Form 10-Q for the Period Ended December 31, 2003

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A110/BFlBKEZOwiwfGphrRxUCgpgRXRLXUncHz+4IDOqrAGUXAtPb3U5rUeRwCZ6 k3TvQbd7FYcF1w2I+BIXuA== 0001193125-04-022243.txt : 20040213 0001193125-04-022243.hdr.sgml : 20040213 20040213093014 ACCESSION NUMBER: 0001193125-04-022243 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040213 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BJ SERVICES CO CENTRAL INDEX KEY: 0000864328 STANDARD INDUSTRIAL CLASSIFICATION: OIL, GAS FIELD SERVICES, NBC [1389] IRS NUMBER: 630084140 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10570 FILM NUMBER: 04594973 BUSINESS ADDRESS: STREET 1: 5500 NW CENTRAL DR CITY: HOUSTON STATE: TX ZIP: 77210 BUSINESS PHONE: 7134624239 MAIL ADDRESS: STREET 1: 5500 NORTHWEST CENTRAL DR STREET 2: 5500 NORTHWEST CENTRAL DR CITY: HOUSTON STATE: TX ZIP: 77092 10-Q 1 d10q.htm FORM 10-Q FOR THE PERIOD ENDED DECEMBER 31, 2003 Form 10-Q for the Period Ended December 31, 2003

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2003

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From to .

Commission file number 1-10570

BJ SERVICES COMPANY

(Exact name of registrant as specified in its charter)


Delaware		63-0084140
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


5500 Northwest Central Drive, Houston, Texas		77092
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (713) 462-4239

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES þ NO ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12B-2 of the Exchange Act.)
YES þ NO ¨

There were 159,201,769 shares of the registrant’s common stock, $.10 par value, outstanding as of February 11, 2004.

BJ SERVICES COMPANY

INDEX



PART I—FINANCIAL INFORMATION:

Item 1. Financial Statements

Consolidated Condensed Statement of Operations (Unaudited)—Three months ended December 31, 2003 and 2002		3

Consolidated Condensed Statement of Financial Position (Unaudited)—December 31, 2003 and September 30, 2003		4

Consolidated Statement of Stockholders’ Equity (Unaudited) Three months ended December 31, 2003		5

Consolidated Condensed Statement of Cash Flows (Unaudited)—Three months ended December 31, 2003 and 2002		6

Notes to Unaudited Consolidated Condensed Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

Item 3. Quantitative and Qualitative Disclosures About Market Risk		27

Item 4. Controls and Procedures		28

PART II—OTHER INFORMATION		29

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

BJ SERVICES COMPANY

CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)

(In thousands, except per share amounts)


	Three Months Ended December 31,
	2003			2002
Revenue	$	600,799		$	473,124
Operating expenses:
Cost of sales and services		457,730			375,733
Research and engineering		10,505			9,314
Marketing		19,297			17,129
General and administrative		17,881			16,375
Loss on disposal of assets		378			600

Total operating expenses		505,791			419,151

Operating income		95,008			53,973
Interest expense		(4,202	)		(4,001	)
Interest income		820			519
Other expense—net		(496	)		(906	)

Income before income taxes		91,130			49,585
Income tax expense		29,617			16,115

Net income	$	61,513		$	33,470

Earnings per share:
Basic	$	.39		$	.21
Diluted	$	.38		$	.21
Weighted-average shares outstanding:
Basic		158,859			157,574
Diluted		161,905			160,684

The accompanying notes are an integral part of these consolidated condensed financial statements

BJ SERVICES COMPANY

CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL POSITION

(UNAUDITED)

(In thousands)


	December 31, 2003		September 30, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	298,288	$	277,666
Receivables—net		479,926		469,656
Inventories:
Products		112,210		109,383
Work in process		2,352		2,048
Parts		49,833		51,137

Total inventories		164,395		162,568
Deferred income taxes		474		718
Other current assets		43,017		31,100

Total current assets		986,100		941,708
Property—net		855,147		850,340
Deferred income taxes		66,759		66,877
Goodwill		884,706		879,710
Other assets		44,779		47,322

	$	2,837,491	$	2,785,957

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	201,647	$	220,031
Short-term borrowings		7,224		5,888
Accrued employee compensation and benefits		56,907		69,205
Income and other taxes		86,623		82,192
Accrued insurance		14,738		14,772
Other accrued liabilities		85,335		78,573

Total current liabilities		452,474		470,661
Commitments and contingencies (Note 6)
Long-term debt		494,939		493,754
Deferred income taxes		7,617		7,475
Other long-term liabilities		150,575		163,435
Stockholders’ equity		1,731,886		1,650,632

	$	2,837,491	$	2,785,957

The accompanying notes are an integral part of these consolidated condensed financial statements

BJ SERVICES COMPANY

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(In thousands)


	Common Stock Shares	Common Stock		Capital In Excess of Par			Treasury Stock			Unearned Compensation			Retained Earnings			Accumulated Other Comprehensive Income			Total
Balance, September 30, 2003	158,306	$	17,376	$	964,348		$	(348,277	)	$	—		$	1,026,832		$	(9,647	)	$	1,650,632
Comprehensive income:
Net income														61,513
Other comprehensive income, net of tax:
Cumulative translation adjustments																	6,916
Forward foreign exchange contracts																	368
Comprehensive income																				68,797
Reissuance of treasury stock for:
Stock options	45							1,020						(48	)					972
Stock purchase plan	495							11,157						(217	)					10,940
Stock performance plan	95				(3,103	)		2,144						898						(61	)
Stock performance plan grant					7,273						(7,273	)
Recognition of unearned compensation											606									606

Balance, December 31, 2003	158,941	$	17,376	$	968,518		$	(333,956	)	$	(6,667	)	$	1,088,978		$	(2,363	)	$	1,731,886

The accompanying notes are an integral part of these consolidated condensed financial statements

BJ SERVICES COMPANY

CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)

(In thousands)


	Three Months Ended December 31,
	2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	61,513		$	33,470
Adjustments to reconcile net income to cash provided by operating activities:
Minority interest		886			1,196
Amortization of unearned compensation		606			277
Depreciation and amortization		30,694			28,462
Deferred income taxes		3,438			5,535
Changes in:
Receivables		(9,509	)		(22,879	)
Inventories		(1,818	)		2,174
Accounts payable		(18,399	)		(13,766	)
Other current assets and liabilities		(15,587	)		(8,710	)
Other—net		11,708			7,020

Net cash provided by operating activities		63,532			32,779
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions		(38,121	)		(34,251	)
Proceeds from disposal of assets		2,379			1,560
Acquisitions of businesses, net of cash acquired		(14,182	)		—

Net cash used for investing activities		(49,924	)		(32,691	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings, net		1,336			4,246
Proceeds from long-term borrowings		1,185			1,167
Proceeds from exercise of stock options and stock purchase plan		4,035			2,784

Net cash provided by financing activities		6,556			8,197

Effect of exchange rate changes on cash		458			(385	)

Increase in cash and cash equivalents		20,622			7,900
Cash and cash equivalents at beginning of period		277,666			84,727

Cash and cash equivalents at end of period	$	298,288		$	92,627

Cash Paid for Interest and Taxes:
Interest	$	1,146		$	1,145
Taxes		22,152			9,440

The accompanying notes are an integral part of these consolidated condensed financial statements

BJ SERVICES COMPANY

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 1 General

In the opinion of management, the unaudited consolidated condensed financial statements of BJ Services Company (the “Company”) include all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of its financial position and statement of stockholders’ equity as of December 31, 2003, and its results of operations and cash flows for each of the three-month periods ended December 31, 2003 and 2002. The consolidated condensed statement of financial position at September 30, 2003 is derived from the September 30, 2003 audited consolidated financial statements. Although management believes the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations and cash flows for the three-month period ended December 31, 2003 are not necessarily indicative of the results to be expected for the full year.

Certain amounts for fiscal 2003 have been reclassified in the accompanying consolidated condensed financial statements to conform to the current year presentation.

Note 2 Earnings Per Share (“EPS”)

Basic EPS excludes dilution and is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS is based on the weighted-average number of shares outstanding during each period and the assumed exercise of dilutive instruments (stock options, the stock purchase plan and the stock incentive plan) less the number of treasury shares assumed to be purchased with the exercise proceeds using the average market price of the Company’s common stock for each of the periods presented. No dilutive effect has been included for the convertible senior notes issued April 24, 2002 (see Note 5 of the Notes to the Consolidated Financial Statements included in the Company’s annual report on Form 10-K for the fiscal year ending September 30, 2003) because the Company currently has the ability and intent to settle the conversion price in cash.

The following table presents information necessary to calculate earnings per share for the periods presented (in thousands, except per share amounts):


	Three Months Ended December 31,
	2003		2002
Net income	$	61,513	$	33,470
Weighted-average common shares outstanding		158,859		157,574

Basic earnings per share	$	.39	$	.21


	Three Months Ended December 31,
	2003		2002
Weighted-average common and dilutive potential common shares outstanding:
Weighted-average common shares outstanding		158,859		157,574
Assumed exercise of stock options⁽¹⁾		3,046		3,110

Weighted-average dilutive shares outstanding		161,905		160,684

Diluted earnings per share	$	.38	$	.21

⁽¹⁾	For the three months ended December 31, 2003 and 2002, 66 thousand and 103 thousand stock options were excluded from the computation of diluted earnings per share due to their antidilutive effect, respectively.

Note 3 Employee Stock Plans

The Company has an Employee Stock Purchase Plan and several Incentive Plans that provide for the issuance of stock options and other awards of the Company’s common stock, which are described more fully in Note 13 of the Notes to the Consolidated Financial Statements included in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2003. Statement of Financial Accounting Standards (“SFAS”) 123, Accounting for Stock-Based Compensation, encourages, but does not require, companies to record compensation cost for employee stock-based compensation plans at fair value as determined by generally recognized option pricing models such as the Black-Scholes model or a binomial model. Because of the inexact and subjective nature of deriving stock option values using these methods, the Company has adopted the disclosure-only provisions of SFAS 123 and continues to account for stock-based compensation as it has in the past using the intrinsic value method prescribed in Accounting Principles Board (“APB”) 25, Accounting for Stock Issued to Employees. Accordingly, no compensation expense has been recognized in the consolidated condensed statement of operations for the Company’s Employee Stock Purchase Plan and the incentive plans. In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No.148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123, Accounting for Stock-Based Compensation. This statement requires pro forma disclosures on an interim basis as if the Company had applied the fair value recognition provisions of SFAS 123.

The following pro forma table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to the Company’s Employee Stock Purchase Plan and the incentive plans (in thousands, except per share amounts):


	Three Months Ended December 31,
	2003		2002
Net income, as reported	$	61,513	$	33,470
Less: total stock-based employee compensation expense determined under SFAS 123 for all awards, net of tax		12,113		13,799

Net income, pro forma	$	49,400	$	19,671


	Three Months Ended December 31,
	2003		2002
Earnings per share:
Basic, as reported	$	.39	$	.21

Basic, pro forma	$	.31	$	.12

Diluted, as reported	$	.38	$	.21

Diluted, pro forma	$	.31	$	.12

Note 4 Segment Information

The Company has three reportable segments: U.S./Mexico Pressure Pumping, International Pressure Pumping and Other Oilfield Services. The U.S./Mexico Pressure Pumping segment includes cementing services and stimulation services (consisting of fracturing, acidizing, sand control, nitrogen, coiled tubing and service tool services) provided throughout the United States and Mexico, both offshore and onshore. The International Pressure Pumping segment also includes cementing and stimulation services provided to customers in more than 50 countries in the major international oil and natural gas producing areas of Latin America, Europe, Russia, Africa, Asia, Canada, China and the Middle East. The Other Oilfield Services segment consists of production chemicals, casing and tubular services, process and pipeline services and completion tools and completion fluids services in the U.S. and in select markets internationally.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 2 of the Notes to the Consolidated Financial Statements included in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2003. Operating segment performance is evaluated based on operating income. Intersegment sales and transfers are not material.

Summarized financial information concerning the Company’s segments is shown in the following table. The “Corporate” column includes corporate expenses not allocated to the operating segments.

Business Segments


	U.S./ Mexico Pressure Pumping		International Pressure Pumping		Other Oilfield Services		Corporate			Total
	(in thousands)
Three Months Ended December 31, 2003
Revenue	$	284,442	$	221,209	$	94,907	$	241		$	600,799
Operating income (loss)		66,207		25,199		12,127		(8,525	)		95,008
Identifiable assets		843,393		1,053,133		506,556		434,409			2,837,491

Three Months Ended December 31, 2002
Revenue	$	211,982	$	178,880	$	82,290	$	(28	)	$	473,124
Operating income (loss)		33,102		19,243		9,854		(8,226	)		53,973
Identifiable assets		778,964		1,001,681		458,777		244,399			2,483,821

A reconciliation from the segment information to consolidated income before income taxes is set forth below (in thousands):


	Three Months Ended December 31,
	2003			2002
Total operating profit for reportable segments	$	95,008		$	53,973
Interest expense		(4,202	)		(4,001	)
Interest income		820			519
Other expense—net		(496	)		(906	)

Income before income taxes	$	91,130		$	49,585

Note 5 Acquisitions

On November 26, 2003, the Company completed the acquisition of Cajun Tubular Services, Inc. (“Cajun”) for a total purchase price of $8.1 million (net of cash). Cajun, located in Lafayette, Louisiana, provides tubular running, testing and torque monitoring services to the Gulf of Mexico market. This acquisition was accounted for using the purchase method of accounting.

On December 2, 2003, the Company acquired the assets and business of Petro-Drive, a division of Grant Prideco, Inc., for a total purchase price of $7 million. Petro-Drive, located in Lafayette, Louisiana, is a leading provider of hydraulic and diesel hammer services to the Gulf of Mexico market and select markets internationally. This business complements the Company’s

tubular services business. This acquisition was accounted for using the purchase method of accounting.

The Company is in the process of completing its review and determination of the fair values of the assets acquired. Accordingly, allocation of the purchase price is subject to revision based on final determination of the asset values. The pro forma financial information for these acquisitions is not included as they were not material to the Company.

Note 6 Commitments and Contingencies

Litigation

The Company, through performance of its service operations, is sometimes named as a defendant in litigation, usually relating to claims for bodily injuries or property damage (including claims for well or reservoir damage). The Company maintains insurance coverage against such claims to the extent deemed prudent by management. The Company believes that there are no existing claims that are likely to have a material adverse effect on the Company’s financial position or results of operations for which it has not already provided.

Through acquisition the Company assumed responsibility for certain claims and proceedings made against the Western Company of North America, Nowsco Well Service Ltd. and OSCA in connection with their businesses. Some, but not all, of such claims and proceedings will continue to be covered under insurance policies of the Company’s predecessors that were in place at the time of the acquisitions. Although the outcome of the claims and proceedings against the Company (including Western, Nowsco and OSCA) cannot be predicted with certainty, management believes that there are no existing claims or proceedings that are likely to have a material adverse effect on the Company’s financial position or results of operations for which it has not already provided.

Chevron Phillips Litigation

On July 10, 2002, Chevron Phillips Chemical Company (“Chevron Phillips”) filed a lawsuit against BJ Services Company (“BJ”) for patent infringement in the United States District Court for the Southern District of Texas (Corpus Christi). The lawsuit relates to a patent issued in 1992 to the Phillips Petroleum Company (“Phillips”). This patent (the ‘477 patent) relates to a method for using enzymes to decompose used drilling mud. Although BJ has its own patents for remediating damage resulting from drill-in fluids (as opposed to drilling muds) in oil and gas formations (products and services for which are offered under the “Mudzyme” trademark), the Company approached Phillips for a license of the ‘477 patent. BJ was advised that Phillips had licensed this patent on an exclusive basis to Geo-Microbial Technologies, Inc. (“GMT”), a company co-owned by a former Phillips employee who is one of the inventors on the ‘477 patent, and that BJ should deal with GMT in obtaining a sublicense. BJ entered into a five year sublicense agreement with GMT in 1997.

2000, BJ stopped offering its enzyme product for use on drilling mud and drill-in fluids in the U.S. Nevertheless, Chevron Phillips is claiming that the use of enzymes in fracturing fluids and other applications in the oil and gas industry falls under the ‘477 patent. Further, even though their patent is valid only in the United States, Chevron Phillips is requesting that the court award it damages for BJ’s use of enzymes in foreign countries on the theory that oil produced from wells treated with enzymes is being imported into the United States.

The Company disputes Chevron Phillips’ interpretation of the ‘477 patent and its theory of damages, and has vigorously defended itself against the allegations. On November 25^th and 26^th of 2002, the Court conducted a hearing regarding the scope and the interpretation of the claims in the ‘477 patent. Following the hearing, the Court issued a ruling on March 16, 2003, which we believe interprets the ‘477 patent in a manner that is consistent with BJ’s position. Based on this ruling, BJ filed a Motion for Summary Judgment seeking a determination that fracturing fluids with enzymes do not come within the scope of the ‘477 patent. The Court granted this Motion on July 2, 2003. Subsequently, BJ filed a Motion for Summary Judgment relating to the use of Mudzymes outside of the United States. On September 22, 2003, the Court granted the Company’s Motion and dismissed this portion of the Chevron Phillips’ case. We have been advised by Chevron Phillips that they will appeal these rulings to the Court of Appeals to the Federal Circuit. Although these rulings from the District Court have been favorable to the Company’s position, they could be overturned on appeal. Given the scope of these claims, the possibility of very costly litigation and even a substantial adverse verdict still exists. However, the Company does not presently believe it is likely that the results of this litigation will have a material adverse impact on the Company’s financial position or results of operations.

Halliburton—Python Litigation

On June 27, 2002, Halliburton Energy Services, Inc. filed suit against BJ and Weatherford International, Inc. for patent infringement in connection with drillable bridge plug tools. These tools are used to isolate portions of a well for stimulation work, after which the plugs are milled out using coiled tubing or a workover rig. Halliburton claims that tools offered by BJ (under the trade name “Python”) and Weatherford infringe two of its patents for a tool constructed of composite material. The lawsuit has been filed in the United States District Court for the Northern District of Texas (Dallas). Halliburton requested that the District Court issue a temporary restraining order and a preliminary injunction against both Weatherford and BJ to prevent either company from selling competing tools. On March 4, 2003, the District Court issued its opinion denying Halliburton’s requests. The Court denied Halliburton’s Motion to reconsider and Halliburton has filed an appeal with the Court of Appeals for the Federal Circuit.

The Company believes that the current design of the Python plug offered by BJ does not infringe any of the valid claims in the two Halliburton patents. The Company also believes that certain claims in the Halliburton patents are invalid based upon prior art demonstrated in products offered well before Halliburton filed for its patents. BJ’s revenue from the sale of its Python tools since the inception of this product in the summer of 2001 is approximately $4 million. The Company believes that it has no liability for infringement of the Halliburton patents. Moreover, even if the patents are found to be enforceable and the Company is found to have infringed them, the Company does not believe it is likely that the results of this litigation will have a material adverse impact on the Company’s financial position or the results of operations.

Halliburton—Vistar Litigation

On March 17, 2000, BJ Services Company filed a lawsuit against Halliburton Energy Services in the United States District Court for the Southern District of Texas (Houston). In the lawsuit, BJ alleged that a well fracturing fluid system used by Halliburton infringes a patent issued to BJ in January 2000 for a method of well fracturing referred to by BJ as “Vistar^™”. This case was tried in March and April of 2002. The jury reached a verdict in favor of BJ on April 12, 2002. The jury determined that BJ’s patent was valid and that Halliburton’s competing fluid system, Phoenix, infringed the BJ patent. The District Court has entered a judgment for $101.1 million and a permanent injunction preventing Halliburton from using its Phoenix system. On August 6, 2003, a three-judge panel of the Court of Appeals for the Federal Circuit in Washington, D.C. unanimously affirmed the judgment in BJ’s favor. On October 17, 2003, the Federal Circuit denied Halliburton’s request for a re-hearing. Halliburton filed a Petition for Writ of Certiorari with the U.S. Supreme Court on January 15, 2004. Based upon the Petition, the Supreme Court will determine whether it will consider Halliburton’s appeal. As of December 31, 2003 the Company has not recorded any income related to this case.

Newfield Litigation

On April 4, 2002, a jury rendered a verdict adverse to OSCA in connection with litigation pending in the United States District Court for the Southern District of Texas (Houston). The lawsuit arose out of a blowout that occurred in 1999 on an offshore well owned by Newfield Exploration. The jury determined that OSCA’s negligence caused or contributed to the blowout and that it was responsible for 86% of the damages suffered by Newfield. The total damage amount awarded to Newfield was $15.5 million (excluding pre- and post-judgement interest). The Court delayed entry of the final judgment in this case pending the completion of the related insurance coverage litigation filed by OSCA against certain of its insurers and its former insurance broker. The Court elected to conduct the trial of the insurance coverage issues based upon the briefs of the parties. In the interim, the related litigation filed by OSCA against its former insurance brokers for errors and omissions in connection with the policies at issue in this case has been stayed. On February 28, 2003, the Court issued its Final Judgement in connection with the Newfield claims, based upon the jury’s verdict. The total amount of the verdict against OSCA is $15.6 million, inclusive of interest. At the same time, the Court issued its ruling on the related insurance dispute finding that OSCA’s coverage for this loss is limited to $3.8 million. Motions for New Trial have been denied by the Judge and the case is now on appeal to the U.S. Court of Appeals for the Fifth Circuit, both with regard to the liability case and the insurance coverage issues. Great Lakes Chemical Corporation, which formerly owned the majority of the outstanding shares of OSCA, has agreed to indemnify BJ for 75% of any uninsured liability in excess of $3 million arising from the Newfield litigation. Taking this indemnity into account, the Company’s share of the uninsured portion of the verdict is approximately $5.7 million. The Company is fully reserved for its share of this liability.

Environmental

Federal, state and local laws and regulations govern the Company’s operation of underground fuel storage tanks. Rather than incur additional costs to restore and upgrade tanks as required by regulations, management has opted to remove the existing tanks. The Company has completed the removal of these tanks and has remedial cleanups in progress related to the tank removals. In addition, the Company is conducting environmental investigations and remedial actions at current and former company locations and, along with other companies, is currently named as a potentially responsible party at four third-party owned waste disposal sites. An accrual of approximately $3.3 million has been established for such environmental matters, which is management’s best estimate of the Company’s portion of future costs to be incurred. Insurance is also maintained for environmental liabilities in amounts which the Company’s management believes are reasonable based on its knowledge of potential exposures.

The Company was notified on May 19, 2003, that misdemeanor criminal charges had been filed against it in connection with the illegal disposal of allegedly hazardous waste from its facility in Ardmore, Oklahoma. The Company’s investigation of this incident concluded that a former employee at the facility, a product handler, had removed and improperly disposed of drums from the facility in September of 2001, without instructions from, or the knowledge of the management at this location. The product handler provided a written statement to the investigating authorities in which he admitted having disposed of the drums without instructions from anyone at the Company and that he knew that his actions were prohibited under law. The charges that have been filed against the Company carry potential fines of $50,000. The Company does not believe that it is criminally responsible for the actions of this former employee and intends to defend itself from these charges. The Company has begun discussions with the prosecuting authorities in an effort to convert this matter to a civil proceeding.

Lease and Other Long-Term Commitments

In December 1999, the Company contributed certain pumping service equipment to a limited partnership. The equipment is used to provide services to the Company’s customers for which the Company pays a service fee over a period of at least six years, but not more than 13 years, at approximately $12 million annually. This is accounted for as an operating lease. The Company owns a 1% interest in the limited partnership. The transaction resulted in a gain that is being deferred and amortized over 13 years. The balance of the deferred gain was $32.9 million and $33.9 million as of December 31, 2003 and September 30, 2003, respectively. In September 2010, the Company has the option, but not the obligation, to purchase the pumping service equipment for approximately $32 million.

million as of December 31, 2003 and September 30, 2003, respectively. The agreement permits substitution of equipment within the partnership as long as the implied fair value of the new property transferred in at the date of substitution equals or exceeds the implied fair value, as defined, of the current property in the partnership that is being replaced. The Company received partnership approval in October 2003 to substitute certain pumping service equipment and has accounted for it as an exchange of like-kind assets with no earnings impact since the earnings process has not yet culminated. As a result of the substitutions, the deferred gain was reduced by $14.1 million during the quarter ended December 31, 2003. In June 2009, the Company has the option, but not the obligation, to purchase the pumping service equipment for approximately $27 million.

Guarantees

The Company routinely issues Parent Company Guarantees (“PCG’s”) in connection with service contracts entered into by the Company’s subsidiaries. The issuance of these PCG’s is frequently a condition of the bidding process imposed by the Company’s customers for work in countries outside of North America. The PCG’s typically provide that the Company guarantees the performance of the services by the Company’s local subsidiary. The term of these PCG’s varies with length of the service contract.

The Company arranges for the issuance of a variety of bank guarantees, performance bonds and standby letters of credit. The vast majority of these are issued in connection with contracts the Company, or a subsidiary, has entered into with its customers. The customer has the right to call on the bank guarantee, performance bond or standby letter of credit in the event that the Company, or the subsidiary, defaults in the performance of the services. These instruments are required as a condition to the Company, or the subsidiary, being awarded the contract, and are typically released upon completion of the contract. The balance of these instruments are predominantly standby letters of credit issued in connection with a variety of the Company’s financial obligations, such as in support of fronted insurance programs, claims administration funding, certain employee benefit plans and temporary importation bonds. The following table summarizes the Company’s other commercial commitments as of December 31, 2003 (in thousands):


Other Commercial Commitments	Total Amounts Committed		Amount of commitment expiration per period
Other Commercial Commitments	Total Amounts Committed		Less than 1 Year		1–3 Years		4–5 Years		Over 5 Years
Standby Letters of Credit	$	30,682	$	30,652	$	—	$	—	$	30
Bank Guarantees and Performance Bonds		154,404		49,193		93,976		3,438		7,797

Total Other Commercial Commitments	$	185,086	$	79,845	$	93,976	$	3,438	$	7,827

Note 7 New Accounting Standards

On December 23, 2003, the FASB issued FASB Statement No. 132-Revised 2003 (“SFAS 132R”), Employers’ Disclosures about Pensions and Other Postretirement Benefits. This

standard increases the existing GAAP disclosure requirements by requiring more details about pension plan assets, benefit obligations, cash flows, benefit costs and related information. Companies will be required to segregate plan assets by category, such as debt, equity and real estate, and to provide certain expected rates of return and other informational disclosures. SFAS 132R also requires companies to disclose various elements of pension and postretirement benefit costs in interim-period financial statements for quarters beginning after December 15, 2003. Since SFAS 132R only revises disclosure requirements, it will not have an impact on the Company’s financial position or results of operations.

Item

2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

The Company’s worldwide operations are primarily driven by the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, the number of well completions and the level of workover activity. Drilling activity, in turn, is largely dependent on the price of crude oil and natural gas. This situation often leads to volatility in the Company’s revenue and profitability, especially in the United States and Canada, where the Company historically has generated in excess of 50% of its revenue.

For the three-month period ended December 31, 2003, the active U.S. rig count averaged 1,109 rigs, a 31% increase in activity compared to the same period in fiscal 2003. The Company’s management believes that the average U.S. rig count for fiscal 2004 will be approximately 15-20% higher than the average rig count of 966 for fiscal 2003.

Drilling activity outside North America has historically been less volatile than the U.S. and Canadian drilling activity. During the three months ended December 31, 2003, active international drilling rigs (excluding Canada) averaged 791 rigs, an increase of 5% in activity compared to the same period in fiscal 2003. Canadian drilling activity also increased during the three months ended December 31, 2003 averaging 408 active drilling rigs, up 44% from the same period of fiscal year 2003. The Company expects international drilling activity outside of Canada to remain relatively flat for fiscal 2004 compared to fiscal 2003 and expects drilling activity in Canada to increase approximately 20-25% for fiscal 2004 over fiscal 2003.

Critical Accounting Policies

For an accounting policy to be deemed critical, the accounting policy must first include an estimate that requires a company to make assumptions about matters that are highly uncertain at the time the accounting estimate is made. Second, different estimates that the company reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, must have a material impact on the presentation of the company’s financial condition or results of operations. Estimates and assumptions about future events and their effects cannot be predicted with certainty. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments. These estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. There have been no material changes or developments in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies disclosed in our Form 10-K for the fiscal year ending September 30, 2003.

Acquisitions

Results of Operations

The following table sets forth selected key operating statistics reflecting industry rig count and the Company’s financial results:


	Three Months Ended December 31,
	2003			2002
Rig Count: ⁽¹⁾
U.S.		1,109			847
International⁽²⁾		1,199			1,036
Consolidated revenue (in millions)	$	600.8		$	473.1
Revenue by business segment (in millions):
U.S./Mexico Pressure Pumping	$	284.4		$	212.0
International Pressure Pumping		221.2			178.9
Other Oilfield Services		94.9			82.2
Corporate		.3			—
Percentage of research and engineering expense to revenue		1.7	%		2.0	%
Percentage of marketing expense to revenue		3.2	%		3.6	%
Percentage of general and administrative expense to revenue		3.0	%		3.5	%
Consolidated operating income (in millions)	$	95.0		$	54.0
Operating income by business segment (in millions):
U.S./Mexico Pressure Pumping	$	66.2		$	33.1
International Pressure Pumping		25.2			19.2
Other Oilfield Services		12.1			9.9
Corporate		(8.5	)		(8.2	)

⁽¹⁾	Estimate of drilling activity as measured by average active drilling rigs based on Baker Hughes Incorporated rig count information.

⁽²⁾	Includes Mexico rig count of 107 and 76 for the three-month period ended December 31, 2003 and 2002, respectively.

Revenue and Operating Income: For the three month period ended December 31, 2003, consolidated revenue increased 27%, compared to the prior year’s first quarter with U.S./Mexico Pressure Pumping revenue increasing 34%, International Pressure Pumping increasing 24% and Other Oilfield Services increasing 15%. The increase in drilling activity is the primary reason for the increase in our pressure pumping segments. Additional projects and international growth are the primary reasons for the increase in the Other Oilfield Services segment. For the three months ended December 31, 2003, operating income margins improved to 15.8% from 11.4% reported in the prior year’s first quarter, due primarily to increased margins from the Company’s U.S./Mexico and Canadian operations. See below discussion on individual segments for further revenue and operating income variance details.

Research and Engineering, Marketing, and General and Administrative Expenses: Research and engineering, marketing and general and administrative expenses increased 11% versus the same period in the prior year due mainly to expenses associated with increased activity. As a percent of revenue, each of these expenses showed a small decline when compared to the same period of the prior year. We expect these expenses will increase slightly for the remainder of fiscal 2004 as a percentage of revenue, but to be slightly less than fiscal 2003 as a percentage of revenue.

U.S./Mexico Pressure Pumping Segment

The U.S./Mexico Pressure Pumping segment primarily provides stimulation and cementing services to the petroleum industry in the U.S. and Mexico. Stimulation services are designed to improve the flow of oil and natural gas from producing formations. Cementing services consists of pumping a cement slurry into a well between the casing and the wellbore to isolate fluids that might otherwise damage the casing and/or affect productivity, or that could migrate to different zones, during the drilling and completion phase of a well.

Results for the three-month period ended December 31, 2003 and 2002

Revenue was $284.4 million, an increase of $72.4 million, or 34% compared to the first quarter of the prior fiscal year. This is a result of a combined U.S. and Mexico increase in drilling activity of 32% over the same period last year. The geographic expansion into Poza Rica in Mexico also contributed to the increase in revenue.

Operating income for the Company’s U.S./Mexico pressure pumping segment was $66.2 million, an increase of $33.1 million, or 100% from the same period of the prior year. The increase in operating income was primarily due to increases in drilling activity and labor and equipment efficiency gains. The headcount for the three-month period ended December 31, 2003 increased 5% compared to the same period last year with revenue increasing $72.4 million, or 34%.

Outlook

We do not expect the normal seasonal decline in drilling activity during our second fiscal quarter of 2004. During the second quarter of fiscal 2004, we expect rig count to remain flat to modestly up compared to levels experienced during the first quarter of fiscal 2004.

International Pressure Pumping Segment

The International Pressure Pumping segment primarily provides stimulation and cementing services to the petroleum industry outside of the U.S. and Mexico. Stimulation services are designed to improve the flow of oil and natural gas from producing formations. Cementing services consists of pumping a cement slurry into a well between the casing and the wellbore to

isolate fluids that might otherwise damage the casing and/or affect productivity, or that could migrate to different zones, during the drilling and completion phase of a well.

Results for the three-month period ended December 31, 2003 and 2002

International revenue was $221.2 million, an increase of $42.3 million, or 24% from the same period in the prior year. Canadian revenue increased 97% compared to the same period in the prior year. This increase was primarily due to a 44% increase in rig activity compared to the same period in fiscal 2003, increased revenue as the U.S. dollar weakened against the Canadian dollar compared to the same period in fiscal 2003, and pricing improvement. Due to a contract award in the last half of fiscal 2003, the Company’s stimulation vessel in the North Sea also contributed to our increase in revenue over first quarter in fiscal 2003. These increases in revenue were partially offset by decreased revenue in Saudi Arabia and Norway. There was no fracturing activity in Saudi Arabia during the first quarter of fiscal 2004 and in Norway, there was a decline in rig activity and a decrease in coil tubing work from prior year.

Operating income was $25.2 million, an increase of $6.0 million, or 31% from the same period of the prior year. While the weakening U.S. dollar increased Canadian revenue, it had minimal impact on operating income as most of our expenses are also denominated in Canadian dollars. The increase in operating income is primarily due to the activity increases which also resulted in improved labor and equipment utilization efficiencies in Canada. This was partially offset by the decreased margins in Saudi Arabia as a result of the decline in activity described above.

Outlook

Compared to levels experienced during the first fiscal quarter of fiscal 2004, the Company expects international drilling activity outside of Canada to remain relatively flat for the second fiscal quarter. We expect Canadian drilling activity to increase 15-20% during the second quarter of fiscal 2004 compared to the drilling activity in the first quarter of fiscal 2004.

Other Oilfield Services Segment

The Other Oilfield Services segment consists of production chemical services, casing and tubular services, process and pipeline services and completion tools and completion fluids services in the U.S. and select markets internationally.

Results for the three-month period ended December 31, 2003 and 2002

Revenue was $94.9 million, an increase of $12.7 million, or 15% when compared to the same period in fiscal 2003. Process and pipeline services, tubular services, and completion tools are the primary contributors to this increase. The Company experienced increased project activity in

the process and pipeline services and tubular services. Completion tools revenue increased due to expanded international growth for this service line.

Operating income for the Company’s Other Oilfield Services segment was $12.1 million, an increase of $2.2 million, or 22% from the same period of the prior year. The revenue increases described above are the primary reasons for the increase in operating income.

Outlook

We expect revenue for this segment to increase modestly for the remainder of fiscal 2004 over fiscal 2003, primarily attributable to expanded markets for the tubular, completion tools and completion fluids businesses.

Financial Position and Liquidity

Financial Position

The Company’s working capital increased $62.6 million at December 31, 2003 compared to September 30, 2003. The increase in cash is a result of positive cash flow from operations. During the quarter, significant cash payments included an annual pre-payment for insurance of approximately $13 million and the distribution of annual incentives of approximately $11 million.

Capital Expenditures

The Company anticipates spending approximately $200 million in fiscal 2004, compared to $167 million spent in 2003. The 2004 capital expenditure program is expected to consist primarily of spending for the enhancement of the Company’s existing pressure pumping equipment, continued investment in the U.S. fracturing fleet recapitalization initiative and stimulation expansion internationally. The Company has made significant progress with the U.S. fleet recapitalization initiative. The actual amount of 2004 capital expenditures will depend primarily on maintenance requirements and expansion opportunities and is expected to be funded by cash flows from operating activities.

Liquidity and Capital Resources

The Company has in place a $400 million committed line of credit (“Committed Credit Facility”). The Committed Credit Facility consists of a $200 million, 364-day commitment that renews annually at the option of the lenders and a $200 million three-year commitment. The current Committed Credit Facility expires in June 2004 and the Company expects to replace this facility during the year. There were no outstanding borrowings under the Committed Credit Facility at December 31, 2003.

In addition to the Committed Credit Facility, the Company had $95.4 million in various unsecured, discretionary lines of credit at December 31, 2003, which expire at various dates in 2004. There are no requirements for commitment fees or compensating balances in connection with these lines of credit, and interest on borrowings is based on prevailing market rates. There were $7.2 million and $5.9 million in outstanding borrowings under these lines of credit at December 31, 2003 and September 30, 2003, respectively.

At December 31, 2003 and September 30, 2003, the Company had issued and outstanding $78.9 million of unsecured 7% Series B Notes due in 2006, net of discount.

On April 24, 2002 the Company sold convertible senior notes with a face value at maturity of $516.4 million (gross proceeds of $408.4 million). The notes are unsecured senior obligations that rank equally in right of payment with all of the Company’s existing and future senior unsecured indebtedness. The Company used the aggregate net proceeds of $400.1 million to fund a substantial portion of the purchase price of its acquisition of OSCA, which closed on May 31, 2002, and for general corporate purposes. There were $416.0 million and $414.9 million outstanding under the convertible senior notes at December 31, 2003 and September 30, 2003, respectively.

The notes will mature in 2022 and cannot be called by the Company for three years after issuance. If the Company exercises its right to call the notes, the redemption price must be paid in cash. Holders of the notes can require the Company to repurchase the notes on the third, fifth, tenth and fifteenth anniversaries of the issuance. The first such anniversary will occur during the second fiscal quarter of 2005. The Company has the option to pay the repurchase price in cash or stock. The issue price of the notes was $790.76 for each $1,000 in face value, which represents an annual yield to maturity of 1.625%. Of this 1.625% yield to maturity, 0.50% per year on the issue price will be paid semi-annually in cash for the life of the security.

The notes are convertible into BJ Services common stock at an initial rate of 14.9616 shares for each $1,000 face amount note. This rate results in an initial conversion price of $52.85 per share (based on the purchaser’s original issue discount) and represents a premium of 45% over the April 18, 2002 closing sale price of the Company’s common stock on the New York Stock Exchange of $36.45 per share. The Company has the option to settle notes that are surrendered for conversion using cash. Generally, except upon the occurrence of specified events, including a credit rating downgrade to below investment grade, holders of the notes are not entitled to exercise their conversion rights until the Company’s stock price is greater than a specified percentage (beginning at 120% and declining to 110% at the maturity of the notes) of the accreted conversion price per share. At December 31, 2003, the accreted conversion price per share would have been $53.71.

In calendar year 2004, due to the poor market performance of the pension plan investments in fiscal 2001 and 2002, the Company will have a minimum pension funding requirement of $11 million. This is expected to be funded by cash flows from operating activities.

The Company’s total debt (net of cash) was 10.5% of its total capitalization (total capitalization equals the sum of debt, net of cash and stockholders’ equity) at December 31, 2003, compared to 11.9% at September 30, 2003. The Committed Credit Facility includes various customary covenants and other provisions including the maintenance of certain profitability and solvency ratios, none of which materially restrict the Company’s activities. The Company is currently in compliance with all covenants imposed by the terms of its indebtedness. Management believes that the Committed Credit Facility, combined with other discretionary credit facilities and cash flows from operations, provide the Company with sufficient capital resources and liquidity to manage its routine operations, meet debt service obligations and fund projected capital expenditures. If the discretionary lines of credit are not renewed, or if borrowings under these lines of credit otherwise become unavailable, the Company expects to refinance this debt by arranging additional committed bank facilities or through other long-term borrowing alternatives.

Off Balance Sheet Transactions

In 1997, the Company contributed certain pumping service equipment to a limited partnership. The equipment is used to provide services to the Company’s customers for which the Company pays a service fee over a period of at least eight years, but not more than 14 years at approximately $10 million annually. This is accounted for as an operating lease. The transaction resulted in a gain that is being deferred and amortized over 12 years. The balance of the deferred gain was $1.9 and $16.0 million as of December 31, 2003 and September 30, 2003, respectively. The agreement permits substitution of equipment within the partnership as long as the implied fair value of the new property transferred in at the date of substitution equals or exceeds the implied fair value, as defined, of the current property in the partnership that is being replaced. The Company received partnership approval in October 2003 to substitute certain pumping service equipment and has accounted for it as an exchange of like-kind assets with no earnings impact since the earnings process has not yet culminated. As a result of the substitutions, the deferred gain was reduced by $14.1 million during the quarter ended December 31, 2003. In June 2009, the Company has the option, but not the obligation, to purchase the pumping service equipment for approximately $27 million.

Accounting Pronouncements

On December 15, 2003, the FASB issued an exposure draft amending FASB Statement No. 128 (“SFAS 128”), Earnings per Share. The exposure draft would amend the computational guidance of SFAS 128. When applying the treasury stock method for year-to-date diluted earnings per share (EPS), SFAS 128 requires that the number of incremental shares included in the denominator be determined by computing a year-to-date weighted average of the number of incremental shares included in each quarterly diluted EPS computation. Under this proposed Statement, the number of incremental shares included in year-to-date diluted EPS would be computed using the average market price of common shares for the year-to-date period. The proposed Statement also would eliminate the provisions of SFAS 128 that allow an entity to rebut the presumption that contracts with the option of settling in either cash or stock will be settled in cash. In addition, the proposed Statement would require that shares to be issued upon conversion of a mandatorily convertible security be included in the computation of basic EPS from the date that conversion becomes mandatory. Under the current SFAS 128, we have excluded the convertible senior notes from our diluted EPS calculation as we have the ability and intent to settle the obligation with cash instead of stock. If implemented as proposed, we would be required to include the convertible senior notes in the diluted EPS calculation, which could have a material effect on our diluted EPS. The provisions of the final Statement could differ from this disclosure; as a result, the actual application of any final Statement could result in different effects than discussed.

On December 23, 2003, the FASB issued FASB Statement No. 132-Revised 2003 (“SFAS 132R”), Employers’ Disclosures about Pensions and Other Postretirement Benefits. This standard increases the existing GAAP disclosure requirements by requiring more details about pension plan assets, benefit obligations, cash flows, benefit costs and related information. Companies will be required to segregate plan assets by category, such as debt, equity and real estate, and to provide certain expected rates of return and other informational disclosures. SFAS 132R also requires companies to disclose various elements of pension and postretirement benefit costs in interim-period financial statements for quarters beginning after December 15, 2003. Since SFAS 132R only revises disclosure requirements, it will not have an impact on the Company’s financial position or results of operations.

Forward Looking Statements

This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934 concerning, among other things, the Company’s prospects, expected revenues, expenses and profits, developments and business strategies for its operations, all of which are subject to certain risks, uncertainties and assumptions. These forward-looking statements are identified by their use of terms and phrases such as “expect,” “estimate,” “project,” “believe,” “achievable,” “anticipate” and similar terms and phrases. These statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate under the circumstances. Such statements are subject to:

•

fluctuating prices of crude oil and natural gas,

•

conditions in the oil and natural gas industry, including drilling activity,

•

reduction in prices or demand for our products and services,

•

general global economic and business conditions,

•

international political instability, security conditions, and hostilities,

•

the Company’s ability to expand its products and services (including those it acquires) into new geographic markets,

•

our ability to generate technological advances and compete on the basis of advanced technology,

•

risks from operating hazards such as fire, explosion, blowouts and oil spills,

•

unexpected litigation for which insurance and customer agreements do not provide protection,

•

changes in currency exchange rates,

•

weather conditions that affect conditions in the oil and natural gas industry,

•

the business opportunities that may be presented to and pursued by the Company,

•

competition and consolidation in the Company’s business, and

•

changes in law or regulations and other factors, many of which are beyond the control of the Company.

If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, actual results may vary materially from those expected, estimated or projected. Other than as required under securities laws, the Company does not assume a duty to update these forward looking statements. This list of risk factors is not intended to be comprehensive. See “Risk Factors” included elsewhere in the Company’s Form 10-K for the fiscal year ending September 30, 2003.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The table below provides information about the Company’s market sensitive financial instruments and constitutes a “forward-looking statement.” The Company’s major market risk exposure is to foreign currency fluctuations internationally and changing interest rates, primarily in the United States, Canada and Europe. The Company’s policy is to manage interest rates through use of a combination of fixed and floating rate debt. If the floating rates were to increase by 10% from December 31, 2003 rates, the Company’s combined interest expense to third parties would increase by a total of $3,010 each month in which such increase continued. At December 31, 2003, the Company had issued fixed-rate debt of $494.9 million. These instruments are fixed-rate and, therefore, do not expose the Company to the risk of loss in earnings due to changes in market interest rates. However, the fair value of these instruments would increase by $21.3 million if interest rates were to decline by 10% from their rates at December 31, 2003.

Periodically, the Company borrows funds which are denominated in foreign currencies, which exposes the Company to market risk associated with exchange rate movements. There were no such borrowings denominated in foreign currencies at December 31, 2003. When the Company believes prudent, the Company enters into forward foreign exchange contracts to hedge the impact of foreign currency fluctuations. There were three forward foreign exchange contracts outstanding as of December 31, 2003, each in the amount of $2.3 million. These contracts are being accounted for as cash flow hedges of future foreign currency denominated obligations. Beginning in February 2004 and ending in August 2004, one contract will settle in each of the following three quarters. All items described are non-trading and are stated in U.S. dollars (in thousands).


	Expected Maturity Dates											Fair Value
	2004		2005	2006		2007	2008	Thereafter		Total		December 31, 2003
SHORT-TERM BORROWINGS
Bank borrowings; U.S. $ denominated	$	7,224								$	7,224	$	7,224
Average variable interest rate—5.00% at December 31, 2003
LONG-TERM BORROWINGS
7% Series B Notes—U.S. $denominated
Fixed interest rate—7%				$	78,899						78,899		85,668
1.625% Convertible Notes ⁽¹⁾
U.S. denominated
Fixed interest rate—1.625%								$	416,039		416,039		421,858
FINANCIAL INSTRUMENTS
Forward foreign exchange contracts	$	368									368		368
Total	$	7,592	—	$	78,899	—	—	$	416,039	$	502,530	$	515,118

⁽¹⁾

The holders of the convertible notes can require the Company to repurchase the convertible notes in May 2005 and 2007. In the event the holders require the Company to repurchase the convertible notes, the Company expects the obligation to be paid with cash, or to refinance this on a long-term basis.

Item 4. Controls and Procedures

(a)

Evaluation of disclosure controls and procedures. Based on their evaluation of the Company’s disclosure controls and procedures as of the end of the period covered by this report, the Chief Executive Officer and Chief Financial Officer of the Company have concluded that the disclosure controls and procedures are effective in ensuring that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

(b)

Changes in internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

Litigation

Chevron Phillips Litigation

Early in 2000, Phillips advised BJ that Phillips had reportedly terminated the license agreement between Phillips and GMT for GMT’s non-payment of royalties and that BJ’s sublicense had also been terminated. Even though BJ believes that its sublicense with GMT was not properly terminated and BJ’s Mudzyme treatments may not be covered by the ‘477 patent, in 2000, BJ stopped offering its enzyme product for use on drilling mud and drill-in fluids in the U.S. Nevertheless, Chevron Phillips is claiming that the use of enzymes in fracturing fluids and other applications in the oil and gas industry falls under the ‘477 patent. Further, even though

their patent is valid only in the United States, Chevron Phillips is requesting that the court award it damages for BJ’s use of enzymes in foreign countries on the theory that oil produced from wells treated with enzymes is being imported into the United States.

Halliburton—Python Litigation

Halliburton—Vistar Litigation

Newfield Litigation

Environmental

has completed the removal of these tanks and has remedial cleanups in progress related to the tank removals. In addition, the Company is conducting environmental investigations and remedial actions at current and former company locations and, along with other companies, is currently named as a potentially responsible party at four third-party owned waste disposal sites. An accrual of approximately $3.3 million has been established for such environmental matters, which is management’s best estimate of the Company’s portion of future costs to be incurred. Insurance is also maintained for environmental liabilities in amounts which the Company’s management believes are reasonable based on its knowledge of potential exposures.

Item 2. Changes in Securities and Use of Proceeds

None

Item 3. Defaults upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits.



10.1		2003 Incentive Plan

31.1		Section 302 certification for J. W. Stewart

31.2		Section 302 certification for T. M. Whichard

32.1		Section 906 certification furnished for J. W. Stewart

32.2		Section 906 certification furnished for T. M. Whichard

(b) Reports furnished on Form 8-K.

On November 4, 2003, the Company furnished a Form 8-K attaching a press release with respect to an announcement of the financial results for the fourth quarter ended September 30, 2003, pursuant to Item 12 of Form 8-K.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


				BJ Services Company (Registrant)




Date: February 13, 2004				BY /s/ J. W. Stewart

				J. W. Stewart Chairman of the Board




Date: February 13, 2004				BY /s/ T. M. Whichard

				T. M. Whichard Chief Financial Officer

EX-10.1 3 dex101.htm 2003 INCENTIVE PLAN 2003 Incentive Plan

Exhibit 10.1

BJ Services Company

2003 Incentive Plan

TABLE OF CONTENTS


		Page
ARTICLE I INTRODUCTION		1
1. Purpose		1
2. Definitions		1
3. Shares Subject to the Plan and Awards		3
4. Administration of the Plan		4
5. Amendment and Discontinuance of the Plan		4
6. Granting of Discretionary Awards		4
7. Term of Plan		4
8. Rule 16b-3 Compliance		5

ARTICLE II NONQUALIFIED STOCK OPTIONS		5
1. Eligible Individuals		5
2. Calculation of Exercise Price		5
3. Terms and Conditions of Options		5
4. Amendment		6
5. Acceleration upon a Change of Control		6
6. Vesting		7

ARTICLE III INCENTIVE STOCK OPTIONS		7
1. Eligible Employees		7
2. Calculation of Exercise Price		7
3. Terms and Conditions of Options		7
4. Amendment		8
5. Acceleration upon a Change of Control		9
6. Notice of Disposition		9

ARTICLE IV PERFORMANCE STOCK AND PERFORMANCE UNITS		9
1. Eligible Individuals		9
2. Terms and Conditions of Performance Awards		9
3. Amendment		10
4. Acceleration upon a Change of Control		10
5. Restriction of Certificates		10

ARTICLE V BONUS STOCK		11

ARTICLE VI CASH AWARDS		11
1. Eligible Individuals		11
2. Tandem Cash Tax Rights		11
3. Terms and Conditions of Performance Cash Awards		11
4. Amendment		12
5. Acceleration upon a Change of Control		12
6. Other Provisions		12
7. Bonus Cash Awards		12

ARTICLE VII STOCK APPRECIATION RIGHTS AND PHANTOM STOCK		12
1. Stock Appreciation Rights		12
2. Phantom Stock Awards		13
3. Acceleration upon a Change of Control		13

ARTICLE VIII TRANSFERABLE OPTIONS		14

ARTICLE IX WITHHOLDING FOR TAXES		14

ARTICLE X PARACHUTE TAX GROSS-UP		14


		Page
ARTICLE XI CHANGE OF CONTROL		15
1. Publicly-Traded Stock Transaction		15
2. Other Transaction		15

ARTICLE XII OTHER PROVISIONS		15

ARTICLE I

INTRODUCTION

1. Purpose. The BJ SERVICES COMPANY 2003 INCENTIVE PLAN (the “Plan”) is intended to promote the interests of BJ SERVICES COMPANY (the “Company”) and its Affiliates stockholders by encouraging employees of the Company and its Affiliates and non-employee directors of the Company to acquire or increase their equity interest in the Company and to relate compensation to Company performance goals, thereby giving employees and directors an added incentive to work toward the continued growth and success of the Company. The Board of Directors of the Company (the “Board”) also contemplates that through the Plan, the Company and its Affiliates will be better able to compete for the services of personnel needed for the continued growth and success of the Company. However, nothing in this Plan shall operate or be construed to prevent the Company from granting bonuses and other stock awards outside of this Plan.

2. Definitions. As used in the Plan, the following terms shall have the meanings set forth below:

“Act” means the Securities Exchange Act of 1934, as amended.

“Affiliate” means (i) any “parent corporation” of the Company (as defined in section 424(e) of the Code), (ii) any “subsidiary corporation” of any such parent corporation (as defined in section 424(f) of the Code) of the Company and (iii) any trades or businesses, whether or not incorporated which are members of a controlled group or are under common control (as defined in Sections 414(b) or (c) of the Code) with the Company.

“Awards” means, collectively, Options, Bonus Stock, Performance Stock, Performance Units, Phantom Stock, Stock Appreciation Rights or Cash Awards.

“Bonus Stock” is defined in Article V.

“Cause” for termination of any Participant who is a party to an agreement of employment with or services to the Company shall mean (i) the willful commission by a Participant of a criminal or other act that causes or is likely to cause substantial economic damage to the Company or an Affiliate or substantial injury to the business reputation of the Company or Affiliate; (ii) the commission by a Participant of an act of fraud in the performance of such Participant’s duties on behalf of the Company or an Affiliate; or (iii) the continuing willful failure of a Participant to perform the duties of such Participant to the Company or an Affiliate (other than such failure resulting from the Participant’s incapacity due to physical or mental illness) after written notice thereof (specifying the particulars thereof in reasonable detail) and a reasonable opportunity to be heard and cure such failure are given to the Participant by the Company or an Affiliate. For purposes of the Plan, no act, or failure to act, on the Participant’s part shall be considered “willful” unless done or omitted to be done by the Participant not in good faith and without reasonable belief that the Participant’s action or omission was in the best interest of the Company or an Affiliate, as the case may be.

“Change of Control” As used in the Plan, a “Change of Control” shall be deemed to have occurred upon, and shall mean (a) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Act) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Act) of 25% or more of either (i) the then outstanding shares of Common Stock of the Company (the “Outstanding Company Common Stock”) or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan(s) (or related trust(s)) sponsored or maintained by the Company or any corporation controlled by the Company, or (D) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, immediately following such reorganization, merger or consolidation, the conditions described in clause (i), (ii) and (iii) of clause (c) of this definition are satisfied; (b) the approval by the Company’s stockholders of the sale or disposition of all or substantially all of the Company’s assets or the dissolution or liquidation of the Company; or (c) the approval by the stockholders of the Company of a reorganization, merger or consolidation, in each case, unless immediately following such reorganization, merger or consolidation (i) more than 60% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding the Company, any employee benefit plan(s) (or related trust(s)) of the Company and/or its subsidiaries or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior

to such reorganization, merger or consolidation, directly or indirectly, 25% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board (as defined below) at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation. The “Incumbent Board” shall mean individuals who, as of the date the Plan is adopted by the Board, constitute the Board; provided, however, that any individual becoming a director subsequent to such date whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either (1) an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Act), or an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board or (2) a plan or agreement to replace a majority of the members of the Board then comprising the Incumbent Board.

“Code” means the Internal Revenue Code of 1986 as amended and any regulations promulgated pursuant thereto.

“Committee” means a committee appointed by the Board to administer the Plan. The Committee shall consist solely of two or more persons who are “outside directors” as described in Section 162(m)(4)(c)(i) of the Code and “non-employee directors” as defined in Rule 16b-3 of the Act.

“Common Stock” means shares of common stock, $.10 par value per share of the Company. Each share of Common Stock includes an associated one-quarter preferred share purchase right.

“Covered Employee” shall mean the Chief Executive Officer of the Company or the four highest paid officers of the Company other than the Chief Executive Officer as described in Section 162(m)(3) of the Code.

“Disability” means shall mean that a Participant is suffering from a mental or physical disability, which, in the opinion of the Board, prevents the Participant from performing his regular duties and is expected to be of long continued duration or to result in death.

“Employee” means any employee of the Company or an Affiliate and includes officers.

“Employment” includes any period in which a Participant is an Employee of the Company or an Affiliate.

“Fair Market Value Per Share” means the per share price of the last sale of Common Stock in regular trading on the New York Stock Exchange on the trading day prior to the date of determination as reported in the Wall Street Journal. If the Common Stock is not listed on the New York Stock Exchange on such date, the Fair Market Value Per Share shall be based on the closing price of the Common Stock on the principal exchange or over-the-counter market on which such shares are trading, if any, or as reported on any composite index which includes such principal exchange, for the date of the determination, or if no trade of the Common Stock shall have been reported for such date, the closing sales price quoted on such exchange for the most recent trade prior to the determination date. If shares of the Common Stock are not listed or admitted to trading on any exchange, over-the-counter market or any similar organization as of the determination date, the Committee shall determine the Fair Market Value Per Share in good faith using any fair and reasonable means selected in its discretion.

“Incentive Stock Option” means any option that satisfies the requirements of Code Section 422 and is granted pursuant to Article III of the Plan.

“Non-Employee Director” means any person who is a member of the Board but who is not an Employee of the Company or any Affiliate.

“Non-Qualified Option” shall mean an option not intended to satisfy the requirements of Code Section 422 and which is granted pursuant to Article II of the Plan.

“Option” means an option to acquire Common Stock granted pursuant to the provisions of the Plan, and refers to either an Incentive Stock Option or a Non-Qualified Stock Option, or both, as applicable.

“Option Expiration Date” means the date determined by Committee, which shall not be more than ten years after the date of grant of an Option.

“Optionee” means a Participant who has received or will receive an Option.

“Participant” means any Non-Employee Director or Employee granted an Award under the Plan.

“Performance Period” shall mean the period established by the Committee with respect to an Award during which the Award either remains subject to forfeiture or is not exercisable by the Participant.

“Performance Stock” shall mean any share of Common Stock, prior to the lapse of restrictions thereon, granted under Article IV of the Plan.

“Performance Unit” means an Award granted pursuant to Article IV of the Plan of the right to receive shares of Common Stock issued at the end of a Performance Period.

“Retirement” shall mean (i) the termination of an Employee’s Employment with the Company, or its Affiliates, (A) on or after an Employee reaches age 65 or (B) on or after an Employee reaches age 55 with the consent of the Board; or (ii) the termination of service of a Non-Employee Director following a period of service on the Board of at least three years, for reasons other than death, Disability or Cause.

3. Shares Subject to the Plan and Awards. The aggregate number of shares of Common Stock that may be issued under the Plan shall not exceed 4,000,000. However, in the event that at any time after the effective date of the Plan the outstanding shares of Common Stock are changed into or exchanged for a different number or kind of shares or other securities by reason of merger, consolidation, recapitalization, reclassification, stock split, stock dividend, combination of shares or the like, the aggregate number and class of securities available under the Plan shall be ratably adjusted by the Committee. With respect to any of the events described in the preceding sentence, the Committee shall, in such manner as it may deem equitable, adjust any or all of (a) the number of shares of Common Stock with respect to which Awards may be granted, (b) the number of shares of Common Stock subject to outstanding Awards, and (c) the grant or exercise price with respect to an Award. The Committee’s determinations shall be final and binding upon the Company and all other interested persons. In the event the number of shares to be delivered upon the exercise or payment of any Award granted under the Plan is reduced for any reason whatsoever or in the event any Award granted under the Plan can no longer under any circumstances be exercised or paid, the number of shares no longer subject to such Award shall thereupon be released from such Award and shall thereafter be available under the Plan for the grant of additional Awards. Shares issued pursuant to the Plan shall be fully paid and nonassessable.

4. Administration of the Plan. The Plan shall be administered by the Committee or, if none, the Board. Subject to the provisions of the Plan, the Committee shall interpret the Plan and all awards under the Plan, shall make such rules as it deems necessary for the proper administration of the Plan, shall make all other determinations necessary or advisable for the administration of the Plan and shall correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any award under the Plan in the manner and to the extent that the Committee deems desirable to effectuate the Plan. Any action taken or determination made by the Committee pursuant to this and the other sections of the Plan shall be binding on all parties. The act or determination of a majority of the Committee shall be deemed to be the act or determination of the Committee.

Subject to the following, the Committee, in its sole discretion, may delegate any or all of its powers and duties under the Plan, including the power to grant Awards under the Plan, to the President of the Company, subject to such limitations on such delegated powers and duties as the Committee may impose. Upon any such delegation all references in the Plan to the “Committee” shall be deemed to include the President; provided, however, that such delegation shall not limit the President’s right to receive Awards under the Plan. Notwithstanding the foregoing, the President may not grant Awards to, or take any action with respect to any Award previously granted to, a person who is a Covered Employee, or who is an officer or a director of the Company or otherwise subject to Section 16(b) of the Act.

5. Amendment and Discontinuance of the Plan. The Board may amend, suspend or terminate the Plan; provided, however, that each such amendment of the Plan (a) extending the period within which Awards may be made under the Plan, (b) increasing the number of shares of Common Stock to be awarded under the Plan, except as provided in Article I, Section 3, Article II, Section 3(e) and Article III, Section 3(e), (c) reducing the option exercise price per share provided in the Plan, except as provided in Article I, Section 3, Article II, Section 3(e) and Article III, Section 3(e), (d) changing the class of persons to whom Awards may be made under the Plan, or (e) otherwise amending an Award or the Plan in a manner which would constitute a “material revision” of the Award or the Plan (as that term is used in the rules of the New York Stock Exchange) shall be subject to shareholder approval; and provided, further, that no amendment, suspension or termination of the Plan may cause the Plan to fail to meet the requirements of Rule 16b-3 or may, without the consent of the holder of an Award, terminate such Award or adversely affect such person’s rights in any material respect.

6. Granting of Discretionary Awards. The Committee shall have the authority to grant, prior to the expiration date of the Plan, to such Employees and Non-Employee Directors as may be selected by it, options to purchase shares of Common Stock and awards of Performance Stock, Performance Units, Bonus Stock, Stock Appreciation Rights, Phantom Stock and/or Cash Awards on the terms and conditions hereinafter set forth. Stock issued with respect to an Award under the Plan may be authorized but unissued, or reacquired shares of Common Stock. The Committee shall also have the authority to determine whether options are granted pursuant to Article II or Article III, as hereinafter set forth; provided, however, only Employees may be granted options pursuant to Article III. In selecting Participants, and in determining the number of shares to be covered by each Award granted to such individual, the

Committee may consider such factors that it may consider relevant. Further, the Committee shall have the authority to grant options in substitution for options held by individuals employed by corporations who become Employees of the Company, its subsidiaries, or affiliated entities as a result of a merger or consolidation or other business combination of such individual’s employing corporation with the Company, any such subsidiary, or any such affiliated entity.

7. Term of Plan. The Plan shall be effective as of November 20, 2003 (the “Effective Date”). The provisions of the Plan are applicable to all Awards granted on or after the Effective Date. All Awards granted pursuant to the Plan shall be contingent upon shareholder approval of the Plan at the first meeting of shareholders occurring after the Effective Date. Except with respect to Awards then outstanding, the Plan, if not sooner terminated under the provisions of Article I, Section 5, shall terminate upon, and no further Awards shall be made, after the tenth (10^th) anniversary of the Effective Date.

8. Rule 16b-3 Compliance. The Company intends that:

(a) the Plan meet the requirements of Rule 16b-3;

(b) transactions of the type specified in Rule 16b-3 by Non-Employee Directors pursuant to the Plan will be exempt from the operation of Section 16(b) of the Act; and

(c) transactions of the type specified in Rule 16b-3 by officers of the Company (whether or not they are directors) pursuant to the Plan will be exempt from the operation of Section 16(b) of the Act.

In all cases, the terms, provisions, conditions and limitations of the Plan shall be construed and interpreted consistent with the Company’s intent as stated in this Article 1, Section 8.

ARTICLE II

NONQUALIFIED STOCK OPTIONS

1. Eligible Individuals. Employees and Non-Employee Directors shall be eligible to receive Nonqualified Options under this Article II; provided, however, no such person may receive more than 1,000,000 Nonqualified Options and/or Incentive Stock Options hereunder during any calendar year (subject to adjustment in the same manner provided in Article I, Section 3 with respect to shares of Common Stock available under the Plan).

2. Calculation of Exercise Price. The exercise price to be paid for each share of Common Stock deliverable upon exercise of each Option granted under this Article II shall be the Fair Market Value Per Share on the date of grant of such Option. The exercise price for each Option granted under Article II shall be subject to adjustment as provided in Article II, Section 3(e) below.

3. Terms and Conditions of Options. Options shall be in such form as the Committee may from time to time approve, shall be subject to the following terms and conditions and may contain such additional terms and conditions, not inconsistent herewith, as the Committee shall deem desirable:

(a) Option Period and Conditions and Limitations on Exercise. No Nonqualified Option shall be exercisable later than the date which is ten years after the date of grant (the “Option Expiration Date”). To the extent not prohibited by other provisions of the Plan, each Nonqualified Option shall be exercisable at such time or times as the Committee, in its discretion, may establish in the Option Agreement.

(b) Termination of Service and Death. The Committee shall determine and shall set forth in the Option Agreement the extent to which, if any, and the manner in which an Option may be exercised following termination of a Participant’s employment or service as a director. To the extent exercisable, an Option granted under Article II may be exercised by the Participant’s estate or by the person or persons who acquire the right to exercise his Option by bequest or inheritance with respect to any or all of the shares remaining subject to his Option at the time of his death. The Committee, in its discretion, may extend the period for exercise of any Option upon a Participant’s termination, but in no event may any Option be exercised later than the Option Expiration Date.

(c) Manner of Exercise. In order to exercise an Option, the person or persons entitled to exercise it shall deliver to the Company payment in full for the shares being purchased, together with any required withholding taxes. The payment of the exercise price for each Option shall either be (i) in cash or by check payable and acceptable to the Company, (ii) by tendering to the Company shares of Common Stock owned by the person (for more than six months if such shares were acquired by the exercise of a Company-provided option) having an aggregate Fair Market Value as of the date of exercise that is not greater than the full exercise price (and any required withholding) for the shares with respect to which the Option is being exercised and by paying any remaining amount of the exercise price as provided in (i) above, or (iii) by delivering to the Company and to a broker a properly executed exercise notice and irrevocable instructions to such broker to deliver to the Company cash or a check payable and acceptable to the Company to pay the Option exercise price and any applicable withholding taxes. Upon receipt of the cash or check from the broker, the Company will deliver to the broker the shares for which the Option is exercised. In the event that the person elects to make payment as allowed under clause (ii) above, the Company may, upon confirming that the Optionee owns the number of additional shares being tendered, authorize the issuance of a new certificate for the number of shares being acquired pursuant to the exercise of the Option less the number of shares being tendered upon the exercise and return to the person (or not require surrender of) the certificate for the shares being tendered upon the exercise. If the Company so requires, such person or persons shall also deliver a written representation that all shares being purchased are being acquired for investment and not with a view to or for resale in connection with, any distribution of such shares.

(d) Options not Transferable. Except as provided in Article VIII, no Nonqualified Option granted under Article II shall be transferable otherwise than by will or by the laws of descent and distribution. During the lifetime of the Participant to whom any Option is granted, it shall be exercisable only by the Optionee. Any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of, or to subject to execution, attachment or similar process, any Nonqualified Option granted under Article II, or any right thereunder, contrary to the provisions hereof, shall be void and ineffective, shall give no right to the purported transferee and shall, at the sole discretion of the Committee, result in forfeiture of the Option with respect to the shares involved in such attempt.

(e) Adjustment of Shares. In the event that at any time after the Effective Date of the Plan the outstanding shares of Common Stock are changed into or exchanged for a different number or kind of shares or other securities by reason of merger, consolidation, recapitalization, reclassification, stock split, stock dividend, combination of shares or the like, the Committee shall make an appropriate and equitable adjustment in the number and kind of shares as to which all outstanding Nonqualified Options granted under Article II, or portions thereof then unexercised, shall be exercisable, and with any necessary corresponding adjustment in exercise price per share, to the end that after such event the shares subject to Article II of the Plan and each Optionee’s proportionate interest shall be maintained as before the occurrence of such event. Any such adjustment made by the Committee shall be final and binding upon all Optionees, the Company, and all other interested persons.

(f) Listing and Registration of Shares. Each Option granted under Article II shall be subject to the requirement that if at any time the Committee determines, in its discretion, that the listing, registration, or qualification of the shares subject to such Option under any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the issue or purchase of shares thereunder, such Option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been free of any conditions not acceptable to the Committee.

4. Amendment. The Committee may, with the consent of the person or persons entitled to exercise any outstanding Option granted under Article II, amend such Option. The Committee may at any time or from time to time, in its discretion, in the case of any Option previously granted under Article II which is not then immediately exercisable in full, accelerate the time or times at which such Option may be exercised to any earlier time or times.

5. Acceleration Upon a Change of Control. Notwithstanding any provision in the Plan or in any document or instrument evidencing a Nonqualified Option granted under the Plan, upon the occurrence of a Change of Control each Nonqualified Option previously granted which is not then immediately exercisable in full, shall be immediately exercisable in full.

6. Vesting. The Committee shall set forth in the terms of the grant, the time or times at which each Option shall be exercisable; provided, however, that unless an Option grant specifically provides to the contrary, all Options held by a Non-Employee Director shall become immediately exercisable in full upon such Non-Employee Director’s death, Disability or Retirement.

ARTICLE III

INCENTIVE STOCK OPTIONS

1. Eligible Employees. Employees shall be eligible to receive Incentive Stock Options under this Article III; provided, however, no such person may receive more than 1,000,000 Incentive Stock Options and/or Nonqualified Options hereunder during any calendar year (subject to adjustment in the same manner provided in Article I, Section 3 with respect to shares of Common Stock available under the Plan).

2. Calculation of Exercise Price. The exercise price to be paid for each share of Common Stock deliverable upon exercise of each Incentive Stock Option granted under Article III shall be the Fair Market Value Per Share at the time of grant; provided, however, than in the case of an Employee who, at the time such Option is granted, owns (within the meaning of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company or any Affiliate, then the exercise price per share shall be at least 110% of the Fair Market Value Per Share of Common Stock at the time of grant. The exercise price for each Incentive Stock Option shall be subject to adjustment as provided in Article III, Section 3(e) below.

3. Terms and Conditions of Options. Incentive Stock Options shall be in such form as the Committee may from time to time approve, shall be subject to the following terms and conditions and may contain such additional terms and conditions, not inconsistent herewith, as the Committee shall deem desirable:

(a) Option Period and Conditions and Limitations on Exercise. No Incentive Stock Option shall be exercisable later than the date which is ten years after the date of grant; provided, however, that in the case of an Employee who, at the time such Option is granted, owns (within the meaning of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company or its Affiliates, then such Option shall not be exercisable with respect to any of the shares subject to such Option later than the date which is five years after the date of grant. The date on which an Incentive Stock Option ultimately becomes unexercisable under the previous sentence is hereinafter referred to as the “ISO Expiration Date.” To the extent not prohibited by other provisions of the Plan, each Incentive Stock Option shall be exercisable at such time or times as the Committee in its discretion may establish in the Option Agreement.

(b) Termination of Employment and Death. The Committee shall determine and shall set forth in the Incentive Stock Option Agreement the extent to which, if any, and the manner in which an Incentive Stock Option may be exercised following termination of an Employee’s Employment. To the extent exercisable, an Incentive Stock Option granted under Article III may be exercised by the Participant’s estate or by the person or persons who acquire the right to exercise his Option by bequest or inheritance with respect to any or all of the shares remaining subject to his Option at the time of his death. The Committee, in its discretion, may extend the period for exercise of any Option upon an Optionee’s termination, but in no event later than the ISO Expiration Date.

In the event and to the extent that an Incentive Stock Option granted under Article III is not exercised (A) within three months after the Optionee’s termination of employment or (B) within one year after the Optionee’s employment is terminated because of disability within the meaning of Section 22(e)(3) of the Code, whichever is applicable, such Option shall be taxed as a Nonqualified Option. Further, in the event that an Employee ceases to be employed by the Company or an Affiliate, then, to the extent an Incentive Stock Option is not exercised within three months after the date of such cessation of employment such Option shall be taxed as a Nonqualified Option.

(c) Manner of Exercise. Options granted under this Article III shall be exercised in the manner described in Article II, Section 3(c) except to the extent that payment by the Optionee of any required withholding may not be required.

(d) Options not Transferable. No Incentive Stock Option shall be transferable otherwise than by will or by the laws of descent and distribution and, during the lifetime of the Optionee to whom any Option is granted, it shall be exercisable only by such Optionee. Any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of, or to subject to execution, attachment or similar process, any Incentive Stock Option granted under Article III, or any right thereunder, contrary to the provisions hereof, shall be void and ineffective, shall give no right to the purported transferee, and shall, at the sole discretion of the Committee, result in forfeiture of the Option with respect to the shares involved in such attempt.

(e) Adjustment of Shares. In the event that at any time after the Effective Date of the Plan the outstanding shares of Common Stock are changed into or exchanged for a different number or kind of shares or other securities by reason of merger, consolidation, recapitalization, reclassification, stock split, stock dividend, combination of shares or the like, the Committee shall make an appropriate and equitable adjustment in the number and kind of shares as to which all outstanding Incentive Stock Options granted under Article III, or portions thereof then unexercised, shall be exercisable, and with any necessary corresponding adjustment in exercise price per share, to the end that after such event the shares subject to Article III of the Plan and each Optionee’s proportionate interest shall be maintained as before the occurrence of such event. Any such adjustment made by the Committee shall be final and binding upon all Optionees, the Company, and all other interested persons.

(f) Listing and Registration of Shares. Each Incentive Stock Option granted under Article III shall be subject to the requirement that if at any time the Committee determines, in its discretion, that the listing, registration, or qualification of the shares subject to such Option upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the issue or purchase of shares thereunder, such Option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained and the same shall have been free of any conditions not acceptable to the Committee.

(g) Limitation on Amount. Notwithstanding any other provision of the Plan, to the extent that the aggregate Fair Market Value (determined as of the time the respective Incentive Stock Option is granted) of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by an Employee during any calendar year under all Incentive Stock Option plans of the Company and any Affiliate exceeds $100,000, such Incentive Stock Options shall be taxed as Nonqualified Options. The Company shall determine, in accordance with applicable provisions of the Code and other administrative pronouncements, which of an Optionee’s Incentive Stock Options will be treated as Nonqualified Options because of such limitation and shall notify the Optionee of such determination as soon as practicable after such determination.

4. Amendment. The Committee may, with the consent of the person or persons entitled to exercise any outstanding Incentive Stock Option granted under Article III, amend such Incentive Stock Option. The Committee may at any time or from time to time, in its discretion, in the case of any Incentive Stock Option previously granted under Article III which is not then immediately exercisable in full, accelerate the time or times at which such Option may be exercised to any earlier time or times.

5. Acceleration upon a Change of Control. Notwithstanding any provision in Article III or in any document or instrument evidencing an Incentive Stock Option granted under Article III, upon the occurrence of a Change of Control, each Incentive Stock Option previously granted under Article III which is not then immediately exercisable in full shall be immediately exercisable in full.

6. Notice of Disposition. The Committee may require any person who exercises an Incentive Stock Option to give prompt notice to the Company of any disposition of shares of Common Stock acquired upon exercise of an Incentive Stock Option within two years after the date of grant of such Option or within one year after the transfer of shares to such person.

ARTICLE IV

PERFORMANCE STOCK AND PERFORMANCE UNITS

1. Eligible Individuals. Employees and Non-Employee Directors shall be eligible to receive awards of Performance Stock and/or Performance Units under this Article IV; provided, however, no one individual may receive more than 1,000,000 Performance Stock and/or Performance Unit awards hereunder during any calendar year (subject to adjustment in the same manner provided in Article I, Section 3 with respect to shares of Common Stock available under the Plan).

2. Terms and Conditions of Performance Awards. Shares of Performance Stock and Performance Units granted to an eligible individual (a “Grantee”) shall be, with respect to Performance Stock, a share of Common Stock and, with respect to a Performance Unit, a phantom share of Common Stock. Both types of Awards shall be subject to the following terms and conditions and may contain such additional terms and conditions, not inconsistent with Article IV, as the Committee shall deem desirable:

(a) Performance Period and Vesting. Subject to Article IV, Sections 3 and 4, no shares of Performance Stock or Performance Units granted under Article IV shall become vested, i.e., earned and nonforfeitable, earlier than the date which is one year from the date of grant nor later than the date which is ten years after the date of grant (the “Performance Period”). Each share of Performance Stock and each Performance Unit granted under Article IV shall become vested upon the achievement of such performance goals (Company and/or individual) over such Performance Period as the Committee, in its discretion, may determine at or prior to the grant of such performance Award. With respect to any Performance Stock or Performance Unit grant to any Covered Employee that is intended to meet the requirements of Section 162(m) of the Code, the performance goal or goals for such Award shall be with respect to one or more of the following: earnings per share; earnings before interest, taxes, depreciation and amortization expenses (“EBITDA”); earnings before interest and taxes (“EBIT”); EBITDA, EBIT or earnings before taxes and unusual or nonrecurring items as measured either against the annual budget or as a ratio to revenue; market share; sales; costs; return on equity; operating cash flow; return on net capital employed (“RONCE”) and/or stock price performance. The goals can be applied, where appropriate, with respect to an individual, a business unit or the Company as a whole and need not be based on increases or positive results, but can be based on maintaining the status quo or limiting economic losses, for example. Which goals to use with respect to a performance Award, the weighting of the goals if more than one is used, and whether the goal is to be measured against a Company-established budget or target, an index or a peer group of companies, shall also be determined by the Committee at the time of grant of the Award.

(b) Termination of Service and Death. The Committee shall determine and shall set forth in the Award the extent to which, if any, a Grantee’s rights with respect to each share of Performance Stock and each Performance Unit which is not then vested shall terminate upon termination of service.

(c) Performance Awards not Transferable. No shares of Performance Stock or Performance Units granted under Article IV shall be transferable otherwise than by will or by the laws of descent and distribution. Any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of, or to subject to execution, attachment or similar process, any shares of Performance Stock or Performance Units granted under Article V, or any right thereunder, contrary to the provisions hereof, shall be void and ineffective, shall give no right to the purported transferee, and shall, at the sole discretion of the Committee, result in forfeiture of the shares of the Performance Stock or Performance Units involved in such attempt.

3. Amendment. The Committee may, at any time or times, without the consent of the Grantee, amend the performance objectives and/or the Performance Period for earning such Award; provided, however, that except in the case of death, Disability or Retirement, the Committee may not waive, amend or accelerate the Performance Period to be a period that is less than one year.

4. Acceleration upon a Change of Control. Notwithstanding any provision of the Plan or in any document or instrument evidencing Performance Stock or Performance Units granted under the Plan, upon the occurrence of a Change of Control each share of Performance Stock and each Performance Unit previously granted under Article IV which is not then immediately vested in full shall be immediately vested in full, all performance goals shall be deemed to have been met to the fullest extent under the terms of such grant, and the Performance Periods shall immediately end.

5. Restriction of Certificates. Each certificate representing Performance Stock awarded under the Plan shall be registered in the name of the Grantee and, during the Performance Period, shall be left in deposit with the Company and a stock power endorsed in blank. The grantee of Performance Stock shall have all the rights of a stockholder with respect to such shares including the right to vote and the right to receive dividends or other distributions paid or made with respect to such shares. Any certificate or certificates representing shares of Performance Stock shall bear a legend similar to the following:

The shares represented by this certificate have been issued pursuant to the terms of the BJ Services Company 2003 Incentive Plan and may not be sold, pledged, transferred, assigned or otherwise encumbered in any manner except as is set forth in the terms of such award dated .

After certification by the Committee as to the satisfaction of the terms and conditions set by the Committee with respect to an Award of (i) Performance Stock, a certificate, without the legend set forth above, for the number of shares of Common Stock that are no longer subject to such restrictions, terms and conditions shall be delivered to the employee and (ii) Performance Units, a certificate for the number of shares of Common Stock equal to the number of Performance Units vested shall be delivered to the employee. The remaining unearned shares of Performance Stock issued with respect to such Award, if any, or unearned Performance Units, as the case may be, shall either be forfeited back to the Company or, if appropriate under the terms of the Award applicable to such shares or units, shall continue to be subject to the restrictions, terms and conditions set by the Committee with respect to such Award.

ARTICLE V

BONUS STOCK

The Committee may, from time to time and subject to the provisions of the Plan, grant shares of Bonus Stock to Employees and Non-Employee Directors. Bonus Stock shall be shares of Common Stock that are not subject to a Performance Period under Article IV. Except with respect to shares of Bonus Stock awarded to a Participant in lieu of cash compensation which would otherwise be due and payable to such Participant as fees, salary or bonus for services rendered, Bonus Stock shall not be awarded in excess of 5% of the total number of shares authorized under the Plan.

ARTICLE VI

CASH AWARDS

1. Eligible Individuals. Employees and Non-Employee Directors shall be eligible to receive Cash Awards, which may be Tandem Cash Tax Rights, Performance Cash Awards or Bonus Cash Awards (as hereinafter defined) under this Article VI.

2. Tandem Cash Tax Rights. The Committee may grant a Tandem Cash Tax Right with respect to a Performance Stock or Performance Unit Award, Stock Appreciation Right or Phantom Stock Award that, subject to the further provisions hereof, entitles the Grantee to receive from the Company, upon the later of the vesting of such Award or the date such Award is taxable to the Grantee, an amount of cash such that the “net” benefit received by the Grantee, after paying all applicable federal, state and other taxes (assuming for this purpose, the highest marginal income tax rate for individuals applies) on the Award and this Tandem Cash Tax Right, shall be equal to the value of the Award payment received by the Grantee before any such taxes thereon.

3. Terms and Conditions of Performance Cash Awards. Performance Cash Awards granted a Grantee shall be subject to the following terms and conditions and may contain such additional terms and conditions, not inconsistent with Article VI, as the Committee shall deem desirable:

(a) Performance Period and Vesting. Subject to Article VI, Sections 4 and 5, no Performance Cash Awards granted under Article VI shall become vested, i.e., earned and nonforfeitable, earlier than the date which is one year from the date of grant nor later than the date which is ten years after the date of grant (the “Performance Period”). Each Performance Cash Award granted under Article VI shall become vested upon the achievement of such performance goals (Company and/or individual) over such Performance Period as the Committee in its discretion may determine at or prior to the grant of such Performance Cash Award. With respect to any Performance Cash Award grant to any Covered Employee that is intended to meet the requirements of Section 162(m) of the Code, the performance goal or goals for such Award shall be with respect to one or more of the following: earnings per share; earnings before interest, taxes, depreciation and amortization expenses (“EBITDA”); earnings before interest and taxes (“EBIT”); EBITDA, EBIT or earnings before taxes and unusual or nonrecurring items as measured either against the annual budget or as a ratio to revenue; market share; sales; costs; return on equity; operating cash flow; return on net capital employed (“RONCE”) and/or stock price performance. The goals can be applied, where appropriate, with respect to an individual, a business unit or the Company as a whole and need not be based on increases or positive results, but can be based on maintaining the status quo or limiting economic losses, for example. Which goals to use with respect to a Performance Cash Award, the weighting of the goals if more than one is used, and whether the goal is to be measured against a Company-established budget or target, an index or a peer group of companies, shall also be determined by the Committee at the time of grant of the Award.

(b) Termination of Service and Death. The Committee shall determine and shall set forth in the Award the extent to which, if any, a Grantee’s rights with respect to each Performance Cash Award which is not then vested shall terminate upon termination of service.

(c) Performance Cash Awards not Transferable. No Performance Cash Awards granted under Article VI shall be transferable otherwise than by will, or by the laws of descent and distribution. Any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of, or to subject to execution, attachment or similar process, any Performance Cash Awards granted under Article VI, or any right thereunder, contrary to the provisions hereof, shall be void and ineffective, shall give no right to the purported transferee, and shall, at the sole discretion of the Committee, result in forfeiture of the Performance Cash Awards involved in such attempt.

(d) Maximum Award. With respect to a Performance Cash Award that is intended to qualify as performance based compensation under Section 162(m) of the Code, the maximum aggregate of such awards that may be granted to any one Grantee during any calendar year shall not exceed $5,000,000.

4. Amendment. The Committee may, at any time or times, without the consent of the Grantee, amend the performance objectives and/or the Performance Period for earning such Award; provided, however, that except in the case of death, Disability or Retirement, the Committee may not waive, amend or accelerate the Performance Period to be a period that is less than one year.

5. Acceleration upon a Change of Control. Notwithstanding any provision in the Plan or in any document or instrument evidencing Performance Cash Awards granted under Article VI, upon the occurrence of a Change of Control each Performance Cash Award previously granted under Article VI which is not then immediately vested in full shall be immediately vested and payable in cash in full, all performance goals shall be deemed to have been met to the fullest extent under the terms of such grant, and the Performance Period shall immediately end.

6. Other Provisions. After certification by the Committee as to the satisfaction of the terms and conditions set by the Committee with respect to a Performance Cash Award, the portion of such Award that is no longer subject to such restrictions, terms and conditions shall be paid (in cash) to the Grantee. The remaining unearned portion of such Performance Award, if any, shall either be forfeited or, if appropriate under the terms applicable to such Award, shall continue to be subject to the restrictions, terms and conditions set by the Committee with respect to such Award.

7. Bonus Cash Awards. The Committee may, from time to time and subject to the provisions of the Plan, grant Bonus Cash Awards to Employees or Non-Employee Directors. Bonus Cash Awards shall be cash payments that are not subject to a Performance Period under Article VI.

ARTICLE VII

STOCK APPRECIATION RIGHTS AND PHANTOM STOCK

1. Stock Appreciation Rights. The Committee is authorized to grant Stock Appreciation Rights to Employees or Non-Employee Directors on the following terms and conditions. No one individual may receive Stock Appreciation Rights with respect to more than 1,000,000 shares of Common Stock during any one calendar year (subject to adjustment as provided in Article I, Section 3).

(a) Right to Payment. A Stock Appreciation Right shall confer on the Participant to whom it is granted a right to receive (in cash or Common Stock or a combination of cash and Common Stock), upon exercise thereof, the excess of (A) the Fair Market Value Per Share on the date of exercise over (B) the grant price of the Stock Appreciation Right as determined by the Committee, which shall not be less than the Fair Market Value of the Common Stock on the date of grant.

(b) Rights Related to Options. A Stock Appreciation Right granted in connection with an Option shall entitle a Participant, upon exercise thereof, to surrender that Option or any portion thereof, to the extent unexercised, and to receive payment of an amount computed pursuant to Article VII, Section 1(a) hereof. That Option shall then cease to be exercisable to the extent surrendered. A Stock Appreciation Right granted in connection with an Option shall be exercisable only at such time or times and only to the extent that the related Option is exercisable and shall not be transferable (other than by will or the laws of descent and distribution) except to the extent that the related Option is transferable.

(c) Right Without Option. A Stock Appreciation Right granted independent of an Option shall be exercisable as determined by the Committee and set forth in the Award agreement governing the Stock Appreciation Right.

(d) Terms. The Committee shall determine at the date of grant the time or times at which and the circumstances under which a Stock Appreciation Right may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the method of exercise, whether or not a Stock Appreciation Right shall be in tandem or in combination with any other Award, and any other terms and conditions of any Stock Appreciation Right.

2. Phantom Stock Awards. The Committee is authorized to grant Phantom Stock Awards to Participants, which are rights to receive a specified number of shares of Common Stock or cash equal to the Fair Market Value of specified number of shares of Common Stock at the end of a specified deferral period, subject to the following terms and conditions. No one individual may receive Phantom Stock Awards with respect to more than 1,000,000 shares of Common Stock during any calendar year (subject to adjustment as provided in Article I, Section 3).

(a) Award and Restrictions. Satisfaction of a Phantom Stock Award shall occur upon expiration of the deferral period specified for such Phantom Stock Award by the Committee or, if permitted by the Committee, as elected by the Participant. Such deferral period shall not be extend beyond the date which is ten years after the date of grant. In addition, Phantom Stock Awards shall be subject to such restrictions (which may include a risk of forfeiture), if any, as the Committee may impose, which restrictions may lapse at the expiration of the deferral period or at earlier specified times (including based on achievement of performance goals and/or future service requirements), separately or in combination, in installments or otherwise, as the Committee may determine, subject to Article VII, Sections 2(b) and 2(c) below.

(b) Forfeiture. Except as otherwise provided below with respect to Non-Employee Directors, upon termination of a Participant’s employment or service as a Non-Employee Director during the applicable deferral period or portion thereof to which forfeiture conditions apply, all Phantom Stock Awards that are at that time subject to deferral (other than a deferral at the election of the Participant) shall be forfeited; provided that the Committee may provide, by rule or regulation or in any Award agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Phantom Stock Awards shall be waived in whole or in part in the event of termination resulting from death, Disability or Retirement. Phantom Stock awarded to Non-Employee Directors shall not be forfeited upon termination of service due to death, Disability or Retirement and shall be paid upon expiration of the applicable deferral period.

(c) Vesting. With respect to any Phantom Stock Award to any Participant which is subject to any of the performance goals described in Article IV, Section 2(a), the Performance Period shall not be less than one year from the date of grant. Any Phantom Stock Award which is not subject to any of the performance goals described in Article IV, Section 2(a), shall be subject to such forfeiture restrictions as the Committee may impose, which restrictions may be based on future service requirements. Such forfeiture restrictions may lapse at such time or times as the Committee shall determine and set forth in such Award, but, subject to Article VII, Sections 2(b) and 3, may not lapse earlier than ratably over a period of three years from the date of grant.

3. Acceleration upon a Change of Control. Notwithstanding any provision of the Plan or in any document or instrument evidencing Stock Appreciation Rights or Phantom Stock granted under the Plan, upon the occurrence of a Change of Control each Stock Appreciation Right and share of Phantom Stock previously granted under Article VII which is not then immediately exercisable or vested in full shall be immediately exercisable or vested in full, all conditions shall be deemed to have been met to the fullest extent under the terms of such grant, and all deferral periods shall immediately end.

ARTICLE VIII

TRANSFERABLE OPTIONS

The Committee may, in its discretion, provide in an Option Agreement (other than an Incentive Stock Option) that the Option right granted to the individual may be transferred (in whole or in part and subject to such terms and conditions as the Committee may impose thereon) by the individual to (i) the spouse, children or grandchildren of the individual (“Immediate Family Members”), (ii) a trust or trusts for the exclusive benefit of the Immediate Family Members and, if applicable, the individual, (iii) a partnership in which such Immediate Family Members and, if applicable, the individual are the only partners, or (iv) as otherwise provided for in the Option Agreement. Following transfer, any such transferred Option rights shall continue to be subject to the same terms and conditions as were applicable to the Option rights immediately prior to transfer; provided, however, that no transferred Option rights shall be exercisable unless arrangements satisfactory to the Company have been made to satisfy any tax withholding obligations the Company may have with respect to the Option rights.

ARTICLE IX

WITHHOLDING FOR TAXES

Notwithstanding anything in the Plan to the contrary any issuance of Common Stock pursuant to the exercise of an Option or payment of any other Award under the Plan shall not be made until appropriate arrangements satisfactory to the Company have been made for the payment of any tax amounts (federal, state, local or other) that may be required to be withheld or paid by the Company with respect thereto. Such arrangements may, at the discretion of the Company, include allowing the Participant to tender to the Company shares of Common Stock owned by the Optionee or Grantee, or to request or, to the extent provided in the Award agreement to direct, the Company to withhold a portion of the shares of Common Stock being acquired pursuant to the Award, which have a fair market value per share as of the date of such withholding that is not greater than the sum of all tax amounts to be withheld with respect thereto, together with payment of any remaining portion of such tax amounts in cash or by check payable and acceptable to the Company.

ARTICLE X

PARACHUTE TAX GROSS-UP

To the extent that the grant, payment, or acceleration of vesting or payment, whether in cash or stock, of any Award made to a Participant under the Plan (a “Benefit”) is subject to a golden parachute excise tax under Section 4999(a) of the Code (a “Parachute Tax”), the Company shall pay such person an amount of cash (the “Gross-up Amount”) such that the “net” Benefit received by the person under this Plan, after paying all applicable Parachute Taxes (including those on the Gross-up Amount) and any federal or state taxes on the Gross-up Amount, shall be equal to the Benefit that such person would have received if such Parachute Tax had not been applicable.

ARTICLE XI

CHANGE OF CONTROL

Notwithstanding any provisions to the contrary in the Plan, the following additional provisions shall become effective upon the occurrence of a Change of Control:

1. Publicly-Traded Stock Transaction. If the consideration offered to shareholders of the Company in connection with a Change of Control consists of shares of the common stock (“New Stock”) of the entity acquiring the Company or the parent company of the entity acquiring the Company (the “Acquiring Entity”) that are publicly traded, upon the occurrence of such Change of Control, the Acquiring Entity shall assume each Optionee’s outstanding options to purchase Common Stock (“Prior Options”) and each such Prior Option shall become an option (a “New Option”) (i) to purchase that number of shares of New Stock determined by multiplying the number of shares of Common Stock issuable upon exercise of such Prior Option by the exchange ratio of Common Stock in the transaction, (ii) at an exercise price per share determined by dividing the per share exercise price of such Prior Option by the exchange ratio of Common Stock in the transaction and (iii) otherwise upon the same terms and conditions as such Prior Option, except that (A) such New Option shall be exercisable until the applicable Option Expiration Date or ISO Expiration Date regardless of any termination of Optionee’s service following the Change of Control, and (B) such New Option may be surrendered to the Acquiring Entity during the 90-day period following the occurrence of the Change of Control in return for payment in cash or shares of New Stock or a combination of cash and shares of New Stock as determined by the Acquiring Entity, equal in value to the excess of (I) the higher of (1) the per share value of the consideration received by shareholders of the Company upon the occurrence of the Change of Control (valued for such purposes as of the date of the Change of Control) or (2) the highest per share price for Common Stock of the Company during the period commencing with the public announcement of the proposed Change of Control transaction and ending upon the occurrence of the Change of Control over (II) the per share exercise price of the Common Stock of the Company under the Prior Option, multiplied by the number of shares of Common Stock of the Company subject to the Prior Option.

2. Other Transaction. If the consideration offered to shareholders of the Company in connection with a Change of Control consists of cash or of New Stock that is not publicly traded, upon the occurrence of such Change of Control, each Optionee shall surrender each of his outstanding Options to purchase Common Stock to the Acquiring Entity in return for a payment in cash equal to the Black-Scholes value of such Option as of the date of the Change of Control, without discount for risk of forfeiture and non-transferability. The Black-Scholes valuation for this purpose shall be performed using a risk free rate for option term as determined by the then current rate on Treasury bills with a maturity approximating the remaining option life, and estimated future annual stock volatility based on the prior twelve months volatility.

ARTICLE XII

OTHER PROVISIONS

(a) The person or persons entitled to exercise, or who have exercised, an Option granted under the Plan shall not be entitled to any rights as a stockholder of the Company with respect to any shares subject to such Option until he shall have become the holder of record of such shares.

(b) No Award granted under the Plan shall be construed as limiting any right that the Company or any Affiliate may have to terminate at any time, with or without Cause, the employment of any of any person to whom such Award has been granted. No Award granted under the Plan shall be construed as limiting any rights which either the stockholders of the Company or the Board may have to remove at any time, with or without Cause, any person to whom such Award has been granted from the Board.

(c) Notwithstanding any provision of the Plan or the terms of any Award, the Company shall not be required to issue any shares hereunder if such issuance would, in the judgment of the Committee, constitute a violation of any state or federal law or of the rules or regulations of any governmental regulatory body.

(d) The Committee, in its discretion, may permit any Employee to surrender unexercised any Nonqualified Option for the receipt of another Award or other arrangement in order to defer the “spread” on exercise of such option.

(e) Subject to the restrictions set forth in the Plan, the Committee may amend any outstanding Award and may waive, amend or accelerate any requirement or condition to payment or exercise with respect to any Award. The Committee may not amend any outstanding Award in a manner that would adversely affect the rights of the Grantee without such Grantee’s consent. Except as provided in Article I, Section 3, Article II, Section 3(e), Article III, Section 3(e), and Article XI, Section 1, no Option or Stock Appreciation Right shall be amended to lower the exercise price, and (2) no outstanding Option or Stock Appreciation Right shall be canceled with subsequent replacement or regrant of an Option or Stock Appreciation Right having a lower exercise price without the approval of the stockholders of the Company.

(f) A Participant’s service shall be deemed to have terminated at the close of business on the day preceding the first date on which he is no longer an Employee or Non-Employee Director for any reason whatsoever (including death).

EX-31.1 4 dex311.htm CERTIFICATION OF CHIEF EXECUTIVE OFFICER Certification of Chief Executive Officer

Exhibit 31.1

CERTIFICATION

I, J.W. Stewart, certify that:

1.	I have reviewed this quarterly report on Form 10-Q for the quarterly period ended December 31, 2003 of BJ Services Company;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation ; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information ; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 13, 2004

BY /s/ J. W. Stewart

J.W. Stewart

Chief Executive Officer

EX-31.2 5 dex312.htm CERTIFICATION OF CHIEF FINANCIAL OFFICER Certification of Chief Financial Officer

Exhibit 31.2

CERTIFICATION

I, T. M. Whichard, certify that:

1.	I have reviewed this quarterly report on Form 10-Q for the quarterly period ended December 31, 2003 of BJ Services Company;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 13, 2004

BY /s/ T. M. Whichard

T. M. Whichard

Chief Financial Officer

EX-32.1 6 dex321.htm 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER 906 Certification of Chief Executive Officer

Exhibit 32.1

BJ Services Company

5500 Northwest Central Drive

Houston, Texas 77092

February 13, 2004

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549-0405

Re:	CEO/CFO Certifications Pursuant to 18 U.S.C. Section 1350,

As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of BJ Services Company (the “Company”) on Form 10-Q for the quarterly period ended December 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, J.W. Stewart, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

BY /s/ J.W. Stewart

J.W. Stewart

Chief Executive Officer

February 13, 2004

EX-32.2 7 dex322.htm 906 CERTIFICATION OF CHIEF FINANCIAL OFFICER 906 Certification of Chief Financial Officer

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of BJ Services Company (the “Company”) on Form 10-Q for the quarterly period ended December 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Taylor M. Whichard III, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

BY /s/ T.M. Whichard

T. M. Whichard

Chief Financial Officer

February 13, 2004

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