award component sfas 123r recognizing compensation expense units granted based fair value date grant using lattice model monte carlo simulation fair values grant outstanding september 30 2006 assumptions used determine fair value listed september 30 2006 59 million total unrecognized compensation cost related units cost expected recognized weightedaverage period 30 years units vest years ended september 30 2006 2005 2004 stock purchase plan purchase plan allows employees purchase shares common stock 85 market value first last business day whichever lower twelvemonth plan period beginning october purchases limited 10 employee’s regular salary issued total 488542 shares fiscal 2006 purchase plan reserved 774911 shares fiscal 2007 compensation expense determined sfas 123r year ended september 30 2006 calculated using blackscholes option pricing model following assumptions calculated estimated volatility using historical daily prices based appropriate expected life stock purchase plan riskfree interest rate based observed us treasury rates appropriate expected life stock purchase plan dividend yield based history dividend payouts 14 stockholders’ equity common stock january 31 2006 stockholders approved charter amendment increasing authorized number shares common stock 380000000 shares 910000000 shares dividends board directors approved 2 1 stock split effected form stock dividend payable september 1 2005 stockholders record august 18 2005 common shares earnings per share amounts restated prior periods presented reflect increased number bj services company notes consolidated financial statementscontinued common shares outstanding initial public offering 1990 2004 pay cash dividends stockholders july 22 2004 announced initiation regular quarterly cash dividend fiscal 2005 paid cash dividends amount 04 per common share quarterly basis 519 million aggregate annual amount july 28 2005 board directors approved 25 increase quarterly cash dividend declared cash dividend 05 per common share fiscal 2006 paid dividends totaling 643 million anticipate paying cash dividends amount 05 per common share quarterly basis fiscal 2007 however dividends subject approval board directors quarter board ability change dividend policy time stockholder rights plan stockholder rights plan “rights plan” designed deter coercive takeover tactics prevent acquirer gaining control company without offering fair price stockholders rights plan amended september 26 2002 extend expiration date rights september 26 2012 increase purchase price rights plan amended outstanding share common stock includes oneeighth preferred share purchase right “right” becomes exercisable certain circumstances including beneficial ownership common stock person group equals exceeds 15 company’s outstanding common stock right entitles registered holder purchase company one onethousandth share series junior participating preferred stock price 520 subject adjustment certain circumstances result stock splits effected form stock dividends 1998 2001 2005 one right associated eight outstanding shares common stock purchase price oneeighth right associated one share common stock effectively 65 upon occurrence certain events specified rights plan holder right “acquiring person” defined rights plan right upon exercise right receive number shares common stock company surviving corporation time transaction would market price two times purchase price right issued shares series junior participating preferred stock treasury stock december 19 1997 board directors authorized stock repurchase program 150 million series increases stock repurchase program authorized repurchase 22 billion repurchases made discretion management program remain effect terminated board directors purchased 48366000 shares cost 4990 million fiscal 2004 fiscal 2005 purchased total 3982000 shares cost 984 million fiscal 2006 purchased total 31725882 shares cost 11333 million september 30 2006 remaining authority repurchase common stock 4693 million treasury shares utilized various stock plans described note 13 total 1509000 treasury shares used cost 212 million fiscal 2006 3655000 treasury shares used cost 452 million fiscal 2005 7126000 treasury shares used cost 601 million fiscal 2004 subsequent september 30 2006 purchased 668889 shares 200 million november 30 2006 stock repurchase program discussed note 14 notes consolidated financial statements authority remaining purchase additional 4493 million stock november 30 2006 bj services company notes consolidated financial statementscontinued 15 quarterly financial data unaudited 1 represents revenue less cost sales services research engineering expenses item 9item 8 financial statements supplementary data management’s report internal control financial reporting responsible establishing maintaining adequate internal control financial reporting term defined securities exchange act 1934 rule 13a15f internal controls designed provide reasonable assurance reliability financial statements external purposes accordance accounting principles generally accepted us internal control financial reporting inherent limitations may prevent detect misstatements therefore even systems determined effective provide reasonable assurance absolute assurance respect financial statement preparation presentation changes conditions effectiveness internal control financial reporting may vary time supervision participation chief executive officer chief financial officer evaluated effectiveness internal control financial reporting september 30 2007 required securities exchange act 1934 rule 13a15c making assessment utilized criteria set forth committee sponsoring organizations treadway commission internal controlintegrated framework concluded based evaluation internal control financial reporting effective september 30 2007 effectiveness internal control financial reporting september 30 2007 audited deloitte touche llp independent registered public accounting firm stated report included herein jw stewart jeffrey e smith jw stewart jeffrey e smith president chief executive officer senior vice president chief financial officer report independent registered public accounting firm board directors stockholders bj services company audited internal control financial reporting bj services company subsidiaries “company” september 30 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers persons performing similar functions effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion company maintained material respects effective internal control financial reporting september 30 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission also audited accordance standards public company accounting oversight board united states consolidated financial statements financial statement schedule year ended september 30 2007 company report dated november 29 2007 expressed unqualified opinion consolidated financial statements financial statement schedule deloitte touche llp houston texas november 29 2007 report independent registered public accounting firm board directors stockholders bj services company audited accompanying consolidated statements financial position bj services company subsidiaries “company” september 30 2007 2006 related consolidated statements operations stockholders’ equity comprehensive income cash flows three years period ended september 30 2007 audits also included financial statement schedule listed index item 15 financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position bj services company subsidiaries september 30 2007 2006 results operations cash flows three years period ended september 30 2007 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states company’s internal control financial reporting september 30 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated november 29 2007 expressed unqualified opinion company’s internal control financial reporting deloitte touche llp houston texas november 29 2007 bj services company consolidated statement operations accompanying notes integral part consolidated financial statements bj services company consolidated statement financial position assets accompanying notes integral part consolidated financial statements bj services company liabilities stockholders’ equity accompanying notes integral part consolidated financial statements bj services company consolidated statement stockholders’ equity comprehensive income thousands accompanying notes integral part consolidated financial statements bj services company consolidated statement cash flows accompanying notes integral part consolidated financial statements bj services company notes consolidated financial statements 1 business basis presentation bj services company “company” whose operations trace back byron jackson company founded 1872 organized 1990 corporate laws state delaware leading worldwide provider pressure pumping oilfield services petroleum industry pressure pumping services consist cementing stimulation services used completion new oil natural gas wells remedial work existing wells onshore offshore oilfield services group includes completion tools completion fluids casing tubular services provided oil natural gas exploration production industry commissioning inspection services provided refineries pipelines offshore platforms chemical services consolidate investments greater 50 control material intercompany balances transactions eliminated consolidation investments companies ownership interest ranges 20 50 exercise significant influence operating financial policies accounted using equity method investments accounted using cost method preparation financial statements conformity accounting principles generally accepted united states america requires us make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting periods actual results could differ estimates certain amounts 2006 2005 reclassified accompanying consolidated financial statements conform current year presentation 2 summary significant accounting policies cash equivalents consider highly liquid investments purchased original maturities three months less time purchase cash equivalents allowance doubtful accounts perform ongoing credit evaluations customers adjust credit limits based upon payment history customer’s current credit worthiness determined review available credit information continuously monitor collections payments customers maintain provision estimated uncollectible accounts based upon historical experience specific customer collection issues identified credit losses historically within expectations provisions established cannot give assurances continue experience credit loss rates past cyclical nature industry may affect customers’ operating performance cash flows could impact ability collect receivables addition many customers located certain international areas inherently subject risks economic political civil instabilities may impact ability collect receivables inventories consist principally products consumed services provided customers ii spare parts equipment used providing services iii manufactured components attachments equipment used providing services stated primarily lower weightedaverage cost market cost primarily represents invoiced costs regularly review inventory quantities hand record provisions excess obsolete inventory based primarily estimated forecast product demand market conditions production requirements technological developments significant unanticipated changes market condition forecast could require additional provisions excess obsolete inventory bj services company notes consolidated financial statementscontinued property stated cost less amounts provided permanent impairments includes capitalized interest 80 million 20 million 12 million years ended september 30 2007 2006 2005 respectively depreciation generally provided using straightline method estimated useful lives individual items leasehold improvements amortized straightline basis shorter estimated useful lives lease terms estimated useful lives 10 30 years buildings leasehold improvements range 3 12 years machinery equipment make judgments estimates conjunction carrying value assets including amounts capitalized depreciation amortization methods useful lives additionally carrying values assets reviewed impairment whenever events changes circumstances indicate carrying amounts may recoverable determination recoverability made based upon estimated undiscounted future cash flows impairment loss recorded period determined carrying amount recoverable amount impairment amount net book value asset exceeds fair value fair value determination requires us make longterm forecasts future revenue costs related assets subject review forecasts require assumptions demand products services future market conditions technological developments significant unanticipated changes assumptions could require provision impairment future period worldwide average active drilling rigs experienced continued growth last three years substantially equipment perform currently working fiscal 2005 determined certain equipment able operate maintained corporate personnel idle asset yard would written fair value usable major components fair value assets based market prices similar assets recorded 117 million impairment fourth fiscal quarter 2005 related idle assets impairment reflected loss longlived assets consolidated statement operations within corporate segment footnote disclosure intangible assets goodwill represents excess cost fair value net assets companies acquired purchase transactions account goodwill accordance statement financial accounting standards “sfas” 142 goodwill intangible assets requires goodwill reviewed reporting unit possible impairment annual basis circumstances indicate impairment may exist determining reporting units considered way manage operations nature operations reporting units operating segments see note 8 performed annual evaluation september 30 concluded impairment adjustment necessary goodwill balance september 30 2007 2006 respectively intangible assets primarily consist technology based intangible assets amortized straightline basis ranging 5 20 years weighted average amortization period 148 years utilize undiscounted estimated cash flows evaluate possible impairment intangible assets discount rate utilized based market factors time loss determined income taxes provide income taxes accordance sfas 109 accounting income taxes standard takes account differences financial statement treatment tax treatment certain transactions deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect change tax rates recognized income expense period includes enactment date calculation requires us make certain estimates future operations changes state federal foreign tax laws well changes financial condition could affect estimates record valuation allowance reduce deferred tax assets likely portion deferred tax assets utilized consider available evidence positive negative determine whether valuation allowance needed ultimate realization deferred tax assets depends ability bj services company notes consolidated financial statementscontinued generate sufficient taxable income appropriate character within carryback carryforward period set forth applicable tax law tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities potentially courts resolution situations inevitably includes degree uncertainty accordingly provide taxes amounts believe ultimately result proceedings addition aforementioned assessments received various taxing authorities provide taxes certain situations assessments received situations accrue income taxes consider probable taxes ultimately payable exceed amounts reflected filed tax returns accordingly taxes provided situations guidance sfas 5 accounting contingencies self insurance accruals selfinsured certain losses relating workers’ compensation general liability property damage employee medical benefits claims filed claims incurred reported liability based primarily actuarial undiscounted basis using individual casebased valuations statistical analysis based upon judgment historical experience however final cost many claims may known five years longer management reviews reserve quarterly basis changes claims experience health care costs etc could affect estimates contingencies accounted accordance sfas 5 standard requires record estimated loss contingency information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements amount loss reasonably estimated accounting contingencies environmental legal income tax matters requires us use judgment believe accruals matters adequate actual loss contingency significantly different estimated loss results operations may adversely impacted significant litigation accrue legal costs environmental remediation compliance environmental remediation costs accrued based estimates known environmental exposures using currently available facts existing environmental permits technology presently enacted laws regulations sites primarily responsible remediation estimate costs developed based internal evaluations discounted accruals recorded environmental assessments andor remedial efforts probable cost reasonably estimated accrual recorded even significant uncertainties exist ultimate cost remediation updated additional information becomes available ongoing environmental compliance costs obtaining environmental permits installation pollution control equipment waste disposal expensed incurred identified potentially responsible party us federal state superfund site accrue share estimated remediation costs site based ratio estimated volume waste contributed site us total estimated volume waste site revenue recognition revenue composed product sales rental service revenue products rentals services generally sold based fixed determinable priced purchase orders contracts customer include right return recognize revenue product sales title passes customer assumes risks rewards ownership collectibility reasonably assured rental service revenue recognized services provided collectibility reasonably assured research development expenditures research development expenditures expensed incurred bj services company notes consolidated financial statementscontinued maintenance repairs expenditures maintenance repairs expensed incurred expenditures renewals improvements capitalized extend life increase capacity improve efficiency asset foreign currency translation functional currency primarily us dollar gains losses resulting financial statement translation foreign operations foreign currency functional currency included comprehensive income operations canada hungary algeria use respective local currencies functional currency derivative instruments occasionally enter forward foreign exchange contracts hedge impact currency fluctuations certain transactions assets liabilities denominated foreign currencies enter derivative instruments speculative trading purposes sfas 133 accounting derivative instruments hedging activities amended requires recognize derivatives balance sheet fair value record derivative transactions accordance sfas 133 contracts outstanding september 30 2007 2006 employee stockbased compensation employee services received exchange stock expensed accordance sfas 123r sharebased payment fair value employee services received exchange stock measured based grantdate fair value determined using blackscholes optionpricing model stock option awards bonus stock phantom stock montecarlo simulation model stock incentive awards granted expensed ratably vesting period award unless retirement age reached case expense accelerated reduce expense recognized based estimated forfeiture rate time grant revise rate necessary subsequent periods reflect actual forfeitures excess tax benefits defined sfas 123r recognized addition capital excess par new accounting pronouncements february 2007 fasb issued sfas 159 “sfas 159” fair value option financial assets financial liabilities including amendment fasb statement 115 statement provides companies option report selected financial assets liabilities fair value sfas 159 companies elect fair value option report unrealized gains losses earnings subsequent reporting date addition sfas 159 establishes presentation disclosure requirements designed facilitate comparisons companies choose different measurement attributes similar types assets liabilities fair value option election irrevocable unless new election date occurs sfas 159 effective beginning entity’s first fiscal year beginning november 15 2007 applied prospectively unless entity elects early adoption currently process evaluating impact sfas 159 financial statements choose elect option september 2006 fasb issued sfas 157 “sfas 157” fair value measurements effective financial statements issued fiscal years beginning november 15 2007 sfas 157 introduces new definition fair value fair value hierarchy requiring market based assumptions used available new disclosures assets liabilities measured fair value based level hierarchy currently process evaluating impact sfas 157 financial statements july 2006 fasb issued interpretation 48 “fin 48” accounting uncertainty income taxes effective fiscal years beginning december 15 2006 fin 48 prescribes recognition threshold measurement attribute well criteria subsequently recognizing derecognizing measuring tax positions financial statement purposes requires companies make disclosures uncertain income tax positions including detailed rollforward tax benefits taken qualify financial statement recognition addition fin 48 requires us disclose classification interest penalties related uncertain tax positions record component income tax expense estimate impact adopting fin 48 reduction retained earnings range 6 million 10 million bj services company notes consolidated financial statementscontinued 3 acquisitions businesses fiscal 2007 november 3 2006 completed acquisition profile international ltd “profile” total purchase price 25 million resulted 22 million goodwill profile located newcastle england provides caliper inspection tools pipeline integrity assessment markets worldwide business complements pipeline inspection business oilfield services group segment december 20 2006 purchased substantially operating assets tekcor technology ltd “tekcor” 83 million resulted increase 36 million total current assets 07 million property equipment 40 million technology based intangible assets tekcor provides specialty chemicals related services oil gas well drilling industry located houston texas tekcor services markets along texas louisiana gulf coast included completion fluids business oilfield services group segment march 1 2007 acquired aberdeenbased norson services ltd “norson” division norson group ltd substantially assets norson group’s united states subsidiary norson services llc total purchase price paid acquisitions 290 million including legal fees resulted increase 74 million total current assets 59 million property equipment 18 million intangible assets 54 million current liabilities 193 million goodwill acquisition strengthens service capabilities addition norson’s hydraulic electrical umbilical testing services provided norson’s subsea units include remote pigging flooding subsea hydro testing subsea data logging business complements process pipeline business oilfield services group segment june 30 2007 completed acquisition substantially capillary tubing assets allischalmers total purchase price 163 million resulted increase 15 million current assets 18 million property equipment 130 million goodwill assets used installation service capillary injection systems primarily us mexico assets complement dynacoil acquisition occurred fourth quarter fiscal 2006 enhance chemical services operation oilfield services group segment fiscal 2006 june 25 2006 acquired additional 2 interest algerian joint venture societe algerienne de stimulation de puits productures d’hydrocarbures “bjsp” 46 million increasing total ownership bjsp 51 l’enterprise de services aux puits “ensp” indirect subsidiary sonatrach petroleum corp owns remaining 49 bjsp provides coiled tubing fracturing cementing services algerian market prior obtaining controlling interest bjsp accounted investment using cost method could exercise significant influence entity following transaction accounted stepacquisition control bjsp consolidate entity accordance accounting principles board “apb” 18 equity method accounting investments common stock accounting research bulletin “arb” 51 consolidated financial statements 2006 retroactively adjusted beginning retained earnings adopt equity method accounting ownership interest previous periods adjustment resulted 83 million increase beginning retained earnings following transaction assets liabilities results operations bjsp included consolidated results international pressure pumping segment consolidation resulted increase 424 million total current assets including approximately 141 million cash 121 million total current liabilities 193 million minority interest 02 million goodwill august 15 2006 purchased substantially operating assets dyna coil south texas ltd dyna coil injection systems inc dynochem ltd collectively “dynacoil” 617 million bj services company notes consolidated financial statementscontinued cash dynacoil focused production optimization services particularly installation service capillary injection systems associated products production chemicals mostly us canada included chemical services business oilfield services group segment acquisition resulted increase 82 million total current assets 34 million property equipment 71 million technology based intangibles 429 million goodwill currently process completing review determination fair values assets acquired norson allischalmers accordingly allocation purchase price subject revision based final determination asset values pro forma financial information fiscal 2007 fiscal 2006 acquisitions included material individually aggregate financial statements 4 earnings per share basic eps excludes dilution computed dividing net income weightedaverage number common shares outstanding period diluted eps based weightedaverage number shares outstanding period assumed exercise dilutive instruments stock options employee stock purchase plan stock incentive awards director stock awards less number treasury shares assumed purchased exercise proceeds using average market price common stock periods presented following table presents information necessary calculate earnings per share three years ended september 30 2007 thousands except per share amounts 1 year ended september 30 2007 29 million stock options excluded computation diluted earnings per share due antidilutive effect stock options excluded computation diluted earnings per share due antidilutive effect years ended september 30 2006 2005 5 debt long term debt september 30 consisted following thousands bj services company notes consolidated financial statementscontinued june 8 2006 completed public offering 5000 million aggregate principal amount senior notes consisting 2500 million floating rate senior notes due 2008 annual interest rate threemonth libor plus 17 basis points 2500 million 575 senior notes due 2011 net proceeds offering approximately 4971 million deducting underwriting discounts commissions expenses used primarily repurchase outstanding shares common stock also repay indebtedness fund capital expenditures corporate purposes september 30 2007 2500 million senior notes due 2008 issued outstanding 2498 million net discount 575 senior notes due 2011 issued outstanding intend redeem 2500 million senior notes due 2008 existing cash necessary funds available revolving credit facility august 2007 amended restated existing revolving credit facility amended restated revolving credit facility “revolving credit facility” permits borrowings 400 million principal amount revolving credit facility includes 50 million sublimit issuance standby letters credit 20 million sublimit swingline loans swingline loans shortterm maturities remaining amounts outstanding revolving credit facility become due payable august 2012 addition right request additional 200 million permitted borrowings 400 million subject approval lenders time request interest outstanding borrowings charged based prevailing market rates charged various fees connection revolving credit facility including commitment fee based average daily unused portion commitment totaling 03 million fiscal 2007 05 million fiscal 2006 addition revolving credit facility charges utilization fee outstanding loans letters credit usage revolving credit facility exceeds 625 though material fees fiscal 2007 2006 september 30 2007 2006 1470 million 1600 million respectively outstanding borrowings revolving credit facility addition revolving credit facility 1649 million unsecured discretionary lines credit september 30 2007 expire bank’s discretion requirements commitment fees compensating balances connection lines credit interest prevailing market rates 243 million 03 million outstanding borrowings lines credit september 30 2007 2006 respectively weighted average interest rates shortterm borrowings outstanding september 30 2007 2006 540 595 respectively management believes cash flows operations combined cash equivalents revolving credit facility discretionary credit facilities provide us sufficient capital resources liquidity manage routine operations meet debt service obligations fund projected capital expenditures repurchase common stock pay regular quarterly dividend support development shortterm longterm operating strategies discretionary lines credit renewed borrowings lines credit otherwise become unavailable expect refinance debt arranging additional committed bank facilities longterm borrowing alternatives senior notes revolving credit facility include various customary covenants provisions including maintenance certain profitability solvency ratios none materially restrict activities currently compliance covenants imposed 6 financial instruments following methods assumptions used estimate fair value class financial instruments practicable cash equivalents shortterm investments trade receivables trade payables shortterm borrowings carrying amount approximates fair value short maturity instruments bj services company notes consolidated financial statementscontinued longterm debt fair value based rates currently available us debt similar terms average maturities foreign currency debt periodically borrow funds denominated foreign currencies exposes us market risk associated exchange rate movements 154 million borrowings denominated foreign currencies september 30 2007 03 million borrowings september 30 2006 fair value financial instruments differed carrying value september 30 2007 2006 follows thousands 7 income taxes geographical sources income taxes three years ended september 30 follows thousands provision income taxes three years ended september 30 summarized thousands bj services company notes consolidated financial statementscontinued consolidated effective income tax rates percent income loss income taxes three years ended september 30 2007 varied united states statutory income tax rate reasons set forth deferred tax assets liabilities recognized estimated future tax effects temporary differences tax basis assets liabilities reported amount financial statements measurement deferred tax assets liabilities based enacted tax laws rules currently effect taxing jurisdictions operations generally deferred tax assets liabilities classified current noncurrent according classification related asset liability financial reporting purposes deferred tax assets liabilities september 30 follows thousands 1 deferred gain contribution pumping service equipment partnership referred note 10 bj services company notes consolidated financial statementscontinued september 30 2007 approximately 966 million foreign net operating loss carryforwards 24 million state net operating loss carryforwards foreign net operating loss carryforwards expire follows 76 million fiscal year 2016 remaining 890 million expire state net operating losses expire fiscal year 2008 fiscal year 2018 also 214 million us foreign tax credit carryforwards substantially expire 2012 tax impact net operating loss foreign tax credit carryforwards likely expire realization benefit reflected valuation allowance balance september 30 2007 record valuation allowance reduce deferred tax assets likely portion deferred tax assets expire realization benefit management believes likely portion foreign net operating loss carry forwards us foreign tax credits realized valuation allowance recorded amounts furthermore respect valuation allowance approximately 28 million valuation allowance subsequently realized allocated reduce goodwill stock basis difference foreign subsidiaries us deferred tax liability established approximately 3796 million september 30 2007 stock basis difference arises existence unremitted foreign earnings cumulative translation adjustments provided additional taxes anticipated repatriation foreign earnings foreign subsidiaries determined foreign subsidiaries earnings indefinitely reinvested foreign subsidiaries whose earnings indefinitely reinvested provision us federal state income taxes provided record tax liability full tax versus book basis difference foreign subsidiaries additional net deferred tax liability approximately 327 million would necessary 8 segment information currently thirteen operating segments separate financial information available separate management teams engaged oilfield services results operating segments evaluated regularly chief operating decision maker deciding allocate resources assessing performance operating segments aggregated four reportable segments usmexico pressure pumping international pressure pumping canada pressure pumping oilfield services group usmexico pressure pumping two operating segments includes cementing services stimulation services consisting fracturing acidizing sand control nitrogen coiled tubing service tool services provided throughout united states mexico two operating segments aggregated one reportable segment offer type services similar economic characteristics similar production processes use methods provide services international pressure pumping segment five operating segments similar usmexico pressure pumping includes cementing stimulation services provided customers 50 countries major international oil natural gas producing areas latin america europe africa asia pacific russia middle east operating segments aggregated one reportable segment similar economic characteristics offer type services similar production processes use methods provide services also serve similar customers include major multinational independent national stateowned oil companies canada pressure pumping segment one operating segment like international usmexico pressure pumping includes cementing stimulation services provided customers major oil natural gas producing areas canada bj services company notes consolidated financial statementscontinued oilfield services segment five operating segments operating segments provide oilfield services chemical services casing tubular services process pipeline services completion tools completion fluids services us select markets internationally operating segments aggregated one reportable segment provide oilfield services serve similar customers operating segments share resources accounting policies segments described summary significant accounting policies evaluate performance segments based operating income intersegment sales transfers material summarized financial information concerning segments three years ended september 30 2007 2006 2005 shown following tables thousands “corporate” column includes corporate expenses allocated operating segments revenue geographic location determined based location services rendered products sold years ended september 30 2007 2006 2005 provided services several thousand customers none accounted 5 consolidated revenue business segments bj services company notes consolidated financial statementscontinued geographic information revenue product line reconciliation segment information consolidated income taxes three years ended september 30 2007 set forth thousands 9 employee benefit plans adoption sfas 158 september 2006 fasb issued sfas 158 employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r “sfas 158” requires companies recognize funded status defined benefit postretirement bj services company notes consolidated financial statementscontinued plan multiemployer plan asset liability statement financial position recognize changes funded status year changes occur comprehensive income business entity also requires companies measure funded status plan date yearend statement financial position adopted requirements sfas 158 fiscal year ended september 30 2007 previously measured defined benefit plan assets obligations fiscal yearend thus portion sfas 158 impact financial statements impact adopting remaining requirements sfas 158 statement financial position september 30 2007 shown defined benefit pension plans defined benefit pension plans covering certain employees us uk norway canada fiscal 2004 plans frozen new entrants uk canada defined benefit pension plan us frozen effective december 31 1995 time earned benefits vested september 2006 entered agreement settle obligation respect us defined benefit plan assets approximately 72 million plus contribution 15 million used purchase insurance contract used fund benefits settle plan proposed settlement requires approval pension benefit guaranty corporation internal revenue service relieve us primary responsibility pension benefit obligation regulatory approval obtained expected fiscal 2008 expense approximately 233 million connection settlement consists 7 million prepaid pension cost 16 million loss currently recognized comprehensive income relieving us obligation expense would otherwise recognized remaining plan life accelerated period approval received bj services company notes consolidated financial statementscontinued obligations funded status amounts recognized consolidated statement financial position consist amounts recognized accumulated comprehensive income consist following september 30 2007 bj services company notes consolidated financial statementscontinued estimated amortization amounts reflected accumulated comprehensive income net periodic benefit cost expected 100 million net tax fiscal 2008 us plan expected material plans outside us accumulated benefit obligations abo excess plan assets abo actuarial present value pension benefits employees’ current compensation levels differs projected benefit obligation abo include assumptions future compensation levels abo plans 2681 million 2398 million september 30 2007 2006 respectively components net periodic benefit cost assumptions used determine benefit obligations september 30 follows assumptions used determine net periodic benefit cost years ended september 30 follows expected longterm rate return assumptions represent rate return plan assets reflecting average rate earnings expected funds invested provide benefits included projected benefit obligation assumption determined reflecting expectations regarding future bj services company notes consolidated financial statementscontinued rates return portfolio considering asset distribution target related historical rates return redemption yield government fixed interest bonds well corporate bonds used proxies return debt securities weighted relative proportion within actual portfolio return equities based historical longterm performance equity classes rate reassessed least annual basis assumptions relating us plan 2007 applicable due pending settlement discussed plan assets objective diversify portfolio among several asset classes reduce volatility maintaining asset mix provides highest rate return acceptable risk primarily mix equity securities fixed income funds generate asset returns comparable general market investment committees meet least annually review portfolio returns determine assetmix targets based assetliability studies nationally recognized thirdparty investment consultants assist us developing asset allocation strategy determine expected rate return expected risk various investment portfolios investment committees consider studies formal establishment current assetmix targets based projected risk return levels asset class investment portfolio september 30 2007 2006 1 plan assets approximately 71 million plus contribution 15 million used purchase insurance contract used fund benefits settle us plan contributions estimated benefit payments pension plans generally funded amounts necessary meet legal contractual minimum funding requirements contributed 154 million fiscal 2007 79 million discretionary infrequently make discretionary contributions expect contribute 174 million defined benefit plans fiscal 2008 represents legal contractual minimum funding requirements expected discretionary contributions following benefit payments reflect expected future service appropriate expected paid 1 disclosed annuity contract purchased us plan therefore approximately 72 million distributed plan participants form individual annuity contracts 2008 benefit payments related plan included schedule bj services company notes consolidated financial statementscontinued postretirement benefit plans sponsor plans provide certain health care life insurance benefits retired employees primarily us meet specified age service requirements eligible dependents plans unfunded retain right subject existing agreements modify eliminate postretirement medical benefit plan provides credits based years service used purchase coverage retiree plan effectively caps health care inflation rate 4 increase per year use september 30 measurement date plans amounts presented thousands unless otherwise stated obligations funded status abo 576 million 550 million september 30 2007 2006 respectively amounts recognized consolidated statement financial position consist postretirement benefit obligation september 30 2007 2006 determined using discount rate 64 60 respectively health care cost trend rate 4 reflecting cap described increasing assumed health care cost trend rates one percentage point would material impact accumulated postretirement benefit obligation net periodic postretirement benefit cost benefits capped amounts recognized accumulated comprehensive income consist net gain 22 million september 30 2007 fiscal 2008 expecting amortization net gain accumulated comprehensive income net periodic benefit cost bj services company notes consolidated financial statementscontinued components net periodic benefit cost postretirement benefit cost september 30 2007 2006 2005 determined using discount rate 600 575 respectively health care cost trend rate 4 reflecting cap described contributions estimated benefit payments postretirement plan generally funded amounts necessary meet benefit costs incurred expect contribute 16 million post retirement plan fiscal 2008 represents anticipated claims following benefit payments reflect expected future service appropriate expected paid defined contribution plans administer defined contribution plans employees us uk canada whereby eligible employees may elect contribute 2 20 base salaries employee benefit trust match employee contributions rate 100 per 100 6 employee’s base salary us equal matching 55 employee’s base salary uk addition contribute 2 6 employee’s base salary depending age years service us uk canada matching contributions vest immediately base contributions become fully vested three years employment contributions defined contribution plans 310 million 239 million 166 million fiscal 2007 2006 2005 respectively postretirement plans nonqualified supplemental executive retirement plan unfunded defined benefit plan provide executives supplemental retirement benefits based highest consecutive three years compensation final ten years become vested upon later executive’s 55th birthday date executive completes five full years service officer expense associated plan 55 million 29 million 21 million years ended september 30 2007 2006 2005 respectively related accrued benefit obligation 219 million 165 million september 30 2007 2006 respectively bj services company notes consolidated financial statementscontinued nonqualified directors’ benefit plan unfunded defined benefit plan provide nonemployee directors benefits upon termination service based number years service last annual retainer fee expense associated plan 02 million 07 million 05 million years ended september 30 2007 2006 2005 respectively related accrued benefit obligation 31 million 29 million september 30 2007 2006 respectively 10 commitments contingencies litigation performance service operations sometimes named defendant litigation usually relating claims bodily injuries property damage including claims well reservoir damage maintain insurance coverage claims extent deemed prudent management series acquisitions assumed responsibility certain claims proceedings made western company north america nowsco well service ltd osca companies whose stock acquired connection businesses claims proceedings continue covered insurance policies predecessors place time acquisitions although outcome claims proceedings us including western nowsco osca cannot predicted certainty management believes existing claims proceedings likely material adverse effect financial position results operations already provided newfield litigation april 4 2002 jury rendered verdict adverse osca connection litigation pending united states district court southern district texas houston lawsuit filed newfield exploration september 29 2000 arose blowout occurred 1999 offshore well owned newfield jury determined osca’s negligence caused contributed blowout responsible 86 damages suffered newfield total damage amount awarded newfield 156 million excluding pre postjudgment interest court delayed entry final judgment case pending completion related insurance coverage litigation filed osca certain insurers former insurance broker court elected conduct trial insurance coverage issues based upon briefs parties interim related litigation filed osca former insurance brokers errors omissions connection policies issue case stayed february 28 2003 court issued final judgment connection newfield claims based upon jury’s verdict time court issued rulings adverse osca connection claim insurance coverage motions new trial denied judge case appealed us court appeals fifth circuit regard liability case insurance coverage issues fifth circuit issued ruling april 12 2006 finding osca liability issues ruling osca’s favor insurance coverage aislic filed motion rehearing fifth circuit denied case remanded district court june 2006 consideration one exclusion contained aislic policy district court recently ruled aislic owes additional 43 million insurance policy covers portions damages incurred case date approximately 50 judgment osca already paid aislic due ruling fifth circuit upon remand newfield filed motion enforce judgment osca court denied great lakes chemical corporation owned majority outstanding shares osca time acquisition agreed indemnify osca 75 uninsured liability excess 3 million arising newfield litigation taking indemnity account without regard outcome insurance coverage dispute share verdict approximately 53 million fully reserved share liability bj services company notes consolidated financial statementscontinued asbestos litigation august 2004 certain predecessors along numerous defendants named four lawsuits filed circuit courts jones smith counties mississippi four lawsuits included 118 individual plaintiffs alleging suffer various illnesses exposure asbestos seeking damages lawsuits assert claims unseaworthiness negligence strict liability based upon status predecessors jones act employers plaintiffs required complete data sheets specifying companies employed asbestoscontaining products allegedly exposed process approximately 25 plaintiffs identified us predecessors employer amended lawsuits filed four individuals us remainder original claims 114 dismissed four lawsuits three failed name us employer manufacturer asbestos containing products thereby dismissed subsequently individual one lawsuits brought action us result currently named employer two mississippi lawsuits possible many 21 claimants identified us predecessors employer could file suit us done time minimal medical information regarding alleged asbestosrelated disease suffered plaintiffs two lawsuits provided accordingly unable estimate potential exposure lawsuits predecessors past maintained insurance may available respond claims addition jones act cases named small number additional asbestos cases allegations cases vary generally include claims provided unspecified product service contained utilized asbestos employee exposed asbestos one facilities customer job site allegations involve claims successor byron jackson company date successful obtaining dismissals cases without payment settlements judgments although remain pending present time intend defend vigorously cases based information available us time expect outcome lawsuits individually collectively material adverse effect financial position results operations cash flows however assurance ultimate outcome lawsuits additional similar lawsuits may filed environmental federal state local laws regulations govern operation underground fuel storage tanks rather incur additional costs restore upgrade tanks management opted remove existing tanks beginning 1989 remedial cleanups progress related tank removals addition conducting environmental investigations remedial actions current former company locations along companies currently named potentially responsible party five waste disposal sites owned third parties accrual approximately 34 million established environmental matters management’s best estimate portion future costs incurred insurance also maintained environmental liabilities lease longterm commitments 1999 contributed certain pumping service equipment limited partnership 1 interest equipment used provide services customers pay service fee period least six years 13 years approximately 12 million annually accounted operating lease assessed terms agreement determined variable interest entity defined fin 46 consolidation variable interest entities however deemed primary beneficiary therefore consolidation required transaction resulted gain deferred amortized 13 years balance deferred gain 90 million 161 million september 30 2007 september 30 2006 respectively agreement permits substitution equipment bj services company notes consolidated financial statementscontinued within partnership long implied fair value new property transferred date substitution equals exceeds implied fair value defined current property partnership replaced result substitutions deferred gain reduced 08 million fiscal 2007 28 million fiscal 2006 september 2010 option obligation purchase pumping service equipment approximately 32 million currently intent exercise option price purchase equipment partnership depends part fair market value equipment held partnership time option exercised well factors specified agreement 1997 contributed certain pumping service equipment limited partnership owned 1 interest equipment used provide services customers paid service fee february 9 2007 purchased remaining partnership interest 478 million result acquired partnership equipment acquisition partnership controlling interest accounted asset purchase september 30 2007 longterm operating leases service fee commitments covering certain facilities equipment well longterm commitments varying expiration dates minimum annual commitments years ending september 30 2008 2009 2010 2011 2012 606 million 502 million 337 million 297 million 186 million respectively 78 million aggregate thereafter contractual obligations routinely issue parent company guarantees “pcgs” connection service contracts entered subsidiaries issuance pcgs frequently condition bidding process imposed customers work countries outside north america pcgs typically provide guarantee performance services local subsidiary term pcgs varies length service contract date parent company called upon perform pcgs arrange issuance variety bank guarantees performance bonds standby letters credit vast majority issued connection contracts subsidiary entered customers customer right call bank guarantee performance bond standby letter credit event subsidiary default performance services instruments required condition awarded contract typically released upon completion contract balance instruments predominantly standby letters credit issued connection variety financial obligations support fronted insurance programs claims administration funding certain employee benefit plans temporary importation bonds following table summarizes commercial commitments september 30 2007 thousands bj services company notes consolidated financial statementscontinued following table summarizes contractual obligations commercial commitments september 30 2007 thousands 1 discussed previously option obligation purchase pumping service equipment partnership approximately 32 million 2010 currently expect purchase pumping service equipment therefore included option payment table 2 includes agreements purchase goods services approved specify significant terms pricing quantity timing policies require purchase order completed items 200 miscellaneous items office supplies 3 entered agreements certain suppliers ensure certain level materials maintained us canada 4 includes expected cash payments longterm liabilities reflected consolidated balance sheet amounts timing payment known amounts include asset retirement obligations known pension funding requirements postretirement benefit obligation environmental accruals miscellaneous longterm obligations amounts exclude deferred gains see “lease longterm commitments” pension obligations funding requirements uncertain longterm contingent liabilities 11 intangible assets changes carrying amount goodwill reportable segment year ended september 30 2007 follows thousands goodwill increased 366 million fiscal 2007 result acquisitions discussed note 3 increase reduced 10 million decrease goodwill due utilization tax attributes acquired prior acquisitions bj services company notes consolidated financial statementscontinued technology based intangible assets net accumulated amortization 289 million 197 million september 30 2007 2006 respectively amortization three years ended september 30 2007 2006 2005 22 million 07 million 05 million respectively 12 supplemental financial information supplemental financial information years ended september 30 follows thousands 1 includes step acquisition entries bjsp fiscal 2006 see note 3 expense income net years ended september 30 summarized follows thousands recovery misappropriated fundsreversal excess liabilities october 2004 company received report whistleblower alleging asia pacific region controller misappropriated company funds fiscal 2001 company began internal investigation misappropriation whether inappropriate actions occurred region controller admitted multiple misappropriations totaling approximately 90 million 30month period ended april 2002 misappropriations approximately 90 million repaid company region controller’s employment terminated former region controller pled guilty one count theft singapore received 21 month prison sentence may 7 2007 misappropriations expense company form theft recorded consolidated statement operations periods prior april 2002 90 million repayment represents gain contingency reflected income consolidated condensed statement operations quarter ended december 31 2004 accordance sfas 5 accounting contingencies bj services company notes consolidated financial statementscontinued company continuing investigate whether additional funds misappropriated beyond 90 million originally identified company identified additional 17 million believes misappropriated former region controller additional 17 million likely misappropriations expenses company recorded consolidated statement operations periods prior april 2002 possible additional information could emerge resulting adjustments consolidated statements operations material adjustments known time june 2007 company filed civil lawsuit former region controller seeking recover additional misappropriated funds seeking accounting disbursements could explained following investigation october 2004 company also received whistleblower allegations illegal payments foreign officials made asia pacific region audit committee board directors engaged independent counsel conduct separate investigation determine whether illegal payments made investigation found information indicating significant likelihood payments made company entity asia pacific region company certain contractual relationships used make payments government officials asia pacific region information included information indicating certain employees company asia pacific region believed funds paid entity would used make payments government officials payments may illegal aggregated approximately 26 million made fiscal 1999 2004 thereafter december 2005 company received payment approximately 28 million entity referenced entity said funds represented 26 million funds described plus interest amount 26 million misappropriated benefit certain entity’s employees used make payments government officials audit committee’s investigation able verify claim 28 million payment represents gain contingency reflected income consolidated condensed statement operations quarter ended december 31 2005 accordance sfas 5 accounting contingencies 2007 investigation identified another payment 300000 made prior year entity may used make illegal payments government officials company audit committee also investigated large volume payments made company period fiscal 1998 2004 asia pacific region respect approximately 10 million payments investigations date either able establish legitimacy transactions reflected underlying documents able resolve questions adequacy underlying documents support accounting entries payments may proper circumstances surrounding others suggest theft illegal payments improprieties may involved payments previously expensed therefore company believes additional expense required recorded payments company voluntarily disclosed information found special audit committee investigation well related information company’s theft investigation us department justice “doj” us securities exchange commission “sec” engaged discussions authorities review matter company cannot predict whether investigative efforts may required initiated authorities connection discussions regarding possible illegal payments asia pacific region us government officials raised question whether company made illegal payments contractor bj services company notes consolidated financial statementscontinued intermediary obtain business country central asia audit committee investigated question company voluntarily disclosed information found investigation doj sec engaged discussions authorities review matter doj sec authorities broad range civil criminal sanctions us foreign corrupt practices act “fcpa” laws may seek impose corporations individuals appropriate circumstances including limited injunctive relief disgorgement fines penalties modifications business practices compliance programs agencies authorities entered agreements obtained range sanctions several public corporations individuals arising allegations improper payments deficiencies books records internal controls whereby civil criminal penalties imposed recent civil criminal settlements included multimillion dollar fines deferred prosecution agreements guilty pleas sanctions including requirement corporation retain monitor oversee corporation’s compliance fcpa furthermore corporations entered prior consent decrees regarding fcpa potentially subject greater penalties company entered consent decree sec 2004 following investigation improper payments argentina discussions doj sec regarding certain matters described possible accurately predict time matters resolved based current information cannot predict outcome investigations whether reach resolution discussions actions may taken doj sec authorities effect foregoing may consolidated financial statements misappropriations related accounting adjustments asia pacific region possible certain internal control operating deficiencies fiscal 2002 company implemented policy changes worldwide disbursements significant personnel changes also made asia pacific region company assigned new region manager new region controller assistant controller replaced several accountants asia pacific region company also took disciplinary action personnel region addition put place internal control process improvement function led internal control manager corporate office supported managers five regional bases worldwide document enhance test control processes 13 employee stock plans currently three incentive plans employee stock purchase plan 1997 incentive plan 2000 incentive plan 2003 incentive plan “plans” provide granting stock options officers key employees nonemployee directors exercise price equal fair market value stock date grant plans also provide granting performance awards officers 2003 plan provides restricted stock awards nonemployee directors aggregate 320 million shares common stock authorized grants plans 99 million shares available future grants september 30 2007 1999 employee stock purchase plan “purchase plan” allows employees purchase shares common stock 85 market value first last business day whichever lower twelvemonth plan period beginning october 1 purchases limited 10 employee’s regular salary 21250 whichever less aggregate 120 million shares common stock authorized grants 65 million shares available future grants september 30 2007 prior october 1 2005 adopted disclosureonly provisions sfas 123 accounted certain stockbased compensation using intrinsic value method prescribed apb 25 apb 25 compensation expense recognized stock options purchase plan compensation expense recognized stock incentive awards director stock awards bj services company notes consolidated financial statementscontinued sfas 123r unearned compensation balance september 30 2005 reclassified capital excess par october 1 2005 following table summarizes stock based compensation expense recognized sfas 123r fiscal 2007 2006 apb 25 fiscal 2005 allocated follows thousands following table illustrates effect net income earnings per share fiscal 2007 2006 compared pro forma effect net income earnings per share fiscal 2005 applied fair value recognition provisions sfas 123 stock options shares reserved purchase plan thousands except per share amounts stock options plans provide granting stock options officers key employees nonemployee directors exercise price equal fair market value stock date grant options outstanding generally vest three fouryear periods exercisable periods ranging seven ten years expected life determined based exercise history last ten years exercise history showed officers tend hold options longer period exercising nonofficers october 1 2005 began segregating grants options officers nonofficers fair value determination sfas 123r due historical differences exercise patterns exhibited prior adoption sfas 123r segregate grants groups beginning october 1 2005 calculated estimated volatility using historical daily price intervals generate expected future volatility based appropriate expected lives options prior october 1 2005 calculated volatility using historical daily weekly monthly price intervals generate reasonable range expected future volatility used factor low end range accordance sfas 123 riskfree interest rate based observed us treasury rates appropriate expected lives options dividend yield based history dividend payouts bj services company notes consolidated financial statementscontinued compensation expense grants determined sfas 123r fiscal years ended september 30 calculated using blackscholes option pricing model following assumptions summary stock option activity related information presented thousands except per share prices september 30 2007 weightedaverage grant date fair value options granted fiscal 2007 2006 2005 1069 1170 699 respectively total intrinsic value options exercised years ended september 30 2007 2006 2005 78 million 211 million 482 million respectively summary status unvested shares september 30 2007 changes fiscal 2007 presented thousands except per share prices bj services company notes consolidated financial statementscontinued september 30 2007 309 million total unrecognized compensation cost related unvested stock options cost expected recognized weightedaverage period 31 years total fair value shares vested years ended september 30 2007 2006 2005 153 million 96 million 170 million respectively director stock awards addition stock options nonemployee directors may granted award common stock company exercise price “restricted stock” restricted stock awards generally vest ratably three year period compensation expense determined sfas 123r calculated using blackscholes option pricing model assumptions used calculate stock based compensation expense non officer stock option grants prior adopting sfas 123r compensation expense restricted stock awards calculated manner stock incentive awards made 1997 stock incentive plan 2000 stock incentive plan reserved 334417 shares common stock issuance performance units “units” awarded representing maximum number shares officers could receive outstanding awards unit represents right receive company end stipulated period one unrestricted share common stock contingent upon achievement certain financial performance goals stipulated period sfas 123r compensation expense recorded entire grant amount adjusted regardless achievement level attained prior adoption sfas 123r aggregate fair market value underlying shares granted plan considered unearned compensation time grant adjusted quarterly based current market price common stock compensation expense determined based management’s current estimate likelihood meeting specific financial goals expensed ratably stipulated period expense stock incentive awards 15 million 36 million 123 million fiscal 2007 2006 2005 respectively addition award units officer also awarded cash equal tax liability units receive end performance period recognize compensation expense cash award ratably performance period cash liability marked market quarterly according sfas 123r adjustment recorded compensation expense september 30 2007 accrued 19 million cash award liability outstanding grants however actual performance results end performance period could result decrease increase actual cash payments resulting increase decrease compensation expense end performance period performance criteria met fiscal 2005 fiscal 2004 grant accordance sfas 123r compensation expense reversed fair value award however 32 million 42 million reversed cash award component fiscal 2007 2006 respectively sfas 123r recognizing compensation expense units granted based fair value date grant using lattice model monte carlo simulation fair values grant outstanding september 30 2007 assumptions used determine fair value listed september 30 2007 31 million total unrecognized compensation cost related units cost expected recognized weightedaverage period 30 years units vest years ended september 30 2007 2006 2005 bj services company notes consolidated financial statementscontinued fiscal 2007 also granted officers award common stock company exercise price exercise price awards granted fair value awards equal company’s stock price date grant awards vested quarterly calendar year 2007 contingent upon achievement certain financial performance goals stipulated period addition officer also awarded cash equal tax liability common stock received end performance period fiscal 2007 expense common stock award related cash award 36 million purchase plan issued total 650008 shares fiscal 2007 purchase plan reserved 919885 shares fiscal 2008 compensation expense determined sfas 123r year ended september 30 2007 calculated using blackscholes option pricing model following assumptions calculated estimated volatility using historical daily prices based appropriate expected life purchase plan riskfree interest rate based observed us treasury rates appropriate expected life purchase plan dividend yield based history dividend payouts 14 stockholders’ equity common stock january 31 2006 stockholders approved charter amendment increasing authorized number shares common stock 380000000 shares 910000000 shares dividends paid cash dividends amount 04 per common share quarter 519 million aggregate annual amount fiscal year 2005 paid 05 per common share quarter 643 million 586 million aggregate annual amount fiscal years 2006 2007 respectively anticipate paying cash dividends amount 05 per common share quarterly basis fiscal 2008 however dividends subject approval board directors quarter board ability change dividend policy time stockholder rights plan stockholder rights plan “rights plan” designed deter coercive takeover tactics prevent acquirer gaining control company without offering fair price stockholders rights plan amended september 26 2002 extend expiration date preferred share purchase right “right” september 26 2012 increase purchase price rights plan amended outstanding share common stock includes oneeighth right becomes exercisable certain circumstances including beneficial ownership common stock person group equals exceeds 15 company’s outstanding common stock right entitles registered holder purchase company one onethousandth share series junior participating preferred stock price 520 subject adjustment certain circumstances result stock splits effected form stock dividends 1998 2001 2005 one right associated eight outstanding shares common stock purchase price oneeighth right associated one share common stock effectively 65 upon occurrence certain events specified rights plan holder right “acquiring person” defined rights plan right upon exercise bj services company notes consolidated financial statementscontinued right receive number shares common stock company surviving corporation time transaction would market price two times purchase price right issued shares series junior participating preferred stock treasury stock december 19 1997 board directors authorized stock repurchase program 150 million series increases stock repurchase program authorized repurchase 22 billion repurchases made discretion management program remain effect terminated board directors purchased 52348000 shares cost 5974 million fiscal 2005 fiscal 2006 purchased total 31725882 shares cost 11333 million fiscal 2007 purchased total 2564457 shares cost 746 million september 30 2007 remaining authority repurchase common stock 3947 million treasury shares utilized various stock plans described note 13 total 1110321 treasury shares used cost 294 million fiscal 2007 1509000 treasury shares used cost 212 million fiscal 2006 3655000 treasury shares used cost 452 million fiscal 2005 accumulated comprehensive income accumulated comprehensive income loss consists following thousands tax effects allocated component changes comprehensive income summarized follows thousands bj services company notes consolidated financial statementscontinued 15 quarterly financial data unaudited 1 represents revenue less cost sales services research engineering expenses item 9item 8 financial statements supplementary data management’s report internal control financial reporting responsible establishing maintaining adequate internal control financial reporting term defined securities exchange act 1934 rule 13a15f internal controls designed provide reasonable assurance reliability financial statements external purposes accordance accounting principles generally accepted united states america internal control financial reporting inherent limitations may prevent detect misstatements therefore even systems determined effective provide reasonable assurance absolute assurance respect financial statement preparation presentation changes conditions effectiveness internal control financial reporting may vary time supervision participation chief executive officer chief financial officer evaluated effectiveness internal control financial reporting september 30 2008 required securities exchange act 1934 rule 13a15c making assessment utilized criteria set forth committee sponsoring organizations treadway commission internal control integrated framework concluded based evaluation internal control financial reporting effective september 30 2008 effectiveness internal control financial reporting september 30 2008 audited deloitte touche llp independent registered public accounting firm stated report included herein jw stewart jeffrey e smith jw stewart jeffrey e smith president chief executive officer senior vice president chief financial officer report independent registered public accounting firm board directors stockholders bj services company houston texas audited internal control financial reporting bj services company subsidiaries “company” september 30 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers persons performing similar functions effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion company maintained material respects effective internal control financial reporting september 30 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission also audited accordance standards public company accounting oversight board united states consolidated financial statements year ended september 30 2008 company report dated november 25 2008 expressed unqualified opinion consolidated financial statements deloitte touche llp houston texas november 25 2008 report independent registered public accounting firm board directors stockholders bj services company houston texas audited accompanying consolidated statements financial position bj services company subsidiaries “company” september 30 2008 2007 related consolidated statements operations stockholders’ equity comprehensive income cash flows three years period ended september 30 2008 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position bj services company subsidiaries september 30 2008 2007 results operations cash flows three years period ended september 30 2008 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states company’s internal control financial reporting september 30 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated november 25 2008 expressed unqualified opinion company’s internal control financial reporting deloitte touche llp houston texas november 25 2008 bj services company consolidated statement operations accompanying notes integral part consolidated financial statements bj services company consolidated statement financial position assets accompanying notes integral part consolidated financial statements bj services company consolidated statement financial position liabilities stockholders’ equity accompanying notes integral part consolidated financial statements bj services company consolidated statement stockholders’ equity comprehensive income thousands accompanying notes integral part consolidated financial statements bj services company consolidated statement cash flows accompanying notes integral part consolidated financial statements bj services company notes consolidated financial statements 1 business basis presentation bj services company “company” whose operations trace back byron jackson company founded 1872 organized 1990 corporate laws state delaware leading worldwide provider pressure pumping oilfield services petroleum industry pressure pumping services consist cementing stimulation services used completion new oil natural gas wells remedial work existing wells onshore offshore oilfield services group includes casing tubular services process pipeline services chemical services completion tools completion fluids services consolidate investments greater 50 material intercompany balances transactions eliminated consolidation investments companies ownership interest ranges 20 50 exercise significant influence operating financial policies accounted using equity method investments accounted using cost method preparation financial statements conformity accounting principles generally accepted united states america requires us make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting periods actual results could differ estimates 2 summary significant accounting policies cash equivalents consider highly liquid investments purchased original maturities three months less time purchase cash equivalents allowance doubtful accounts perform ongoing credit evaluations customers adjust credit limits based upon payment history customer’s current credit worthiness determined review available credit information continuously monitor collections payments customers maintain provision estimated uncollectible accounts based upon historical experience specific customer collection issues identified inventories consist principally products consumed services provided customers ii spare parts equipment used providing services iii manufactured components attachments equipment used providing services stated primarily lower weightedaverage cost market cost primarily represents invoiced costs regularly review inventory quantities hand record provisions excess obsolete inventory based primarily estimated forecast product demand market conditions production requirements technological developments significant unanticipated changes market condition forecast could require additional provisions excess obsolete inventory property stated cost less amounts provided permanent impairments includes capitalized interest 70 million 80 million 20 million years ended september 30 2008 2007 2006 respectively depreciation generally provided using straightline method estimated useful lives individual items leasehold improvements amortized straightline basis shorter estimated useful lives lease terms estimated useful lives 10 30 years buildings leasehold improvements range 3 12 years machinery equipment make judgments estimates conjunction carrying value assets including amounts capitalized depreciation amortization methods useful lives additionally carrying values assets reviewed bj services company notes consolidated financial statementscontinued impairment whenever events changes circumstances indicate carrying amounts may recoverable determination recoverability made based upon estimated undiscounted future cash flows impairment loss recorded period determined carrying amount recoverable amount impairment amount net book value asset exceeds fair value fair value determination requires us make longterm forecasts future revenue costs related assets subject review forecasts require assumptions demand products services future market conditions technological developments significant unanticipated changes assumptions could require provision impairment future period intangible assets goodwill represents excess cost fair value net assets companies acquired purchase transactions account goodwill accordance statement financial accounting standards “sfas” 142 goodwill intangible assets requires goodwill reviewed reporting unit possible impairment annual basis circumstances indicate impairment may exist determining reporting units considered way manage operations nature operations reporting units operating segments see note 8 segment information performed annual evaluation september 30 2008 concluded goodwill associated russia might recoverable result analysis recorded 61 million impairment goodwill related russia operations fiscal 2008 impairment adjustment goodwill balance fiscal 2007 based analysis performed september 30 2007 intangible assets primarily consist acquired patents amortized straightline basis ranging 2 20 years weighted average amortization period 107 years utilize undiscounted estimated cash flows evaluate possible impairment intangible assets discount rate utilized based market factors time loss determined income taxes provide income taxes accordance sfas 109 accounting income taxes standard takes account differences financial statement treatment tax treatment certain transactions deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect change tax rates recognized income expense period includes enactment date calculation requires us make certain estimates future operations changes state federal foreign tax laws well changes financial condition could affect estimates record valuation allowance reduce deferred tax assets likely portion deferred tax assets utilized consider available evidence positive negative determine whether valuation allowance needed ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character within carryback carryforward period set forth applicable tax law tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities potentially courts resolution situations inevitably includes degree uncertainty accordingly also provide taxes accordance fasb interpretation 48 accounting uncertainty income taxes “fin 48” fin 48 addresses determination whether tax benefits claimed expected claimed tax return recorded financial statements fin 48 tax benefit uncertain tax position recognized likely based technical merits position sustained examination taxing authorities additionally amount tax benefit recognized largest amount benefit greater fifty percent likelihood realized upon ultimate settlement fin 48 also provides guidance derecognition classification interest penalties income taxes accounting interim periods financial statement disclosures recognize potential penalties interest related unrecognized tax benefits component income tax expense bj services company notes consolidated financial statementscontinued selfinsurance accruals selfinsured certain losses relating workers’ compensation general liability property damage employee medical benefits claims filed claims incurred reported liability based primarily actuarial undiscounted basis using individual casebased valuations statistical analysis based upon judgment historical experience however final cost many claims may known five years longer review selfinsurance accruals quarterly basis purchased stoploss coverage limit extent feasible aggregate exposure certain claims assurance coverage adequately protect us liability potential consequences contingencies accounted accordance sfas 5 standard requires record estimated loss contingency information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements amount loss reasonably estimated accounting contingencies environmental legal income tax matters requires us use judgment believe accruals matters adequate actual loss contingency significantly different estimated loss results operations may adversely impacted significant litigation accrue legal costs environmental remediation compliance environmental remediation costs accrued based estimates known environmental exposures using currently available facts existing environmental permits technology presently enacted laws regulations sites primarily responsible remediation estimate costs developed based internal evaluations discounted accruals recorded environmental assessments andor remedial efforts probable cost reasonably estimated accrual recorded even significant uncertainties exist ultimate cost remediation updated additional information becomes available ongoing environmental compliance costs obtaining environmental permits installation pollution control equipment waste disposal expensed incurred identified potentially responsible party us federal state superfund site accrue share estimated remediation costs site based ratio estimated volume waste contributed site us total estimated volume waste site revenue recognition revenue composed product sales rental service revenue products rentals services generally sold based fixed determinable priced purchase orders contracts customer include right return recognize revenue product sales title passes customer assumes risks rewards ownership collectibility reasonably assured rental service revenue recognized services provided collectibility reasonably assured research development expenditures research development expenditures expensed incurred maintenance repairs expenditures maintenance repairs expensed incurred expenditures renewals improvements capitalized extend life increase capacity improve efficiency asset foreign currency translation functional currency primarily us dollar gains losses resulting financial statement translation foreign operations foreign currency functional currency included comprehensive income operations canada algeria use respective local currencies functional currency derivative instruments occasionally enter forward foreign exchange contracts hedge impact currency fluctuations certain transactions assets liabilities denominated foreign currencies bj services company notes consolidated financial statementscontinued enter derivative instruments speculative trading purposes sfas 133 accounting derivative instruments hedging activities amended “sfas 133” requires recognize derivatives balance sheet fair value record derivative transactions accordance sfas 133 contracts outstanding september 30 2008 2007 employee stockbased compensation employee services received exchange stock expensed accordance sfas 123r sharebased payment fair value employee services received exchange stock measured based grantdate fair value determined using blackscholes optionpricing model stock option awards bonus stock phantom stock montecarlo simulation model performance units awards granted expensed ratably vesting period award unless retirement age reached case expense accelerated reduce expense recognized based estimated forfeiture rate time grant revise rate necessary subsequent periods reflect actual forfeitures excess tax benefits defined sfas 123r recognized addition capital excess par detriments recognized reduction capital excess par extent sufficient capital excess par available extent sufficient capital excess par available detriment recorded tax expense new accounting pronouncements april 2008 financial accounting standards board “fasb” issued fasb staff position 1423 determination useful life intangible assets “fsp 1423” fsp 1423 amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset fasb statement 142 goodwill intangible assets “sfas 142” objective fsp 1423 improve consistency useful life recognized intangible asset sfas 142 period expected cash flows used measure fair value asset sfas 141r business combinations us generally accepted accounting principles fsp 1423 effective fiscal years beginning december 15 2008 currently process evaluating impact fsp 1423 financial statements march 2008 fasb issued sfas 161 disclosures derivative instruments hedging activities amendment fasb statement 133 “sfas 161” sfas 161 changes disclosure requirements derivative instruments hedging activities entities required provide enhanced disclosures 1 entity uses derivative instruments 2 derivative instruments related hedged items accounted sfas 133 related interpretations 3 derivative instruments related hedged items affect entity’s financial position financial performance cash flows sfas 161 effective fiscal years interim periods beginning november 15 2008 required adopt sfas 161 second quarter fiscal 2009 currently derivative financial instruments subject accounting disclosure sfas 133 therefore expect adoption sfas 161 affect consolidated statement financial position results operations cash flows december 2007 fasb issued sfas 141 revised 2007 business combinations “sfas 141r” replacing sfas 141 business combinations “sfas 141” sfas 141r retains fundamental requirements sfas 141 acquisition method accounting used business combinations acquirer identified business combination sfas 141r defines acquirer entity obtains control one businesses business combination establishes acquisition date acquirer achieves control sfas 141r establishes principles requirements acquirer recognizes measures financial statements identifiable assets acquired liabilities assumed noncontrolling interest acquiree bj services company notes consolidated financial statementscontinued b recognizes measures goodwill acquired business combination gain bargain purchase c determines information disclose enable users financial statements evaluate nature financial effects business combination statement effective business combinations occurring beginning first annual reporting period beginning december 15 2008 adopt sfas 141r october 1 2009 acquisitions beginning date december 2007 fasb issued sfas 160 noncontrolling interests consolidated financial statements “sfas 160” amending arb 51 establish accounting reporting standards noncontrolling interest subsidiary deconsolidation subsidiary sfas 160 requires consolidated net income reported amounts include amounts attributable parent noncontrolling interest also requires disclosure face consolidated statement income amounts consolidated net income attributable parent noncontrolling interest requires parent recognize gain loss net income subsidiary deconsolidated sfas 160 requires expanded disclosures consolidated financial statements identify distinguish interests parent’s owners interests noncontrolling owners subsidiary shall applied prospectively beginning fiscal year initially applied except presentation disclosure requirements presentation disclosure requirements shall applied retrospectively periods presented sfas 160 effective fiscal years beginning december 15 2008 significant noncontrolling interests consolidated subsidiaries therefore adoption standard expected significant impact financial statements february 2007 fasb issued sfas 159 fair value option financial assets financial liabilities including amendment fasb statement 115 “sfas 159” statement provides companies option report selected financial assets liabilities fair value sfas 159 companies elect fair value option report unrealized gains losses earnings subsequent reporting date addition sfas 159 establishes presentation disclosure requirements designed facilitate comparisons companies choose different measurement attributes similar types assets liabilities fair value option election irrevocable unless new election date occurs sfas 159 effective beginning entity’s first fiscal year beginning november 15 2007 applied prospectively unless entity elects early adoption consequently adopted sfas 159 effective october 1 2008 elect apply fair value option september 2006 fasb issued sfas 157 fair value measurements “sfas 157” effective financial statements issued fiscal years beginning november 15 2007 february 2008 fasb issued fasb staff position 1572 delaying effective date sfas 157 nonfinancial assets liabilities fiscal years beginning november 15 2008 sfas 157 introduces new definition fair value fair value hierarchy requiring market based assumptions used available new disclosures assets liabilities measured fair value based level hierarchy currently process evaluating impact sfas 157 financial statements bj services company notes consolidated financial statementscontinued 3 acquisitions businesses fiscal 2008 may 21 2008 acquired outstanding shares innicor subsurface technologies inc “innicor” purchase price 544 million including transaction costs resulted increase 381 million total current assets 145 million property equipment 07 million intangible assets 112 million current liabilities 31 million long term liabilities 154 million goodwill innicor designs manufactures provides tools equipment utilized completion production phases oil gas well development canada select international markets business complements completion tools business oilfield services group pro forma financial information acquisition included material financial statements fiscal 2007 november 3 2006 completed acquisition profile international ltd “profile” total purchase price 25 million resulted 22 million goodwill profile located newcastle england provides caliper inspection tools pipeline integrity assessment markets worldwide business complements pipeline inspection business oilfield services group segment december 20 2006 purchased substantially operating assets tekcor technology ltd “tekcor” 83 million resulted increase 36 million total current assets 07 million property equipment 40 million technologybased intangible assets tekcor provides specialty chemicals related services oil gas well drilling industry located houston texas tekcor services markets along texas louisiana gulf coast included completion fluids business oilfield services group segment march 1 2007 acquired aberdeenbased norson services ltd “norson” division norson group ltd substantially assets norson group’s united states subsidiary norson services llc total purchase price paid acquisitions 290 million including legal fees resulted increase 74 million total current assets 59 million property equipment 18 million intangible assets 54 million current liabilities 193 million goodwill acquisition strengthens service capabilities addition norson’s hydraulic electrical umbilical testing services provided norson’s subsea units include remote pigging flooding subsea hydro testing subsea data logging business complements process pipeline business oilfield services group segment june 30 2007 completed acquisition substantially capillary tubing assets allischalmers total purchase price 163 million resulted increase 15 million current assets 18 property equipment 130 million goodwill assets used installation service capillary injection systems primarily united states mexico assets complement dynacoil acquisition occurred fourth quarter fiscal 2006 enhance chemical services operation oilfield services group segment pro forma financial information fiscal 2008 fiscal 2007 acquisitions included material individually aggregate financial statements bj services company notes consolidated financial statementscontinued 4 earnings per share basic earnings per share excludes dilution computed dividing net income weightedaverage number common shares outstanding period diluted earnings per share based weightedaverage number shares outstanding period assumed exercise dilutive instruments stock options employee stock purchase plan stock incentive awards bonus stock director stock awards less number treasury shares assumed purchased exercise proceeds using average market price common stock periods presented following table presents information necessary calculate earnings per share three years period ended september 30 2008 thousands except per share amounts years ended september 30 2008 2007 29 million stock options excluded computation diluted earnings per share due antidilutive effect stock options excluded computation diluted earnings per share year ended september 30 2006 outstanding stock options dilutive year 5 debt longterm debt september 30 consisted following thousands may 19 2008 completed public offering 2500 million 6 senior notes due 2018 net proceeds offering approximately 2469 million deducting underwriting discounts commissions expenses used retire 2500 million outstanding floating rate senior notes matured june 1 2008 september 30 2008 company 2498 million 575 senior notes due 2011 2489 million 6 senior notes due 2018 issued outstanding net discount bj services company notes consolidated financial statementscontinued amended restated revolving credit facility “revolving credit facility” permits borrowings 400 million principal amount revolving credit facility includes 50 million sublimit issuance standby letters credit 20 million sublimit swingline loans swingline loans shortterm maturities remaining amounts outstanding revolving credit facility become due payable august 2012 addition right request additional 200 million permitted borrowings 400 million subject approval lenders time request depending amount borrowings outstanding facility interest rate applicable borrowings generally ranges 3040 basis points libor charged various fees connection revolving credit facility including commitment fee based average daily unused portion commitment totaling 02 million fiscal 2008 03 million fiscal 2007 addition revolving credit facility charges utilization fee outstanding loans letters credit usage revolving credit facility exceeds 625 although material fees fiscal 2008 borrowings revolving credit facility september 30 2008 1470 million outstanding september 30 2007 may 2008 entered committed credit facility commercial bank finance acquisition innicor subsurface technologies inc commitment fees required facility interest rate based market rates dates amounts borrowed september 30 2008 500 million outstanding borrowings credit facility expire may 2009 addition revolving credit facility committed credit facility available 622 million discretionary lines credit september 30 2008 expire bank’s discretion except 48 million discretionary credit lines unsecured requirements commitment fees compensating balances connection lines credit interest prevailing market rates 76 million 243 million outstanding borrowings lines credit september 30 2008 2007 respectively weighted average interest rates shortterm borrowings outstanding september 30 2008 2007 523 540 respectively senior notes revolving credit facility committed credit facility include various customary covenants provisions including maintenance certain profitability solvency ratios none materially restrict activities currently compliance covenants imposed 6 financial instruments following methods assumptions used estimate fair value class financial instruments practicable cash equivalents shortterm investments trade receivables trade payables shortterm borrowings carrying amount approximates fair value short maturity instruments longterm debt fair value based rates currently available us debt similar terms average maturities foreign currency debt periodically borrow funds denominated foreign currencies exposes us market risk associated exchange rate movements 76 million 154 million borrowings denominated foreign currencies september 30 2008 2007 respectively bj services company notes consolidated financial statementscontinued fair value financial instruments differed carrying value september 30 2008 2007 follows thousands 7 income taxes geographical sources income taxes three years period ended september 30 2008 follows thousands provision income taxes three years period ended september 30 2008 summarized thousands bj services company notes consolidated financial statementscontinued consolidated effective income tax rates percent income taxes three years period ended september 30 2008 varied us statutory income tax rate reasons set forth deferred tax assets liabilities recognized estimated future tax effects temporary differences tax basis assets liabilities reported amount financial statements measurement deferred tax assets liabilities based enacted tax laws rules currently effect taxing jurisdictions operations generally deferred tax assets liabilities classified current noncurrent according classification related asset liability financial reporting purposes deferred tax assets liabilities september 30 follows thousands 1 deferred gain contribution pumping service equipment partnership referred note 10 bj services company notes consolidated financial statementscontinued adopted provisions fin 48 october 1 2007 result implementation fin 48 recognized reduction 81 million october 1 2007 balance retained earnings corresponding increase longterm liabilities date adoption unrecognized tax benefits 666 million recognized would favorably affect effective tax rate period recognized reconciliation beginning ending amount unrecognized tax benefits follows thousands recognize potential penalties interest related unrecognized tax benefits component income tax expense reasonably possible approximately 6 million unrecognized tax benefits could realized next twelve months due expiring statutes settlements taxing authorities file tax returns united states approximately fifty countries subject audits periodically none expected material impact financial statements due uncertainty various stages audits unable make reasonably reliable estimates period cash settlement related fin 48 liabilities whether material net cash settlement required united states canada major taxing jurisdictions earliest open tax year subject examination 2005 united states 1999 canada september 30 2008 approximately 562 million foreign net operating loss carryforwards 24 million state net operating loss carryforwards foreign net operating loss carryforwards expire follows 03 million 2010 08 million 2012 22 million fiscal year 2017 remaining 529 million expire state net operating losses expire fiscal year 2009 fiscal year 2019 record valuation allowance reduce deferred tax assets likely portion deferred tax assets expire realization benefit management believes likely portion foreign net operating loss carry forwards realized valuation allowance recorded amounts stock basis difference foreign subsidiaries us deferred tax liability established approximately 6249 million september 30 2008 stock basis difference arises existence unremitted foreign earnings cumulative translation adjustments provided additional taxes anticipated repatriation foreign earnings foreign subsidiaries determined foreign subsidiaries earnings indefinitely reinvested foreign subsidiaries whose earnings indefinitely reinvested provision us federal state income taxes recorded record tax liability full tax versus book basis difference foreign subsidiaries additional net deferred tax liability approximately 499 million would recorded september 30 2008 8 segment information currently thirteen operating segments separate financial information available separate management teams engaged oilfield services results operating segments bj services company notes consolidated financial statementscontinued evaluated regularly chief operating decision maker deciding allocate resources assessing performance operating segments aggregated four reportable segments usmexico pressure pumping canada pressure pumping international pressure pumping oilfield services group usmexico pressure pumping segment two operating segments provide cementing services stimulation services consisting fracturing acidizing sand control nitrogen coiled tubing service tool services throughout united states mexico two operating segments aggregated one reportable segment offer type services similar economic characteristics similar production processes use methods provide services canada pressure pumping segment one operating segment like usmexico pressure pumping provides cementing stimulation services provided customers major oil natural gas producing areas canada international pressure pumping segment five operating segments similar usmexico canada pressure pumping provides cementing stimulation services provided customers 50 countries major international oil natural gas producing areas latin america europe asia pacific russia middle east operating segments aggregated one reportable segment similar economic characteristics offer type services similar production processes use methods provide services also serve similar customers include major multinational independent national stateowned oil companies fiscal 2008 revised internal management reporting structure pressure pumping operations africa whose results operations previously reported europeafrica operating segment north africa results including algeria libya included middle east operating segment west africa results south nigeria including angola gabon included latin america operating segment nigeria coastal areas north remain part europe operating segment change impact reportable segments oilfield services segment five operating segments operating segments provide oilfield services casing tubular services process pipeline services chemical services completion tools completion fluids services united states select markets internationally operating segments aggregated one reportable segment provide oilfield services serve similar customers operating segments share resources accounting policies segments described summary significant accounting policies evaluate performance segments based operating income intersegment sales transfers material summarized financial information concerning segments three years period ended september 30 2008 shown following tables thousands “corporate” column includes corporate expenses assets allocated operating segments revenue geographic location determined based location services rendered products sold years ended september 30 2008 2007 2006 provided services several thousand customers none accounted 5 consolidated revenue bj services company notes consolidated financial statementscontinued business segments geographic information bj services company notes consolidated financial statementscontinued revenue product line reconciliation segment information consolidated income taxes three years period ended september 30 2008 set forth thousands 9 employee benefit plans defined benefit pension plans defined benefit pension plans covering certain employees united states certain international locations including uk canada norway elsewhere fiscal 2004 plans uk canada frozen new entrants us defined benefit pension plan frozen effective december 31 1995 time earned benefits vested september 2006 entered agreement settle obligation respect us defined benefit plan assets approximately 72 million used purchase insurance contract used fund benefits settle plan proposed settlement requires approval pension benefit guaranty corporation internal revenue service relieve us primary responsibility pension benefit obligation regulatory approval obtained expected early fiscal 2009 record noncash pretax charge approximately 216 million connection settlement consists 56 million prepaid pension cost 160 million loss currently recognized accumulated comprehensive income also nonqualified supplemental executive retirement plan “serp” unfunded defined benefit pension plan provides executives supplemental retirement benefits based highest consecutive three years compensation final ten years employment benefits serp become vested upon later executive’s 55th birthday date executive completes five full years service officer postretirement benefit plans also sponsor plans provide certain health care life insurance benefits retired employees primarily united states meet specified age service requirements eligible dependents plans unfunded retain right subject existing agreements modify eliminate postretirement medical benefit plan provides credits based years service used purchase coverage retiree plan effectively caps health care inflation rate 4 increase per year bj services company notes consolidated financial statementscontinued use september 30 measurement date plans amounts presented thousands unless otherwise stated data frozen us defined benefit pension plan included table obligations related plan effectively transferred insurance contract mentioned obligations funded status amounts recognized consolidated statement financial position consist amounts recognized accumulated comprehensive income consist following september 30 2008 bj services company notes consolidated financial statementscontinued estimated amortization amounts reflected accumulated comprehensive income net periodic benefit cost expected 11 million fiscal 2009 us serp expected material plans outside united states accumulated benefit obligations abo excess plan assets abo actuarial present value pension benefits employees’ current compensation levels differs projected benefit obligation abo include assumptions future compensation levels abo us serp postretirement plan 735 million 819 million september 30 2008 2007 respectively abo nonus plans 1674 million 2027 million september 30 2008 2007 respectively following information plans abo’s excess plan assets september 30 components net periodic benefit cost assumptions weighted average assumptions used determine benefit obligations september 30 follows bj services company notes consolidated financial statementscontinued weighted average assumptions used determine net periodic benefit costs years ended september 30 follows expected longterm rate return assumptions represent rate return plan assets reflecting average rate earnings expected funds invested provide benefits included projected benefit obligation assumption determined reflecting expectations regarding future rates return portfolio considering asset distribution target related historical rates return redemption yield government fixed interest bonds well corporate bonds used proxies return debt securities weighted relative proportion within actual portfolio return equities based historical longterm performance equity classes rate reassessed least annual basis postretirement benefit obligation september 30 2008 2007 also determined using health care cost inflation rate 4 reflecting cap described plan assets objective diversify portfolios pension assets among several asset classes reduce volatility maintaining asset mix provides highest rate return acceptable risk primarily mix equity securities fixed income funds generate asset returns comparable general market investment committees meet least annually review portfolio returns determine assetmix targets based assetliability studies investment committees consider studies formal establishment current assetmix targets based projected risk return levels asset class investment portfolio september 30 2008 2007 contributions estimated benefit payments pension plans generally funded amounts necessary meet legal contractual minimum funding requirements contributed 164 million fiscal 2008 none discretionary infrequently make discretionary contributions expect contribute 177 million defined benefit plans fiscal 2009 represents legal contractual minimum funding requirements postretirement plan generally funded amounts necessary meet benefit costs incurred contributed 04 million fiscal 2008 expect contribute 16 million post retirement plan fiscal 2009 represents anticipated claims bj services company notes consolidated financial statementscontinued following benefit payments plans reflect expected future service appropriate expected paid defined contribution plans administer defined contribution plans employees united states uk canada whereby eligible employees may elect contribute 2 20 base salaries employee benefit trust match employee contributions rate 100 6 employee’s base salary united states equal matching 55 employee’s base salary uk addition contribute 2 6 employee’s base salary depending age years service united states uk canada matching contributions vest immediately base contributions become fully vested three years employment company contributions defined contribution plans 306 million 310 million 239 million fiscal 2008 2007 2006 respectively directors’ retirement plan nonqualified directors’ retirement plan unfunded defined benefit plan provides nonemployee directors benefits upon termination service based number years service last annual retainer fee plan discontinued december 2007 currently serving directors expense associated plan 24 million 02 million 07 million years ended september 30 2008 2007 2006 respectively benefits paid plan totaled 40 thousand years ended september 30 2008 2007 2006 related accrued benefit obligation 55 million 31 million september 30 2008 2007 respectively 10 commitments contingencies litigation performance service operations sometimes named defendant litigation usually relating claims personal injury property damage including claims well reservoir damage maintain insurance coverage claims extent deemed prudent management series acquisitions assumed responsibility certain claims proceedings made western company north america nowsco well service ltd osca companies whose stock acquired connection businesses claims proceedings continue covered insurance policies predecessors place time acquisitions although outcome claims proceedings us cannot predicted certainty management believes existing claims proceedings likely material adverse effect financial position results operations already provided bj services company notes consolidated financial statementscontinued newfield litigation april 4 2002 jury rendered verdict adverse osca connection litigation pending united states district court southern district texas houston lawsuit filed newfield exploration september 29 2000 arose blowout occurred 1999 offshore well owned newfield jury determined osca’s negligence caused contributed blowout responsible 86 damages suffered newfield total damage amount awarded newfield 156 million excluding pre postjudgment interest court delayed entry final judgment case pending completion related insurance coverage litigation filed osca certain insurers former insurance broker court elected conduct trial insurance coverage issues based upon briefs parties interim related litigation filed osca former insurance brokers errors omissions connection policies issue case stayed february 28 2003 court issued final judgment connection newfield claims based upon jury’s verdict time court issued rulings adverse osca connection claim insurance coverage motions new trial denied judge case appealed us court appeals fifth circuit regard liability case insurance coverage issues fifth circuit issued ruling april 12 2006 finding osca liability issues ruling osca’s favor insurance coverage aislic filed motion rehearing fifth circuit denied case remanded district court june 2006 consideration one exclusion contained aislic policy district court recently ruled aislic owes additional 43 million insurance policy covers portions damages incurred case upon remand newfield filed motion enforce judgment osca court denied great lakes chemical corporation owned majority outstanding shares osca time acquisition agreed indemnify osca 75 uninsured liability excess 3 million arising newfield litigation case settled third quarter fiscal 2008 adjusted amount accrued accordingly resulting 38 million reduction general administrative expense corporate segment fiscal 2008 asbestos litigation august 2004 certain predecessors along numerous defendants named four lawsuits filed circuit courts jones smith counties mississippi four lawsuits included 118 individual plaintiffs alleging suffer various illnesses exposure asbestos seeking damages lawsuits assert claims unseaworthiness negligence strict liability based upon status predecessors jones act employers plaintiffs required complete data sheets specifying companies employed asbestoscontaining products allegedly exposed process approximately 25 plaintiffs identified us predecessors employer amended lawsuits filed four individuals us remainder original claims 114 dismissed four lawsuits three failed name us employer manufacturer asbestos containing products thereby dismissed subsequently individual one lawsuits brought action us result currently named employer two mississippi lawsuits possible many 21 claimants identified us predecessors employer could file suit us done time minimal medical information regarding alleged asbestosrelated disease suffered plaintiffs two lawsuits provided accordingly unable estimate potential exposure lawsuits predecessors past maintained insurance may available respond claims addition jones act cases named small number additional asbestos cases allegations cases vary generally include claims provided unspecified product service contained utilized asbestos employee exposed asbestos one facilities customer job sites allegations involve claims successor byron jackson company date successful obtaining bj services company notes consolidated financial statementscontinued dismissals cases without payment settlements judgments although remain pending present time intend defend vigorously cases based information available us time expect outcome lawsuits individually collectively material adverse effect financial position results operations cash flows however assurance ultimate outcome lawsuits additional similar lawsuits may filed halliburton python litigation december 21 2007 halliburton energy services inc refiled prior suit us another oilfield services company patent infringement connection drillable bridge plug tools used isolate portions well stimulation work plugs milled using coiled tubing workover rig halliburton claims tools offered trade name “python” tools offered company infringe various patents tool constructed composite material lawsuit filed united states district court northern district texas dallas lawsuit arises litigation filed 2003 halliburton regarding patents issue earlier case dismissed without prejudice halliburton sought reexamination patents united states patent trademark office july 6 2004 expect outcome matter material adverse effect financial position results operations cash flows however assurance ultimate outcome matter future lawsuits may filed investigations regarding misappropriation possible illegal payments october 2004 received report whistleblower alleging asia pacific region controller misappropriated company funds illegal payments made government officials region management audit committee board directors conducted investigations allegations well questions later arose whether illegal payments made elsewhere result theft investigation region controller admitted multiple misappropriations returned certain amounts company employment terminated 2004 addition audit committee’s investigation found information indicating significant likelihood payments made us entity asia pacific region contractual relationship used make payments government officials region information also indicated certain employees region believed payments us would used way payments may illegal aggregated approximately 29 million made period several years investigation also identified certain payments legitimacy transactions reflected underlying documents could established questions adequacy underlying documents could resolved voluntarily disclosed information found investigations us department justice “doj” us securities exchange commission “sec” engaged discussions authorities connection review matter cannot predict whether investigative efforts may required initiated authorities may 2007 former region controller pled guilty one count theft singapore june 2007 filed civil lawsuit seeking recover additional misappropriated funds seeking accounting disbursements could explained following investigation july 2008 reached settlement litigation region controller made payment us doj sec authorities broad range civil criminal sanctions us foreign corrupt practices act “fcpa” laws may seek impose appropriate circumstances recent civil criminal settlements number public corporations individuals bj services company notes consolidated financial statementscontinued included multimillion dollar fines disgorgement injunctive relief guilty pleas deferred prosecution agreements sanctions including requirements corporations retain monitor oversee compliance fcpa cannot predict actions may taken doj sec authorities effect foregoing may consolidated financial statements environmental conducting environmental investigations remedial actions current former company locations along companies currently named potentially responsible party five waste disposal sites owned third parties september 30 2008 2007 reserved approximately 46 million 34 million respectively environmental matters represents management’s best estimate portion future costs incurred insurance also maintained environmental liabilities lease longterm commitments 1999 contributed certain pumping service equipment limited partnership 1 interest equipment used provide services customers pay service fee period least six years 13 years approximately 12 million annually accounted operating lease assessed terms agreement determined variable interest entity defined fin 46r consolidation variable interest entities however deemed primary beneficiary therefore consolidation required transaction resulted gain deferred amortized 13 years balance deferred gain 42 million 90 million september 30 2008 2007 respectively agreement permits substitution equipment within partnership long implied fair value new property transferred date substitution equals exceeds implied fair value defined current property partnership replaced result substitutions deferred gain reduced 27 million fiscal 2008 08 million fiscal 2007 2010 option obligation purchase pumping service equipment approximately 46 million currently intend exercise option price purchase equipment partnership depends part fair market value equipment held partnership time option exercised well factors specified agreement 1997 contributed certain pumping service equipment limited partnership owned 1 interest equipment used provide services customers paid service fee february 9 2007 purchased remaining partnership interest 478 million result acquired partnership equipment acquisition partnership controlling interest accounted asset purchase september 30 2008 longterm operating leases service fee commitments covering certain facilities equipment well longterm commitments varying expiration dates minimum annual commitments years ending september 30 2009 2010 2011 2012 2013 650 million 436 million 367 million 221 million 105 million respectively 115 million aggregate thereafter contractual obligations routinely issue parent company guarantees “pcgs” connection service contracts performance obligations entered subsidiaries issuance pcgs frequently condition bidding process imposed customers work countries outside north america pcgs bj services company notes consolidated financial statementscontinued typically provide guarantee performance services local subsidiary term pcgs varies length service contract date parent company called upon perform pcgs arrange issuance variety bank guarantees performance bonds standby letters credit vast majority issued connection contracts subsidiaries entered customers customer right call bank guarantee performance bond standby letter credit event subsidiaries default performance services instruments required condition awarded contract typically released upon completion contract also issued standby letters credit connection variety financial obligations support fronted insurance programs claims administration funding certain employee benefit plans temporary importation bonds following table summarizes commercial commitments september 30 2008 thousands 11 intangible assets changes carrying amount goodwill reportable segment three years period ended september 30 2008 follows thousands goodwill increased 176 million fiscal 2008 primarily result acquisition innicor subsurface technologies inc discussed note 3 goodwill reduced 61 million fiscal 2008 result 61 million impairment goodwill related russia operations competitive pressure areas operate russia cost inflation currency risks concerns future activity reductions analysis indicates goodwill associated russia might recoverable technologybased intangible assets net accumulated amortization 312 million 289 million september 30 2008 2007 respectively amortization three years ended september 30 2008 2007 2006 37 million 22 million 07 million respectively estimated amortization expense subsequent five fiscal years expected within range 40 million 50 million bj services company notes consolidated financial statementscontinued 12 supplemental financial information supplemental financial information years ended september 30 follows thousands expense net years ended september 30 summarized follows thousands activity allowance doubtful accounts years ended september 30 follows thousands 13 stockbased compensation currently two stock incentive plans two employee stock purchase plans 2000 incentive plan 2003 incentive plan “plans” provide granting stock options officers certain eligible employees nonemployee directors exercise price equal fair market value stock date grant plans also provide granting performance based long term stock incentive awards including performance units “units” bonus stock phantom stock officers 2003 plan provides restricted stock awards certain eligible employees nonemployee directors aggregate 200 million shares common stock authorized grants plans 71 million shares bj services company notes consolidated financial statementscontinued available future grants september 30 2008 1999 employee stock purchase plan 2008 employee stock purchase plan “purchase plans” allow employees purchase shares common stock 85 market value first last business day whichever lower twelvemonth plan period beginning october 1 purchases limited 10 employee’s regular salary 21250 whichever less aggregate 220 million shares common stock authorized purchases purchase plans 159 million shares available future purchases september 30 2008 following table summarizes stockbased compensation expense recognized sfas 123r fiscal 2008 2007 2006 allocated follows thousands stock options plans provide granting stock options officers certain eligible employees nonemployee directors exercise price equal fair market value stock date grant options outstanding generally vest threeyear period exercisable periods ranging seven ten years expected life determined based exercise history last ten years exercise history showed officers tend hold options longer period exercising nonofficers segregate grants options officers nonofficers fair value determination sfas 123r due historical differences exercise patterns exhibited calculate estimated volatility using historical daily price intervals generate expected future volatility based appropriate expected lives options riskfree interest rate based observed us treasury rates appropriate expected lives options dividend yield based history dividend payouts compensation expense grants determined sfas 123r fiscal years ended september 30 calculated using blackscholes option pricing model following assumptions bj services company notes consolidated financial statementscontinued summary stock option activity related information presented thousands except per share prices years september 30 2008 weightedaverage grant date fair value options granted fiscal 2008 2007 2006 704 1069 1170 respectively total intrinsic value options exercised years ended september 30 2008 2007 2006 469 million 78 million 211 million respectively summary status unvested shares september 30 2008 changes fiscal 2008 presented thousands except per share prices september 30 2008 152 million total unrecognized compensation cost related unvested stock options cost expected recognized weightedaverage period 15 years total fair value shares vested years ended september 30 2008 2007 2006 145 million 153 million 96 million respectively director stock awards addition stock options nonemployee directors may granted award common stock company exercise price “restricted stock” restricted stock awards generally vest ratably threeyear period compensation expense determined sfas 123r calculated using blackscholes option pricing model assumptions used calculate stockbased compensation expense nonofficer stock option grants expense director stock awards 13 million 10 million 13 million fiscal 2008 2007 2006 respectively stock incentive awards made 1997 stock incentive plan 2000 stock incentive plan reserved 345168 shares common stock issuance units awarded representing maximum number shares officers could receive outstanding awards unit represents right receive company end stipulated period one unrestricted share common stock contingent upon achievement certain marketbased financial performance goals stipulated period sfas 123r compensation expense stockbased compensation awards contingent bj services company notes consolidated financial statementscontinued upon market condition recorded entire grant amount regardless achievement market condition expense stock incentive awards 31 million 15 million 36 million fiscal 2008 2007 2006 respectively addition award units officer also awarded cash equal tax liability units receive end performance period recognize compensation expense cash award ratably performance period cash liability marked market quarterly according sfas 123r adjustment recorded compensation expense september 30 2008 accrued 11 million cash award liability outstanding grants however actual performance results end performance period could result decrease increase actual cash payments resulting increase decrease compensation expense end performance period performance criteria met fiscal 2005 2004 2003 unit grants threeyear performance period accordance sfas 123r compensation expense reversed fair value award however 14 million 32 million 42 million reversed cash award component fiscal 2008 2007 2006 respectively sfas 123r recognizing compensation expense units granted based fair value date grant using lattice model monte carlo simulation fair values grant outstanding september 30 2008 assumptions used determine fair value listed september 30 2008 34 million total unrecognized compensation cost related units cost expected recognized weightedaverage period 16 years units vest years ended september 30 2008 2007 2006 fiscal 2008 2007 also granted officers awards bonus stock phantom stock common stock company exercise price exercise price awards granted fair value awards equal company’s stock price date grant portion awards vest quarterly calendar year remaining vest annually contingent upon achievement certain financial performance goals stipulated periods addition officer also awarded cash equal tax liability common stock received end performance period fiscal 2008 2007 expense common stock award related cash award 51 million 48 million respectively bj services company notes consolidated financial statementscontinued purchase plan issued total 769428 shares fiscal 2008 purchase plan reserved 1282908 shares fiscal 2009 compensation expense determined sfas 123r year ended september 30 2008 calculated using blackscholes option pricing model following assumptions calculated estimated volatility using historical daily prices based appropriate expected life purchase plan riskfree interest rate based observed us treasury rates appropriate expected life purchase plan dividend yield based history dividend payouts 14 stockholders’ equity common stock authorization issue 9100 million shares common stock dividends paid 05 per common share quarter 586 million aggregate annual amount fiscal years 2008 2007 643 million aggregate annual amount fiscal year 2006 anticipate paying cash dividends amount 05 per common share quarterly basis fiscal 2009 however dividends subject approval board directors quarter board ability change dividend policy time stockholder rights plan stockholder rights plan “rights plan” designed deter coercive takeover tactics prevent acquirer gaining control company without offering fair price stockholders rights plan amended september 26 2002 extend expiration date preferred share purchase right “right” september 26 2012 increase purchase price rights plan amended outstanding share common stock includes oneeighth right becomes exercisable certain circumstances including beneficial ownership common stock person group equals exceeds 15 company’s outstanding common stock right entitles registered holder purchase company one onethousandth share series junior participating preferred stock price 520 subject adjustment certain circumstances result stock splits effected form stock dividends 1998 2001 2005 one right associated eight outstanding shares common stock purchase price oneeighth right associated one share common stock effectively 65 upon occurrence certain events specified rights plan holder right “acquiring person” defined rights plan right upon exercise right receive number shares common stock company surviving corporation time transaction would market price two times purchase price right issued shares series junior participating preferred stock treasury stock 1997 board directors initiated stock repurchase program series increases authorizes repurchase 22 billion company stock repurchases made discretion management program remain effect terminated board directors purchased 84073882 shares cost 17307 million fiscal 2006 fiscal 2007 purchased total 2564457 shares cost 746 million fiscal 2008 purchased total bj services company notes consolidated financial statementscontinued 101400 shares cost 21 million treasury shares utilized various stock plans described note 13 total 3933259 treasury shares used cost 1043 million fiscal 2008 1110321 treasury shares used cost 294 million fiscal 2007 1509000 treasury shares used cost 212 million fiscal 2006 october 1 2008 november 17 2008 purchased 3466500 shares cost 442 million currently remaining authorization purchase additional 3484 million stock accumulated comprehensive income accumulated comprehensive income loss consists following thousands tax effects allocated component changes accumulated comprehensive income summarized follows thousands bj services company notes consolidated financial statementscontinued 15 quarterly financial data unaudited 1 represents revenue less cost sales services research engineering expenses item 9item 8 financial statements supplementary data management’s report internal control financial reporting responsible establishing maintaining adequate internal control financial reporting term defined securities exchange act 1934 rule 13a15f internal controls designed provide reasonable assurance reliability financial statements external purposes accordance accounting principles generally accepted united states america internal control financial reporting inherent limitations may prevent detect misstatements therefore even systems determined effective provide reasonable assurance absolute assurance respect financial statement preparation presentation changes conditions effectiveness internal control financial reporting may vary time supervision participation chief executive officer chief financial officer evaluated effectiveness internal control financial reporting september 30 2009 required securities exchange act 1934 rule 13a15c making assessment utilized criteria set forth committee sponsoring organizations treadway commission internal control integrated framework concluded based evaluation internal control financial reporting effective september 30 2009 effectiveness internal control financial reporting september 30 2009 audited deloitte touche llp independent registered public accounting firm stated report included herein report independent registered public accounting firm board directors stockholders bj services company houston texas audited internal control financial reporting bj services company subsidiaries “company” september 30 2009 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers persons performing similar functions effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion company maintained material respects effective internal control financial reporting september 30 2009 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission also audited accordance standards public company accounting oversight board united states consolidated financial statements year ended september 30 2009 company report dated november 23 2009 expressed unqualified opinion consolidated financial statements deloitte touche llp houston texas november 23 2009 report independent registered public accounting firm board directors stockholders bj services company houston texas audited accompanying consolidated statements financial position bj services company subsidiaries “company” september 30 2009 2008 related consolidated statements operations stockholders’ equity comprehensive income cash flows three years period ended september 30 2009 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position bj services company subsidiaries september 30 2009 2008 results operations cash flows three years period ended september 30 2009 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states company’s internal control financial reporting september 30 2009 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated november 23 2009 expressed unqualified opinion company’s internal control financial reporting deloitte touche llp houston texas november 23 2009 bj services company consolidated statement operations accompanying notes integral part consolidated financial statements bj services company consolidated statement financial position assets accompanying notes integral part consolidated financial statements bj services company consolidated statement financial position liabilities stockholders’ equity accompanying notes integral part consolidated financial statements bj services company consolidated statement stockholders’ equity comprehensive income thousands accompanying notes integral part consolidated financial statements bj services company consolidated statement cash flows accompanying notes integral part consolidated financial statements bj services company notes consolidated financial statements 1 business basis presentation baker hughes merger agreement bj services company “company” whose operations trace back byron jackson company founded 1872 organized 1990 corporate laws state delaware leading worldwide provider pressure pumping oilfield services petroleum industry pressure pumping services consist cementing stimulation services used completion new oil natural gas wells remedial work existing wells onshore offshore oilfield services group includes casing tubular services process pipeline services chemical services completion tools completion fluids services consolidate investments greater 50 intercompany balances transactions eliminated consolidation investments companies ownership interest ranges 20 50 exercise significant influence operating financial policies accounted using equity method investments accounted using cost method preparation financial statements conformity accounting principles generally accepted united states america requires us make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting periods actual results could differ estimates evaluated subsequent events november 23 2009 date issuance consolidated financial statements baker hughes merger agreement august 30 2009 company baker hughes incorporated “baker hughes” entered agreement plan merger “merger agreement” pursuant company merge whollyowned subsidiary baker hughes share company common stock converted right receive 040035 shares baker hughes common stock 269 cash “merger” completion merger subject customary closing conditions including approval merger stockholders company ii approval stockholders baker hughes issuance baker hughes common stock execute merger iii applicable regulatory approvals including termination expiration applicable waiting period us hartscottrodino antitrust improvements act 1976 amended iv effectiveness registration statement form s4 relating baker hughes common stock issued merger v customary closing conditions merger agreement company agreed conduct business ordinary course merger pending generally refrain acquiring new businesses incurring new indebtedness repurchasing treasury shares issuing new common stock equity awards entering new material contracts commitments outside normal course business without consent baker hughes company incurred 53 million costs related merger fiscal 2009 included general administrative expense corporate segment certain circumstances company baker hughes may required pay termination fee 175 million party merger completed merger approved completed certain contractual obligations company may triggered accelerated “change control” provisions contractual arrangements examples arrangements include stockbased compensation awards severance retirement plan agreements applicable executive officers directors certain employees equipment partnership described note 11 baker hughes company working comply us department justice’s second request additional information documentary material issued october 14 2009 complete merger quickly practicable currently expect merger completed company’s second fiscal quarter fiscal 2010 however company cannot predict certainty merger completed completion merger subject conditions within beyond company’s control bj services company notes consolidated financial statementscontinued 2 summary significant accounting policies cash equivalents consider highly liquid investments purchased original maturities three months less time purchase cash equivalents allowance doubtful accounts perform ongoing credit evaluations customers adjust credit limits based upon payment history customer’s current creditworthiness determined review available credit information continuously monitor collections payments customers maintain provision estimated uncollectible accounts based upon historical experience specific customer collection issues identified inventories consist principally products consumed services provided customers ii spare parts equipment used providing services iii manufactured components attachments equipment used providing services stated primarily lower weightedaverage cost market cost primarily represents invoiced costs regularly review inventory quantities hand record provisions excess obsolete inventory based primarily estimated forecast product demand market conditions production requirements technological developments significant unanticipated changes market condition forecast could require additional provisions excess obsolete inventory property stated cost less amounts provided permanent impairments includes capitalized interest 60 million 70 million 80 million years ended september 30 2009 2008 2007 respectively depreciation generally provided using straightline method estimated useful lives individual items leasehold improvements amortized straightline basis shorter estimated useful lives lease terms estimated useful lives 10 30 years buildings leasehold improvements range 3 12 years machinery equipment make judgments estimates conjunction carrying value assets including amounts capitalized depreciation amortization methods useful lives additionally carrying values assets reviewed impairment whenever events changes circumstances indicate carrying amounts may recoverable determination recoverability made based upon estimated undiscounted future cash flows impairment loss recorded period determined carrying amount recoverable amount impairment amount net book value asset exceeds fair value fair value determination requires us make longterm forecasts future revenue costs related assets subject review forecasts require assumptions demand products services future market conditions technological developments significant unanticipated changes assumptions could require provision impairment future period intangible assets goodwill represents excess cost fair value net assets companies acquired purchase transactions review goodwill reporting unit possible impairment annual basis circumstances indicate impairment may exist determining reporting units considered way manage operations nature operations reporting units operating segments see note 9 segment information reviewed goodwill balance impairment march 31 june 30 september 30 2009 concluded time impairment existed fiscal 2008 recorded 61 million impairment goodwill related russia operations intangible assets primarily consist acquired patents amortized straightline basis ranging 2 20 years weighted average amortization period 122 years utilize undiscounted estimated cash flows evaluate possible impairment intangible assets discount rate utilized based market factors time evaluation performed income taxes provide income taxes accordance asc 740 income taxes standard takes account differences financial statement treatment tax treatment certain transactions deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect change tax rates recognized income expense period includes enactment date calculation requires us make certain estimates future operations changes state federal foreign tax laws well changes financial condition could affect estimates record valuation allowance reduce deferred tax assets likely portion deferred tax assets utilized consider available evidence positive negative determine whether valuation allowance needed ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate bj services company notes consolidated financial statementscontinued character within carryback carryforward period set forth applicable tax law tax filings various periods subjected audit tax authorities jurisdictions conduct business audits may result assessments additional taxes resolved authorities potentially courts resolution situations inevitably includes degree uncertainty asc 740 also addresses determination whether tax benefits claimed expected claimed tax return recorded financial statements tax benefit uncertain tax position recognized likely based technical merits position sustained examination taxing authorities additionally amount tax benefit recognized largest amount benefit greater fifty percent likelihood realized upon ultimate settlement asc 740 also provides guidance derecognition classification interest penalties income taxes accounting interim periods financial statement disclosures recognize potential penalties interest related unrecognized tax benefits component income tax expense selfinsurance accruals selfinsured certain losses relating workers’ compensation general liability property damage employee medical benefits claims filed claims incurred reported liability based primarily actuarial undiscounted basis using individual casebased valuations statistical analysis based upon judgment historical experience however final cost many claims may known five years longer review selfinsurance accruals quarterly basis purchased stoploss coverage limit extent feasible aggregate exposure certain claims assurance coverage adequately protect us liability potential consequences contingencies record estimated loss contingency information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements amount loss reasonably estimated accounting contingencies environmental legal income tax matters requires us use judgment believe accruals matters adequate actual loss contingency significantly different estimated loss results operations may adversely impacted significant litigation accrue estimated legal defense costs environmental remediation compliance environmental remediation costs accrued based estimates known environmental exposures using currently available facts existing environmental permits technology presently enacted laws regulations sites primarily responsible remediation estimate costs developed based internal evaluations discounted accruals recorded environmental assessments andor remedial efforts probable cost reasonably estimated accrual recorded even significant uncertainties exist ultimate cost remediation updated additional information becomes available ongoing environmental compliance costs obtaining environmental permits installation pollution control equipment waste disposal expensed incurred identified potentially responsible party us federal state superfund site accrue share estimated remediation costs site based ratio estimated volume waste contributed site us total estimated volume waste site revenue recognition revenue composed product sales rental service revenue products rentals services generally sold based fixed determinable priced purchase orders contracts customer include right return recognize revenue product sales title passes customer assumes risks rewards ownership collectibility reasonably assured rental service revenue recognized services provided collectibility reasonably assured research development expenditures research development expenditures expensed incurred maintenance repairs expenditures maintenance repairs expensed incurred expenditures renewals improvements capitalized extend life increase capacity improve efficiency asset foreign currency translation functional currency primarily us dollar gains losses resulting financial statement translation foreign operations foreign currency functional currency included comprehensive income operations canada algeria use respective local currencies functional currency bj services company notes consolidated financial statementscontinued derivative instruments occasionally enter forward foreign exchange contracts hedge impact currency fluctuations certain transactions assets liabilities denominated foreign currencies enter derivative instruments speculative trading purposes recognize derivatives balance sheet fair value contracts outstanding september 30 2009 2008 employee stockbased compensation employee services received exchange stock stockbased awards expensed accordance asc 505 equity asc 718 compensation stock compensation fair value employee services received exchange stockbased awards measured based grantdate fair value determined using blackscholes optionpricing model stock option awards bonus stock phantom stock montecarlo simulation model performance units awards granted expensed ratably vesting period award unless retirement age reached case expense accelerated reduce expense recognized based estimated forfeiture rate time grant revise rate necessary subsequent periods reflect actual forfeitures excess tax benefits defined recognized addition capital excess par detriments recognized reduction capital excess par extent sufficient capital excess par available extent sufficient capital excess par available detriment recorded income tax expense new accounting pronouncements june 2009 financial accounting standards board “fasb” issued guidance contained asc 105 generally accepted accounting principles establishing authoritative united states gaap superseding preexisting accounting standards literature guidance effective financial statements issued interim annual periods september 15 2009 consequently changed accounting literature references contained report new standard significant impact consolidated financial statements june 2009 fasb issued asc 810 consolidation variable interest entities addresses addition qualified special purpose entities previous guidance concept entities eliminated asc 860 guidance also modifies analysis controlling interest variable interest entity determined thereby requiring controlling interest consolidate variable interest entity controlling interest exists party variable interest entity power direct activities variable interest entity significantly impact entity’s economic performance ii obligation absorb losses receive benefits entity could potentially significant variable interest entity statement could impact way account limited partnership discussed note 11 lease longterm commitments asc 810 becomes effective beginning first annual reporting period beginning november 15 2009 applied prospectively interim annual periods period going forward adopt guidance asc 810 october 1 2010 yet determined impact consolidated financial statements june 2009 fasb issued guidance asc 860 transfers servicing eliminates concept qualified special purpose entity enhances guidance related derecognition transferred assets asc 860 becomes effective beginning first annual reporting period beginning november 15 2009 applied prospectively interim annual periods period going forward adopt guidance asc 860 october 1 2010 yet determined impact consolidated financial statements june 30 2009 adopted guidance asc 825 financial instruments overall requiring publiclytraded companies disclose fair value financial instruments interim financial statements see note 7 disclosure may 2009 fasb issued guidance asc 855 subsequent events establish general standards accounting disclosures events occur balance sheet date financial statements issued available issued adopted guidance beginning june 30 2009 condensed consolidated financial statements december 2008 fasb issued guidance asc 715 compensation retirement benefits defined benefit plans requiring disclosure major categories plan assets investment policies strategies fair value measurement plan assets significant concentration credit risks related defined benefit pension postretirement plans guidance effective fiscal years ending december 15 2009 accordingly adopt fiscal 2010 bj services company notes consolidated financial statementscontinued april 2008 fasb issued guidance contained asc 350 intangibles goodwill others general intangibles goodwill amending factors considered developing renewal extension assumptions used determine useful life recognized intangible asset previously existing literature objective guidance improve consistency useful life recognized intangible asset asc 350 period expected cash flows used measure fair value asset asc 805 business combinations asc 350 effective company beginning october 1 2009 expected significant impact consolidated financial statements march 2008 fasb issued guidance asc 815 derivatives hedging changing disclosure requirements derivative instruments hedging activities entities required provide enhanced disclosures 1 entity uses derivative instruments 2 derivative instruments related hedged items accounted asc 815 related interpretations 3 derivative instruments related hedged items affect entity’s financial position financial performance cash flows adopted guidance second quarter fiscal 2009 currently derivative financial instruments subject accounting disclosure asc 815 therefore guidance asc 815 effect consolidated statements financial position results operations cash flows december 2007 fasb issued guidance asc 805 business combinations retains fundamental requirements requiring acquisition method accounting used business combinations acquirer identified business combination asc 805 defines acquirer entity obtains control one businesses business combination establishes acquisition date acquirer achieves control asc 805 establishes principles requirements acquirer recognizes measures financial statements identifiable assets acquired liabilities assumed noncontrolling interest acquiree b recognizes measures goodwill acquired business combination gain bargain purchase c determines information disclose enable users financial statements evaluate nature financial effects business combination guidance effective business combinations occurring beginning first annual reporting period beginning december 15 2008 consequently adopt guidance october 1 2009 december 2007 fasb issued guidance asc 810 consolidation overall transition amending previous guidance establish accounting reporting standards noncontrolling interest subsidiary deconsolidation subsidiary asc 810 requires consolidated net income reported amounts include amounts attributable parent noncontrolling interest also requires disclosure face consolidated statement income amounts consolidated net income attributable parent noncontrolling interest requires parent recognize gain loss net income subsidiary deconsolidated asc 810 requires expanded disclosures consolidated financial statements identify distinguish interests parent’s owners interests noncontrolling owners subsidiary shall applied prospectively beginning fiscal year initially applied except presentation disclosure requirements presentation disclosure requirements shall applied retrospectively periods presented guidance effective fiscal years beginning december 15 2008 fiscal year beginning october 1 2009 significant noncontrolling interests consolidated subsidiaries therefore adoption guidance expected significant impact consolidated financial statements february 2007 fasb issued guidance asc 825 financial instruments providing companies option report selected financial assets liabilities fair value asc 825 companies elect fair value option report unrealized gains losses earnings subsequent reporting date addition guidance establishes presentation disclosure requirements designed facilitate comparisons companies choose different measurement attributes similar types assets liabilities fair value option election irrevocable unless new election date occurs asc 825 effective beginning entity’s first fiscal year beginning november 15 2007 applied prospectively unless entity elects early adoption consequently adopted asc 825 effective october 1 2008 elected apply fair value option bj services company notes consolidated financial statementscontinued september 2006 fasb issued guidance asc 820 fair value measurements disclosures section 10 defining fair value outlining fair value hierarchy requiring marketbased assumptions used available setting disclosure requirements assets liabilities measured fair value based level hierarchy october 1 2008 adopted without material impact consolidated financial statements provisions asc 820 related financial assets liabilities adopt provisions asc 820 related nonfinancial assets liabilities october 1 2009 expect adoption provisions materially impact consolidated financial statements 3 discontinued operations completed work final pressure pumping contract russia july 2009 consequently classified russia pressure pumping unit operating segment within international pumping services segment discontinued operation accordingly assets liabilities business along results operations reclassified periods presented soon contractual obligations fulfilled began process redeployment liquidation assets associated business exit activities fourth quarter fiscal 2009 recorded charges totaling 66 million connection exit activities including employee separation costs fixed asset inventory impairment charges expect incur additional exit costs fiscal 2010 range 34 million complete exit activities associated russia pressure pumping business fiscal 2008 goodwill related russia pressure pumping operations 61 million fully impaired analysis time indicated goodwill would likely recoverable largely result competitive pressure areas operated cost inflation currency risks concerns future activity reductions summarized operating results discontinued operations follows significant categories assets liabilities discontinued operations shown september 30 4 acquisitions businesses fiscal 2008 may 21 2008 acquired outstanding shares innicor subsurface technologies inc “innicor” purchase price 544 million including transaction costs resulted increase 364 million total current assets 145 million property equipment 07 million intangible assets 113 million current liabilities 31 million long term liabilities 172 million goodwill innicor designs manufactures provides tools equipment utilized completion production phases oil gas well development canada select international markets business complements completion tools business oilfield services group pro forma financial information acquisition included material consolidated financial statements bj services company notes consolidated financial statementscontinued fiscal 2007 november 3 2006 completed acquisition profile international ltd “profile” total purchase price 25 million resulted 22 million goodwill profile located newcastle england provider caliper inspection tools pipeline integrity assessment markets worldwide business complements pipeline inspection business oilfield services group segment december 20 2006 purchased substantially operating assets tekcor technology ltd “tekcor” 83 million resulted increase 36 million total current assets 07 million property equipment 40 million technologybased intangible assets located houston texas tekcor provider specialty chemicals related services oil gas well drilling industry along texas louisiana gulf coast included completion fluids business oilfield services group segment march 1 2007 acquired aberdeenbased norson services ltd “norson” division norson group ltd substantially assets norson group’s united states subsidiary norson services llc total purchase price paid acquisitions 290 million including legal fees resulted increase 74 million total current assets 59 million property equipment 18 million intangible assets 54 million current liabilities 193 million goodwill addition norson’s hydraulic electrical umbilical testing services provided norson’s subsea units include remote pigging flooding subsea hydro testing subsea data logging strengthened service capabilities process pipeline services business oilfield services group segment june 30 2007 completed acquisition substantially capillary tubing assets allischalmers total purchase price 163 million resulted increase 15 million current assets 18 property equipment 130 million goodwill assets used installation service capillary injection systems primarily united states mexico assets complement dynacoil acquisition occurred fourth quarter fiscal 2006 enhance chemical services operation oilfield services group segment pro forma financial information fiscal 2007 acquisitions included material individually aggregate consolidated financial statements 5 earnings per share basic earnings per share excludes dilution computed dividing net income weightedaverage number common shares outstanding period diluted earnings per share based weightedaverage number shares outstanding period assumed exercise dilutive instruments stock options employee stock purchase plan stock incentive awards bonus stock director stock awards less number treasury shares assumed purchased exercise proceeds using average market price common stock periods presented bj services company notes consolidated financial statementscontinued following table presents information necessary calculate earnings per share three years period ended september 30 2009 thousands except per share amounts years ended september 30 2009 2008 2007 114 million 29 million 29 million stock options respectively excluded computation diluted earnings per share due antidilutive effect year ended september 30 2009 09 million shares granted stock purchase plan see note 14 excluded computation diluted earnings per share due antidilutive effect 6 debt longterm debt september 30 consisted following thousands may 19 2008 completed public offering 2500 million 6 senior notes due 2018 net proceeds offering approximately 2469 million deducting underwriting discounts commissions expenses used retire 2500 million outstanding floating rate senior notes matured june 1 2008 also outstanding 2500 million 575 senior notes due 2011 amended restated revolving credit facility “revolving credit facility” permits borrowings 400 million principal amount revolving credit facility includes 50 million sublimit issuance standby letters credit 20 million sublimit swingline loans swingline loans shortterm maturities remaining amounts outstanding revolving credit facility become due payable august 2012 addition right request additional 200 million permitted borrowings 400 million subject approval lenders time request depending amount borrowings outstanding facility interest rate applicable borrowings generally ranges 3040 basis points libor charged various fees connection revolving credit facility including commitment fee based average daily unused portion commitment totaling 03 million 02 million 03 million fiscal 2009 2008 2007 respectively addition revolving credit facility charges utilization fee outstanding loans letters credit usage revolving credit facility exceeds 625 material utilization fees incurred fiscal years ended september 30 bj services company notes consolidated financial statementscontinued 2009 2008 2007 borrowings revolving credit facility september 30 2009 2008 pursuant merger agreement must borrowings outstanding revolving credit facility completion date merger may 2008 entered 500 million committed credit facility commercial bank finance acquisition innicor subsurface technologies inc commitment fees required facility interest rate based market rates dates amounts borrowed facility expired may 2009 repaid cash hand addition revolving credit facility available 243 million unsecured discretionary lines credit september 30 2009 expire bank’s discretion requirements commitment fees compensating balances connection lines credit interest prevailing market rates 72 million 76 million outstanding borrowings lines credit september 30 2009 2008 respectively weighted average interest rates shortterm borrowings outstanding september 30 2009 2008 450 523 respectively senior notes revolving credit facility include various customary covenants provisions including maintenance certain profitability solvency ratios none materially restrict activities currently compliance financial covenants imposed 7 financial instruments following methods assumptions used estimate fair value class financial instruments practicable cash equivalents shortterm investments trade receivables trade payables shortterm borrowings carrying amount approximates fair value shortterm maturity instruments longterm debt fair value based quoted prices active markets debt securities foreign currency debt periodically borrow funds denominated foreign currencies exposes us market risk associated exchange rate movements 72 million 76 million borrowings denominated foreign currencies september 30 2009 2008 respectively fair value financial instruments differed carrying value september 30 2009 2008 follows thousands 8 income taxes geographical sources income continuing operations income taxes three years period ended september 30 2009 follows thousands bj services company notes consolidated financial statementscontinued provision income taxes three years period ended september 30 2009 summarized thousands consolidated effective income tax rates percent income taxes three years period ended september 30 2009 varied us statutory income tax rate reasons set forth bj services company notes consolidated financial statementscontinued deferred tax assets liabilities recognized estimated future tax effects temporary differences tax basis assets liabilities reported amount financial statements measurement deferred tax assets liabilities based enacted tax laws rules currently effect taxing jurisdictions operations generally deferred tax assets liabilities classified current noncurrent according classification related asset liability financial reporting purposes deferred tax assets liabilities september 30 follows thousands adopted provisions asc 740 regarding recognition tax benefits october 1 2007 result implementation new standard recognized reduction 81 million october 1 2007 balance retained earnings corresponding increase longterm liabilities unrecognized tax benefits recognized would favorably affect effective tax rate period recognized reconciliation beginning ending amount unrecognized tax benefits follows thousands recognize potential penalties interest related unrecognized tax benefits component income tax expense reasonably possible approximately 144 million unrecognized tax benefits could realized next twelve months due expiring statutes limitation settlements government authorities file tax returns united states approximately fifty countries subject audits periodically none expected material impact financial statements due uncertainty various stages audits unable make reasonably reliable estimates period cash settlement related tax benefit liabilities whether material net cash settlement required united states canada major taxing jurisdictions earliest open tax year subject examination 2006 united states 2001 canada september 30 2009 approximately 313 million foreign net operating loss carryforwards 10 million state net operating loss carryforwards foreign net operating loss carryforwards expire follows 13 million 2012 24 million fiscal year 2014 remaining 276 million expire state net operating losses expire fiscal year 2010 fiscal year 2019 bj services company notes consolidated financial statementscontinued record valuation allowance reduce deferred tax assets likely portion deferred tax assets expire realization benefit management believes likely portion foreign net operating loss carryforwards foreign tax credit carryforwards realized valuation allowance recorded portion amounts stock basis difference foreign subsidiaries us deferred tax liability established approximately 8667 million september 30 2009 stock basis difference arises existence unremitted foreign earnings cumulative translation adjustments provided additional taxes anticipated repatriation foreign earnings foreign subsidiaries determined foreign subsidiaries earnings indefinitely reinvested foreign subsidiaries whose earnings indefinitely reinvested provision us federal state income taxes recorded record tax liability full tax versus book basis difference foreign subsidiaries additional net deferred tax liability approximately 1212 million would recorded september 30 2009 9 segment information currently twelve operating segments separate financial information available separate management teams engaged oilfield services results operating segments evaluated regularly chief operating decision maker deciding allocate resources assessing performance operating segments aggregated four reportable segments usmexico pressure pumping canada pressure pumping international pressure pumping oilfield services group revised internal management reporting structure fiscal 2009 moving us service tool business previously reported within usmexico pressure pumping segment completion tools division oilfield services group periods presented recast conform new reporting structure usmexico pressure pumping segment two operating segments provide cementing services stimulation services consisting fracturing acidizing sand control nitrogen coiled tubing service tool services throughout united states mexico two operating segments aggregated one reportable segment offer type services similar economic characteristics similar production processes use methods provide services canada pressure pumping segment one operating segment like usmexico pressure pumping provides cementing stimulation services provided customers major oil natural gas producing areas canada international pressure pumping segment four operating segments similar usmexico canada pressure pumping provides cementing stimulation services provided customers 50 countries major international oil natural gas producing areas europe middle east asia pacific latin america operating segments aggregated one reportable segment similar economic characteristics offer type services similar production processes use methods provide services also serve similar customers include major multinational independent national stateowned oil companies russia pressure pumping unit historically operating segment within international pressure pumping discontinued 2009 see note 3 consequently operating results excluded segment data tables oilfield services segment five operating segments operating segments provide oilfield services casing tubular services process pipeline services chemical services completion tools completion fluids services united states select markets internationally operating segments aggregated one reportable segment provide oilfield services pressure pumping similar economic characteristics serve similar customers primarily include major multinational independent national stateowned oil companies operating segments share resources accounting policies segments described summary significant accounting policies evaluate performance segments based operating income intersegment sales transfers material summarized financial information concerning segments three years period ended september 30 2009 shown following tables thousands “corporate” column includes corporate expenses assets allocated operating segments revenue geographic location determined based bj services company notes consolidated financial statementscontinued location services rendered products sold historically disclosing longlived assets geographic location included goodwill united states purposes report shown goodwill respective country origin based acquisition history result corresponding amounts longlived assets previously reported periods restated conform current presentation format reducing united states 4174 million 3555 million increasing canada 1169 million 1169 million increasing countries 3005 million 2386 million fiscal 2008 2007 respectively years ended september 30 2009 2008 2007 provided services several thousand customers none accounted 5 consolidated revenue business segments geographic information bj services company notes consolidated financial statementscontinued revenue product line reconciliation segment information consolidated income continuing operations income taxes three years period ended september 30 2008 set forth thousands result reduction demand services products caused recent global economic downturn identified list cementing stimulation equipment used pressure pumping business economical repair maintain current market environment impaired equipment write scrap salvage value recording noncash pretax impairment charges totaling 57 million us pressure pumping segment 15 million middle east region international pressure pumping segment third quarter fiscal 2009 charges totaling 72 million included loss disposal assets net consolidated statement operations 10 employee benefit plans defined benefit pension plans defined benefit pension plans covering employees certain international locations including uk canada norway elsewhere fiscal 2004 plans uk canada frozen new entrants september 2006 entered agreement insurance company settle transfer obligation respect us defined benefit plan assets approximately 72 million used purchase insurance contract fund benefits effectively settle plan subject regulatory approvals december 2008 received approval pension benefit guaranty corporation internal revenue service relieved primary responsibility pension benefit obligation consequently recorded noncash pretax charge 217 million connection settlement first quarter fiscal 2009 charge resulted 57 million reduction prepaid pension cost 160 million increase accumulated comprehensive income tax effect 59 million also nonqualified supplemental executive retirement plan “serp” unfunded defined benefit pension plan provides executives supplemental retirement benefits based highest consecutive three years compensation final ten years employment benefits serp become vested upon later executive’s 55th birthday date executive completes five full years service officer postretirement benefit plans also sponsor plans provide certain health care life insurance benefits retired employees primarily united states meet specified age service requirements eligible dependents plans unfunded retain right subject existing agreements modify eliminate postretirement medical benefit plan provides credits based years service used purchase coverage retiree plan effectively caps health care inflation rate 4 increase per year bj services company notes consolidated financial statementscontinued amounts following tables presented thousands dollars except percentages unless otherwise stated obligations funded status amounts recognized consolidated statement financial position consist amounts recognized accumulated comprehensive income consist following september 30 estimated net loss prior service cost us serp amortized accumulated comprehensive income net periodic benefit cost fiscal 2010 01 million 11 million respectively estimated net loss nonus pension plans amortized accumulated comprehensive income net periodic benefit cost fiscal 2010 30 million estimated net gain us postretirement plan amortized accumulated comprehensive income net periodic benefit cost fiscal 2010 48 million accumulated benefit obligations abo excess plan assets abo actuarial present value pension benefits employees’ current compensation levels differs projected benefit obligation abo include assumptions future compensation levels abo us serp 274 million 242 million september 30 2009 2008 respectively abo nonus plans 1914 million 1674 million september 30 2009 2008 respectively bj services company notes consolidated financial statementscontinued following information plans abo’s excess plan assets september 30 components net periodic benefit cost changes plan assets projected benefit obligation recognized comprehensive income assumptions weighted average assumptions used determine benefit obligations september 30 follows weighted average assumptions used determine net periodic benefit costs years ended september 30 follows expected longterm rate return assumptions represent rate return plan assets reflecting average rate earnings expected funds invested provide benefits included projected benefit obligation assumption determined reflecting expectations regarding future rates bj services company notes consolidated financial statementscontinued return portfolio considering asset distribution target related historical rates return redemption yield government fixed interest bonds well corporate bonds used proxies return debt securities weighted relative proportion within actual portfolio return equities based historical longterm performance equity classes rate reassessed least annual basis postretirement benefit obligation september 30 2009 2008 determined using health care cost inflation rate 4 reflecting cap described increasing assumed health care cost trend rates would material impact accumulated postretirement benefit obligation net periodic postretirement benefit cost benefits capped pursuant terms plan assets objective diversify portfolios pension assets among several asset classes reduce volatility maintaining asset mix provides highest rate return acceptable risk primarily mix equity securities fixed income funds generate asset returns comparable general market investment committees meet least annually review portfolio returns determine assetmix targets based assetliability studies investment committees consider studies formal establishment current assetmix targets based projected risk return levels asset class investment portfolio september 30 2009 2008 contributions estimated benefit payments pension plans generally funded amounts necessary meet legal contractual minimum funding requirements infrequently make discretionary contributions contributed 128 million fiscal 2009 none discretionary expect contribute 137 million defined benefit plans fiscal 2010 represents legal contractual minimum funding requirements postretirement plan generally funded amounts necessary meet benefit costs incurred contributed 07 million fiscal 2009 expect contribute 13 million post retirement plan fiscal 2010 represents anticipated claims following benefit payments plans reflect expected future service appropriate expected paid thousands defined contribution plans administer defined contribution plans employees united states uk canada whereby eligible employees may elect contribute 2 20 base salaries employee benefit trust match employee contributions rate 100 6 employee’s base salary united states equal matching 55 employee’s base salary uk addition contribute 2 6 employee’s base salary depending age years service united states uk canada matching contributions vest immediately base contributions become fully vested three years employment company contributions defined contribution plans 341 million 306 million 310 million fiscal 2009 2008 2007 respectively bj services company notes consolidated financial statementscontinued directors’ retirement plan nonqualified directors’ retirement plan unfunded defined benefit plan provides nonemployee directors benefits upon termination service based number years service last annual retainer fee plan discontinued december 2007 currently serving directors expense associated plan 33 million 24 million 02 million years ended september 30 2009 2008 2007 respectively benefits paid plan totaled 40 thousand years ended september 30 2009 2008 2007 related accrued benefit obligation 88 million 55 million september 30 2009 2008 respectively 11 commitments contingencies litigation performance service operations sometimes named defendant litigation usually relating claims personal injury property damage including claims well reservoir damage pipelines process facilities maintain insurance coverage claims extent deemed prudent management series acquisitions assumed responsibility certain claims proceedings made western company north america nowsco well service ltd osca companies whose stock acquired connection businesses claims proceedings continue covered insurance policies predecessors place time acquisitions although outcome claims proceedings us cannot predicted certainty management believes existing claims proceedings likely material adverse effect financial position results operations cash flows stockholder lawsuits regarding baker hughes merger connection pending baker hughes merger various lawsuits filed court chancery state delaware “delaware lawsuits” behalf public stockholders company naming company current members company’s board directors baker hughes defendants delaware lawsuits plaintiffs allege among things company’s board directors violated various fiduciary duties approving merger agreement company andor baker hughes aided abetted alleged violations among remedies plaintiffs seek enjoin merger september 25 2009 delaware chancery court entered order consolidating delaware lawsuits one class action bj services company shareholders litigation ca 4851vcn october 6 2009 delaware chancery court entered order designating law firm faruqi llp new york new york lead counsel rosenthal monhait goddess pa wilmington delaware liaison counsel october 16 2009 lead counsel plaintiffs filed amended complaint delaware chancery court among things adds jeffrey e smith company’s executive vice president chief financial officer defendant contains new factual allegations merger negotiations alleges preliminary joint proxyprospectus filed october 14 2009 us securities exchange commission “sec” omits misrepresents material information various lawsuits also filed district courts harris county texas “texas lawsuits” texas lawsuits make substantially allegations initially asserted delaware lawsuits seek relief october 9 2009 harris county court consolidated texas lawsuits one class action garden city employees’ retirement system et al v bj services company et al cause 200957320 80th judicial district harris county texas october 20 2009 court appeals first district texas houston granted defendants’ emergency motion stay texas lawsuits pending decision defendants’ petition seeking stay texas lawsuits pending adjudication delaware lawsuits filed first company believes delaware lawsuits texas lawsuits without merit intends vigorously defend outcome litigation uncertain however cannot currently predict manner timing resolution suits likelihood issuance injunction preventing consummation merger estimate range possible losses minimum loss could result event adverse verdict suits could prevent delay completion bj services company notes consolidated financial statementscontinued merger result substantial costs company baker hughes recorded amount estimated legal defense costs applicable insurance policies however assurance ultimate outcome lawsuits whether applicable insurance policies provide sufficient coverage claims asbestos litigation august 2004 certain predecessors along numerous defendants named four lawsuits filed circuit courts jones smith counties mississippi four lawsuits included 118 individual plaintiffs alleging suffer various illnesses exposure asbestos seeking damages lawsuits assert claims unseaworthiness negligence strict liability based upon status predecessors jones act employers plaintiffs required complete data sheets specifying companies employed asbestoscontaining products allegedly exposed process approximately 25 plaintiffs identified us predecessors employer amended lawsuits filed four individuals us remainder original claims 114 dismissed four lawsuits three failed name us employer manufacturer asbestoscontaining products thereby dismissed subsequently individual one lawsuits brought action us result currently named jones act employer two mississippi lawsuits possible many 21 claimants identified us predecessors employer could file suit us done time minimal medical information regarding alleged asbestosrelated disease suffered plaintiffs two lawsuits provided accordingly unable estimate potential exposure lawsuits predecessors past maintained insurance may available respond claims addition jones act cases named small number additional asbestos cases allegations cases vary generally include claims provided unspecified product service contained utilized asbestos employee exposed asbestos one facilities customer job sites allegations involve claims successor byron jackson company date successful obtaining dismissals successor cases without payment settlements judgments although remain pending present time intend defend vigorously cases based information available us time expect outcome lawsuits individually collectively material adverse effect financial position results operations cash flows however assurance ultimate outcome lawsuits additional similar lawsuits may filed halliburton python litigation december 21 2007 halliburton energy services inc refiled prior suit us another oilfield services company patent infringement connection drillable bridge plug tools used isolate portions well stimulation work plugs milled using coiled tubing workover rig halliburton claims tools offered trade name “python” tools offered company infringe various patents tool constructed composite material lawsuit filed united states district court northern district texas dallas lawsuit arises litigation filed 2003 halliburton regarding patents issue earlier case dismissed without prejudice halliburton sought reexamination patents united states patent trademark office july 6 2004 parties filed briefs court arguing positions construction coverage halliburton’s patent expect court either issue ruling schedule hearing issues within next months expect outcome matter material adverse effect financial position results operations cash flows however assurance ultimate outcome matter future lawsuits may filed halliburton optifrac litigation december 2008 halliburton filed lawsuit us eastern district texas marshall another lawsuit toronto canada us another oilfield services company patent infringement suits halliburton claims coiled tubing perforating system “optifrac” infringes various patents coiled tubing fracturing system marketed halliburton process analyzing methods claims causes action alleged halliburton suits expect outcome matters material adverse effect financial position results operations cash flows however assurance ultimate outcome matters future lawsuits may filed bj services company notes consolidated financial statementscontinued customer claim november 19 2009 received correspondence customer operating north sea claiming company’s decision move stimulation vessel north sea market constituted breach contract customer alleges forced purchase well stimulation services providers higher cost original agreement customer company customer alleges incurred actual estimated future damages 404 million plus undisclosed amount production loss andor production deferral threatens arbitration provided contract believe claim without merit intend vigorously defend matter based information available us time expect outcome matter material adverse effect financial position results operations cash flows however assurance ultimate outcome matter investigations regarding misappropriation possible illegal payments october 2004 received report whistleblower alleging asia pacific region controller misappropriated company funds illegal payments made government officials region management audit committee board directors conducted investigations allegations well questions later arose whether illegal payments made elsewhere result theft investigation region controller admitted multiple misappropriations returned certain amounts company employment terminated 2004 addition audit committee’s investigation found information indicating significant likelihood payments made us entity asia pacific region contractual relationship used make payments government officials region information also indicated certain employees region believed payments us would used way payments may illegal aggregated approximately 29 million made period several years investigation also identified certain payments legitimacy transactions reflected underlying documents could established questions adequacy underlying documents could resolved voluntarily disclosed information found investigations us department justice “doj” sec engaged discussions authorities connection review matter cannot predict whether investigative efforts may required initiated authorities may 2007 former region controller pled guilty one count theft singapore june 2007 filed civil lawsuit seeking recover additional misappropriated funds seeking accounting disbursements could explained following investigation july 2008 reached settlement litigation region controller made payment us doj sec authorities broad range civil criminal sanctions us foreign corrupt practices act “fcpa” laws may seek impose appropriate circumstances recent civil criminal settlements number public corporations individuals included multimillion dollar fines disgorgement injunctive relief guilty pleas deferred prosecution agreements sanctions including requirements corporations retain monitor oversee compliance fcpa cannot predict actions may taken doj sec authorities effect foregoing may consolidated financial statements environmental conducting environmental investigations remedial actions current former company locations along companies currently named potentially responsible party five waste disposal sites owned third parties september 30 2009 2008 reserved approximately 50 million 46 million respectively environmental matters represents management’s best estimate portion future costs incurred insurance also maintained environmental liabilities lease longterm commitments 1999 contributed certain pumping service equipment limited partnership 1 interest equipment used provide services customers pay service fee period least six years 13 years approximately 12 million annually accounted operating lease assessed terms agreement determined variable interest entity however deemed primary beneficiary therefore consolidation required transaction resulted gain deferred amortized partnership term partnership agreement permits substitution equipment within partnership long implied fair value new property transferred bj services company notes consolidated financial statementscontinued date substitution equals exceeds implied fair value defined current property partnership replaced substitution activity partnership term reduced balance deferred gain zero september 30 2009 compared 42 million september 30 2008 2010 option purchase pumping service equipment approximately 46 million notified partner intent 1997 contributed certain pumping service equipment limited partnership owned 1 interest equipment used provide services customers paid service fee february 9 2007 purchased remaining partnership interest 478 million result acquired partnership equipment acquisition partnership controlling interest accounted asset purchase september 30 2009 longterm operating leases service fee commitments covering certain facilities equipment well longterm commitments varying expiration dates minimum noncancelable lease equipment financing obligations september 30 2009 follows thousands september 30 2009 also commitments outstanding purchase obligations related capital expenditures inventory purchase orders contracts approximately 2802 million contractual obligations routinely issue parent company guarantees “pcgs” connection service contracts performance obligations entered subsidiaries issuance pcgs frequently condition bidding process imposed customers work countries outside north america pcgs typically provide guarantee performance services local subsidiary term pcgs varies length service contract date parent company called upon perform pcgs arrange issuance variety bank guarantees performance bonds standby letters credit vast majority issued connection contracts subsidiaries entered customers customer right call bank guarantee performance bond standby letter credit event subsidiaries default performance services instruments required condition awarded contract typically released upon completion contract also issued standby letters credit connection variety financial obligations support fronted insurance programs claims administration funding certain employee benefit plans temporary importation bonds following table summarizes commercial commitments september 30 2009 thousands bj services company notes consolidated financial statementscontinued 12 intangible assets changes carrying amount goodwill reportable segment two years period ended september 30 2009 follows thousands goodwill increased 176 million fiscal 2008 primarily result acquisition innicor subsurface technologies inc discussed note 4 goodwill increased 25 million fiscal 2009 primarily result revisions estimates used purchase accounting related innicor acquisition technologybased intangible assets gross carrying amount 440 million 390 million accumulated amortization 114 million 78 million net balance 326 million 312 million september 30 2009 2008 respectively amortization three years ended september 30 2009 2008 2007 36 million 37 million 22 million respectively estimated amortization expense subsequent five fiscal years expected within range 40 million 50 million 13 supplemental financial information supplemental financial information years ended september 30 follows thousands expense net years ended september 30 summarized follows thousands bj services company notes consolidated financial statementscontinued activity allowance doubtful accounts years ended september 30 follows thousands 14 stockbased compensation currently two stock incentive plans two employee stock purchase plans 2000 incentive plan 2003 incentive plan “plans” provide granting stock options officers certain eligible employees nonemployee directors exercise price equal fair market value stock date grant plans also provide granting performancebased long term stock incentive awards including performance units “units” bonus stock phantom stock officers certain eligible employees 2003 plan provides restricted stock awards certain eligible employees nonemployee directors aggregate 270 million shares common stock authorized grants plans 97 million shares available future grants september 30 2009 2008 employee stock purchase plan “purchase plan” allows employees purchase shares common stock 85 market value first last business day whichever lower twelvemonth plan period beginning october 1 purchases limited 10 employee’s regular salary 21250 whichever less aggregate 100 million shares common stock authorized purchases purchase plan 100 million shares available future purchases september 30 2009 following table summarizes stockbased compensation expense fiscal 2009 2008 2007 allocated follows thousands stock options plans provide granting stock options officers certain eligible employees nonemployee directors exercise price equal fair market value stock date grant options outstanding generally vest threeyear period exercisable period seven years expected life determined based exercise history last ten years exercise history showed officers tend hold options longer period nonofficers segregate grants options officers nonofficers fair value determination due historical differences exercise patterns exhibited calculate estimated volatility using historical daily price intervals generate expected future volatility based appropriate expected lives options riskfree interest rate based observed us treasury rates appropriate expected lives options dividend yield based history dividends paid bj services company notes consolidated financial statementscontinued compensation expense grants fiscal years ended september 30 calculated using blackscholes option pricing model following assumptions summary stock option activity related information presented thousands except per share prices years september 30 2009 weightedaverage grant date fair value options granted fiscal 2009 2008 2007 445 704 1069 respectively total intrinsic value options exercised years ended september 30 2009 2008 2007 51 million 469 million 78 million respectively summary status unvested stock options september 30 2009 changes fiscal 2009 presented thousands except per share prices september 30 2009 112 million total unrecognized compensation cost related unvested stock options cost expected recognized weightedaverage period 14 years total fair value shares vested years ended september 30 2009 2008 2007 163 million 145 million 153 million respectively director stock awards addition stock options nonemployee directors may granted award common stock company exercise price “restricted stock” restricted stock awards generally vest ratably threeyear period compensation expense calculated using blackscholes option pricing model assumptions used calculate stockbased compensation expense nonofficer stock option grants expense director stock awards 12 million 13 million 10 million fiscal 2009 2008 2007 respectively bj services company notes consolidated financial statementscontinued stock incentive awards made 2000 stock incentive plan 2003 stock incentive plan reserved 965111 shares common stock issuance units awarded representing maximum number shares officers could receive outstanding awards unit represents right receive company end stipulated period 1333 shares common stock contingent upon achievement certain marketbased financial performance goals stipulated threeyear period asc 505 asc 718 compensation expense stockbased compensation awards contingent upon market condition recorded entire grant amount regardless achievement market condition expense stock incentive awards 46 million 31 million 15 million fiscal 2009 2008 2007 respectively addition award units officer also awarded cash equal tax liability units receive end performance period recognize compensation expense cash award ratably performance period cash liability marked market quarterly adjustment recorded compensation expense september 30 2009 accrued 46 million cash award liability outstanding grants however actual performance results end performance period could result decrease increase actual cash payments resulting increase decrease compensation expense end performance period performance criteria met fiscal 2005 2004 unit grants threeyear performance period accordance asc 505 asc 718 compensation expense reversed fair value award however 14 million 32 million reversed cash award component fiscal year 2008 2007 respectively recognize compensation expense units granted based fair value date grant using lattice model monte carlo simulation fair values grant outstanding september 30 2009 assumptions used determine fair value listed september 30 2009 82 million total unrecognized compensation cost related units cost expected recognized weightedaverage period 17 years fiscal 2009 2008 2007 units vested annually grant officers awards phantom stock fiscal 2008 2007 also granted officers awards bonus stock fiscal 2009 also granted awards phantom stock certain nonofficer employees phantom stock bonus stock common stock company exercise price exercise price awards granted fair value awards equal company’s stock price date grant bonus stock awards vest quarterly calendar year phantom stock vests ratably annual increments threeyear period types common stock awards contingent upon achievement certain financial performance goals stipulated periods addition officer also awarded cash equal tax liability common stock receive end performance period fiscal 2009 2008 2007 expense common stock awards related cash awards 110 million 51 million 48 million respectively merger agreement described note 1 agreed grant new stock options stockbased awards merger pending bj services company notes consolidated financial statementscontinued purchase plan october 2009 issued total 949400 shares fiscal 2009 plan period purchase plan reserved 912996 shares fiscal 2010 plan period compensation expense year ended september 30 2009 calculated using blackscholes option pricing model following assumptions calculated estimated volatility using historical daily prices based appropriate expected life purchase plan riskfree interest rate based observed us treasury rates appropriate expected life purchase plan dividend yield based history dividends paid 15 stockholders’ equity common stock authorization issue 9100 million shares common stock dividends paid common stock dividends 005 per common share quarter since fourth quarter fiscal 2005 585 million 586 million 586 million aggregate fiscal years 2009 2008 2007 respectively anticipate paying cash dividends amount 005 per common share quarterly basis fiscal 2010 time merger described note 1 completed dividends declared yet paid prior closing date merger paid upon closing merger dividends subject approval board directors quarter board ability change dividend policy time stockholder rights plan stockholder rights plan “rights plan” designed deter coercive takeover tactics prevent acquirer gaining control company without offering fair price stockholders rights plan amended september 26 2002 extend expiration date preferred share purchase right “right” september 26 2012 increase purchase price rights plan amended outstanding share common stock includes oneeighth right becomes exercisable certain circumstances including beneficial ownership common stock person group equals exceeds 15 company’s outstanding common stock right entitles registered holder purchase company one onethousandth share series junior participating preferred stock price 520 subject adjustment certain circumstances result stock splits effected form stock dividends 1998 2001 2005 one right associated eight outstanding shares common stock purchase price oneeighth right associated one share common stock effectively 65 upon occurrence certain events specified rights plan holder right “acquiring person” defined rights plan right upon exercise right receive number shares common stock company surviving corporation time transaction would market price two times purchase price right issued shares series junior participating preferred stock amended rights plan august 30 2009 connection merger agreement permit entry merger agreement baker hughes described note 1 amendment provides triggering event shall occurred person entity shall deemed become acquiring person treasury stock 1997 board directors initiated stock repurchase program series increases authorizes repurchase 22 billion company stock repurchases made discretion management program remain effect terminated board directors fiscal 2009 purchased total 3466500 shares cost 442 million fiscal 2008 purchased total 101400 shares cost 21 million fiscal 2007 purchased total 2564457 shares cost 746 million treasury shares used satisfy obligations various stockbased compensation plans described note 14 total 1990982 treasury shares used cost 518 million fiscal 2009 3933259 treasury shares used cost 1043 million fiscal 2008 1110321 treasury shares used cost 294 million fiscal 2007 currently remaining authorization purchase additional 3484 million stock repurchase program however merger agreement described note 1 agreed repurchase common stock without approval baker hughes expect repurchase shares repurchase program merger pending bj services company notes consolidated financial statementscontinued accumulated comprehensive income accumulated comprehensive income loss consists following thousands tax effects allocated component comprehensive income summarized follows thousands bj services company notes consolidated financial statementscontinued 16 quarterly financial data unaudited 1 represents revenue less cost sales services research engineering expenses item 9item 8 financial statements supplementary data independent auditors report stockholders bj services company audited accompanying consolidated statements financial position bj services company subsidiaries september 30 1998 1997 related consolidated statements operations stockholders equity cash flows three years period ended september 30 1998 audits also included financial statement schedule listed item 14 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position bj services company subsidiaries september 30 1998 1997 results operations cash flows three years period ended september 30 1998 conformity generally accepted accounting principles also opinion financial statement schedule considered relation basis consolidated financial statements taken whole presents fairly material respects information set forth therein deloitte touche llp houston texas november 24 1998 bj services company consolidated statement operations see notes consolidated financial statements bj services company consolidated statement financial position assets see notes consolidated financial statements bj services company consolidated statement financial position continued liabilities stockholders equity see notes consolidated financial statements bj services company consolidated statement stockholders equity see notes consolidated financial statements bj services company consolidated statement cash flows see notes consolidated financial statements bj services company notes consolidated financial statements 1 basis presentation bj services company leading provider pressure pumping oilfield services petroleum industry consolidated financial statements include accounts bj services company majorityowned subsidiaries company significant intercompany balances transactions eliminated consolidation certain amounts 1997 1996 reclassified accompanying consolidated financial statements conform current year presentation fiscal 1997 1996 number shares price per share amounts restated reflect 2 1 stock split fiscal year 1998 see notes 13 14 2 summary significant accounting policies use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting periods actual results could differ estimates cash equivalents company considers highly liquid debt instruments purchased original maturities three months less cash equivalents inventories consist principally products consumed companys services provided customers ii spare parts equipment used providing services iii manufactured components attachments equipment used providing services stated primarily lower weightedaverage cost market property stated cost less amounts provided permanent impairments includes capitalized interest 1665000 684000 200000 years ended september 30 1998 1997 1996 respectively funds borrowed finance construction capital additions depreciation generally provided using straightline method estimated useful lives individual items leasehold improvements amortized straightline basis shorter estimated useful life lease term intangible assets goodwill represents excess cost fair value net assets companies acquired purchase transactions goodwill amortized straightline method periods ranging 5 40 years patents amortized straight line basis estimated useful lives exceed 17 years accumulated amortization intangible assets september 30 1998 1997 43525000 29612000 respectively company utilizes undiscounted estimated cash flows evaluate possible impairment intangible assets investments companies companys ownership interest ranges 20 50 percent company exercises significant influence operating financial policies accounted using equity method investments accounted using cost method foreign currency translation gains losses resulting financial statement translation foreign operations us dollar functional currency included consolidated statement operations gains losses resulting financial statement translation foreign operations foreign currency functional currency included separate component bj services company notes consolidated financial statements continued stockholders equity except canada companys foreign operations use us dollar functional currency foreign exchange contracts time company enters forward foreign exchange contracts hedge impact foreign currency fluctuations certain assets liabilities denominated foreign currencies changes market value offset foreign exchange gains losses related assets liabilities included cost sales services foreign exchange contracts outstanding september 30 1998 1997 environmental remediation compliance environmental remediation compliance costs accrued based estimates known environmental exposures liabilities recorded environmental assessments andor remedial efforts probable cost reasonably estimated impairment longlived assets accordance financial accounting standards board statement 121 accounting impairment longlived assets longlived assets disposed sfas 121 company recognizes impairment losses longlived assets used operations indicators impairment present undiscounted cash flows estimated generated assets less assets carrying amount september 1998 company recorded impairment 122 million certain longlived assets based decrease undiscounted cash flows expected generated assets result downturn oilfield drilling activity see note 4 employee stockbased compensation fiscal 1997 company adopted financial accounting standards board statement 123 accounting stockbased compensation sfas 123 sfas 123 company permitted either record expenses stock options stockbased employee compensation plans based fair value date grant continue apply accounting principles board opinion 25 apb 25 recognize compensation expense based intrinsic value equity instrument measurement date company elected continue following apb 25 therefore compensation expense recognized exercise price employee stock options equals market price underlying stock date grant new accounting pronouncements june 1997 financial accounting standards board issued statement 130 reporting comprehensive income sfas 130 statement 131 disclosures segments enterprise related information sfas 131 february 1998 financial accounting standards board issued statement 132 employers disclosures pensions postretirement benefits sfas 132 sfas 130 establishes standards reporting displaying comprehensive income components sfas 131 establishes standards way public business enterprises report information operating segments interim annual financial statements sfas 132 standardizes disclosures employers disclosures pensions postretirement benefit plans extent possible requires additional information changes benefit obligations fair value plan assets statements effective periods beginning december 15 1997 june 1998 financial accounting standards board issued statement 133 accounting derivative instruments hedging activities sfas 133 sfas 133 establishes accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities statement requires entity recognize derivatives either assets liabilities statement financial position measure instruments fair value statement effective fiscal quarters fiscal years beginning june 15 1999 statements effect companys 1997 1998 financial bj services company notes consolidated financial statements continued statements management currently evaluating additional adjustment disclosure may required statements adopted fiscal 1999 2000 3 acquisitions businesses nowsco june 1996 company completed acquisition nowsco well service ltd nowsco total purchase price 5826 million including transaction costs cash transaction may summarized follows thousands acquisition accounted using purchase method accounting accordingly results nowscos operations included statement operations beginning july 1 1996 assets liabilities nowsco recorded companys statement financial position estimated fair market value june 30 1996 remaining purchase price reflected goodwill amortized straight line basis 40 years following unaudited pro forma summary presents consolidated results operations excluding estimated consolidation savings company year ended september 30 1996 nowsco acquisition related issuance common stock occurred beginning 1996 thousands except per share amounts effective september 30 1998 company acquired remaining 51 ownership previously unconsolidated joint venture bolivia total consideration 26 million cash effective july 1 1997 company acquired top tool company inc total cash outlay 73 million including transaction costs top tool provides oilfield servicing tools along louisiana gulf coast acquisition provides added capacity tool expertise companys downhole tool operations consolidated statement operations includes operating results subsidiary acquired since date acquisition effective december 1 1996 company acquired remaining 51 ownership previously unconsolidated joint venture argentina total consideration 135 million funded borrowings existing credit facilities consolidated statement operations includes operating results subsidiary acquired since date acquisition acquisitions accounted using purchase method accounting accordingly excess total consideration estimated fair value net assets bj services company notes consolidated financial statements continued acquired recorded goodwill amortized 40 years acquisitions material companys financial statements therefore pro forma information presented 4 unusual charges fourth quarter fiscal 1998 company recorded pretax unusual charge 266 million 176 million tax 22 per diluted share reflect changes operations result downturn oilfield drilling activity components unusual charge follows thousands 1 includes 55 noncash impairment facilities asset impairment losses 122 million consist principally writedown certain nonproductive facilities equipment us result evaluation companys ability recover asset costs given downturn oilfield drilling activity severance related benefits costs relate involuntary termination approximately 850 permanent contracted personnel worldwide substantially notified september 30 1998 company expects pay remaining severance benefits end march 1999 bad debt expense relates writeoff uncollectible receivables resulting certain customers inability pay obligations due reduced production revenue result lower prices oil natural gas facility closure costs relate closing certain marginal operating locations impacted drilling downturn also cancellation costs related proposed new office building costs relate primarily legal expenses resulting employee terminations cancellation costs related certain proposed equipment purchases 1996 company recorded unusual charge 74 million 07 per share aftertax costs incurred connection acquisition nowsco components unusual charge follows thousands interest charge represents incremental interest accrued date financing nowsco acquisition june 13 1996 date nowscos results consolidated financial reporting purposes bj services company notes consolidated financial statements continued july 1 1996 bank fees represent writeoff unamortized portion companys prior credit facility replaced credit facility finance nowsco acquisition asset writeoffs include computer systems inventory assets purchased previous years used subsequent acquisition remaining portion unusual charge reflects severance costs terminated bj services employees relocation personnel equipment legal fees costs would incurred acquisition nowsco occurred expenditures costs made september 30 1997 5 earnings per share october 1997 company adopted statement financial accounting standards 128 earnings per share eps accordance standard company replaced presentation primary eps fully diluted eps presentation basic eps diluted eps periods presented basic eps excludes dilution computed dividing income available common stockholders weightedaverage number common shares outstanding period diluted eps based weightedaverage number shares outstanding period assumed exercise dilutive stock options warrants less number treasury shares assumed purchased proceeds using average market price companys common stock periods presented annual meeting stockholders january 22 1998 companys stockholders approved amendment companys charter increasing number authorized shares common stock 80 million 160 million shares 2 1 stock split approved board directors december 11 1997 effected form stock dividend distributed february 20 1998 stockholders record january 30 1998 accordingly references financial statements number shares outstanding earnings per share amounts retroactively restated periods presented reflect increased number common shares outstanding resulting stock split following table presents information necessary calculate earnings per share three years ended september 30 1998 thousands except per share amounts bj services company notes consolidated financial statements continued 6 longterm debt bank credit facilities longterm debt september 30 1998 1997 consisted following thousands company committed unsecured bank credit facility bank credit facility consisting sixyear term loan approximately 1571 million currently drawn us canadian dollars provision renewed annually option banks repayable 22 quarterly installments began march 1997 five year us 2250 million revolving facility available june 2001 interest outstanding borrowings charged based prevailing market rates company charged various fees connection bank credit facility including commitment fee based average daily unused portion commitment fees companys credit facilities 355000 414000 366000 1998 1997 1996 respectively september 30 1998 borrowings outstanding bank credit facility totaled 1571 million consisting solely borrowings term loan principal reductions term loans bank credit facility due aggregate annual installments 398 million 426 million 426 million 321 million years ending september 30 1999 2000 2001 2002 respectively addition committed facility company 2463 million various unsecured discretionary lines credit september 30 1998 expire various dates 1999 requirements commitment fees compensating balances connection lines credit interest borrowings based prevailing market rates september 30 1998 1849 million outstanding borrowings lines credit consisting 1046 million canadian borrowings 791 million us borrowings 12 million currencies september 30 1997 598 million outstanding borrowings lines credit weighted average interest rates shortterm borrowings outstanding september 30 1998 1997 61 47 respectively company issued outstanding 1250 million unsecured 7 notes due 2006 net proceeds issuance 7 notes 1233 million august 1996 used company repay indebtedness outstanding term loan portion companys existing bank credit facility 60 million outstanding balance companys 92 notes 22 million outstanding balance companys 12 78 notes repaid december 1997 september 30 1998 company outstanding letters credit performance related bonds totaling 186 million 339 million respectively letters credit issued guarantee various trade activities bj services company notes consolidated financial statements continued companys debt agreements contain various customary covenants including maintenance certain profitability solvency ratios restrictions dividend payments defined bank credit facility 7 financial instruments following methods assumptions used estimate fair value class financial instruments practicable estimate value cash equivalents trade receivables trade payables shortterm borrowings carrying amount approximates fair value short maturity instruments longterm debt fair value based rates currently available company debt similar terms average maturities longterm debt consists borrowings companys bank credit facility carrying amount borrowings approximates fair value individual borrowings bear interest current market rates fair value financial instruments differed carrying value september 30 1998 1997 follows thousands 8 income taxes geographical sources income loss income taxes three years ended september 30 1998 follows thousands bj services company notes consolidated financial statements continued provision benefit income taxes three years ended september 30 1998 summarized thousands consolidated effective income tax rates percent income taxes three years ended september 30 1998 varied united states statutory income tax rate reasons set forth deferred tax assets liabilities recognized estimated future tax effects temporary differences tax basis asset liability reported amount financial statements measurement deferred tax assets liabilities based enacted tax laws rates currently effect jurisdictions company operations generally deferred tax assets liabilities classified current noncurrent according classification related asset bj services company notes consolidated financial statements continued liability financial reporting estimated deferred tax effect temporary differences carryforwards september 30 1998 1997 follows thousands 1997 deferred tax valuation allowance decreased due increase projected taxable income following combination western nowsco bj services operations adjustment deferred tax valuation allowance recorded reduction goodwill subsequent decreases deferred tax valuation allowance also recorded reduction goodwill september 30 1998 company approximately 443 million us tax net operating loss carryforwards expiring varying amounts 2000 2011 company also approximately 80 million foreign tax net operating loss carryforwards approximately 10 million foreign investment tax credit carryforwards september 30 1998 foreign tax net operating loss carryforwards approximately 45 million subject annual limitation carryforward indefinitely foreign investment tax credit carryforward remaining loss carryforward used expire varying amounts beginning 1999 potential impact expiration net operating loss investment tax credit carryforwards reflected deferred tax asset valuation allowance balance september 30 1998 1997 company provide federal income taxes undistributed earnings foreign subsidiaries company considers permanently reinvested foreign operations cumulative amount undistributed earnings approximately 360 million september 30 1998 bj services company notes consolidated financial statements continued 9 geographic information company operates primarily one business segmentoilfield services summarized information concerning geographic areas company operated september 30 1998 1997 1996 years ended shown follows thousands export sales totaled 11541000 11547000 2744000 years ended september 30 1998 1997 1996 respectively corporate general administrative expense research engineering expense certain expenses related worldwide manufacturing support functions benefit domestic international operations allocation expenses made foreign areas based total revenues expenses allocated totaled 7117000 12106000 10853000 years ended september 30 1998 1997 1996 respectively 10 employee benefit plans company administers thrift plan whereby eligible employees elect contribute 2 12 base salaries employee benefit trust employee contributions matched company rate 50 per 100 6 employees base salary addition company contributes 2 5 employees base salary depending age january 1 year base contribution company matching contributions vest immediately base contributions become fully vested five years employment companys us employees formerly employed western company north america western covered thrift plan merged companys thrift plan effective december 31 1995 companys us employees formerly employed nowsco covered thrift plan merged companys thrift plan effective october 1 1996 companys contributions thrift plans amounted 7916000 6887000 5095000 1998 1997 1996 respectively companys us employees formerly employed western least one year service also covered defined benefit pension plan carryover western acquisition pension benefits based years service average compensation employees five consecutive bj services company notes consolidated financial statements continued highest paid years last ten years worked benefits western plan frozen effective december 31 1995 time earned benefits vested management yet made decision whether terminate plan therefore fund amounts necessary meet minimum funding requirements employees retirement income security act amended funded status plan september 30 1998 1997 follows thousands pursuant provisions statement financial accounting standards 87 employers accounting pensions company recorded noncurrent liabilities additional minimum pension liability adjustments 60 million 32 million september 30 1998 1997 respectively representing amount accumulated benefit obligation exceeded fair value plan assets plus accrued amounts previously recorded previously unrecognized prior service costs september 30 1998 1997 full amount adjustments net related deferred tax benefit recorded reduction stockholders equity 39 million 21 million respectively assumptions used accounting companys us defined benefit plan follows costs three years ended september 30 1998 companys us defined benefit plan follows thousands addition company sponsors defined benefit plans foreign operations cover substantially employees canada united kingdom company also sponsored defined benefit plan venezuela fiscal year 1998 new labor law enacted venezuela resulted termination plan new labor law essence prospectively requires employers fund stipulated amounts based employees salaries trust fund making contribution company bj services company notes consolidated financial statements continued obligation therefore obligation included venezuela september 30 1998 funded status companys international plans september 30 1998 1997 follows thousands assumptions used accounting companys international defined benefit pension plans follows combined costs companys international defined benefit plans three years ended september 30 1998 follows thousands addition company expensed 910000 1998 relating settlement pension liability resulting enactment new labor law venezuela company also sponsors plan whereby certain health care life insurance benefits provided retired employees primarily us eligible dependents employee meets specified age service requirements plans unfunded company retains right subject existing agreements modify eliminate plans companys postretirement medical benefit plan provides credits based years service used purchase coverage active employee plans plan effectively caps bj services company notes consolidated financial statements continued companys health care inflation rate 4 increase per year reduction approximately 57 million accumulated postretirement benefit obligation due amendment amortized average period future service date full eligibility postretirement benefits active employees net periodic postretirement benefit costs three years ended september 30 1998 included following components thousands actuarial recorded liabilities postretirement benefits follows september 30 1998 1997 thousands accumulated postretirement benefit obligation september 30 1998 1997 determined using discount rate 625 70 respectively health care cost trend rate 4 reflecting cap discussed increasing assumed health care cost trend rates one percentage point would material impact accumulated postretirement benefit obligation net periodic postretirement benefit cost benefits effectively capped company 11 commitments contingencies company performance service operations sometimes named defendant litigation usually relating claims bodily injuries property damage including claims well reservoir damage company maintains insurance coverage claims extent deemed prudent management company believes existing claims potentially material adverse nature already provided appropriate accruals federal state local laws regulations govern companys operation underground fuel storage tanks rather incur additional costs restore upgrade tanks required regulations management opted remove existing tanks company completed removal tanks remedial cleanups progress related tank removals addition company conducting number environmental investigations remedial actions current former company bj services company notes consolidated financial statements continued locations along companies named potentially responsible party five waste disposal sites company established accrual 6300000 environmental matters management believes best estimate companys portion future costs incurred company also maintains insurance environmental liabilities company believes reasonable based knowledge industry 1997 company completed transaction involving transfer certain pumping service equipment assets company received 1000 million used pay outstanding bank debt equipment used provide services companys customers company pay service fee period least eight fourteen years transaction generated deferred gain book purposes approximately 38 million amortized twelve years lease longterm commitments september 30 1998 company longterm operating leases service fee commitments covering certain facilities equipment varying expiration dates minimum annual commitments years ended september 30 1999 2000 2001 2002 2003 36279000 32290000 29791000 22778000 18138000 respectively 78273000 aggregate thereafter 12 supplemental financial information supplemental financial information three years ended september 30 1998 follows thousands bj services company notes consolidated financial statements continued income expensenet three years ended september 30 1998 summarized follows thousands 13 employee stock plans stock option plans companys 1990 stock incentive plan 1995 incentive plan 1997 incentive plan plans provide granting options purchase companys common stock common stock performance based awards officers key employees nonemployee directors company options vest three fouryear period exercisable periods ranging one ten years options granted december 1996 also acceleration clause provided options would vest immediately closing price common stock reached 3750 october 1 1997 companys common stock closed 3753 options granted december 12 1996 became vested full aggregate 9000000 shares common stock reserved grants 3827164 available future grants september 30 1998 summary status companys stock option activity related information years ended september 30 1998 1997 1996 presented thousands except per share prices bj services company notes consolidated financial statements continued following table summarizes information stock options outstanding september 30 1998 thousands except per share prices sfas 123 encourages require companies record compensation cost employee stockbased compensation plans fair value determined generally recognized option pricing models blackscholes model binomial model inexact subjective nature deriving stock option values using methods company adopted disclosureonly provisions sfas 123 continues account stockbased compensation past using intrinsic value method prescribed apb 25 accordingly compensation expense recognized companys employee stock option plans compensation cost companys employee stock option plans determined based fair value grant date awards issued 1998 1997 1996 consistent provisions sfas 123 companys net earnings diluted earnings per share would reduced 44 million 05 per share 51 million 07 per share 18 million 03 per share 1998 1997 1996 respectively calculation consider effect awards issued prior 1996 may representative effects pro forma net income future years pro forma fair value options date grant estimated using blackscholes model following assumptions stock purchase plan companys 1990 employee stock purchase plan purchase plan employees may purchase shares common stock 85 market value first last business day twelvemonth plan period beginning october whichever lower purchases limited 10 employees regular pay maximum aggregate 1500000 shares reserved purchase plan 698731 available future purchase september 30 1998 october 1998 131435 shares purchased 1504 per share october 1997 186220 shares purchased 1541 per share compensation cost companys stock purchase plan determined consistent provisions sfas 123 companys net earnings diluted earnings per share would reduced 6 million 01 per share 6 million 01 per share 4 million 01 per share 1998 1997 1996 respectively pro forma value bj services company notes consolidated financial statements continued employees purchase rights estimated using blackscholes model following assumptions dividend yield expected life 1 year expected volatility 662 1998 374 1997 1996 risk free interest rate 468 1998 58 1997 1996 weightedaverage fair value purchase rights granted 1998 1997 1996 681 1079 751 respectively pursuant terms 1990 stock incentive plan 1993 1997 company also issued total 632932 performance units officers company unit represents right receive company end stipulated period one unrestricted share common stock contingent upon achievement certain financial performance goals stipulated period company fail achieve specific financial goals set executive compensation committee board directors units canceled related shares revert company reissuance plan aggregate fair market value underlying shares granted plan considered unearned compensation time grant adjusted annually based current market price common stock compensation expense determined based managements current estimate likelihood meeting specific financial goals charged ratably stipulated period september 30 1998 295838 units outstanding october 12 1998 executive compensation committee board directors reviewed companys performance threeyear period ending september 30 1998 purposes determining performance criteria achievement level performance unit awards made november 1995 based various performance factors including comparison companys stock price peer group established time grant changed significantly due mergers acquisitions oilfield sector earnings growth return equity growth return assets growth compensation committee decided 1995 performance units vest level 66 maximum level therefore total 123145 units converted common stock issued officers 25495 units deferred later issuance 76572 units cancelled 14 stockholders equity stockholder rights plan company stockholder rights plan rights plan designed deter coercive takeover tactics prevent acquirer gaining control company without offering fair price companys stockholders plan outstanding share common stock includes one preferred share purchase right becomes exercisable certain circumstances including beneficial ownership common stock person group equals exceeds 15 companys outstanding common stock right entitles registered holder purchase company one onehundredth share series junior participating preferred stock price 150 subject adjustment certain circumstances upon occurrence certain events specified rights plan holder right acquiring person right upon exercise right receive number shares common stock company surviving corporation time transaction would market price two times purchase price right shares series junior participating preferred stock issued company september 30 1998 rights proportionately adjusted stock split record date reflect effect stock split stock purchase warrants connection acquisition western company north america 1995 company issued 4800037 stock purchase warrants issued april 14 1995 initial value 500 per warrant subsequent stock split effective february 20 1998 warrant represents right purchase two shares common bj services company notes consolidated financial statements continued stock exercise price 15 per share expiration date april 13 2000 september 30 1998 1562 warrants exercised stock split annual meeting stockholders january 22 1998 companys stockholders approved amendment companys charter increasing number authorized shares common stock 80 million 160 million shares allowed company effect 2 1 stock split form dividend previously authorized board directors december 11 1997 distribution february 20 1998 increased number shares outstanding 37694427 75388854 net treasury shares 986000 split share per share data including stock option stock purchase plan information restated reflect stock split treasury stock december 1997 board directors approved share repurchase program authorizing purchases 150 million discretion companys management may 1998 board approved increase authorized amount 300 million program company repurchased 5996400 shares cost 1966 million fiscal 1998 15 quarterly financial data unaudited 1 represents revenue less cost sales services research engineering expenses 2 includes 266 million 176 million tax 22 per diluted share unusual charge resulting restructuring worldwide operations due downturn oilfield drilling activity see note 4 item 9 nannannannannannanitem 15 exhibits financial statement schedules reports form 8k list documents filed part report incorporated herein reference 1 financial statements following financial statements registrant set forth part ii item 8 report form 10k pages indicated 2 financial statement schedules financial statement schedules omitted absence conditions required material information required reported included consolidated financial statements notes thereto 3 exhibits filed herewith management contract compensatory plan arrangement b july 17 2002 company filed form 8ka include item 7ai audited financial statements business acquired item 7aii unaudited financial statements business acquired item 7b pro forma financial information certain events item 5 update disclosures concerning litigation osca inc defendants also supply agreement osca inc great lakes corporation august 14 2002 company filed form 8k report sworn statements pursuant securities exchange commission order 4460 signed principal executive officer principal financial officer september 17 2002 company filed form 8k file item 5 pro forma financial information unaudited giving effect acquisition osca inc sale convertible senior notes due 2022 october 15 2002 company filed form 8k report amendment companys amended restated rights agreement item 5 attached exhibit second amendment amended restated rights agreement dated september 26 2002 company bank new york november 7 2002 company filed form 8k announce item 5 appointment brian mccole controller effective november 5 2002 signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized bj services company jw stewart jw stewart president chief executive officer date december 20 2002 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date jw stewart chairman board december 20 2002 president chief jw stewart executive officer principal executive officer certifications jw stewart certify 1 reviewed annual report form 10k bj services company 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officer disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officer indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date december 20 2002 jw stewart jw stewart chief executive officer taylor whichard iii certify 1 reviewed annual report form 10k bj services company 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officer disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officer indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date december 20 2002 taylor whichard iii taylor whichard iii chief executive officer bj services company schedule iivaluation qualifying accounts years ended september 30 2000 2001 2002 thousands 1 deductions allowance doubtful accounts principally reflect writeoff previously reserved accounts 2 deductions reserve inventory obsolescence adjustment principally reflect sale disposal related inventory 3 additions reserve principally resulting acquisitions businessesitem 15 exhibits financial statement schedules reports form 8k list documents filed part report incorporated herein reference 1 financial statements following financial statements registrant set forth part ii item 8 report form 10k pages indicated page form 10k report independent auditors consolidated statement operations years ended september 30 2003 2002 2001 consolidated statement financial position september 30 2003 2002 consolidated statement stockholders’ equity years ended september 30 2003 2002 2001 consolidated statement cash flows years ended september 30 2003 2002 2001 notes consolidated financial statements 2 financial statement schedules schedule number description schedule page number ii valuation qualifying accounts financial statement schedules omitted absence conditions required material information required reported included consolidated financial statements notes thereto 3 exhibits filed herewith  management contract compensatory plan arrangement b reports furnished form 8k july 22 2003 company furnished form 8k attaching press release respect announcement financial results third quarter ended june 30 2003 pursuant item 12 form 8k november 4 2003 company furnished form 8k attaching press release respect announcement financial results fourth quarter ended september 30 2003 pursuant item 12 form 8k signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date december 17 2003 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated bj services company schedule iivaluation qualifying accounts years ended september 30 2001 2002 2003 thousands 1 deductions allowance doubtful accounts principally reflect writeoff previously reserved accounts 2 deductions reserve inventory obsolescence adjustment principally reflect sale disposal related inventory 3 additions reserve principally resulting acquisitions businessesitem 15 exhibits financial statement schedules list documents filed part report incorporated herein reference 1 financial statements following financial statements registrant set forth part ii item 8 report form 10k pages indicated page form 10k report independent auditors consolidated statement operations years ended september 30 2004 2003 2002 consolidated statement financial position september 30 2004 2003 consolidated statement stockholders’ equity years ended september 30 2004 2003 2002 consolidated statement cash flows years ended september 30 2004 2003 2002 notes consolidated financial statements 2 financial statement schedules schedule number description schedule page number ii valuation qualifying accounts financial statement schedules omitted absence conditions required material information required reported included consolidated financial statements notes thereto 3 exhibits exhibit number description exhibit 1048 form letter agreement setting forth terms conditions options purchase shares common stock awarded nonemployee directors november 17 2004 filed exhibit 103 company’s current report form 8k filed november 23 2004 incorporated herein reference 1049 form letter agreement setting forth terms conditions options purchase shares common stock awarded executive officers performance fiscal 2004 filed exhibit 104 company’s current report form 8k filed november 23 2004 incorporated herein reference 1050 first amendment bj services deferred compensation plan effective january 1 2002 1051 fifth amendment 1999 employee stock purchase plan effective october 1 2004 1052 form letter agreement setting forth terms conditions options purchase shares common stock awarded nonemployee directors fiscal 2000 1053 form letter agreement setting forth terms conditions options purchase shares common stock awarded nonemployee directors fiscal 2001 2003 1054 form letter agreement setting forth terms conditions options purchase shares common stock awarded nonemployee directors fiscal 2004 1055 form letter agreement setting forth terms conditions options purchase shares common stock awarded executive officers fiscal 1997 1056 form letter agreement setting forth terms conditions options purchase shares common stock awarded executive officers fiscal 1998 1057 form letter agreement setting forth terms conditions options purchase shares common stock awarded executive officers fiscal 1999 1058 form letter agreement setting forth terms conditions options purchase shares common stock awarded executive officers fiscal 2001 1059 form letter agreement setting forth terms conditions options purchase shares common stock awarded executive officers fiscal 2002 1060 form letter agreement setting forth terms conditions options purchase shares common stock awarded executive officers fiscal 2003 1061 form letter agreement setting forth terms conditions options purchase shares common stock awarded executive officers fiscal 2004 1062 form letter agreement setting forth terms conditions performance units awarded executive officers fiscal 2004 1063 form letter agreement setting forth terms conditions phantom stock awarded nonemployee directors fiscal 2004 121 ratio earnings fixed charges 141 code ethics filed exhibit 141 company’s annual report form 10k year ended september 30 2003 incorporated herein reference 211 subsidiaries company 231 consent deloitte touche llp 311 section 302 certification j w stewart 312 section 302 certification whichard 321 section 906 certification furnished j w stewart 322 section 906 certification furnished whichard filed herewith  management contract compensatory plan arrangement signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date january 26 2005 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated bj services company schedule iivaluation qualifying accounts years ended september 30 2002 2003 2004 thousands 1 deductions allowance doubtful accounts principally reflect writeoff previously reserved accounts 2 deductions reserve inventory obsolescence adjustment principally reflect sale disposal related inventory 3 additions reserve principally resulting acquisitions businesses 4 reserve previously netted inventory balance adjustment made reflect gross amount reserve fiscal 2004item 15 exhibits financial statement schedules list documents filed part report incorporated herein reference 1 financial statements following financial statements registrant set forth part ii item 8 report form 10k pages indicated 2 financial statement schedules financial statement schedules omitted absence conditions required material information required reported included consolidated financial statements notes thereto 3 exhibits filed herewith  management contract compensatory plan arrangement signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date december 14 2005 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated bj services company schedule iivaluation qualifying accounts years ended september 30 2003 2004 2005 thousands 1 deductions allowance doubtful accounts principally reflect writeoff previously reserved accounts 2 deductions reserve inventory obsolescence adjustment principally reflect sale disposal related inventory 3 reserve previously netted inventory balance adjustment made reflect gross amount reserve fiscal 2004item 15 exhibits financial statement schedules list documents filed part report incorporated herein reference 1 financial statements following financial statements registrant set forth part ii item 8 report form 10k pages indicated 2 financial statement schedules schedule number description schedule page number ii valuation qualifying accounts financial statement schedules omitted absence conditions required material information required reported included consolidated financial statements notes thereto 3 exhibits filed herewith  management contract compensatory plan arrangement signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized bj services company jw stewart j w stewart president chief executive officer date december 7 2006 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated bj services company schedule iivaluation qualifying accounts years ended september 30 2006 2005 2004 thousands 1 deductions allowance doubtful accounts principally reflect writeoff previously reserved accounts 2 deductions reserve inventory obsolescence adjustment principally reflect sale disposal related inventory 3 reserve previously netted inventory balance adjustment made reflect gross amount reserve fiscal 2004 4 additions related acquisitionsitem 15 exhibits financial statement schedules list documents filed part report incorporated herein reference 1 financial statements following financial statements registrant set forth part ii item 8 report form 10k pages indicated page form 10k report independent registered public accounting firm consolidated statement operations years ended september 30 2007 2006 2005 consolidated statement financial position september 30 2007 2006 consolidated statement stockholders’ equity years ended september 30 2007 2006 2005 consolidated statement cash flows years ended september 30 2007 2006 2005 notes consolidated financial statements 2 financial statement schedules schedule number description schedule page number ii valuation qualifying accounts financial statement schedules omitted absence conditions required material information required reported included consolidated financial statements notes thereto 3 exhibits filed herewith  management contract compensatory plan arrangement signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date november 29 2007 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated bj services company schedule iivaluation qualifying accounts years ended september 30 2007 2006 2005 thousands 1 deductions allowance doubtful accounts principally reflect writeoff previously reserved accounts 2 deductions reserve inventory obsolescence adjustment principally reflect sale disposal related inventory 3 additions related acquisitionsitem 15 exhibits financial statement schedules list documents filed part report incorporated herein reference 1 financial statements following financial statements registrant set forth part ii item 8 report form 10k pages indicated 2 financial statement schedules financial statement schedules omitted absence conditions required material information required reported included consolidated financial statements notes thereto 3 exhibits filed herewith  management contract compensatory plan arrangement signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date november 25 2008 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicateditem 15 exhibits financial statement schedules list documents filed part report incorporated herein reference 1 financial statements following financial statements registrant set forth part ii item 8 report form 10k pages indicated page form 10k management’s report internal control financial reporting reports independent registered public accounting firm consolidated statement operations years ended september 30 2009 2008 consolidated statement financial position september 30 2009 2008 consolidated statement stockholders’ equity comprehensive income years ended september 30 2009 2008 2007 consolidated statement cash flows years ended september 30 2009 2008 notes consolidated financial statements 2 financial statement schedules financial statement schedules omitted absence conditions required material information required reported included consolidated financial statements notes thereto 3 exhibits filed herewith  management contract compensatory plan arrangement signatures pursuant requirements section 13 15 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date november 23 2009 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicatednan